So now we know what China’s biggest property developer really thinks about the Chinese housing boom.
A leaked recording of dinner speech by Vanke Group’s vice-chairman Mao Daqing more or less confirms what the bears have been saying for months. It is a dangerous bubble, and already deflating.
Prices in Beijing and Shanghai have reached the same extremes seen in Tokyo just before the Nikkei boom turned to bust, when the (quite small) Imperial Palace grounds were in theory worth more than California, and the British Embassy grounds (legacy of a good bet in the 19th Century) were worth as much as Wales.
Li Junheng from JL Warren Capital has translated his comments, which I pass on for readers.
“In 1990, Tokyo’s total land value accounts for 63.3pc of US GDP, while Hong Kong reached 66.3pc in 1997. Now, the total land value in Beijing is 61.6pc of US GDP, a dangerous level,” said Mr Mao.
“Overall, I believe that China has reached its capacity limit for new construction of residential projects. Only those coastal Tier 3/Tier 4 cities have the potential for capacity expansion.”
“I don’t see any possibility for a rise in home prices, especially in cities with large housing inventory, unless the government pushes out another few trillion. Beijing and Shanghai have already been listed among the most expensive cities in the world in terms of the medium central city property prices.”
Mr Mao said China’s house production per 1,000 head of population reached 35 in 2011. The figure is below 12 in most developed economies “even when the housing market is hot; no country has a figure of greater than 14”.
“By 2011, housing production per 1000 people reached 30 in Tier 2 cities, excluding the construction of affordable houses. A persistently high figure such as this should cause alarm,” he said.
China’s anti-corruption campaign is spreading terror through the Party cadres. They are frantically trying to offload properties in the top-end range of 40,000 – 50,000 yuan per square metre in case their ill-gotten wealth is exposed by spot audits.
The numbers of flats and houses for sale has suddenly doubled. “Many owners are trying to get rid of high-priced houses as soon as possible, even at the cost of deep discounts. As a result, ordinary people who want to sell homes in the secondary market must face deep price cuts,” he said.
“In China’s 27 key cities, transaction volume dropped 13pc, 21pc, 30pc year-on-year in January, February, and March respectively. We expect the trend to continue in April. The drivers behind the fall in price are credit tightening from the banks.”
“Most cities have seen an increase in the ratio of inventory to sales. Among the 27 key cities we surveyed, more than 21 have inventory exceeding 12 months, among which are 9 greater than 24 months. The supply of residential buildings is rapidly increasing month-on-month.”
Mr Mao said 42 new projects for elite homes in Beijing will be finished in 2015, hitting the market with an extra 50,000 units that “can’t possibly be digested”.
As for the demographic time-bomb, he said China will have 400m people over the age of 60 by 2033. Half the population will be on welfare by then. “If China fails to develop technology as a driving force for its economic growth, the country will be in trouble.”
So there we have it. Vanke Group say the comments do not reflect the view of the company or indeed Mr Mao – which is odd – but they do not dispute that the recording is authentic.
His words compliment recent warnings by Nomura’s Zhiwei Zhang that the problem is even worse in the smaller cities in the interior, as we reported last month:
“We believe that a sharp property market correction could lead to a systemic crisis in China, and is the biggest risk China faces in 2014. The risk is particularly high in third and fourth- tier cities, which accounted for 67pc of housing under construction in 2013,” he said.
Nomura said residential construction has jumped fivefold from 497m square metres in new floor space to 2,596m last year. Floor space per capita has reached 30 square metres, surpassing the level in Japan in 1988.
Land sales and property taxes provided 39pc of the Chinese government’s total tax revenue last year, higher than in Ireland when such “fair-weather” taxes during the boom masked the rot in public finances.
There is a huge problem in all this. The International Monetary Fund says China is running a budget deficit of 10pc of GDP once the land sales are stripped out, and has “considerably less” fiscal leeway than assumed. The state finances are not what they seem.
This does not necessarily mean that China will spiral into crisis. David Li Daokui – former adviser to the Chinese central bank – told me the nuclear trump card of the authorities is the Reserve Requirement Ratio, currently 20pc. They can inject up to $2 trillion into the banking system if need be by slashing the RRR to single figures. It was 6pc in the late 1990s.
The question is whether President Xi Jinping wishes to take his lumps now by pricking the speculative bubble and forcing capitulation – hopefully in a controlled deleveraging – or whether he will blink as his predecessor famously did in the summer of 2012 and let rip with another round of stimulus.
Blinking stores up greater trouble later. Credit has already grown to $25 trillion. Fitch says China has added the equivalent of the entire US and Japanese banking systems combined in five years.
On balance it is better for China to get the trauma over and done with sooner rather than later. But the rest of the world should be under no illusions as to what it means.
This policy decision – should President Xi stay the course – is equivalent in global scale to the decision by Fed chief Benjamin Strong to pop the US speculative bubble in 1928, causing a commodity slump that was transmitted worldwide through the dollar based currency system (Inter-War Gold Standard) and which later snowballed into something far worse.
The US was then the world’s rising creditor power, with foreign reserves above 6pc of global GDP, almost exactly the same as China’s holdings today. When China sneezes … you will catch a cold, wherever you are.