The Chinese economic model – built on debt and secrecy – has found a new outlet store: Australia.
You know, I kinda like China’s gumption. Through an era where the anglo way was the only way as far as economic development was concerned, China remained sceptical.
And while they were being lectured by the West about free-trade and capital flows, I think they saw it for the smoke screen that it was.
“It was low tariffs and free flows of capital that made you rich, was it? It wasn’t slavery, military conquest and the covert over-throw of democratically elected opponents then… No? Really?”
And so they have steadily developed their own way of doing things.
What that way exactly is, is a bit of a mystery. So much so that you wonder if even anyone in China really knows what’s going on.
And China has long since passed the point where most ‘free’ economies would have collapsed in on themselves.
Like Japan. Japan got too high on the debt-juice, and is still wrestling with the hangover twenty years later.
But it hasn’t quite played out that way in China. And partly that’s because the Chinese authorities still have some control over everything.
So say developers borrow too much to build a bunch of buildings nobody wants. In Australia that could bring the banking system to its knees. But not in China. You just order the local governments to buy up the buildings, and the banks to go easy on the debt repayment schedules.
Problem sorted.
And so the Chinese economy looks kind of bananas, but then it’s doing it own thing so who knows how it’s going to play out.
And if the truth be told, even the Australian economy, with a monetary system disconnected from anything real and sky-rocking household debt looks pretty bananas too.
But that’s the modern world. Everything is bananas. What’s a monkey to do?
But then things got a little weird over the weekend, with two data-publishers in China ‘going dark’.
Reuters was running the story:
At least two major Chinese private providers of home price data have stopped publishing the figures, at a time when economists are split whether the red-hot property market will remain a driver of the economy in 2017.
The China Index Academy, a unit of U.S.-listed Fang Holdings, has stopped distributing monthly housing price index data for 100 cities that it usually issued at the start of the month.
The academy told Reuters on Friday it had suspended distribution indefinitely, without giving a reason for the suspension.
“I don't know who exactly is making the order, and it's not mandatory,” said a source with knowledge of the matter, who declined to be identified as the topic is a sensitive one.
E-house China, another influential private real estate consultancy, has also indefinitely suspended its monthly housing price index for 288 cities.
“Judged by current conditions, we won't publish it in the future… Housing prices are an extremely sensitive matter right now,” a source with knowledge of the matter said on condition of anonymity.
The Chinese property bubble has been drawing ohhhs and ahhhs from the kiddies for ages, so now what? The Chinese government bans the data because it doesn’t like what the data is saying?
“I fixed it. I’m a fixer.”
So normally this would be a “not my circus, not my monkeys” type thing, but I think Australia could well be inside the fallout zone.
And the thing I keep thinking about is all these Chinese developers, who have developed their business model under the firm and protective hand of the Chinese state, coming and setting up shop here.
I mean, you look at the coming apartment glut, which is as obvious as the nose on my face, and you think, what are these developers thinking?
And maybe they’re not thinking. Maybe they just don’t even care about supply and demand projections.
Maybe they just happily build, safe in the knowledge that someone will buy it. If it isn’t the public, then the state will always step in.
Chinese developers have totally changed our urban landscape, and they’re still coming. From the AFR:
Chinese developers roared back into Melbourne in the final five months of 2016, snapping up three-quarters of development sites as they shrugged off concerns about apartment oversupply, tougher planning rules and higher property taxes.
Real estate agent CBRE said 75 per cent of the 45 Melbourne development sites they transacted between August and December were sold to mainland Chinese buyers.
“We’ve sold more properties to Chinese buyers in the past five months than in any other five-month period since 2009,” said CBRE national director Mark Wizel…
Bananas.
I don’t really worry about what impact its going to have on the Australian financial system. Aussie banks stopped lending to these things three quarters of a year ago.
But I do worry that Australian cities have become an outlet store for the Chinese development model. Chinese money is funding Chinese developers to build apartments to sell to Chinese buyers.
Who the hell signed up for that?
And how far can we trust a state that is willing to flip the switch on it’s own data providers? And how closely do we want to be tied to an economic model that’s only sustainable so long as everyone is kept in the dark?
