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No Housing Bubble in China
April 12, 2010
This is a special commentary on China housing from director of research John Derrick and senior china analyst Michael Ding.
China’s housing market is hot, but it’s not a bubble on the verge of bursting, as many contend.
Before we can discuss why it’s not a bubble, a little background on the Chinese housing market is needed.
Prior to the early 1990s, urban dwellers in China were provided an apartment by their employers or the government, with rent set at less than 5 percent of their salary (utilities included). Starting in the early 1990s, the government began to privatize housing by selling apartments to their residents at a low price. Almost overnight it created a private home ownership rate of about 70 percent.
This policy change was also a vast redistribution of wealth from the government to the people – those apartments typically occupied prime downtown locations, and thus are worth at least the price of a new luxury apartment.
The price of housing in China has risen as the economy has expanded, but the chart from BCA Research shows that housing price growth has been significantly slower than GDP growth since the late 1980s.
The price of housing has roughly doubled since the late 1990s, but it’s important to remember that China’s prices have risen from a much lower base than in the developed countries (among them, Britain, Ireland and Spain) in which bubbles were created. It’s also relevant to point out that household disposable income in China more than doubled during the period. The rise of the Chinese middle class is a major global economic phenomenon – tens of millions of people are added each year.
Leverage is also an important indicator in judging how susceptible a housing market is to growing into a bubble. The chart below, also from BCA Research, shows debt as a percentage of disposable income in China and in a number of developed-market countries. More than half of the developed countries had debt in excess of income, with Denmark and Ireland pushing 200 percent.
China is at the far other end, with debt totaling just 44 percent of disposable income. Furthermore, homebuyers in China put down at least 20 percent as a down payment (30 percent for a first-time buyer and 40 percent for a second-home buyer to damp down speculation). These buyers rarely fall behind on their mortgage payments.
It’s obviously true that there has been rapid price appreciation in major cities like Shanghai and Beijing. Prices have risen above the affordability level for most families in these cities, and that is why the government is acting to let some air out of those markets before dangerous bubbles form.
For example, the government's "second mortgage rule" requiring much higher down payments is having some effect – in January, price appreciation rose less than 1 percent month-over-month, down from a 2.1 percent jump in December. The government has also ordered that developers build more economical homes.
Where does the China housing market go from here? Home inventories are low in major cities – at the current sales pace, there are only a few months worth of inventory in Shanghai, and the situation isn’t much better in Beijing or Shenzhen.
But demand is still strong. A recent survey by the Hong Kong-based brokerage CLSA found that 56 percent of China’s middle-class families are considering buying a new home – despite the higher prices many families can pay a 30 percent down payment because of their higher savings.
Our own research shows that property developers, coming off a good 2009, are expanding into second- and third-tier cities, where housing markets are also growing and prices are more affordable.
This widening of opportunity, combined with the government’s early recognition that decisive measures were needed, together will raise the probability that it will achieve its goal of slowing down home price increases without causing the market to collapse.
Senior China analyst Michael Ding contributed to this commentary.
China Is Gold’s Future
April 05, 2010
The new report “Gold in the Year of the Tiger” from the World Gold Council (WGC) predicts that gold consumption in China could double in the coming decade as a result of rising demand for jewelry, hard-asset investments and industrial uses.
This forecast seems reasonable, and it lines up with what I’ve long been saying about the profound evolution in China’s economy – domestic consumption is replacing exports as the growth engine as more poor Chinese move up into the middle class and from there into the ranks of the wealthy.
Tens of millions of people in China are joining the middle class every year – by some estimates, they already number more than the entire U.S. population and could double in the next decade.
They are buying more spacious and better-outfitted homes. They have made China the world’s largest automobile market, and a wide range of brand-name Western luxury items are available even in provincial cities.
China has a centuries-long cultural affinity for gold, so it makes sense that more middle class and wealthy would mean more gold sales.
The line on the WGC chart above shows how investment demand for gold has rocketed up from next to nothing in 2001 to 80 tonnes (2.6 million troy ounces) last year, with the sharpest upswing coming after trading rules were liberalized in mid-2007. Over the same period, China’s GDP roughly tripled. The Chinese are famous for their high savings rate, and the chart shows how important gold has become as a store of their growing wealth.
