Pushing downwards

The big October holiday is over, but the Evergrande situation remains as fraught as ever. What is becoming clear is that the Center’s decision is to carve up the problem and have it (hopefully) dissipate at the local level, with local governments being largely responsible for solving Evergrande-related issues on their turf. No doubt the Center will bail out many of them. But the cumulative effect of this on the prospects for the property market and the economy beyond is what matters. The property market is looking less and less likely to be buoyant for a period of time, although there will be exceptions. Our view has always been that property prices in Shanghai would probably still rise even in the event of war. And maybe Beijing and Shenzhen too. But how about all those other cities? 

Now, a solid correction for China’s property market would not necessarily be a bad thing. It has been one of the many weird elements in the mix of the past few decades – a market that cannot fall. And sorting it out to remove the speculation, and also the reliance on property sales to fund local governments is a great idea. The question is whether or not it can be done without having a significant impact on the overall economy. To what extent is China’s economy reliant on a high growth rate, and to what extent is the property market the only significant source of such growth potential? How will local governments fare over the next couple of years if land sales continue to fall and apartment sales slow? The value of nationwide land sales dropped 17.5% year-on-year in August. Prices may not shift much because the government has ways to keep them from falling below a certain level. And also owners are, in most cases, reluctant to sell at low prices. But in the end, the tectonic plates underlying a market have a way of having their way. Serious reform of taxes for local governments has been a top requirement for years, but it looks impossible to implement a property tax in current circumstances. 

So they have found a way to bring the Evergrande mess under control, at least for now, and the problems that emerge at local levels will be far less visible than major international bond payment defaults. But this is still a good time to ponder the future. The whole situation no doubt reminds investors of the advantages of transparency and accountability.

Have a great truncated weekend.