These are big questions. Huge.
Why are we still not talking about it?
What do you think China’s up to?
Artfuldodger says
Hi Jon. Interesting article. Its not just Chinese developers though. There are a number of Asian Government backed developers building in Melbourne. I have seen this happening in other cities around the world. One of the common themes seems to be pour capital into ‘safer’ countries while credit is so cheap and think longer term rather than getting a reasonable return on investment in the short term.
EWorrall says
I still think its a bubble. Its not just realestate, China has built a colossal oversupply of industrial infrastructure, their power station bubble has analysts scratching their heads. I suspect the only think keeping it all afloat is China’s enormous savings rate, and poor bank reporting standards. Sooner or later the Chinese people will realise the banks have lost all the money they thought was safe in their savings accounts.
KiwiAl says
Hi EWorrall,
During a recent two months in China, I did wonder where all that power was coming from. Thanks for answering that question. Yes, the country is literally covered in a High Tension Wire net, power lines everywhere. It also explains where a lot of the air pollution must have come from. Took a train from Beijing south. Expected the air to improve as we left Beijing, but it got worse and worse.
China is an amazing country. Their Rail Network is just incredible. Maybe the best in the world. Rather than waste arable land, they build the new tracks over mountain ridges – bridge, cutting, bridge, tunnel, bridge, cutting…. The expense is obviously enormous. And they have massive new, Chinese-made electric locomotives – 7.2MW each. Sometimes in tandem. I guess they have plans to greatly increase electrification. But using coal to generate the power would seem to defeat the purpose… Maybe they plan to cover their mountains in solar panels a bit further down the track. Then, coal generation would make more sense, because you can vary the output more safely than with nuclear power. But the panels would have to be up the mountains because they won’t work beneath all that smog.
Gino says
Hi Jon
I work in the northern suburbs of Melbourne. Most of the developer/builders are local established ones. Given said that there are Chinese investing to develop and also purchase town houses and units my clients build as well. I feel prices would not be where they are if it were not for overseas influence. That’s the market though and from the stats you provided at the end of the article they are here to stay, especially in the apartment market. I feel conventional units and townies are a better bet. In my 12 years in the game they have stayed in higher demand than apartments and will continue to do so.
KiwiAl says
Good topic Jon.
I think this is “Chinese Whispers” at full throttle. It’s a wonder they (the Chinese people) haven’t wised up by now, but I guess they will eventually. Or maybe, because of Government Control, Chinese Whispers developed?
The Chinese State is obviously moving to try and cool the whole thing down in China, to prevent it spiraling out of control like it has down here. Unlike the Japanese failure at Fukushima, I guess. I really like this aspect of the Chinese system. They are smart enough to know that the Free Market is driven by greed, and they clearly know that “news” often fuels hysteria. Cut the news, stop the hysteria, for the greater good. I’m still convinced that the GFC was as much “Media-generated” as anything. People believe what they hear if it’s repeated enough. The media talked it up, and the people implemented it. Good on the Chinese, I say.
Hey, are you following the huge Anti-Trump fiasco?
Nothing like the hypocrisy of the Trump Haters! Spitting hatred, lies and all the rest.
Let’s see where the media takes that.
Assassination, anyone?
ron goddard says
wow jonno! chinese people still investing in oz! how does the balance of trade cope with that?
eurozone is falling apart. japan can’t change its nappies. usa is till tantrumising over the donald.
here in oz we are now watching the finals of the ‘big bash’ and perth scorchers are looking good..
its all so much fun. then the footie starts. what was that about the economy? i don’t give a rat’s arse about it. cos if the chinese wanna send money here etc. etc. etc. who cares? the only defining thing here is; council approval of anything that makes money. and that, my friends, is the problem. or it maybe that councils get overridden by their state masters. and the creation of traffic congestion worsens.
people worldwide are, and have always been, in one word; insecure since time immemorial. and to balance that insecurity, people want more. and fear! it dominates nations. so they go to war. there is nothing new under the sun. civilisation? who on earth coined that awful word? we are as civil to each other as two alleycats fighting over a smelly fish. but there are exceptions. the original oz aborigines and some north american indian tribes. they believed in the ‘oneness’ of everything. cheers, ron
ron goddard says
oh dear..i didn’t remember to write about mr. trump has just signed off on the tpp. so its a dead duck. so the chinese are miffed. here in oz we will get all sorts of upsetting comments about tpp coming to an end. lets see how it works out.
