Whatever the asset class, China remains an endless tale of boom-bust cycles.
From property to stocks, then commodity futures, and then back to property again — it just goes on, and on, and on, almost always fueled by short-term policy decisions that, more often than not, see rapid price gains turn into equally large losses.
The common denominator in each instance is that it’s always fueled by debt, often encouraged by policymakers in order to help achieve a certain goal.
With the stock market rally and crash from mid-2014 through to mid-2015, it was to drive household savings into the stock market, freeing up capital for highly indebted firms to help them pay down debt.
We all know what happened next.
Even with the modest recovery seen over the past year, the embers of investors burnt by the state-sponsored stock market bubble are still everywhere to see.
Now the government has turned to the housing market, which already had its own boom-bust cycle, in order to bolster economic growth.
In a “kill two birds with one stone” approach, the government has tasked the property market with helping to boost economic activity and consumption levels short-term by encouraging residential construction and, longer-term, raise household wealth levels through higher property prices.
Essentially, the government has turned to the old drivers of Chinese economic growth — debt and construction — in order to help boost the new Chinese economic model: growth through consumption and services.
Though no one doubts the merits of helping the economy to transition, it’s being attempted at a breakneck pace, keeping with the tradition established over countless previous years.
Tai Hui, chief Asia market strategist at JP Morgan Asset Management, is one analyst who sees similarities between the stock market bubble and bust of past years and what’s currently happening in the property market.
“Spiraling leverage and implicit state support are among the common denominators,” he said in an interview with Bloomberg.
“It’s similar to the equity market where if you let things loose, it just runs like a stallion.
“And then you have to really rein it back, then it’s like an ice bucket challenge. So you go through this extreme heat and cold. That’s not particularly good for the economy because then you’re going through very aggressive investment cycles,” he said.
No it isn’t, particularly when you’re talking about the asset class tasked with helping to bolster consumption in the years ahead.
Though the debate over whether or not the property market is already in a bubble is, as yet, unresolved, it’s easy to see why some analysts think that trouble is brewing.
According to analysis from ANZ last month, new mortgage debt in China surged by 112% year-on-year in the first half of 2016, accounting for 32% of all new loans issued.
In cumulative terms, the value of mortgage debt now stands at 16.9 trillion yuan ($US2.53 trillion), with 24% of that total drawn in just the past 12 months alone.
The acceleration in housing credit, in unison with a degree of speculation and loosening of property restrictions following the stock market bust, has reinvigorated house prices, particularly in major eastern cities but also in smaller second and third tier cities that are still grappling with years of unsold housing inventory.
This, in turn, has helped to bolster housing construction, and as a consequence base and bulk commodity prices.
It’s all helping to bolster economic growth in the near-term, and with it profitability in the nation’s industrial sector – another problematic area for policymakers.
The problem is what will those decisions deliver in the future — greater economic prosperity for the more than one billion people in China, or a damaging price bubble that could reap havoc on the nation’s financial sector, and beyond that social trouble.
To be fair to policymakers, there have been measures introduced to slow down property price gains in some major cities. Higher downpayments for property purchases, restrictions on the number of properties that can be bought, along with greater levels of industry oversight, have been rolled out in an attempt to address growing financial risks.
Clearly they are aware that there is an issue, and are looking to minimise risks.
But has the horse already bolted?
Just because policymakers are taking action doesn’t mean that the problem is over.
Just ask those who were reassured by regulators that the stock market rally was on solid footing when the Shanghai Composite fell through 5,000 points in June 2015 on its way to 2,640 just eight months later.
In that instance policymakers rolled out any number of measures — including the arrest of “malicious” short-sellers — all to no avail.
The latest round of measures to minimise risks in the property market may be just as ineffective and do little to slow price growth or a lot. Nobody, not least those introducing them, really knows.
Whatever the latest set of measures bring, policymakers appear to be making the same mistakes of the past according to JP Morgan’s Tai Hui.
“The government seems to just go through wild swings when it comes to control and let things loose because they want growth coming back,” he says.
It’s unlikely that anyone tracking the Chinese economy over the past decade will disagree.
However, if a scenario were to occur in the property market akin to what happened with stocks just two years earlier it’s questionable whether Chinese households would be in a position to rescue the economy even if policy levers were tweaked.
There’s no easy solution to ensure that such an outcome doesn’t occur, something that the Reserve Bank of Australia has outlined about China on several occasions in recent months.
Let’s hope that scenario doesn’t eventuate, particularly for countries as heavily reliant upon the health of the Chinese economy as Australia.
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