A- A A+

The end of the China bonus and beginning of more Chinese property buying?

08 September 2014  |  Economics

moneyOne of the factors that has made Australia's economy the standout performer in the OECD since the global financial crisis is its relationship with China. That is starting to deteriorate, as the Chinese economy begins to change character. China is beginning to make the transition up the "value chain": a move towards creating a higher quality industrial base rather than industry that heavily depends on low wage costs. For China to be politically stable, wages must rise -- this is actually stipulated in the latest Five Year Plan -- and that means a different type of industry base.

The fall in the iron ore price is one indication that the "China effect" is starting to ease. It will put pressure on the economy, although volumes remain high. But Australia's place as a provider of raw materials to the Middle Kingdom seems likely to weaken.

It is important to interpret China correctly. The comments in The Guardian that China's housing market is starting to weaken are another example of interpreting China as if it is like a modern Western economy. The housing market is not the same bell wether that it is in developed economies. There has only been private property ownership since the mid-90s in China, and the over building should be seen in the context that over 300 million Chinese are expected to move from the country to the city over the next decade. Moreover, the Chinese government still owns most of the land in China, which is tier 1 capital they can sell off to underpin their banks if they get in trouble.

The problem for investors in China is that they have nowhere to put their profits. The banks provide low interest rates and the stock market is unstable and mostly government owned. There is no bond market to speak of. They can't take money out, at least not legitimatley (the increasing buying of Australian property indicates there are other options). So they have put their money into Chinese property, which has become an asset bubble.

That process appears to be at an end. The growth rate of investment in real estate development has dropped off. This time last year it was growing at around 19% year on year; now it is down to 13.7%. It is similar with commercial buildings, with the growth of sales in commercial buildings for the first seven months of this year 8.4% below what was achieved last year.

The weakening of the housing market in China is probably one reason why the iron ore price is dropping. But it should be remembered that the Chinese government will still engage in massive infrastructure investment and the Chinese have over $3 trillion in surplus funds. It is unlikely that iron ore demand will collapse just because of what is happening in the housing market.

But what it does indicate is that China's property bubble is actually worse than Australia's, especially in terms of income yield. That is likely to create an even greater incentive to buy Australian property for those Chinese who can get money out of the country.

The Guardian makes this point:


"The volume of exports increased 1.3% in the June quarter, but the actual dollar amount of exports fell 0.6%.

And so we keep looking to China, hoping their real estate market will hold up, and that their demand for our exports will continue to grow strongly.

But a collapse in the Chinese market would also have another sting – if Chinese real estate investors can’t achieve growth in their own markets they will start looking in even greater numbers for value elsewhere – places like New York, Toronto ... and Sydney."







Similar articles from Economics

The era of deflation

 | 10/1/2014

SqueezeDeflationary pressures have been felt across the developed world for about two decades. It is an important point to remember for DIY super investors.

Five implications of a lower $A

 | 9/28/2014

FiveThe $A seems to be headed on a downwards path. What does it mean for DIY investors?

Cross currents hit

 | 9/22/2014

Cross windThe $A is falling, the stock market is losing this year's gains, and the US markets are in bubble territory. How should it all be interpreted?

The Fed makes the big shift

 | 9/17/2014

ShiftThe US Federal Reserve's shift on interest rates is the most important change in the financial markets since the GFC. It will have an effect on investments around the world.

The GFC is still with us

 | 9/15/2014

GFCWhen interest rates rise in the US, it will be a test of a fragile global financial system. Because the stresses caused by the GFC remain.



Subscribe to the Personal Super Investor weekly email to keep abreast of developments in SMSF law and investment markets. SMSF investors looking to improve investment returns from shares, property, cash or other specialised investments, will find the PSI weekly newsletter an invaluable resource.

Subscribe now »


The contents of this website are of a general nature only and have not been prepared to take into account any particular investor's objectives, financial situation or particular needs. Our content is not intended to be advice and must not be relied upon as such. You should seek independent advice tailored to your specific circumstances prior to making any decisions. Personal Super Investor does not provide financial product advice or recommend any financial products: Where this website or it derived newsletter/electronic publication refers to a particular financial product, whether it be within our editorial or a 3rd party advertising, advertising promotion or advertorial, then you should obtain a Product Disclosure Statement (PDS) relating to that product and consider the PDS before making any decision about whether to acquire the product. We also recommend that you should seek professional advice from a financial adviser before making any decision to purchase any financial product referred to on this website. We do not make any representation or warranty that any material on the Personal Super Investor website will be reliable, accurate or complete, nor do we accept any responsibility arising in any way from errors or omissions of our content or any content provided by any advertiser appearing the Personal Super Investor website. We will not be liable for loss resulting from any action or decision by you in reliance on the Material (whether editorial or advertising) on the Personal Super Investor website, nor any interruption, delay in operation or transmission, virus, communications failure, Internet access difficulties, or malfunction in your equipment or software. By using the site you acknowledge that we are not responsible for, and accept no liability in relation to any content contained on the site that you may use, including any other users’ use of the Personal Super Investor website in any circumstance. You use the Personal Super Investor website at your sole risk.