More in­vest­ment op­tions would check home prices

China Daily (Canada) - - LIFE -

China’s banks, fi­nan­cial reg­u­la­tors, govern­ment of­fi­cials and home­own­ers can all per­haps breathe eas­ier. De­spite sur­face ap­pear­ances, China’s over-heated prop­erty mar­ket will not col­lapse as the US hous­ing sec­tor did in 2008, tak­ing much of the world econ­omy down with it. Yes, there are dan­ger sig­nals in China’s enor­mous real es­tate in­dus­try. China’s prob­lems are real and need ad­dress­ing, but the dif­fer­ences with the United States are large and de­ci­sive.

Start with the fact the US hous­ing crash was brought on by lax lend­ing prac­tices, a po­lit­i­cally rigged reg­u­la­tory sys­tem and a debt-fu­eled “buy-and-flip” short-term in­vest­ment strat­egy. An­other fun­da­men­tal dif­fer­ence: in the US buy­ing a house with bor­rowed money is sub­si­dized by the tax code. Not so in China. China also, thank­fully, has noth­ing like the sub­prime “Ninja Loans” — mean­ing loans to those with no in­come, no job, no as­sets— that were widely avail­able in the US be­fore the crash.

The big­gest risk in China is not a US-style tidal wave of failed mort­gages that leave fam­i­lies home­less and banks in­sol­vent. In­stead, the risk comes from an un­bal­anced flow of cap­i­tal into prop­erty in­vest­ment. Too much of China’s to­tal sav­ings are now go­ing into this one form of in­vest­ment. While buy­ing apart­ments has long been pop­u­lar, other types of in­vest­ments— es­pe­cially in the stock mar­ket and in un­reg­u­lated fixed-in­come se­cu­ri­ties — have suf­fered a big de­cline in pop­u­lar­ity in re­cent months, with good rea­son.

The weight of all that ad­di­tional money flood­ing into prop­erty in­vest­ment inevitably pushes hous­ing prices up, es­pe­cially for apart­ments in ma­jor cities. Putting more land on the mar­ket for de­vel­op­ment and build­ing more low-cost hous­ing are both good moves.

But the best way to cool China’s hous­ing mar­ket both now and for years to come is to have more good and safe al­ter­na­tives for peo­ple to in­vest in. This will take some time as well as a strength­ened reg­u­la­tory and le­gal en­vi­ron­ment. But changes are ur­gently needed.

Mean­time, the govern­ment should con­tinue its pol­icy to grad­u­ally ex­pand the amount of money Chi­nese can legally in­vest in shares and mu­tual funds out­side China.

Chi­nese savers and in­vestors, like those in other coun­tries, look for the high­est re­turn at the low­est pos­si­ble in­cre­ment of risk. In the last nine months, this risk-re­turn cal­cu­lus has un­der­gone some pro­found changes. That’s not only be­cause of the steep slide in the stock mar­ket since July last year, which caused many Chi­nese in­vestors to pull their money out.

Other hot ar­eas have tum­bled just as sharply, as slow­ing growth ex­posed the risks of th­ese al­ter­na­tives. Wealth man­age­ment prod­ucts are ba­si­cally a form of col­lat­er­al­ized lend­ing di­rect from savers to larger Chi­nese com­pa­nies and mu­nic­i­pal­i­ties. In­vestors have grown more wor­ried about de­faults and other signs of mount­ing trou­ble among bor­row­ers. The in­ter­est rates on of­fer don’t seem ad­e­quate to com­pen­sate for the risk.

Even more wor­ry­ing is what’s hap­pened of late in so-called peer-to-peer (P2P) lend­ing. This was un­til re­cently the hottest newway for in­di­vid­u­als to earn big money with their sav­ings.

The amount of money in­vested in P2P lend­ing last year nearly quadru­pled from 2014 to 982 bil­lion yuan ($149 bil­lion). But P2P in­vestors’ worst fears came true when one of the big­ger P2P loan pack­agers, Ezubao, sud­denly went bust in Jan­uary. Ezubao had of­fered mostly fake in­vest­ment prod­ucts to nearly one mil­lion Chi­nese in­vestors, with prom­ises of an­nual re­turns of up to 15 per­cent. Ezubao al­legedly took more than 50 bil­lion yuan from in­vestors. Sadly, the car­di­nal rule of in­vest­ing, “if some­thing sounds too good to be true, it prob­a­bly is” is not as widely ob­served in China as it should be.

Lit­tle won­der then that in­vest­ing in prop­erty should now seem to many Chi­nese like the safest and san­est in­vest­ment, apart from putting money in a State-owned bank. While the in­vest­ment logic is sound, the un­for­tu­nate re­sult is that buy­ing a place to live in is get­ting too ex­pen­sive for too many peo­ple in China, es­pe­cially in Bei­jing, Shang­hai and Shen­zhen.

More than most other places, China’s hous­ing mar­ket is dom­i­nated more by in­vestors look­ing for prof­its than peo­ple look­ing to put a roof over their head. The bal­ance needs to be re­stored. For that to hap­pen, th­ese in­vestors need to find other places to in­vest that of­fer the po­ten­tial for equally at­trac­tive risk-ad­justed re­turns.

The au­thor is chair­man and CEO of China First Cap­i­tal.


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