China's Real Estate Economy Unraveling

• The market is not poised to recover, but will continue to see greater downward pressure on prices;
and
• Real estate investment is likely to flatten out or start falling, erasing several percentage points of GDP growth.

_Patrick Chovanec

Bad loans and shady business practises dot the landscape of the domestic Chinese economy -- from the local and regional governments all the way to the top. Many of these problems are coming to light at the same time that the CCP regime is experiencing the greatest political threat and instability since Tienanmen Square in 1989.

More from China specialist Patrick Chovanec:

China’s developers are playing out a kind of prisoner’s dilemma: rush to complete, in hopes of cashing out. But while supply keeps going up, demand is going down. In late March, a central bank (PBOC) survey reported that only 14.1% of Chinese consumers were looking to buy a house in Q2, the lowest level since 1999. Only 17.7% expected home prices to rise in Q2, and 62.9% said they still consider prices to be too high. So all those rushed completions only add to the glut already on the market, driving prices down further and giving buyers — investors and aspiring residents alike — all the more reason to hold off for a better deal. Perhaps this is why Qin Hong, deputy head of research for the Ministry of Housing and Urban-Rural Development (MOHURD), told the Oriental Morning Post in late March that she doesn’t expect housing prices to rebound significantly for the rest of the year. A strong rebound is impossible, she said, due to the continued property tightening policy and high housing inventory (my italics).

The second implication of the dynamic I’ve just described is that the “resilient” growth in real estate investment that seemed to promise a “soft landing” is not very resilient at all. It’s more like the last gasp of a market that’s running out of steam. Once the surge in completions plays out, the declining number of new starts will become the pipeline, and growth in property investment will flatten or go negative. Property investment accounts for roughly a quarter of gross Fixed Asset Investment (FAI), and net FAI accounts for over half of China’s GDP growth. As I noted in January, in a back-of-the-envelope thought exercise, if property investment plateaus (growth falls to zero), it could shave as much as 2.6 percentage points off of real GDP growth. If it fell 10% (in real, not nominal terms) it could bring GDP growth down to 5.3%. _Chovanec.wordpress.com

China hand Michael Pettis is another Beijing-based economist who is expecting a China hard landing. For those investors who haven't considered what a China hard landing would mean for global markets, the answer is: Nothing good.

Global demand for commodities from crude oil to coal to steel ore etc. hinge upon the Chinese economy's ability to import. As global demand cools, global prices should decline.

There is not an economy on Earth that has been permanently exempted from the laws of economics, despite what politicians, pundits, and greens may say.

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