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China Data, Part 1: Real Estate Downturn

December 12, 2011

Last week, I promised to share some of the data points I’ve been collecting on the recent downturn in the Chinese economy.  The challenge I’ve faced is an embarrassment of riches — too much interesting information, rather than too little.  So I’ve decided to chop my presentation up into several smaller-size parts, for the reader’s sake and for mine.  Today, I’ll focus on what’s happening in China’s real estate market.  Over the next day or so, I’ll broaden that to look at the implications for China’s investment-led GDP growth, the health of its banking system, and its currency. 

Last Wednesday, I was on CCTV News Dialogue show talking about the sharp drop China is seeing in property prices.  You can watch the program here, and it’s a good starting point for getting a handle on the key points and underlying narrative.  There’s also an accompanying survey on the site whose interesting results I’ll refer to in a bit.

The first signs of a downturn emerged in August, when China’s top 10 property developers reported unsold inventories totalling RMB 318 billion (US$ 50 billion), up 46% from the previous year.  Highly leveraged, with debt to asset ratios approaching 65%, developers were coming under increasing pressure to liquidate those inventories for cash.  The fire sale began in October, with several Shanghai developers slashing sale prices on new apartments by 25% or more.  The discounts sparked angry (and sometimes violent) protests from investors who had previously bought the same units at full price, demanding refunds.  Although the Shanghai protests garnered the greatest media attention, the price cuts — and angry reactions — have been far more widespread.  The Beijing Morning Post reports that, according to real estate agency Homelink, by November at least ten cities (including Shanghai, Shenzhen, Nanjing, Suzhou, Hangzhou, Changsha, and Changchun) had seen developers slash prices on major projects and promise to pay the difference to previous buyers.  According to China Securities Journal, by the beginning of November, developers began cutting prices in Tier 2 and 3 cities in the Pearl River Delta.

According to the China Real Estate Index, published by, the average primary market housing price across China’s top 100 cities dropped for the third month in a row in November, by 0.3% month-on-month, with prices in 43 cities still rising and 57 cities falling.  However, other real estate agencies reported steeper drops in specific locations.  Homelink said that in November alone, primary market prices in Beijing dropped 35% month-on-month, and industry sources told the Legal Evening Post they dropped 16.8% week-on-week in the last week of November, down 29% year-on-year.  According to Caijing magazine, Beijing home sales volume (by area) in the first 11 months of 2011 was down 27% year-on-year, to a 10-year record low.  A similar fall-off was evident in commercial as well as residential real estate.  According to the Beijing Morning Post, sales volume for retail and office space in the capital dropped 18% and 7.4% respectively in October, month-on-month.  Homelink’s chief Beijing analyst, Zhang Yue, told the paper he saw a growing supply glut developing.

The downturn was not limited to Beijing.  Dooioo, another agency, said that primary housing sales volumes in Shanghai are the worst since 2006, while Chinese Business News reported that in Shenzhen, primary prices were down 10.7% and transactions down 11.3% week-on-week in the last week of November.  Business China also reported a drastic drop in sales, despite generous discounting:

Housing transactions in Beijing declined by 22% year-on-year in the past week (Nov. 21-27), according to the latest data compiled by the China Index Academy. The data also show almost 80% of the 35 key cities the academy monitors have seen transactions plunge.  Tianjin’s housing transactions shrank 57% y-o-y, and in the central Chinese city of Changsha, activity dropped 79% from a year earlier, according to the data. In South China’s Shenzhen, only 294 flats were sold last week, totaling some 26,600 square meters — only 50% of the transaction area sold in the same period last year.

One location of particular interest is Ordos, the so-called “ghost city” in Inner Mongolia which I’ve been interviewed about so many times on TV.  This summer, I began hearing stories of financial troubles — even a few suicides — among some of the less well-connected developers and speculators.  Then, a few weeks ago, carried a dire report that average property prices there had suddenly plunged 70%, from RMB 10,000 per square meter to RMB 3,000, spawning a massive credit crisis.  The municipal government vigorously denied this report, arguing that while prices had fallen, no catastrophic “crash” had taken place.  However, as this first-hand account by Reuters reporters indicates, the mood and activity in the property sector there has definitely taken a turn for the worse:

“People are worried. Especially if they have bought two or three apartments,” said Yu Mingjun, a worker sitting in a down jacket at a ramshackle office of a half-completed project in the old town.  Beside him, a colleague played video games while outside, the few construction workers left on site chatted over a card game.  “Actually I am worried too. I can’t decide what to do. I’m thinking of leaving here” . . .

