China’s housing market (2) [WIP]

Asset allocation in China

Very different from the US, where financial assets represent a large portion of families’ wealth, for most Chinese families, real estate assets (residential) are the top choice and the most important part for asset allocation. According to a survey conducted in 2019, among urban families’ total assets, 59.1% is residential homes while only 20.4% is in financial assets[1],[2]. In a previous analysis on another series of data, housing asset represents 74.1%, 73.8%, and 72.7% of urban households’ total assets in 2010, 2012 and 2014 respectively[3]. Comparatively, in 2016, US households’ mean value of primary residence is only 24.4% of their mean value of total assets, while financial assets are around 42.5%[4].

For one thing, China’s A-share market doesn’t provide meaningful return over the last decade, compared with S&P 500. The chart below is from 2010 to 2019: the black line is CSI 300 Index, which consists of the 300 largest and most liquid A-share stocks, while the blue line is S&P 500.

Exhibit 2. CSI 300 and S&P 500 performance over from 2010 to 2019

In fact, among the 20.4% financial assets, the report said only around 10% (or 2% of total asset) is equity exposure, including stocks and mutual funds.

Meanwhile, housing prices in China is climbing steadily. Buying a home in top tier cities in China is like a leveraged long position in S&P 500 in the US, with lower risks and higher returns. Indeed, it would be comparable to a leveraged buyout deal – and millions of people are actively participating. According to some 2010 info, prices under RMB 30k per sqm[5] were common in Nanshan, Shenzhen; after 10 years, in the same district, new homes are priced at least at RMB 70k per sqm. Indeed, for the same community, prices can easily triple up.

The last decade’s rise is already on the back of a steady growth in the previous decade. In another study, Shenzhen’s housing price index rose from 1 to 3.65 between 2003 and 2013[6]. The same is true for other first tier cities – index increased from 1 to 4.43 for Shanghai, from 1 to 5 for Guangzhou, and from 1 to 7.6 for Beijing. Tier two and Tier three cities generally experience the same trajectory, with average growth rate a few points lower.

With a common 10x return and the ability to take leverage, residential real estate has become the most obvious, safest asset allocation choice with the best return profile for most people in China.

It is also worth noting that many high-quality companies in China, mostly in the internet industry, are not listed on the A-share market. Thus, they remain inaccessible to many people, further limiting their asset allocation choices.

[1] https://www.reuters.com/article/china-household-assets-0424-fri-idCNKCS2260VC (Chinese)

[2] http://pdf.dfcfw.com/pdf/H3_AP202004271378696212_1.pdf (Chinese)

[3] https://www.mdpi.com/2071-1050/12/7/2946/htm

[4] https://www.bostonfed.org/publications/research-department-working-paper/2019/trends-in-household-portfolio-composition.aspx

[5] https://sz.leju.com/news/2020-09-27/06456715630843769180881.shtml (Chinese)

[6] journals.uchicago.edu/doi/full/10.1086/685953