Tag: Economy

How China exported deflation & what data to watch

1/ China PPI

China’ PPI (12-month) started to decline from Nov 2021 (Dec 2020 – Nov 2021 when global demand running high and supply running low), and entered the negative territory in Oct 2022 (global demand shock after Fed hiked rates & war in Ukraine)

China’ PPI (12-month) has remained in negative territory for 16 month as of Jan 2024 data. Looks to remain negative for next 6 month at least.

 

2/ RMB depreciation

Average exchange rate for RMB has depreciated ~9% in 2 years against USD, which caused additional price deflation.

Average exchange rate in 2023: 0.1415 USD.

Average exchange rate in 2021: 0.155 USD.

 

3/ Domestic demand

Hard to quantify, but weak China domestic demand is partially causing weakness in global demand in commodities etc., especially from the real estate sector., thus reducing inflation pressure.

The sharp dropped happened in August 2021, when Evergrande’s debt problem was catching world’s attention.

What did Japan’s housing price look like during 1990s housing bubble?

Price-to-income ratio

The average price of a new 70 sqm apartment in 1990 in Tokyo was 107,660,000 Yen, or 1,538,000 Yen/sqm, while the average annual income was 5,940,000 Yen. Before the bubble, the average price-to-income ratio in 1985 was 8.08.

Financial Times article (https://www.ft.com/content/2ba1cb74-f598-3a4e-9edd-4e55a48d3480)

So in 1990, new home price is ~18x annual income and before bubble is ~8x.

Relative performance

Price rose ~4x in 15 years

Peak to bottom took 5 years; declined ~40% (1990-1995)

From 1975 – 1995, price still rose ~2.5x in 20 years.

Source: Home Ownership and Economic Change in Japan

Relative to global (before bubble)

Price-to-income ratio is actually more than doubling US-level and is the highest among developed countries.

Source: Introduction to “Housing Markets in the U.S. and Japan”

However, Japan’s women work participation rate is lower than the US back then, which can impact household income.

Source: Lessons from the rise of women’s labor force participation in Japan

Income level

Peak income is actually lower for later generations.

Source: The Impact of the Rise and Collapse of Japan’s Housing Price Bubble on Households’ Lifetime Utility

Due to other reasons, e.g. Asia Financial Crisis, the property market didn’t seem to recover until later years.

Source: New apartment prices in Japan since 1956,
Tokyo Kantei via JAPAN PROPERTY CENTRAL

Fed is bullied by the market – why?

Market news nowadays are saying that Fed is bullied by the market.

e.g. FT article: The Fed should resist market bullying

What’s “bullying”? Seems to me that market is leading and Fed is just following the market.

Why is this the case? I got three reasons:

1/ 2024 is election year. Market knows Fed needs to help the economy.

2/ Market understands data better, and Fed has been saying it’s “data-dependent”; no wonder why market (e.g. hedge funds) is leading with all those high-frequency data. Hedge funds can simply simulate what data Fed is receiving and even have better real-time data than the Fed.

3/ Some market players can “influence” or “control” the data. Sounds absurd. Just an example – what if hedge funds can buy up goods which would cause inflation when needed, or sell them at low prices to cause deflation when needed. As long as they can make huge profits in the market, it can be worth the cost.

Nikkei 250

After a 20-year [1982 to 2002] journey, Nikkei 250 index was back to the starting point.

And it hasn’t yet reached the previous high 34 years ago (1989 level) as of 2023.

What happened?

A lot of things to unpack.

GDP

I am looking at GDP (in local currency terms) first – equity market should be a ratio of GDP.

Japan already enjoyed a robust growth (1972-1982) with GDP almost tripped in 10 years (!), which translates to 11.4% cagr. 

The miracle continued for another decade.

1991 GDP also grew 6.4% yoy vs. 1990; however, GDP growth dropped to 2.5% in 1992 and to 0.0% in 1993.

During the second phase of which ended on 1991, Japan’s GDP still compounded at ~6% cagr (1981 – 1991), although not as high as the last decade. And Nikkei index climbed during this period as well.

What’s wrong then?

The “10-year GDP cagr” would drop continuously from 1991’s 6% to below 1% in 2002. 

Remember, Nikkei index peaked in 1989 (red mark).

While in 1990 and 1991 Japan’s GDP still enjoyed 7.6% and 6.4% growth, 1992 would be 2.5% and 1993 would be 0%.

It was the mid-term / 5-year projection that’s worrisome. And indeed, the 10-year GDP cagr would start to decay, with no reversal in sight.

Nikkei index bottomed in 2003, when the dot-com bubble also came to an end. S&P 500 dropped ~24% in 2002 (after double-digit drop in 2000 and 2001), but grew 26% in 2003.

The index bottomed as the 10-year GDP growth would be bottoming and things won’t go much worse from here.

 

Nikkei index is now (2023) ~4x the 2003 bottom though, what happened?

Nikkei index climbed 4 consecutive years (2003 – 2006), before the Global Financial Crisis hit.

Japan’s 10-year GDP cagr would still be ~0% in 2007, but from 2004 to 2007 it experienced a 4 consecutive year of GDP growth.

