Across different geographies and asset classes, more and more fund managers seem concerned about the consequences of the perceived Chinese housing bubble. They worry that recent, rapid house price rises in the country are unsustainable and could lead to a catastrophic collapse that would be especially painful because of the crucial importance of Chinese growth to the fragile global economic recovery.
Indeed, the fearful response from global stock markets to Chinese authorities’ policy tightening in January was emblematic of the importance with which investors attach to the country.
There is now increasing concern that further action by the Chinese authorities to prevent property speculation – already under way through crackdowns on third home borrowing in some areas – could lead to a dramatic fall in fixed asset investment, which last year accounted for close to two-thirds of Chinese domestic demand.
Any significant slowdown in this part of the economy would have a direct impact on sectors such as commodities as well as risking a further downturn in investor risk appetite.
This risk is clearly weighing on the minds of many fund managers and contributing to an element of caution from investors.
However, there is another side to the argument and it may well be that they are overestimating the risks in the Chinese housing market.
Whilst it is clear that the four cities of Beijing, Shanghai, Guangzhou and Shenzhen have witnessed large price surges, this is far from a nationwide picture and these cities only represent a very small fraction of China’s homebuilding by volume, while public housing projects in other areas are unlikely to be threatened.
As a result, it would seem there is no reason for the necessary tightening to trigger a serious Chinese downturn if the authorities are able to target the pockets of speculation precisely.
It should also be remembered that, unlike the pre-2007 US housing boom, there has not been a culture of creating leveraged portfolios of mortgage-backed securities, reducing the systemic risks from a fall in Chinese house prices.
By Anthony McDonald
OBSR, a Morningstar Company