In empty showrooms of Dongsheng, Ordos’ old city, saleswomen immediately offer 30 percent price discounts if a buyer is willing to pay for a property upfront and in cash . . .

On Thursday, a policeman shooed a Reuters cameraman away from the Wenming (“Culture”) property development right near government buildings in Kangbashi, as workers bearing shovels walked in to demand their last payment before heading home.  “Kangbashi is a sensitive place now,” he said.

Shanghai Securities News reported in late November that many developers in Ordos had borrowed from underground lenders, who were now pushing them to repay.  Caijing reported that one high-end housing developer in Ordos had sold only 1/4 of its units, and was now slashing prices and promising to make up the difference to previous buyers.

The pressure on developers is unlikely to ease up anytime soon.  According to property agency Centaline, unsold developer inventories reached new highs in September and October, levels that it calculates would take at least 22 months to clear in Beijing and 21 months in Shanghai, assuming normal sales volumes, even if no new projects were completed.  Because more projects are underway, Centaline said it expects the country’s unsold housing inventory to keep growing and peak only in March of next year.

Caijing magazine paints a similar picture, estimating that the unsold housing piled up by developers in various cities across China would take roughly 12 months to sell at normal transaction volumes.  It reports that, by the end of November, the total inventory of new unsold housing in eight major Chinese cities reached 45.95 million square meters, an increase of 38.4% over last year — and was still growing, by 3.1% over the previous month.  Unsold stocks in 2nd-tier Hangzhou reached 3.35 million square meters, up an astonishing 61.8% over November 2010.

Conditions are taking their toll on developers.  According to Homelink, China’s top 10 developers recorded sales of RMB 2.7 billion in November, down 25% month-on-month.  With their high debt ratios, receding revenue puts them in an ever more serious cash crunch, according to

Yang Guohua, an analyst with Orient Securities, told Guangzhou Daily that, taking June of this year as a starting point, 115 listed developers in China will face a cash shortage of 132.9 billion yuan (US$20.8 billion) in the next 12 months . . .

Yang estimated that the debts owned by listed developers are mostly due in the next three years, while 46% of them must be paid in 2012 and 12.2% is due in the first quarter of next year. 

“If the situation continues, many property projects will be postponed next year,” an unnamed realtor told the newspaper.

Other companies are piling out of the once-hot sector.  Caijing reports that 16 A-share listed manufacturing companies that got involved in property development have now exited the business.  They explained that while real estate activities had once given them easy access to bank lending, those same activities had now become a major obstacle to obtaining financing.

Real estate agents are also closing up shop.  In early November, China Radio reported that in Shenzhen, Centaline had laid of 17% of its employees.  In Beijing, Centaline had closed 10% of its stores, and in the overall market, roughly half of all agencies had shut down.  According to China Securities Journal, one reason agents are suffering is that developers — who used to settle agents’ commission every month — are now holding back on those payments for up to six months.  Last week, according to Guangzhou Daily, Centaline completely suspended its secondary market sales operations in that city to reduce its losses.

How investors in the secondary market will react to the collapse in primary market prices is the biggest question of all.  As I’ve mentioned many times, many people in China buy multiple units of housing in order to hold them empty indefinitely, as a form of savings.  They do this because they have few attractive alternatives and because they have faith that housing prices will go up.  Since many have paid cash, they aren’t under the same immediate pressure to sell as developers.  But they do tend to look to rising primary market prices for assurance that their investments are profitable and safe, and now those prices are now plummeting.  A great deal depends on whether they hunker down to weather the storm, or join the fire sale.

So far, the result seems to be a standoff.  Secondary market prices have dropped only slightly, but transaction volumes fallen off steeply.  In Beijing, for instance, secondary market prices fell 3.0% month-on-month in November, according to Homelink, but according to Centaline analyst Zhang Dawei, October sales volumes were the lowest since the global financial crisis hit China in December 2008, down 55.8% year-on-year.  In Shenzhen, according to Chinese Business News, secondary residential prices were actually up 1.3% week-on-week in the last week of November, but volume was down 15.3% week-on-week.  A China Daily article describes the dilemma:

According to an industry insider who declined to be identified, sellers of pre-owned homes can afford price drops of only 5 to 10 percent, but buyers want declines of more than 20 percent.

“Some new real estate projects have begun to slash prices to attract buyers, who certainly prefer new homes instead of pre-owned ones, which is the very culprit behind the bleak outlook of the secondhand home market,” he said.

