October 26, 2011
Stunned. That probably best describes the mood of China’s vast pool of property owners. For the last few years, anyone with as much as a taxi driver’s salary has been speculating in the real estate market, scooping up off-plan properties at terms that would make a Countrywide mortgage broker blush.
And why not? Chinese culture has almost universally adopted the attitude that property prices never go down. Minor fluctuations and corrections over the last several months have been written off as statistical error. Well, reality has now uncomfortably set in.
Recent reports from the National Bureau of Statistics show that home prices have fallen up to 50% in many parts of the country in the period from July to September. But who gives a damn about government reports? The real evidence is on the ground.
Here in Shanghai, nearly 300 angry customers stormed a sales office of Longfor Properties Co Ltd after finding out that the developer had slashed prices on one of its projects by nearly 25%… practically overnight.
Another angry mob in Shanghai assembled outside the sales office of China Overseas Property Group Co after that company made similar price concessions for new buyers.
These were obviously the poor suckers who bought in months (or years) ago at a much higher price… and they’re not especially happy about a property crash.
The most significant contributor to the price decline is tightening credit; after dumping trillions of dollars into the economy to ward off the effects of the global financial crisis, the Chinese government is now pressuring banks to reduce loans.
This is bringing much of China’s credit-intensive economy to a screeching halt. So much for China leading the world out of the global financial crisis. And it doesn’t just affect the property market.
Auto dealers are having the same issues, with many luxury brands ranging from BMW to Mercedes offering steep discounts up to 20% to lure buyers onto the showroom floor.
Growth has definitely slowed dramatically, and the tightening of credit is having widespread effect across the economy… and the prospect for increased social unrest here is growing.
Taking a page from America’s playbook, the government is responding by playing up threats of terrorism. It’s an easy distraction, and it keeps people in line. In fact, China’s government is revising its policy to ensure that anyone who might rock the boat is branded a ‘terrorist’ and will be subject to asset seizure.
Many people with money or significant assets in China see the writing on the wall and are lining up to diversify internationally— citizenships, trusts, foreign bank accounts, etc. I should know, I just spent the day in a room packed with Chinese people trying to learn about their internationalization options. I’ll tell you more about that tomorrow.