June 13,2009

China's Economy in Turmoil: Bubbles in a Downturn

By CSC staff, Shanghai

There's ice on the export side, while there's flame on the real estate market side, and China's effort to create internal demand is being distorted. China's economic stimulus, which is bulldozing ahead, is causing problems for China's economic recovery. Manufacturing is steadily declining, employment and consumption growth are weak, but bubbles are beginning to gather in the real estate industry.

In May, China's import and export totaled $164.13 billion, down 25.9%, year on year, and 3.9%, month on month. Export totaled $88.86 billion, off 26.4%, year on year, and 3.4%, month on month, and imports reached $75.37 billion, down 25.2%, year on year, and 4.4%, month on month. Falling exports in May proved the judgment by senior Ministry of Commerce officials that in 2009"negative export growth is a fact."

In the first five months, China's foreign trade totaled $763.49 billion, 24.7% down, year on year. Of that total, exports accounted for $426.14 billion, a fall of 21.8%, and import reached $337.35 billion, down 28%. The accumulated trade surplus totaled $88.79 billion, an increase of 15.7%, or $12.05 billion, over the same period last year.

Compared with figures of previous months, May's decline was steeper. Foreign trade rebounded a bit in the first quarter and exporters gained some orders. But new orders have decreased since, and the second half of this year is unlikely to see a recovery in overall foreign trade.

Policies to stabilize external demand are set to be implemented since the May foreign trade figures have been released. In the short-term, the export tax rebate ratio for 2600 goods has been raised to help maintain the share of "made in China" in overseas markets.

Industry experts say some labor-intensive product exports are recovering. Between January and May, decline in export of major labor-intensive products was lower than the average level. Exports of clothing, shoes, furniture, plastic products, cases and bags, and toys totaled $36.82 billion, $10.58 billion, $10.09 billion, $5.44 billion, $4.88 billion, and $2.28 billion, respectively, in the first five months of the year, falling 8.1%, 2.2%, 7.8%, 6.4%, 4%, and 14%.
The decline of machinery product exports, accouting for a lion's share of China's exports, has long exceeded 20%. From January to May, they totaled $250.53 billion, 21.9% down, year on year.

However, in this seemingly endless economic malaise, higher export tax rebates are not going to solve long-term problems by themselves. China is also using its forex reserve and fiscal funds to encourage overseas investment and development by firms and help overseas buyers with funding difficulties to buy products they need. China has already arranged $84 billion of short-term export credit insurance. Meanwhile, to further support the overseas development of Chinese enterprises, the government is arranging $10 billion of export buyer's credit.

Weak foreign trade shows China's macro-economy has not experienced any rebound from the bottom. CPI dropped 1.4%, year on year, in May, while PPI dropped 7.2%. This is the fourth straight month for decline in both figures, indicating looming deflation.

But go figure--China's real estate market is booming along with its stock market. The March rebound in the real estate market has developed into a luxurious banquet for the property

The latest National Bureau of Statistics figures show that between January and May China's commercial housing sales reached 24,644 square meters, a leap of 25.5%, year on year, with residential housing sales growing 26.7%.

The real estate market boom is led mainly by a liquidity surplus due to a huge increase in credit. The Obama administration is printing money to beat the band, over $2 trillion. China's currency placement is also very high. At the end of April, M2 growth reached 25.95%, the highest level in the past 10 years.

New lending in China in just the first four months of the year totaled 5.2 trillion yuan, with the 2009 total estimated to exceed 8 trillion yuan. Although the great bulk of these funds have not gone directly to real estate developers, the downturn of the macro-economy has other sectors investing in real estate. Significant chunks of those trillions of lent yuan have not entered the real economy at all, but are pushing up prices in the stock and real estate markets instead.

Between January and May, about 1.723 trillion yuan has found its way into the real estate market, up 16.1%, year on year. Of that total, domestic loans accounted for 396.2 billion yuan, up 15.8%, while other funds accounted for 709.1 billion yuan, up 39.8%. Development credit and consumption credit are both growing fast, directly supporting this round’s property market boom.

When both huge domestic and foreign liquidity are injected into the market, inflation rears its head. The real estate and stock markets are still major investment destinations. The 800 point rise in the stock market is boosted by excess funds, while the real estate market's recent prosperity stems from those same funds and demand accumulated since last year, people's demand to improve their living conditions. That demand and the ready cash is again pushing China's real estate market into the bubble range. 

What is especially worth attention is the rise of the high-end residential housing market despite the constant decline in manufacturing.

Declining gross industrial output value and booming real estate prices, a strange combination, are occurring together in Dongguan in south China's Guangdong Province, a major heart of "Made in China," as they are in other cities of the Pearl River Delta. In the first quarter, total industrial output value in Dongguan dropped 2.3%, year on year, to 77.06 billion yuan, while real estate development investment in the same period jumped 29.6%, and sales of residential housing rose by 22.2%.

Buyers of high-end residential housing in Dongguan are mostly private company owners. This is so also in Guangzhou and Shenzhen.

Export company owners in Guangdong are tending to invest in property and stock markets for short-term returns as their companies lack overseas orders and they have money on hand. When they need funds to expand production in the future, they think they can liquidate their property at once and get cash. It is quite easy to get a mortgage on a detached villa, and the bank loans can total up to 80% of the housing price with a 30% interest rate discount.

Buyers from Zhejiang Province cities such as Ningbo, Taizhou, and Wenzhou are also purchasing high-end residential housing in Shanghai. In Beijing, one buyer bought 80 houses. Buyers from Wenzhou, notorious for its asset speculators, can be found in many luxury housing projects in Shanghai. Hutchison Whampoa Property, of Hong Kong, offered 24 semi-detached villas on April 25, with prices ranging from 13 million yuan to 15 million yuan per unit, and several have been acquired by Wenzhou buyers. Five Wenzhou buyers have also bought 13 units in the company's housing project in Gubei, Shanghai.
Overseas investors are also returning to China. Yungching, a Taiwan-based property company with business in Shanghai, says the rise in the secondhand luxury residential housing market is led by the return of overseas buyers, as well as entrepreneurs in Jiangsu and Zhejiang. Among 282 luxury houses and apartments bought in April, 50 went to buyers from Hong Kong, Macao, and Taiwan, as well as foreign countries.

Many analysts believe much of the cash invested in real estate during this round is diverted from the stock market and the real economy. In China, investors believe high-end property with good location will better resist price decline.

"I began to invest my money in villas when orders began to decline in the second half of last year and my factory's production was cut by 1/3. The reason is simple. Under current economic conditions, investing in houses is safer than investing in factories," said the owner of a private firm.

"Do you really think all those stimulus bank loans have entered the real economy?" queried a real estate dealer in Shanghai. "Of course not. They are still in enterprises?hand, or have been invested in real estate and the stock markets. Some companies took money they scored on the stock market and invested in real estate soon after."

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