The article, which makes interesting reading in its entirety, offers a hint at why some investors, at least, are in no hurry to sell at a loss:

For Huang, who is thinking about renovating and renting the apartments that he can’t sell, the situation is still not so bad.

“I’m not short of money, so I wouldn’t rush to sell below my bottom line.”

He said he expected the tightening measures to be loosened during the next five years.

However, not every investor may enjoy the same latitude.  Beijing-based blogger Bill Bishop recently related the story of an email he received, which makes equally interesting reading.  It came from a real estate agent representing a condo owner in one of the city’s top apartment buildings, in the Central Business District (CBD).  Although he had no mortgage, and owned the unit outright, he was desperate to sell in order to raise RMB 20 million for his business.  So it’s worth keeping in mind that, while many Chinese investors may not be directly leveraged on their real estate investments, given the credit explosion that has driven the Chinese economy these past few years, they may be highly leveraged in their business or other ways that could turn them into distressed sellers.

Even without sparking a panic in the secondary market, a prolonged correction in the primary market is enough to pose a serious challenge to the broader Chinese economy.  Remember what that unnamed realtor told, that “if the situation continues, many property projects will be postponed next year.”  According to Shanghai Securities News, PBOC data on new bank accounts being opened by developers indicates that fewer projects are being initiated, and that property investment is slowing.  I’ll have more to say about the likely impact on GDP in my next installment, but for the moment, let’s focus on land sales and local government finances.

According to a central government study, local governments in China depend on land sales for approximately 40% of their revenues.  The all-purpose answer, whenever doubts are raised about the ability of local governments to repay the loans or bonds that funded various stimulus projects, is that they can always sell more land.  But when developers stop building, because they are too busy desperately trying to liquidate their existing inventories, they stop buying land.

According to Centaline, in November, 117 land parcel auctions in 35 major cities failed to find a buyer.  Beijing cancelled two sales; in Guangzhou, 32 plots failed to sell; in Shanghai, one 4 out of 11 parcels offered found buyers; in Nanjing, only 4 out of 8 sold.  According to Guangzhou Daily, in early November, the city suspended the sale of land next to the high-speed rail line, due to lack of bidders.  In October, according to Centaline, 23% of all housing land auctions failed.  This year, again according to Centaline, 11-month land sales revenue in China’s top 15 cities is down by 13% year-on-year.  Beijing is down 14.4%, Shanghai 16%, Nanjing 51%.  Over 130 cities saw land sales down by 30% or more.  According to Chinese Business News, one developer in Sichuan actually tried to sell some land back to the local government, so it could get out of the property business.  Authorities initially agreed, then changed their minds.

Tom Orlik, of the Wall Street Journal, recently highlighted this trend, and its potential ramifications, in a blog post which you can read here.  Suffice it to say — and I will have plenty more to say about this in follow-on posts — ever-rising land prices serve as one crucial underpinning for China’s entire financial system (the other, as we will see, is the nominal fiscal balance sheet of the central government).  So it’s worth examining the excellent graph that accompanies Tom’s post, which displays the three-month moving average of sales volumes and prices for residential land, based on Soufun data.  You can clearly see what was giving the Chinese government heart-attacks at the end of 2008, the boom that resulted from stimulus lending, and the long, difficult effort to bring that boom back under control:

Last but not least, I want to return to the informal online survey on the CCTV News site, the results of which you can view directly here.  Obviously this is a very small, self-selected sample, probably skewed towards a younger, English-speaking audience.  But the results were intriguing.  Far from being upset at dropping prices, over 55% said that prices were still too high for them to afford, and 23% said they were happy prices are falling.  Only 12% said this is a good time to buy a house, while 71% said no, it’s not — probably because nearly 54% believe that prices will keep falling next year.  That’s not what I hear from one Chinese optimist I met at the Boao Forum in Paris, who told me — with the kind of absolute certainly I only wish I could possess about anything — that real estate prices would come surging back away Chinese New Year.  Apparently not everyone agrees, and there are some who are either holding out for lower prices, or expecting things to really fall off a cliff.  Unscientific, but interesting nonetheless.  What is suggests to me is that the earlier dynamic — where prospective homeowners were desperate to buy at any price, for fear that price would rise — has now changed, and even non-speculative buyers are adopting a wait-and-see approach, which undermines demand just as developers are becoming desperate to sell, creating a spiral of downward expectations.

That’s enough for right now.  In my next post, I’ll examine how plunging asset prices appear to be influencing the value of the RMB and China’s exchange rate, as well as inflation.