Things would look better in 2012, when Japan GDP would be re-entering a growth mode. 10-year GDP cagr would bottom in 2011 at -0.7% and recovered to 0.1% in 2015 and to 1.2% in 2019 before covid.

To make it a full graph.

As mentioned above, although 10-year GDP cagr still has pressure from 2003 onward, actually yearly GDP growth is positive from 2004-2007. Therefore the 3-5 year outlook would actually be reversing in 2003.

US new home sales resilient

Looks like the monthly sales is still health. Month to clear inventory is steady and up a bit to ~7.8 months in Oct 2023.

Currently monthly sales pace is better than 2018 and 2022, despite record high interest rate in recent years.

New homes for sales has gone up more. So the number month to clear new home inventory has gone up to 7-8 months recently vs. an average of 6.2 months in 2018. And is much better than the 2020-21 average of 5.1 months.

Better availability should be good for inflation and soft-landing scenario.

New residential sales Oct 2023

See the other post for China new home sales – the inventory stood at over 20 months the last time I checked.

US car vs. home loans

Read the q3 quarterly report on US household debt and credit (here). One interest takeaway is how divergently different loans perform, vs. the GFC era.

When the GFC hit, both all loans perform badly. Transition into delinquency (30+ days) for credit cards, mortgages, and auto loans reached over 10%. Mortgages delinquency were picking up faster and looks worse than auto loans.

This time around, mortgages looks fine (as of 23q3), and delinquency is going up not only slowly but at the level even lower than 2005-06, while auto and credit cards are deteriorating at a faster rate.

By age groups, for 18-29 and 30-39, the percentage of auto loan balance falling 3-month behind is reaching about the similar level of GFC era. (Another theme: younger generation is under more pressure than the older for the past 2 years)

To reflect back, there was a shortage of cars during the pandemic and used car prices were shooting up. It could cost some money if someone bought a car back then and sold it this year, as 2nd-hand car price has been on a downward path.

The selling and downward pricing trend could be a self-reenforcing process.

Meanwhile, house is a more resilient asset class and current macro is still ok. After 10 years, houses are very likely to worth more but cars very likely won’t.

As shown with the FHFA house price index, which is keeping up.

…which is very different from the GFC era when HPI declined and under pressure for years.

China new home sales 2023 Sep vs. 2020 Sep

Facts for China new home sales

2020 2023
Sep Sep
‘0000 sqm 万，平方米
Supply 供应面积           7,529           2,990
Demand 成交面积           5,228           2,262
Inventory 库存         50,739         51,221
Sales pace (month)             9.71           22.64

Inventory actually didn’t increase much, flat after 3 three years.

But the willingness to purchase (new homes) has decreased, area sold in Sep 2023 is less than half (43%) of 2020 Sep level.

Therefore, the resulting month-to-clear-for-sale-homes is more than doubled from ~10 month to almost 23 month – it will need almost 2 years to clear new house inventory at current sales pace.

The above figure is for 100 cities in China.

To look at the bottom 10 cities: back in Sep 2020, the worst 10 cities needed 21.5 – 35.3 month to clear inventory whereas in Sep 2023, the worst 10 cities will need 57.6 – 93.9 month to clear inventory.

Source:

http://m.fangchan.com/news/320/2023-10-25/7122778841134993672.html

http://news.dichan.sina.com.cn/2020/10/27/1274844.html

 

 

 

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

China’s housing market (1) [WIP]

Urbanization and population

According to the World Bank, China’s urban population percentage increased from 36% in 2000 to 60% in 2019, or around 843 million[1]. Two largest cities in China, Shanghai and Beijing, have 24.3 million and 21.5 million residents respectively in 2019 (Exhibit 1).

in millions 2000 2005 2010 2015 2019
Beijing 13.64 15.38 19.62 21.71 21.54
Shanghai 16.09 18.90 23.03 24.15 24.28

Exhibit 1. Beijing and Shanghai residents growth over the past two decades

While the definition for a “resident” is to live for more than 6 month of a given year, two other metrics are “Hukou” and “actual population served / managed” – Hukou, the most conservative one, is a concept dated back to ancient China while the latter is newly disclosed. In 2019, measured by actual population served / managed, Guangzhou has over 22 million, Shenzhen has over 22 million[2], Chengdu has over 21 million[3]. Meanwhile, their official residents in 2019 are 15.3, 13.4 and 16.6 million respectively.

While Hukou population for Shenzhen is only around 5 million, the actual population is 4 times more. The gap seems to be a good proof for Shenzhen’s fast growth over the past few decades, and also implies an outsized demand for future home buying. As further discussed below, Hukou (or certain years of social security tax) has become the prerequisite to buy homes in certain large cities such as Shenzhen. Therefore, fundamentally, the long-term increase in buying pressure is from 1) among the actual population, those who would like to stay in Shenzhen, obtain Shenzhen Hukou and buy homes, 2) the constant increase in actual population managed / served, as Shenzhen continues to attract businesses and provides high-quality jobs.

[1] https://data.worldbank.org/indicator/SP.URB.TOTL?end=2019&locations=CN&start=2000

[2] https://www.thepaper.cn/newsDetail_forward_7843440 (Chinese)

[3] https://m.bjnews.com.cn/detail/159193229415528.html (Chinese)