Saving the banks at the expense of the property industry? Lessons from China

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Saving the banks at the expense of the property
industry? Lessons from China

• J Albert Cao
• Department of Real Estate and Construction
• Oxford Brookes University
• Oxford, UK

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The Chinese property market downturn

• The turning point came before the economic
  slowdown
• Not simply the result of government intervention
  to slow down housing price inflation
• Due to a combination of measures, with the
  crucial factor being the government/central
  banks act to protect the banks

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(No Transcript)
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The three cycles in Chinas economic growth
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The three property cycles in China
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Lessons learnt Financial stability is paramount

• Overheating and hyper-inflation in 1988
• Chaos in the banking system in 1993
• Triggered by massive property speculation
• Distressed assets and non-performing loans in
  1998
• Triggered by failed property development projects
  and the East Asia Financial Crisis
• Bankruptcy of the Guangdong International Trust
  and Investment Corporation

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Property-led urban economic development

• A development model that involves the sale
  of state-owned land by local governments for
  property development and the provision of
  infrastructure funded by land sale proceeds. This
  model has been widely adopted in Chinese cities
  since 1990s to promote economic growth.
• 
  --Cao and Keivani (2007)

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Land sale revenues key to the property-led
development model
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Cumulative housing price inflation in China in
the last decade
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The macro-control central intervention and local
resistance

• First round
• Peoples Bank of China in June 2003 to tighten
  credit on lending to high-end housing and
  commercial property development
• the State Council to calm local opposition by
  designating the real estate industry as a pillar
  industry
• Second round
• Peoples Bank of China raising interest rates and
  tightening credits to property development
• Ministry of Land and Resources to tighten land
  supply
• The State Council to impose taxes on
  transactions, restrict foreign investment and
  encourage supply of housing
• Local governments to fuel land price inflation
  and to facilitate speculation and more market
  activities by non-action

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Monetary policy plays a part in Chinas
intervention of the property market
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The crucial factor sharp reduction of loans to
developers and home buyers
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The wealth effect the tumbling of the stock
market
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Housing price inflation in China since early 2007
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New Housing Price inflation in Beijing and
Shanghai
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Figure 3 Housing price inflation in Guangzhou
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Housing price inflation in Shenzhen
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Performance of the office market in Beijing
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Performance of the office market in Shanghai
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Impact on the property industry and the rescue

• Severe credit crunch to development firms
• Data from Jan to May 2009
• Land purchase down 28.6 y-o-y
• Housing new start down 16.2
• Housing development investment up 4.4, down
  from 35 last year
• GDP growth in Q1 2009
• Shanghai up 3.1, down from 11.5 last year
• Beijing up 6.1, down from 11.3 last year
• Local rescue lower taxes, cash bonus, and others
• Stimulus package excessive lending in Q1 2009
• Rising housing prices in April and May 2009

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Conclusions

• The vigilance on the risks of the property market
  results in protection of the banking system
• Local resistance has resulted in late adjustment
  from the property industry, which caused
  widespread problems
• Major local economies face devastation due to the
  property-led urban economic growth model
• New challenge ahead to change economic growth
  model
• The risks inherent in the property market remain