The China bubble and its impact on Aus

There’s been a lot of discussion about when the China real estate bubble will pop.

The question is will the impact be positive or negative for Australia? One scenario which could play out is millions of wealthy Chinese scrambling to get their money out of a collapsing nation will pour it into Australia (and other countries they are currently invested in).

 

1) It is unlikely to pop - Communist Party will prop it up if it takes a turn for the worse
2) Chinese have severe restrictions on moving money outside the country. Even though many want to invest elsewhere, they cannot
3) If it did happen I would guess it would be economically negative to our economy and thus house prices

There are issues in the Chinese economy, but China is very happy to keep delaying (and enlarging) the eventual problems.

 

Agree with @Toilandtrouble here about this.

The one thing that blew my mind living in the USA in 2008 was how able govts are around the world to "prop things up".

Prior to this I (and others etc) thought that economies were much more rigid in their ability to "fail", if you look around the USA today you'll see how well financial engineering really works.

1/ Will China stop buying Australian commodities.....
- possibly but probably not.

2/ Will China stop buying Australian property
- they bought so little its irrelevant (yeh I know.....people disagree with me on this point). Will jobs dry up if they stop buying "the Australian economy".....yeh maybe but see point 1.

 

Good points there.

First, Chinese government has tightened the reg re moving money off shore. Much harder now.

Second, the influence of Chinese buyers on Australian property market is very small (Asian faces do not equal to Chinese ppl, many of them are Australian)

Third, China needs to grow it's economy above a certain figure (for various reasons), government stimulation plays major part, they need the natural resources (but they might look to south American and Africa, actually they are already doing it, buying lands, mines, building roads....)

Fourth, what is Australian economy built on? (Mainly exporting resources, and some tourism, education and ? Financial services), Australia is closely tied with Asia (especially China, and ? India) economy wise.

 

Real estate!

I'm only half joking. I read an article in Feb that said real estate has overtaken Healthcare to become biggest employer. What booms in the job market does real estate create other than construction? What about finance?

 

China is going the way Japan did in the late 1990s. Somewhere somehow the bubble will pop.

Chairman xi knows that, and so is now trying to slowdown the debt growth and strengthen their financial sector and cool their property markets.

To his credit debt growth has slowed somewhat but at the same time this has slowed GDP growth and caused some problems at state enterprises depending on gov handouts.

However in the short term, China's economy seems to be OK for now with stable positive PMI numbers for both manufacturing and consumers. However house prices are going down in more and more cities. This will likely impact their economy and Australia's in the next few quarters as we depend a lot on mining exports as well as foreign investment from china.

From the forced retreat of mega property firms like Wanda which have been buying big time into sydney and Melbourne real estate , perhaps it's a sign that the party has just ended in Australia.

This is what Harry had to say...
Local buyers are not buying apartments forfeited by Chinese buyers: Harry Triguboff

 

So why didnt the US go the way of Japan? A bubble popping doesnt automatically mean stagnation. It might lead to something worse, but then another cycle begins.

 

US have their place as THE reserve currency with the 'petrodollar'. However who knows what's gonna happen as more countries move away from using USD.

They were also quick to do massive quantitative easing 3 times post GFC. Which has successfully supported the economy with additional debt. Us debt has been going way up and they have had to constantly up their debt ceiling. Japan's economy is in fact growing now as well from their central bank interventions. However is this true growth? Wage gains, even a decade after the gfc are still bad despite everything else looking rosy.

Also Japan has suffered from aging demographics which China looks to be facing now despite the change to 2 child policy which doesn't seem to be working. US doesn't have such a problem yet.

Is China going down same path as Japan with its ageing population?

 

US is very unique in that it’s acting as the worlds central bank. So comparing China to US is like comparing Japan to Germany ....

 

Like they propped up the Shanghai Composite a few years back? The CCP, like most governments, has fairly limited control. If the bubble bursts and people start to sell, the government won't be able to stop them.

