In recent blog entries I’ve tried to draw your attention to the problems facing the Chinese economy:
Things are Getting Messy
A Hard Landing
In case you had any doubt that the party is over in China, read the missive below published on Bloomberg yesterday….
Shanghaied Home Buyers Take to Street as Cuts Shatter Dreams
2011-11-29 16:01:00.0 GMT
By Bloomberg News
Nov. 30 (Bloomberg) — Danny Deng and his bride-to-be dreamed of their lives together as they walked through the showroom for a Shanghai housing project almost three months ago.
Pooling his own and his parents’ savings, a loan from his boss and a 1.1 million yuan ($172,000) mortgage, he bought an apartment and secured his fiancee’s hand.
On Nov. 19, Deng faced off a ring of security guards three rows deep wearing camouflage and carrying shields as he joined more than 100 homeowners rallying in front of the development’s sales office. His transformation from newlywed to street protester came after China Vanke Co. slashed prices for future buyers at the Qinglinjing complex, erasing about 20 percent of the value of his three-bedroom unit overnight.
“If I’d paid for it all myself, the price cut wouldn’t bother me as much, but there’s a lifetime of my parent’s blood and sweat in it,” said Deng, a 30-year-old electrical systems salesman. “Developers’ profits are outrageous. The price they set when the housing market kept going up was far more than the real value.”
Deng’s anger underscores the dilemma facing China’s government as it tries to cool the property market. If policies such as increased down payment requirements don’t go far enough, it risks a housing bubble; if it pushes too hard, it may provoke the ire of a new generation of middle class “fang nu,” or housing slaves, in a reference to the lifetime’s work needed to pay off debts.
Demanding Vanke, China’s largest publicly traded property developer by market value, compensate them or cancel their contracts, Deng and his fellow picketers on that rainy day are among homebuyers stung as prices reverse. Urban residential values have risen 155 percent nationwide since reforms 13 years ago created a private residential market in the communist nation.
Prices in Shanghai almost quadrupled over the past decade.
In October, hundreds of homeowners demonstrated outside the offices of China Overseas Property Group Co. over cuts at another project in Shanghai, according to the Chinese-language New Century Weekly. There have also been Chinese newspaper reports of similar protests in Beijing and the industrial city of Shenzhen near Hong Kong.
“This is certainly sending a very alarming signal,” said Cheng Li, a senior fellow at the Brookings Institution in Washington. “If property prices really go down, there will be a serious political crisis led by the middle class.”
China Vanke, in an e-mailed response to questions, said that while it understood customers’ anxiety, prices were set by supply and demand.
“In a market correction, it’s hard to avoid that both sides, developers and homebuyers, will be affected,” the company said.
Residential property prices fell from the previous month in
33 cities of the 70 measured in October, the worst performance this year, after the government imposed restrictions on mortgages and loans to developers.
Analysts at Credit Suisse Group AG say prices may fall 10 percent this year and another 10 percent in 2012. Huang Yiping, a Hong Kong-based economist at Barclays Plc, said the drop would be between 10 to 30 percent in the next 12 months.
In an indication of how seriously the government is taking the matter, a Nov. 21 commentary by the official Xinhua News Agency said that such protests are “a social phenomenon that cannot be ignored,” before adding that their appeals aren’t supported by law.
Middle Class Power
China’s emerging middle class represents a potent new force that may number as much as 243 million, said Li of the Brookings Institution. On a growing number of issues from housing to the environment they are voicing their opposition online and on the streets.
Another Xinhua article argued that some price declines could be beneficial, enabling more people to afford a home.
Also at stake is the pace of economic expansion in one of the world’s few growth engines. Property directly accounts for
12 percent of China’s gross domestic product even before taking into account building materials, furnishings and appliances, according to a July report by the International Monetary Fund.
A drop in real estate prices could undermine the value of the collateral for about 40 percent of the loans issued by China’s biggest banks, the IMF said after a November survey of the lenders.
Price Move ‘Danger’
Falling land values may also impact local governments which depend on them for one-third of their revenue, said Wang Yi, a Beijing-based real estate analyst at Goldman Sachs Group Inc.
“The government thinks they have everything under control and can set the bottom,” said Du Jinsong, head of property research for Credit Suisse. “The danger is they may do more than enough, and it may be too late to stop a bigger fall.”
Questions over China’s housing policy are “overshadowing”
China’s economic outlook, the Paris-based Organization for Economic Cooperation and Development said Nov. 28. A day earlier, Xinhua reported Chinese Vice Premier Li Keqiang as saying the government should continue tightening after some observers, including scholars at Renmin University of China in Beijing, suggested the government would start lifting restrictions next year.
