China’s boiling housing market is showing signs of cooling, with 90% of cities reporting sales drops in January.
If the cooling turns into a freeze it will have significant implications for China’s municipal governments, which in recent years have depended on selling land for the booming real estate development to raise revenue to meet their administrative obligations.
The downturn also carries threats to years of effort to reform China’s politically driven banking system. China’s National Audit Office in 2011 acknowledged that local government debt totalled nearly 11 trillion yuan ($2 trillion), but some outside analysts estimate the true figure is double that.
The respected Chinese business magazine Caijing last week reported data from the real estate agency Yahao and the China Index Academy showing that sales in January dropped by up to 60% compared with the same month a year ago.
Yahao reported that in the capital, Beijing, developers started selling homes in only seven projects in January, compared with 17 a year ago and 24 in December.
Caijing also reported that commercial real estate transactions in Beijing declined by up to 50% on both a monthly and annual basis.
Meanwhile the China Index Academy says home sales were down by 36.8% in Beijing in January and 30.65% in Shanghai.
The picture was similar in other major Chinese cities such as Guangzhou and Shenzhen.
The situation is even more bleak in China’s smaller cities, said Caijing. House prices in cities such as Shenyang, Haikou and Yinchan doubled from 2008 to 2011, when the Beijing government flooded the market with a $5.4 trillion stimulus package to fend off the global economic crisis.
But now prices have stalled and developers are holding large supplies of unsold homes because of falling demand. Caijing quotes analysts as saying this poses a threat to the whole property development industry in China.
One cause of China’s housing price bubble in recent years is that local governments have been given few avenues for raising revenue to fund the social and administrative responsibilities given them by Beijing.
With the real estate market stimulated by the flood of cheap money after 2008, local governments took to selling land to developers to raise money to pay for their obligations such as welfare programs.
Many municipalities also set up local government financing vehicles (LGFV) to make speculative investments in often ill-conceived infrastructure projects. By some estimates these LGFVs are carrying the equivalent of about $2 trillion in debt.
In a recent essay, Minxin Pei, an expert on governance in China and a professor at Claremont McKenna College in California, warned that this debt is a threat to China’s entire banking system.
He warned of “a future wave of default when the projects into which LGFVs have piled funds fail to yield viable returns to service the debt.”
Oxford Analytica, the British-based global analysis and advisory firm that advises clients on strategy and performance in world markets, last week warned China’s property downturn has serious implications.
“A persistently sluggish market would eat into revenue-generating ability of inland city governments, increasing the risk of local governments being unable to meet their obligations, whether to lenders or to the recipients of welfare expenditure,” the company said in a briefing paper last week.
Oxford Analytica did note that one of the measures included in Beijing’s economic reform package published in November is giving municipalities the power to raise their own taxes to finance local government programs. However, Oxford Analytica comments this reform “does not appear to be imminent.” •
Flaherty pulls plug on controversial immigrant investor program
Ottawa has shut the door in the faces of about 65,000 people, most of them Chinese, waiting to come to Canada as immigrant investors.
Finance Minister Jim Flaherty announced in last week’s budget an immediate end to the controversial program, under which about 130,000 people have become Canadians since the scheme started in 1986.
As he made the announcement Flaherty appeared to agree with critics who have said the program allows foreigners to buy Canadian citizenship without requiring them to make any serious commitment to the country or benefit to the economy. All too often, say critics, the immigrant investors continue to live abroad while their families take advantage of Canadian social services and education.
Flaherty said the scheme “has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship for a guaranteed loan that is significantly less than our peer countries require.”
Immigrant investors were required to have assets worth at least $1.6 million and to loan the government $800,000 interest-free for five years.
The program became the favourite route for wealthy Chinese to acquire foreign citizenship and to allow their families to live in Canada.
Initially, the scheme helped tens of thousands of Hong Kongers, fearful of the British colony’s return to Chinese sovereignty in 1997, to come to Canada. But in recent years the program has come to be dominated by mainland Chinese.
About 45,000 of the 65,000 outstanding applications are by wealthy mainlanders. They will have their deposits returned, but their applications will be “eliminated.”
Ottawa refused to accept any new applications under the scheme in 2012, when the backlog became too large for immigration officials, especially in the Hong Kong consulate, to handle.
Flaherty said the scheme will be replaced by a new immigrant investor venture capital fund and a business skills program.