29 Comments leave one →
  1. December 13, 2011 4:49 am

    CCTV is pure propaganda and your understanding of political economy is naive.

  2. FrParlentAuxFr permalink
    December 13, 2011 8:56 pm

    Thanks for your post Professor Chovanec, your posts are worth infinitely more than many deceitful investment banking reports about the situation in China. It is an on the ground, facts based report. I would argue against JC that one should not trust central planners neither in the US or China or anywhere to achieve the best outcome. In the long it is science and Adam Smith economics which run the show. Currency, sovereign and banking crisis in Europe, looming currency crisis in the US, and real estate and banking crisis are the result of the arrogance of the economic alchemists having the illusion of control. Political economy is a dogma which is invariably destroyed by the invisible hand when it results in imbalances.

  3. Anna permalink
    December 14, 2011 12:11 am

    Thank you Patrick and look forward to your future summaries on the current situation. US/Europe/China are all suffering from the variations of “too much debt”. The fact that in different countries it’s more concentrated in different places – governments, households, banks – is neither here nor there. Debt has to somehow unravel from wherever it sits and all means of debt reduction are painful. Politics create or encourage conditions for debt accummulation but they sadly can’t do anything when debt gets out of control – law of economics kicks in and this can’t be bent by any politician in any country. Ponzi ALWAYS fail when last marginal sucker disapears.
    (The other big problem is balance of payments but this is for another of Patrick’s posts)

  4. December 14, 2011 1:15 am

    Great post professor.

    Do you think the social housing will exacerbate the housing bubble, when/if it pops? If Beijing is adding millions of new units, when there are already tens of millions of vacant units, it seems like they are just making things worse.

    What’s the big aversion to a small property tax, just to shake off a few of the most egregious speculators? I know they were trying that out in Chongqing, but it seems to have vanished from the radar. Sounds like a good way to free up housing units without building new ones.

  5. December 14, 2011 2:30 am

    Thank you Mr. Chovanec for yet another interesting article. Although the weekly sales statistics are extremely volatile in nature, since they do not capture the quality of what’s being sold, it is nevertheless a good indication. Another good indication is the average price per square meter sold by real estate development enterprises all accross China. This is a very broad measure, but in November average prices all accross China was CNY 4800, that’s actually down 2% compared to last year.

    Since the figure 65m empty apartments were released last summer, I have tried my very best to verify this. Do you have any updates on this? According to official statistics, around 80m apartment units of both commercial, off-market and subsidized residential housing was completed between 1998 and 2010, with an additional 60m units in the pipeline over the next few years (36m subsidized units and around 30m commercial units.). Based on this, 65m empty units as of summer 2010 seems to be a bit too much, or perhaps the majority of those apartments are old?

  6. December 14, 2011 4:08 pm

    Thanks again for the insight. I always look forward to reading your posts.

    Any advice to prospective buyers/sellers?

  7. vincent permalink
    January 17, 2012 11:09 pm

    That’s awesome “Building tomorrow infrastructure today, now we are building day after tomorrow’s infrastructure today.”

  8. choo permalink
    February 28, 2012 1:54 pm

    I suspect many Chinese are using property as a “store of value” which is silly as these assets are on leasehold land and building quality is very poor.. Also why would property prices recover when the government lift resctriction on multiple home ownership? Haven’t the Chinese realise that prices don’t always go up? law of demand & supply works even in China. There is no economic value in buying a property & keeping it vacant. Residential property generates the least economic value for a country.

    the growth model China has taken has some pretty bad consequence going forward. let’s see if their great minds can get them out of it and whether their political elite has the will.

  9. choo permalink
    July 31, 2012 10:12 am

    Professor: what are your views on this article? “Beijing scrambles to hold falling yuan up. Enduring weakness if euro, some other currencies blamed for its recent decline SHANGHAI] Market forces are mostly to blame for the yuan’s unprecedented fall against the dollar in recent months, market participants say, with Chinese regulators now busy propping up the currency, marking a major reversal in approach as the country’s economic growth slows.
    The yuan has fallen 1.4 per cent against the US dollar this year and touched 10-month lows, its first period of extended weakness since China’s landmark de-pegging of the currency in July 2005.
    In the past, China’s trade partners – the United States in particular – complained that the Chinese government deliberately undervalued its currency to support exports.
    The decline of the yuan this year has led some to suggest that Beijing is deliberately flogging it downward, but the recent behaviour of the currency does not support that argument….”


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