The next chart compares China’s annual gold jewelry consumption to more than a dozen other countries. Last year, China consumed 347 tonnes in jewelry, which was about 30 tonnes more than the country’s total gold production (tops in the world). But on a per-capita basis, China is near the bottom of this list.
The World Gold Council points out that, if China matched Saudi Arabia on a per-capita basis, it would consume an additional 4,000 tonnes of gold jewelry each year. That’s more than last year’s demand for the entire world (3,386 tonnes), so even the most enthusiastic gold devotees would probably agree that it’s not a realistic number.
But given projections that the Chinese middle class will double in the next decade as China’s economic growth generates a wider distribution of wealth, it’s not farfetched to think that its gold consumption could also double.
It is farfetched, however, to think that China’s domestic gold output could keep pace with demand growth – more and more of the world’s gold production (on a declining trend for years) would have to be diverted to the Chinese market, and the result could be a significant impact on gold prices in the years to come.
Chart of the Week
March 29, 2010
Chart is from the latest edition of U.S. Global’s Weekly Investor Alert:
Indonesia is one of the giants of Asia, yet for most people it doesn’t come to mind when thinking about the continent’s economic vitality.
A few quick facts about Indonesia: a population of 234 million (4th in the world) that has been rapidly urbanizing since the 1970s. An estimated 22 million people live in or around Jakarta, making it the world’s second-largest urban area. Its natural wealth (oil, gas, metals, agriculture) enables it to be part of the G-20 group of major economies, and GDP growth in 2010 is estimated at 6 percent.
The chart shows how annual cement demand in Indonesia has more than doubled in the past decade, with the key driver being housing as the country deals with urban growth – nearly seven of every 10 Indonesians are expected to live in cities by 2030, up from 42 percent in 2000.
But the infrastructure needs run deeper than housing, and so do the opportunities.
A story last week in the Bali Times quoted top government officials saying that the nation wants to attract $90 billion in private infrastructure investment in the coming five years to build and upgrade roads, railroads, seaports, power generation, health care and other facilities critical to economic growth.
This represents a significant policy change in Indonesia, which attracted only $10 billion in foreign direct investment last year.
We watch government policies for signals of a change in investment climate. Indonesia, recognizing that it must deal with its changing demographics and at the same time remain competitive with its neighbors, may be sending an important signal that its doors will open wider to overseas investors.
To get more insights and perspective from the U.S. Global Investors investment team, subscribe to the Weekly Investor Alert.
Emerging Markets on Buying Spree
March 22, 2010
It’s getting to be common news for a Chinese company (usually with links to the government) to buy a foreign commodities producer to secure supplies of coal, oil, iron ore and other assets to fulfill the country’s ambitious growth plans.
China is not alone on this shopping spree. We came across some new data, for example, that shows a clear trend of emerging-market countries increasing their ownership stakes of companies in the developed world.
This is yet another indicator of the shifting balance in global wealth from the developed toward the emerging economies.
China, the Middle East and India led a rebound in the number of emerging-market entities acquiring developed-world companies (E2D), according to KPMG’s Emerging Markets International Acquisition Tracker (EMIAT).
EMIAT showed that 102 E2D transactions were completed in the second half of 2009, compared to 78 such deals in the first six months of the year. The chart above shows the trend for both E2D deals and developed-market companies buying assets in emerging nations (D2E), which have trailed off since the start of the Great Recession.
A little more detail on the EMIAT: it covers 12 developed economies and 11 select emerging economies, and for a deal to count, the buyer must buy at least 10 percent of the overseas company.
In 2009, Chinese companies made 50 acquisitions in the developed markets (which include Hong Kong), the highest number since EMIAT began in 2003. There were 86 deals going in the opposite direction, the lowest figure recorded by KPMG.
China’s outbound deals last year included Sinopec’s purchase of Addax Petroleum for $7.3 billion, Yanzhou Coal’s $2.9 billion deal for Felix Resources and PetroChina’s outlay of $1.7 billion for a stake in Athabasca, the Canadian oil sands producer.
