Chinese Equity Market Madness Continues As Investor Dump Property

Some initial signs that the Chinese equity market slump is starting to affect the real economy have come to light over the past 24 hours.

Chinese media is now reporting that some prospective buyers of property have forfeited their deposits and cancelled planned purchases in an attempt to conserve capital and meet margin calls. Moreover, according to a report published by CNBC, several Shanghai-based real estate agents have told the Chinese media that investors are now looking to sell existing property holdings in a hurry to recoup their losses by selling their properties.

Quick sale

According to CNBC some Chinese real estate agents seen investors put their properties on the market at a 10% discount to the prevailing market price as they look for a quick sale. The big unknown is how much more of this ‘forced selling’ is to come.

On July 5, China’s securities regulator announced that property had become an acceptable form of collateral for margin traders. In late March, the government unveiled a series of measures aimed at encouraging home buyers into the market. These measures included lowering the minimum down payments for buyers of second homes and cutting to two years the length of time a seller must own home before selling to avoid paying a business tax.

UBS AG (NYSE:UBS) believes that forced home sales and order cancellations are isolated events, and analysts at Nomura Holdings, Inc. (ADR) (NYSE:NMR) (TYO:8604) agree. The reason cited for this belief is the fact that equities only account for around 24% of household financial assets on average. Around 55% of household assets are cash and China has one of the highest household savings rates in the world, which should offer some cushion and minimize contagion. A much greater proportion of household wealth is tied up in real estate. According to Bridgewater’s analysis, around 50% of household wealth is tied up in property — the rest in financial assets such as equities, bonds and cash.

Chinese – Actively investing

Nomura also presents some interesting data regarding the number of households that actively invest in the equity market. While there’s no doubt that the number of retail trading accounts opened within China over the past few months has reached record levels, there are only about 109 million active securities accounts in China — only 8% of the total population has a stock market trading account. This means less than 20% of households have participated in the market, compared with, for example, an equivalent ratio of 53% in the US.

History shows that consumption is little affected by equity price plunges. A useful case for comparison is the equity market correction in 2007 when SHCOMP fell by close to 50% between October 2007 and April 2008, but household consumption growth continued to pick up until the economy was hit by the global financial crisis.

In general the consensus among analysts seems to be that the Chinese equity sell-off will not have a dramatic effect on consumption and growth. Turbulence in the property market, as reported by Chinese media overnight, seems to be driven by a small number of highly leveraged speculators.