Iqram says
Hi Jon,
Wonderful article there! It definitely seems there’s no one paying attention to reports on apartment/ unit supply & demand studies. But isn’t that the role of local authorities? Why aren’t we looking at the figures before approving another building?
Also, as you said the Australian banks have themselves covered as they are not funding such projects. Which means that the investment is coming from outside as FDI, which would contribute positively to the Australian Economy. I hope pulling investment out is harder, in that way the money spent in oz, stays in oz. So we wouldn’t be facing problems of sudden exodus of foreign currency out of the country which would cause havoc.
What do you think on that?
Jonnyacidseed says
Maybe the Chinese are trying to crash the Aussie economy by flooding it with unwanted housing…….Is the Chinese Govt funding the developers?
Hugh says
While China could be number 1 in the world peacefully, it plans to be the world’s boss. They already intimidate their neighbours, and verbally attack anyone in the world who says anything they don’t like. They are gaining huge influence from financial investments globally, which also includes control of everything from food from farms to essential infrastructure. They are stockpiling huge amounts of gold, and are increasing their way into global financial activities. They are massively building up their arms so as to bolster all of this as they see necessary.
Brad says
Great article Jon, I think this highlights some of the flaws of just who can invest in the country. Personally I feel this is a clever way to exploit these weaknesses, this is what happens when you open the floodgates. So you increase the lending criteria and the requirements to invest in Oz… I believe that was to slow investors down, yet they are having a field day and have ramped up their efforts to buy Australian land. America is indebted trillions of dollars to the Chinese. China could probably pay for our land just with the interest alone. I think if you look at what you’re saying, we didn’t slow anything down and we have sold out for pennies on the dollar. You don’t see the Chinese selling off their land because they understand the value of their way of life, their land is more valuable than all the gold in the world. As long as the flood gates stay open investors will come, once it’s gone you can never get it back. So the answer is until there’s land of value to investors they will not slow down. Just like Monopoly, the first one to get all property, then they can dictate the prices… However I don’t know if it is just Chinese whispers, apparently the stats show other countries are buying just as much if not more, so why is it only the Chinese who are being highlighted?
Tony says
Hi Jon, Thanks for highlighting this important issue. This
needs to be openly discussed by the Australian public.
We have off shored much of our manufacturing, transitioned away from mining
while failing to diversify our economy. As a result, our economy is now so
reliant on credit growth to fuel construction activity in order to keep our
economy going. It’s a very sad state of affairs that this has been allowed to happen.
In order to maintain economic growth our government is allowing mainland
Chinese investors to buy our productive assets and bid up the price of our
property market to levels that have priced many locals out of the market, or
have enslaved the average person making a purchase with huge levels of debt.
Debt that they will be paying for years, putting them at risk
and impacting on their standard of living (we have the highest private
debt to GDP ratio in the world).
The proliferation of Chinese developers into our property
market seem to have been given a blank cheque. There does not
seem to be any limit to how far this can go. Is this an indication that the Chinese already
have a big influence over our government? When connecting all the dots with
everything else that’s going on it seems that way. I can’t see this ending well
for the skyline in our cities and for the public at large. It’s common to hear
the term ugly “dog box” apartments referring to the size and inferior
quality of a lot of these apartments. Regardless of the quality this has
creating huge affordability issues. The Chinese have spent countless billions
on residential property deals over here, but are Australians or other
foreigners allowed to buy property in China? NO ! This is a very one sided deal
that benefits mainland Chinese investors at the expense of Australians ! Who
signed up for this? Certainly not the Australian public.
As Australians we put our trust in the elected government on election day, but
has this loyalty been rewarded when these policies are clearly aimed
at looking after the interests of foreign Chinese investors at the expense of
Australians who live here and pay their taxes here. This seems to be a betrayal,
as our home is the biggest and most important purchase anyone will make in
their life and is largely responsible for the individual/families stability and
quality of life. Are they playing dice with the family home? For the majority
of our population who are heavily in debt and struggling to buy a home it seems so.
