All eyes on Chinese property

It’s a sobering thought that 2022 could bring a repeat of the financial conditions behind the 2008 GFC, although this time the potential trigger could shift from the US to China.

There is no guarantee history will repeat, but several factors should not be ignored, especially as a Chinese financial crisis would have a severe effect on Western Australia thanks to close trade ties.

The key factors that make it possible to draw a comparison between conditions in 2008 and today include a booming residential property market, easy bank credit, and loose lending standards.

Differences between then and now include the effects of the lingering COVID-19 pandemic and the lack of a clear view of the Chinese banking system, which is under much tighter government control than that of the US when rocked by the collapse of funds exposed to sub-prime residential mortgages.

Those variations have not stopped a debate developing in financial markets about whether China is drifting into a property/ banking crisis that would trim demand for WA mineral exports, especially iron ore.

One of the more interesting attempts to analyse the Chinese economy was undertaken late last year by Thomas Duesterberg, a senior fellow at the US think tank the Hudson Institute.

A sometimes-controversial institution because of its close connections to right-wing politicians and association with climate change denial theories, the Hudson Institute nevertheless regularly produces deep and insightful research reports into the future of the world.

It’s the background to the organisation that causes some people to dismiss its observations as too extreme, but Mr Duesterberg’s comments as reported by The Wall Street Journal are worth a close look, especially about the Chinese property market and a possible collapse that would flow into the country’s banking system.

The slow-motion failures of the giant Evergrande and Kaisa property development companies are indications of trouble in the Chinese real estate sector; but what’s less well-known is that real estate represents about 30 per cent of the Chinese economy, roughly double the 2008 levels of the US and other Western economies such as Britain and Spain.

According to Mr Duesterberg, real estate values, an associated apartment building boom and easy bank loans have kept the Chinese economy (and WA’s, to some extent) growing at a rapid rate for the past decade.

But the most telling remarks about the Chinese property market include an observation that the residential building boom has peaked.

Mr Duesterberg considers the urban property market to be overbuilt.

“Some 90 per cent of urban households own their own properties and enough vacant units are available to accommodate 10 years of urban migration,” he wrote.

“Sales [of units] and prices have tumbled this year and over-borrowed builders and creditors are suffering the consequences.”

Problems associated with a slowdown in the Chinese apartment building sector are flowing into government sector thanks to a heavy reliance by local authorities on revenue from land sales and taxes on development.

The next few months will be important for the outside world to get a greater understanding of how the Chinese property market correction affects the wider economy.

Evidence of the US sub-prime crisis, caused by too much money being loaned to people who couldn’t (or wouldn’t) repay their debts, was noticeable in early 2007, morphing into a full-blown crisis in the second-tier banking world by mid-2007 when a heavily borrowed fund run by investment bank Bear Stearns had to be bailed out with an emergency loan.

However, it was not until mid-2008 that the entire US banking system was on crisis alert, with the failure of another investment bank, Lehmann Brothers, in September of that year tipping the world into the GFC.

Whether China is following the US into its own financial crisis caused by dud loans to over-borrowed households (and property developers) will be one of the big events to watch this year.