A Policy Brief dated August 2014 by Li-Gang Liu, visiting fellow at the Petersen Institute for International Economics, Washington DC.
While noting that China's housing market is slowing down, the research paper explains that amongst other things, comparison with Dubai or Japan is off the mark because -
- China's housing market, borne only in 1998, remains characterised by massive demand, very low gearing, and far from excessive price-to-income ratios as both rural and urban income levels have greatly increased.
- China is still undergoing the fastest and most extensive urbanization transformation in human history with over 200 million more people becoming urbanites by 2023.
The paper's analysis sits well with my earlier prognoses in "Is China the Next Dubai? " (May, 2010) and "China's Ghost Cities and Malls" (May 2011).
As for the risk of potential melt-down of China's shadow banking and indebtedness, it must be borne in mind that China's total debt as a percentage of GDP ranks below a number of advanced countries including the UK, Japan and the United States.
In comparison with the U.S., shadow banking as a percentage of the regulated banking sector is 28% versus 200% while total loan to the real estate sector as a percentage of GDP is 22% versus 103%. (Slide numbers 10-14 in my presentation China Ascendant: Challenges and Opportunities for Hong Kong and the Asia-Pacific in New Zealand in August 2014).
A June 2014 Report by CBRE, an American global commercial real estate services company, suggests that at $3.5-5 trillion, China's shadow banking exposure amounts to 38-55% of the country's GDP, compared with the global size of non-bank financial intermediaries at 117% of global GDP in 2012.
The report notes, however, that China's shadow banking exploded by 42% in 2012 alone, compared with the global average rate of 8.1%. This has prompted the central government to tighten control over trust products, the fastest expanding form of shadow banking. As a result, trust loans plummeted by 79% y-o-y in April 2014. The shadow banking pool is expected to shrink or at least grow at more manageable rates in future.
The report concludes by saying that with the exception of small residential developers in tier-3 and tier-4 cities, the outlook for demand-supply is more balanced in upper-tier cities where the current downturn may well offer selected buying opportunities.
Download Asia Pacific_Special Report - China Shadow Banking and the Real Estate Market_June_2014
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