You shouldn’t worry about a bust in the Chinese property sector, says Deutsche Bank strategist Hui Miao, Ph.D, because the sector is Too Big To Fail.
That’s his words. Because the sector is so ginormous, government will inevitably relax any policy that would hurt the sector, and so you should buy those beaten down property developers that Jim Chanos is so bearish on.
In our view, at the macro level, the property sector is too big to fail and the government will most likely relax policies as needed. Land revenue accounts for 30% of local government revenue. 20 per cent of GDP is directly or indirectly linked to property investments.
However, just in case the government can’t stop a collapse, Hui addresses some common concerns about the sector
More importantly, the current level of residential and construction investment (at around 12% of GDP) is not excessive compared to global peers at the same development stage. The financial sector is relatively insulated from the property sector, given the low level of mortgage debt and developer loans in the banking system.
Indeed, this chart suggests (surprisingly) that the banking system isn’t that exposed to real estate, though we wonder how many loans are booked officially as being for something other than mortgages or real estate, when in fact they’re going exactly to that.
Photo: Deutsche Bank
He goes onto make a few other points, including:
- Most property developers are trading at a 50% discount to their book value, so the downside seems limited.
- Compared to other countries, real estate is not that big as a chunk of Chinese GDP (again, we’re a little sceptical of the data).
- New housing for the poor won’t cannibalise the industry, since although a lot of homes are being put up, a lot of low-end homes are being demolished, too.