Residential property-related companies are already suffering on the stock market. China Vanke, based in Shenzhen, is down 25 percent this year in Shanghai trading, while Soufun Holdings Ltd., owner of China’s biggest real-estate website, has dropped 36 percent.
For Deng, the pain is more than financial. Tears swell in his eyes as he recounts the moment his father handed him access to his life savings of 360,000 yuan to help make the down payment.
Gnawing the Elderly
The gift made Deng consider himself a member of the “ken lao” generation, meaning to gnaw on the elderly.
“I was depressed, uncertain, touched and a bit ashamed,”
he said, asking not to be identified by his full Chinese name because of the personal nature of his story. “I had been proud and didn’t think it was their business. But when the moment really came, I knew it was impossible to manage only by myself.”
Deng had moved to Shanghai three years earlier from a small city in the north to be closer to a girl he met in college. When talk turned to marriage, his girlfriend insisted they buy an apartment first, he said.
“At my age, I should get married and I should have my own home whether or not I can afford it so that I can be the same as my classmates,” Deng said.
Raise a Child
Deng saw an ad on Soufun.com for pre-sales of a project called Qinglinjing, meaning “Clear Forest Path,” that was being constructed near a soon-to-be built subway station next to the future home of the Shanghai Disney Resort. Deng and his girlfriend visited a showroom to walk the wooden floors of the replica 96-square-meter (1,033-square-foot) apartment, planning how they would fill its two bedrooms, living room and study.
“We loved it,” Deng said. “It suits us for the next three to five years because we plan to raise a child soon.”
The snag was its 1.7 million yuan price tag. Chinese policy requires a minimum 30 percent deposit. Deng had saved 70,000 — not enough. That’s when he called his parents, then borrowed another 50,000 yuan from his boss, and secured a loan of 1.1 million yuan paying as much as 7.8 percent interest from Agricultural Bank of China, he said.
On Sept. 28, Deng and his girlfriend signed a contract with the developer, happy after winning discounts including 40,000 yuan off for being a member for the Soufun.com website and a 20,000 yuan markdown by collecting 20 stamps on a red “home- passport” issued by Vanke. The end price: 1.58 million, or about 13 times Deng’s annual wage.
The next month, they got married. Paying the mortgage will take up 40 percent of the new couple’s combined salary.
The new norm for Deng’s generation stems from housing reforms begun in 1998, when then Premier Zhu Rongji privatized state-owned housing provided at low rents to urbanites, transferring home ownership from the government to the families occupying the dwellings. The housing market has boomed ever since, with a brief reversal in 2008 overcome by government stimulus.
Some 290 million city dwellers own their own homes, according to consultants Gavekal Dragonomics in Beijing.
China’s official home-ownership rate of 87.8 percent, which excludes migrant workers, exceeds the U.S. level of 66.3 percent in the first quarter of 2011, according to U.S. census data.
Rising Household Debt
While the property privatization has helped fuel one of the fastest episodes of wealth creation in world history, new buyers like Deng must mortgage their futures to afford a home in China’s swelling cities. The home-buying boom has contributed to a doubling of household debt in China since 2008, though the amount is still far below U.S. levels, according to Dragonomics.
Concerned a bubble was forming, the government this year stepped up measures to curb the market, including limiting home purchases in some cities, raising down payments and warning banks and other lenders to cut back loans to builders. That’s left some developers facing a liquidity crunch, necessitating price cuts to ensure enough sales are made to pay off upcoming debts and payrolls.
“It’s a game between developers and the state,” said Li Yun, an engineer who borrowed 280,000 yuan from his friends and relatives to buy an apartment at the Qinglinjing complex and who joined the protest. “Now that they cut prices so much it pushed homeowners to the frontline.”
Sales Agents Clapped
Zuo Hongxia, mother of a 15-month old baby, said she became a home owner after losing patience waiting for years for prices to come down. She recalled the frenzied scene when she picked her apartment in the same development as agents crowded around urging her to buy and then clapped and congratulated when she nodded agreement.
Just weeks after Deng had signed his purchase contract, he found out about the price cut when he saw a leaflet advertizing apartments in the same development with a discount of 4,000 yuan per sqm. The previous asking price was about 17,000 yuan to 18,000 yuan per sqm, according to Soufun’s website.
Acknowledging he’s unlikely to get the difference refunded, Deng said he’s now pushing for a waiver to management fees or a free parking lot. With talk some people have been detained by police after protesting, he’s also taking precautions, standing on the sidelines with a cap pulled low and bandana masking his face at a separate rally on Nov. 23.
“I didn’t have a choice,” he said of the decision to buy.
“I don’t want to be too different. Otherwise, maybe for a long time, I would be alone.”