There are other factors that have also contributed to rising
prices such as low interest rates etc, but Chinese buyers have played a
significant role, not only in driving up the prices of the new apartment market
but the established market because their capital has found it’s way to this
market through various loop holes (cash sent over here/ friends or family in
Australia coming to agreement with mainland Chinese buyers etc.).
The valuation of a suburb is determined by the relationship
between supply and demand, so the price of a suburb is based on a fraction of
the suburbs dwellings that have recently sold. If you have mainland Chinese scooping up properties for sale every time they become available prices are prevented from ever dropping or following their normal cycle creating permanent upward pressure as is apparent in our market. This outside intervention is overriding our housing economic fundamentals (supply, demand, income, employment, population growth and strength of economy etc) which would govern where the market would normally head, but instead we get serious imbalances and price distortions (high prices). In a sense we have allowed the Australian property market to become part of the Chinese property market. A big mistake.
Added to this, it is widely reported that mainland Chinese investors are trying to get their money out of China and are using our property market as a bank account while locking the property down with no tenants in many cases. This is a complete waste of a accommodation resources strategically positioned close to jobs in our capital cities where rental accommodation can be scarce. So people working in the city are
having to commute from a distance when they could be renting closer to their place of work. What happens when/if China’s real estate bubble bursts or there’s a serious downturn in China (and this is just a matter of time) which prompts many Chinese to sell their properties in Australia? There will be a flood of properties on the market destabilizing our property market and economy posing a huge risk. Imagine what this will do to rents and prices.
Only 2% of China’s population own cars and the average wage in China is $400 per month, which means as the country develops the number of Chinese buyers will grow exponentially. Our government needs to stop foreign investment in Australian property or seriously disable it (I prefer the former)
and leave the Australian property market for Australians which will once again give the average person an opportunity to own their own home. A longer term view needs to be taken in the national interest of the country.
I think it’s obvious to most that China is trying to exert it’s influence and dominate the world. They are doing this on multiple levels globally. This is very meticulously documented with sources in Peter Navarro’s book: “Death by China”. A big eye opener! Peter has been appointed by Donald Trump to lead the trade office. The video documentary can be viewed on you tube.
Bloomberg recently reported on China’s intention to invest heavily in 6 Hollywood studios (a western cultural icon). If that happens it will enable the communist party to freely influence the American people.
Imagine that. They say that their aim is to develop soft power and China is investing heavily in this. This is just the tip of the iceberg, and an examination of the purchases of western assets is in the hundreds of
billions/trillion plus paints a very clear picture of where this is all heading. While they are buying the western worlds prime assets – real estate companies, utilities technology etc, with the money they have made from selling low end manufactured goods, no westerner is able to buy any real estate or asset in China.
Could it be that we are not talking about this important issue in your blog because to some extent it may not be politically correct to do so. Political correctness stifles truth, if the public does not participate in discussion about an important matter relating to a policy then the policy can be introduced without public debate.
Another reason could be because a lot of the public may not be aware of what’s going on as this important matter has not been given the coverage it deserves in the main stream corporate controlled media who generally tow the government line on geopolitical or other issues deemed to be important by government. The media also make most of their advertising revenue from the real estate sector so they have a big interest in this.
The government interest regarding this issue clashes with the Australian public interest so it is not being given the attention it deserves. This is why we are all scratching our heads and asking ourselves “who signed up for that”.
Yes, I think at present we are going bananas. It’s up to the Australian public to take responsibility and put this important issue on the agenda by openly discussing it, creating more awareness, bring their concerns
to the attention of government officials and try to effect a positive change. If we don’t address this issue now it’s just going to get much worse.
stephenfitton says
Banks not loaning for last 9 months on these loans forcing funds from overseas to fill purchases,
Designed by banks to get funds upfront 1-3% through exchange rates, providing them with a no strain way of meeting Government targets of 3-5% funds held against outside loans given.
This way a no risk up front % return with no investment or guarantees given!
CLEVER!
As for over supply simply answered once the bubble has burst. (not for disclosure).