13/10/2012: China's Property Bubble

Some interesting insights into China's economy dependency on property markets from the ECB Monthly Bulletin (link: http://www.ecb.int/pub/pdf/mobu/mb201210en.pdf). Italics are mine:

"Housing investment has been an increasingly important source of growth for China in recent years". Most notably:

• Real estate investment accounts for about 25% of total fixed asset investment, with the latter having driven 50% of GDP growth since 2006. So overall, over 12% of China's economic expansion is now due to property boom directly. Associated activities, e.g. construction, construction materials, banking services and planning & development services probably means that good 17-20% of the overall growth in China since 2006 has been due to the real estate investment boom.
• "In terms of its share in GDP, real estate investment rose from 10% in 2006 to 16% in 2011".
• "Construction and real estate services together employ over 10% of the workforce and contribute to 13% of total added value". 
• "Real estate investment also has strong linkages to other industries such as machinery and equipment".

"House prices in China have risen sharply in recent years and are high compared with incomes'. 'High'? Judge for yourselves:

• Average price per sqm of housing "across a sample of 35 large and mid-sized Chinese cities nearly tripled between 1999 and 2011, although this average masks great disparities." 
• "The price of a 100m2 house expressed in multiples of the annual disposable income of an average family of 3.3 persons also varies widely, from 4.4 times yearly income in peripheral cities (Hohhot, Inner Mongolia), to close to 16 in large, booming cities such as Beijing and Shenzhen (see Chart A)."

• "On average, the ratio fell between 1999 and 2011 as disposable income rose faster than the square metre price (11% compared with 9% annually – see the red dotted line in Chart B). However, when one considers the increase in the size of the average house, a different picture begins to emerge. Over recent years, living space has increased from an average of 19.4 m2 per capita in 1999 to 32.7 m2 in 2011,  while the average household size has decreased from 3.6 persons to 3.1, implying that the average house has grown from 70 m2 to 101 m2. As a result, the price of the average house (expressed in multiples of income) rose from 6.4 in 1999 to 8.6 in 2011 (see the blue line in Chart B)." 

29/3/2012: China's Banking Sector Analysis

A very revealing paper on Chinese banking sector - link here. A lengthy summary of some points:

The study describes "aggregate developments of the sector and compare them to the situation in other countries. ...Our results confirm that the Chinese banking sector is truly in a class of its own, especially given the level of China’s economic development. Despite significant reforms, the state and various public organizations still own controlling shares in the largest commercial banks. The state is also present on the borrowers’ side; it is estimated that about half of state-owned commercial bank lending still goes to state-controlled companies." [Note: this induces rather unique risk into China's banking sector - the risk of losses on both sides of the transaction and also quality risk to banks assets, as state-owned enterprises in China tend to be higher risk]. 

Furthermore: "More than 90% of total banking sector assets are state-owned in China (Economist, 2010), while Vernikov (2009) puts the corresponding figure for Russia at 56%. In general, reforms in the Chinese banking sector have lagged relative to other sectors of the economy."

Thus, "Chinese policy has striking parallels to the Russian experience; there has never been a major effort to privatize banking and banks today continue to be directly or indirectly controlled by the state or public institutions." Except, in Russian case, there are far fewer state enterprises and once controlled for extraction sector enterprises [less subject to traditional risks], there are even fewer state-controlled enterprises links to state-controlled banks of the lender/borrower relations side. Furthermore, "the lack of capital controls, of course, means that Russians have greater freedom in choosing providers of their financial services."

"Despite listing and the presence of foreign investors, all the large commercial banks are still majority state-owned. The share of state and state-owned entities at the end of 2010 was 83.1% in ABC, 70.7 % in ICBC, 67.8 % in BOC, and 60.1 % in CCB. The corresponding number for the Bank of Communications was 32.4 %"

"In this way, the banking system can serve as an important policy tool. (see below)

"Another distinctive feature of the Chinese banking sector is the variety of its banking institutions. New types of banking institutions, especially those serving rural areas, are emerging all the time. While equity and debt markets are still tiny relative to the banking sector and their importance as sources of financing of investment remain minor, they have evolved rapidly in recent years."

Some interesting facts: "The government’s stimulus efforts to avoid recession in 2009 resulted in a massive spike in bank lending that increased the consolidated banking sector balance sheet by approximately a third. Rather than pull back, bank lending went on to expand an additional 20 % in 2010. Lending outside the banking sector’s balance sheet has also grown strongly (García-Herrero and Santabarbara, 2011). These lending trends in themselves should be sufficient to raise concerns about the quality of bank loan portfolios and the need to curtail growth of bank lending in coming years..."

"Bank loans are the most important source of external funding for the non-financial sector in China. They accounted for 75% of all external funding sources at the end of 2010, and exceeded 80% during the crisis years of 2008 and 2009 when other external sources were difficult to obtain. As we saw in early 2009, the Chinese authorities can turn to bank lending as a policy tool when the need arises."

The unbalanced nature of Chinese banking translates into significant concentration of State power in lending: "Bank lending grew between 2006 and 2010 at the average rate of 20% a year, thanks in part to the government stimulus program in the face of the global economic re- cession. Loans to non-financial companies accounted for around 70% of new loans. State- owned commercial banks (SOCBs), traditionally the biggest loan providers, accounted for 43% of all new loans issued in 2009 (their share was 51% in 2001). SOCBs accounted for about half of the total banking sector loan stock at the end of 2010. This proportion corresponds to their share in total sector assets."

And more: "Even though the Chinese banking sector is huge for a middle-income nation, bank lending is heavily skewed to state-owned companies. Allen et al. (2008) note that the size of China’s banking system, in terms of total bank credit to non-state sectors, was 31% of GDP in 2005. This figure is not too different from the average of other major emerging economies with a weighted average of 32% of GDP. Looking at total bank credit, including loans to state sectors, the ratio of China’s bank credit to GDP rises to 110% − a level higher than even in countries with German-origin legal systems (weighted average 106%). The difference between total bank credit and private credit suggests that most of the bank credit is issued to companies that are ultimately owned by the state. Also Okazaki et al. (2011) report that bank lending in the recent years has mostly gone to large SOEs. In 2009, about 50% of SOCB loans were extended to large SOEs. Private enterprises received some 14% of total lending provided by the banking sector."