Thursday, July 29, 2010

Singapore Economy Would Suffer if China Property Boom Collapses

One of the hot topics circling in the global financial news and blogosphere is the potential overheating of the Chinese economy and property market bubble. Home prices in Beijing, for example, have risen to 22 times income levels, a new high that exacerbates housing affordability problems and that raises serious questions about the sustainability of housing prices on the basis of fundamental valuations.

At the same time, reports of China's shadow banking system have started to emerge. A recent video report by TheStreet talks about the "Shark Loan" phenomenon in China. The "Shark Loan" process typically starts with a homeowner taking out a loan on the equity of his house, from a commercial bank, based on the appreciation in the market value of the house due to the booming property market. The homeowner then re-lends the proceeds from the loan to a Shark-Loan operation at a substantially higher interest rate than the homeowner is paying the bank. The Shark-Loan operation, in turn, lends the money it has borrowed from the homeowner, at an even higher interest rate, to a speculator who then bets on the housing market once again. In effect, the Shark-Loan operators are acting as "shadow bankers" in the provision of credit to speculators who would not otherwise get access to capital through traditional funding sources.

The impact of the "Shark-Loan" operations is to circumvent the constraints on credit imposed by the state that are designed to cool the credit bubble that is fueling the property boom. The Shark-loan Shadow Bankers allow the housing bubble to continue its inflation by channeling credit around the legal banking system from homeowners into the hands of speculators, who then further inflate housing prices with their purchases of property. The whole system works beautifully for everybody as long as housing prices continue to rise. But once housing prices fall and the bubble bursts, the entire system of ponzi finance will come crashing down like a house of cards.

Cracks in the upward surge in housing prices are beginning to show. Since the Chinese authorities started implementing measures to cool the property market and to weed out speculation earlier this year, housing activity has stalled in some property markets in China, and in some areas prices have even started to decline. The Financial Times reports on the case of Tongzhou
Tongzhou is one of the more extreme examples of the recent property boom. The town, about 20 miles from Beijing, has become a popular option for middle-class families priced out of the capital. The local government has big ambitions – two years ago, it announced plans for a 500-metre tower, which would be 50 per cent bigger than the tallest building in Beijing.

The Heavenly Famous Garden complex shows how quickly the market has run into a wall. Flats next to a new light railway to central Beijing were put on sale last summer and by this April prices had doubled to Rmb24,000 ($3,500, €2,700, £2,300) per square metre. Yet even though a third of the apartments were still unsold, there have been no buyers since the government announced its April clampdown.

One of the country’s biggest estate agents, 21st Century, opened an office in Tonghu Avenue in Tongzhou in early May. Since then, it has sold a grand total of one flat, although the list prices on some buildings have slipped 15 per cent.
Meanwhile, home sales in Xiamen have plunged 44.7% in the first half of the year, and Tianjin local government revenues from the sale of land have plunged since Wen Jiabao cracked down on the real-estate bubble. Kenneth Rogoff, the Harvard University professor and former International Monetary Fund chief economist, said in a Bloomberg Television interview July 6 that a “collapse” in real estate is beginning.

If indeed the cracks in the system are signs of an impending bubble burst, then Singaporeans should brace themselves for a major fallout from the second and third-order effects of a property and construction bust in China.

Firstly, because of Singapore's addiction to foreign monetary inflows (both capital investments and tourist spending) to sustain its GDP growth, a collapse in the Chinese property market would in turn result in a collapse in monetary flows coming into Singapore from China. Multiple sectors of Singapore's economy are now heavily dependent on these foreign monetary inflows for their prosperity, including the casino industry, private banking, housing market and tourism industry in general. These industries would experience a major slowdown, and most likely even a contraction, if these monetary flows were to dry up.

Secondly, a collapse in the Chinese property market and a slowdown in the Chinese economy would result in a collapse in construction activity and hence the demand for commodities. This would adversely affect the commodity-driven growth economies in Asia such as Malaysia, Indonesia and Australia, which have benefited greatly from China's boom. A slow down in these regional Asian economies would in turn cause a slowdown in the foreign monetary inflows from these countries coming into Singapore, which would exacerbate the impact on the Singaporean economy mentioned above.

To be sure, some commentators have argued that China's property market will not collapse and that it will go through a gradual and manageable housing price correction that will not have the deleterious effects associated with a debt deflation process. I certainly hope that this is the case, because many people would be hurt in the case of a major bubble burst.

But the point remains that restructuring of the Singaporean economy by the Government to depend on foreign monetary inflows over the past few years has made Singapore ever more susceptible to the booms and busts of foreign economies over which we have no control. Singapore's economy is now becoming more like a Sampan Economy which is tossed and turned by the tides and the waves in the deep blue sea.

This susceptibility to global booms and busts breeds fragility and is fundamentally unhealthy for the country. Adjustments need to be made to improve the resilience and stability of the system and to reduce dependence on foreign factor inputs.


Further Reading:

1 comment:

Fievel said...

The weird thing about asset bubbles is that it's like baking a cake. It's gotta "rise" to the correct amount, before the market starts to attack/eat it.

Now, the housing cake is ready for the bears to eat, any further increment in price in the coming months will be merely icing on the cake.