PriceWaterhouseCoopers estimates that China’s overseas deals may grow 40 percent this year – already its national oil company is aiming to buy half of a major producer in Argentina for some $3 billion, and it has its eye on a number of other targets.
For India, last year’s numbers were 25 and 73, respectively. India is the leading E2D dealmaker since 2003, with more than 400 completed transactions. Brazil was a laggard in this trend in 2009: just two E2D deals and 20 D2E deals.
KPMG says it noticed an especially strong trend involving commodity and other resource-related acquisitions in the second half of 2009. It also predicted that oil-fueled Middle East sovereign wealth funds (Abu Dhabi’s alone is estimated at $600+ billion) will soon get busier. Once this occurs, KPMG says, expect the spread between D2E and E2D to narrow dramatically.
The major emerging markets are growing much faster than the developed markets. Companies in these developing countries have used this leverage to build a stronger supply chain of natural resources that will allow them to maintain this brisk pace when the competition for scarce resources heats up.
This is just one of the ways that China and other emerging markets are tilting the global economy so more of the world’s wealth flows their way.
By clicking on the link, you will be directed to the KPMG website. U.S. Global Investors does not endorse all the information supplied by this website and is not responsible for its content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following securities mentioned in this commentary were held by one or more of U.S. Global Investors’ clients as of 12-31-09: Yanzhou Coal Mining Co. Ltd., PetroChina Co. Ltd.
Sovereign Debt: Emerging Markets Advantage
March 15, 2010
It’s not a good time to be a developed economy.
Sovereign debt is at or near the crisis point in Greece, Spain, Ireland and Portugal. It’s also a big issue and getting bigger in the United States, Britain, Japan and a number of other countries.
Mohamed El-Erian, CEO at bond giant Pimco, was right when he wrote in Thursday’s Financial Times that sovereign debt represents “a significant regime shift in advanced economies with consequential and long-lasting effects.”
Debt conditions are much better in the major emerging markets, as you can see in the chart below. In the G-20 largest developed economies, sovereign debt burdens are now at about 100 percent of GDP, while in the 20 most important emerging markets, debt represents only about 40 percent of GDP.
In the next few years, the forecast sees the G-20 ratio rising another 20 percent. In the U.S., the ratio is already at its highest level since World War II, and another $10 trillion (70 percent of current GDP) will be added over the next decade. Meanwhile, the emerging 20’s sovereign debt-to-GDP actually goes down as a result of smaller budget deficits.
The lighter debt load benefits emerging markets in a number of ways, particularly in how risks are measured and perceived.
Sovereign credit ratings for emerging markets are improving, while the credit ratings of developed markets are dropping off significantly. This can be seen in the chart below—of course, developed markets still have higher ratings (left axis versus right axis) but the trend is for the key emerging markets is notably upward.
Higher credit ratings mean lower costs of capital for these countries, which is a positive for economic growth in countries that are already growing faster than the developed markets.
Now what about equity prices? Historically, there has been a negative correlation between bond prices and equity prices in developed markets, in what can be viewed as a safety trade. In emerging markets, however, we see a positive correlation between bond prices and equity prices in recent years. This makes sense to us, because both of these asset classes are driven by money flows from investors attracted by improving economic prospects in emerging countries.
Emerging markets have had appeal for risk-tolerant investors because these economies are growing faster and their companies have generated higher returns. The sovereign debt issue is reducing the relative risk of investing in both bonds and equities in these dynamic markets—in this scenario, investors should consider the equities to capture the higher return.
Net Asset Value
as of 09/08/2010
- Global Resources Fund
PSPFX $8.78 +0.05 - Gold and Precious Metals Fund
USERX $17.44 +0.03 - World Precious Minerals Fund
UNWPX $20.18 -0.01 - China Region Fund
USCOX $8.61 -0.02 - Eastern European Fund
EUROX $9.11 +0.13 - Global Emerging Markets Fund
GEMFX $8.17 +0.08 - Global MegaTrends Fund
MEGAX $7.71 +0.04 - All American Equity Fund
GBTFX $20.02 +0.09 - Holmes Growth Fund
ACBGX $16.04 +0.15 - Tax Free Fund
USUTX $12.58 -0.01 - Near-Term Tax Free Fund
NEARX $2.26 -0.01 - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change