Opinion

Catching a Cold

It’s often said that ‘When China sneezes, Macau catches a cold’. 
 
At a joint business chamber luncheon last month, members and guests were reminded of this old adage.   Guest speaker Joe Zhou, Regional Director and Head of Research for Jones Lang LaSalle in China, presented his views on the influence of China on Macau’s real estate market. 
 
He gave interesting insights into the dynamics and intricacies of the Chinese economy and how invariably it has impacted on us here in Macau. Especially so when it comes to property, which underpins much of the wealth and well being of the local community.  
 
World economists and laypeople alike watch China’s GDP numbers closely to gauge the health or otherwise of the economy.  Whether we can believe the numbers or not, China’s eight percent GDP growth appeared to remain constant from 2000 to the end of 2011 – an enviable figure for many countries.   Then a gentle decline began and at the end of 2015, China announced a number of policy objectives aimed at stimulating the economy again. The concern is however, that short-term growth may come at a price and impose higher risk to the economy in the long run.  
 
Coinciding with China’s overall economic growth, over the past 10 years, house prices have surged.  To climb the housing ladder, buyers have increased their leverage leading to a massive household debt burden. Over 50 percent of bank loans have gone to house purchasing, sales volumes have gone up six times across 20 of the main cities in China, and prices have skyrocketed.  
 
To rein in prices, in October last year a tightening policy was implemented resulting in a 30-50 percent drop in purchasing across the mainland, however inventories in most cities remain at record lows. This will keep prices up.
 
And while China remains the world’s best consumption story on account of its rapidly growing middle class, it’s the demographics that have analysts concerned.  In the 10 years between 2010 and 2020, it’s estimated that China’s urban population will move from savers to consumers, to the point that there will be an almost 20 percent decline in the saver generation and an over 80 percent growth in the consumer generation.  
 
Zhou used the analogy of his parents’ generation, who used savings to buy a home, rather than taking out a bank loan.   Their children on the other hand, belong to the consumer generation.  They use their parents’ savings to put a deposit on a home and spend most of their earnings.   Now their children are growing up, but with no more parental savings to rely on, where is the money going to come from for this young generation to buy their own home?  Bank lending is the answer; higher leveraging is today more the norm than the exception, and this comes with its own risks.  
 
Zhou presented three possible scenarios being predicted for China over the coming couple of years from various reliable sources, all of which point to some level of slowdown in China’s economy, some gradual, some more rapid.
 
What are the implications of all of this for us here in Macau?  The headwinds come in the form of economic volatility within China, policy uncertainty and interest rates that are likely to rise, making borrowing less affordable.  Up until recently, China’s investors have been very active in the property field. In 2016, China exceeded the US as the largest investor, globally. Thirty-eight percent of high net worth individual Chinese hold overseas investments.  But policy changes that tightened capital controls have led to Chinese buyers coming unstuck in places like London where they put down 10 percent deposits on off-plan properties, and now they are defaulting as they can’t get their money out of the country.  There’s a high risk of this in Macau too.
 
The tail winds however, are that Macau has solid underlying fundamentals: unemployment is low and the local property market is still healthy.  Real estate demand is driven by equity and not debt. And the Hong Kong-Macau-Zhuhai bridge and other new transport links will further integrate Macau within the region.  
Zhou ended on a sober note, warning that if China is heading for a hard landing, Macau’s tentative recovery is at risk.  2017 is expected to be relatively stable, with residential properties holding their price, but we are at the mercy of the health of the economy across the border and could all be in for a big shock come 2018.
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