The restrictions regarding money movements are also pretty sketchy. People have a lot of creative ways to remove money from the country, and even if they didn't, it wouldn't stop Chinese property tanking. There are tens of millions of empty apartments. They are worth what, and only what, people will buy for them.

China is likely to experience a similar downturn, if not identical, to what Japan saw in the early 90s. China, demographically and economically, is unlikely to recover within decades from such a crash and it will probably bring about a lot of social upheaval. Australia, as an advanced economy with a free market, is more likely to recover quickly.

 

Many reasons, including the type of the economy, the rate of growth (in Japan the overbuilding was truly extreme). Japan's situation was actually almost identical to China's now: a developing economy, experiencing growth it couldn't sustain, and building apartments as a means of investment, yet simply not having the demographic profile or economic development to absorb them. That is why Japan has never recovered from its crash. It was never going to: its economy grew too fast, too quickly, and was simply too far removed from reality. Japan's crash took it to where it should have been. Its house prices grew 260% in five years. It was honestly just insane.

In contrast USA's bubble was far milder. It grew to less than half the overvaluation, and took three or four times as long, than Japan did when building its bubble. USA only got to about 30-50% overvalued depending on the city. Japan also had the concurrent stock market crash, where the Nikkei dived from 40000 to less than 10000 points over a decade. Japan's industry was extremely factory-reliant, and its industry very external. Basically, its wealth came mostly from people buying its stuff, instead of its own people buying its stuff (at the time), though it was trying to make the shift (as China is now). The combination also had a big effect. Japan also had to compete with a lot of other countries above to provide cheap stuff, such as China. Made in Japan became Made in China, Vietnam, Korea etc.

Again, in comparison, USA's economy was reasonably self sufficient. It definitely suffered, but USA's economy was its own engine, and kept chugging along. People were able to throw money into the US stock market as well.

Japan's crash has ultimately helped it go from being a developing to an advanced economy.

 

They did prop up the stock market and in their efforts made it worse. Most Chinese regard the stock market as gambling rather than investing. Their love affair with property is arguably stronger than Australians.

There are ways to get money out, but it is challenging and limited. Chinese developments in the digital economy and social credit system have further tightened their grasp. Like it or not the capital controls have changed the game and settling on large property settlements is only getting tougher.

I think you could be right on a downturn similar to Japan, but if that does eventuate it will not begin for another 10 years at least and more likely longer. I think it is more likely an external shock to their economy triggers a sudden GFC style moment that leads to a bigger and faster pop. I think it will happen soon after Xi steps down as he has shown he is unwilling to make the tough reform decisions and prefers to delay and make the problem larger.

 

Xi Jinping has successfully removed term limits as president. Don't underestimate the legacy he wants to leave behind. As he goes for his third term and likely more, he will ensure China prospers.

Human nature.

 

Cannot see it happening as a bubble burst. I live here so while not being a financial expert, can tell you what experts have told me.
- Huge amounts of wealth in personal savings. People bank big for future disaster.
- Government controls everything to maintain social stability.
More likely is a long stagnation or drop that hurts China a fair bit but countries that rely on China ( Australia ) a lot more.

 

I wonder if China experts could share their views on the effect of the 70-year limit to Chinese property titles. Basically, in China you can't own a property outright like we do in Australia or other countries. You are essentially buying the right to live in it for 70 years. The land is still owned by the government. Toward the end of this 70-year term, things start getting very murky.

A lot of people who buy new properties don't worry (or even think) about this. But this time bomb is surely going to have an effect I assume? just don't know what kind of issues could surface as time goes on.

 

I don't think that is a big deal. Everyone in China knows if the Government wants your property you are done.

 

Yep. And ACT has pretty much the similar land lease regulations. Doesn’t stop people buying land there.

 

Thats interesting, so if you buy a house in Canberra, you have to give the land back to the ACT gov after, say, 70 years?

 

ACT has a 99 lease condition. Similarly Dubai and a million other jurisdictions (#fakenews). It doesn’t necessarily mean that anything should be given back. Often you can renew the lease for another term, say 99 years, for a token payment of say $1.

Everything in this post and all of my post is hypothetical.