Bonds, Currencies, Emerging Markets, Stocks

Forget Stock Market Swings In China, It’s The Real Estate Sector To Worry About, Barclays Says

Stock markets in China have plunged over the past few months with daily volatile swings after reaching 52-week highs on June 12, and although this has grabbed all the attention, Barclays is warning that we should be watching something else.

According to Barclays, in a recent research note, it’s the Chinese real estate sector that we should be focusing on, and not Chinese stocks.

Over the years, much attention has focused on the massive share that investment commands in China’s growth. At 48%, it is much greater than the investment/GDP ratio in other emerging markets such as India and Brazil, as well as developed economies such as the US. What is perhaps less known is that real estate accounts for most of this increase. A quick glance at Chinese statistics shows that investment as a share of GDP has grown from the mid-thirties to 48% since 2000. In that period, real estate has gone from below 4% of GDP to around 15%.

The chart below shows how China’s real estate sector has growth in comparison to other emerging economies. You’ll notice that it’s significantly higher.

BBG chart1

Barclays anticipates a “sustained slowdown” in the China’s real estate sector in the coming years, and this next chart worries them.

The chart below shows the correlation of real estate and other parts of China’s economy, like auto sales and steel output. Real estate directly and indirectly accounts for 50 percent of all steel used in China, according to Barclays.

BBG chart2

Meanwhile, Barclays highlights a recent report from McKinsey which estimates that nearly half of China’s debt is related to real estate.

BBG chart3

The influence of real estate on both China’s economy and its debt means that the real estate bears are close watching.

We are aware that there are several pressing topics that we do not tackle in this report, including the outlook for the shadow banking sector, the size of bad loans on bank books and state-owned enterprise reform. We have discussed these issues in the past, and plan to do so again in the future. The outlook for the real estate sector remains the most important and the medium term path seems clear – a continued, multi-year slowdown of very significant proportions but not an imminent collapse. The Chinese economy remains on a glide path to slower but more sustainable growth over the next several years, though if we are right, the slope down might be a little steeper than many investors expect.

China’s economic growth in the first quarter (Q1) of 2015 reached the slowest quarterly pace in six years at 7 percent from a year earlier, this was followed by the same growth rate in the second quarter (Q2) which beat economists’ estimates for 6.8 percent growth.

Growth has suffered in China due to a combination of an industrial slowdown, a weak housing market, and local debt, which has added to increased pressure on authorities to do more to meet Premier Li Keqiang’s 2015 growth target of “about 7 percent“.

A full-year growth rate of 7 percent would be its slowest annual rate of expansion in 25 years.


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