China’s woes highlight the limitations of direct government intervention and both monetary and fiscal stimulus in reviving a moribund economy.
The measures the CCP announced are intended to make it easier for Chinese people to access capital and buy property, but access to debt is not the problem here. People in the country do not want to spend money because they are already sitting on large amounts of real-estate debt tied to declining properties. Seventy percent of Chinese household wealth is invested in property, which is a problem since analysts at Société Genéralé found that housing prices have fallen by as much as 30% in Tier 1 cities since their 2021 peak. Land purchases helped fund local governments so they could spend on schools, hospitals, and other social services — now that financing mechanism is out of whack. Sinking prices in these sectors, or what economists call deflation, has spread to the wider economy. The latest consumer price inflation report showed that prices rose by just 0.3% in August compared to the year before, the lowest price growth in three years, prompting concerns that deflation will take hold, spreading to wages and killing jobs.
No amount of stimulus can get around the reality that China’s housing woes stem from the housing bubble previous stimulus efforts catalyzed.
Not only is China’s housing market overbuilt by a couple of orders of magnitude, but housing prices are far above what current housing demand can support.
This is a problem for Beijing, because the housing correction that MUST come is that housing prices must fall. When those prices fall, the 70% of “middle class” Chinese whose wealth is tied up in real estate will see that wealth evaporate.
After the real estate disruptions and developer bankruptcies of the past few years, the average Chinese has lost his or her enthusiasm for taking on significant mortgage debt to buy even one property—but without fresh home sales indebted developers are still unable to raise the funds to finish existing real estate projects.
Propping up current price levels AND incentivizing new sales AND stabilizing housing markets are contradictory goals which require contradictory responses by Beijing. Any effort by Beijing to preserve household wealth along the way becomes a further complication.
The challenge for global investors will be what to do when this latest stimulus effort by Beijing fails to resolve the contradictory challenges within China’s real estate markets.
Somewhere up ahead there is an inflection point where Beijing loses credibility with the Chinese people. China’s deterioration accelerates greatly once that inflection point is reached—and that inflection point is getting closer with each ineffective attempt at “stimulus”.
