China Needs This Property Crisis
On August 28, 2023, China Evergrande (SEHK:3333) resumed trading following a 17-month suspension, only to witness its share price plummet by 87%. Investors interpreted this as an opportunity to divest themselves of their shares, aiming to rescue whatever value they could, regardless of how minimal it might be, rather than eventually enduring a complete loss.
The China property crisis is probably in a full-blown state now. Ultimately, the root of this predicament lies in the fervor that Chinese citizens exhibit towards real estate.
What drives this property obsession?
We can't blame Confucius, for he never advocated for property ownership among the Chinese. To the contrary, his teachings emphasized that possession of real estate is inconsequential in comparison to the realization of one's ambitions. Real estate can even be sacrificed for the sake of an ideal. Obviously the Chinese didn't take heed of the sage's advice.
There isn't a philosophy origin and we don't have a definite answer. But we have some ideas:
The first factor could be "face value." Chinese culture places significant emphasis on "face," which translates into displaying a higher social status by wearing branded goods and driving luxury cars. However, none surpasses the symbolism of possessing an expensive house. People know the price of a house at a particular location and it is more obvious and subtle than telling people you have a $100m stock and bond portfolio. A house best deliver the "face value" for a Chinese.
Another influential factor is the cultural belief that families must own their own homes. When it comes to wedding, the groom is expected to have a home for the newly married. Else, he might be deemed as unworthy for the bride. Again, we don't know where this cultural belief came from but it still runs deep in China as well as the Chinese diaspora around the world. Some parents would rush to buy a house so that their sons become eligible for marriage. They fear that if they don't buy now, prices will rise and become more unattainable later.
The last factor lies in the perceived superiority of real estate over other investment options. Stocks are viewed as risky due to their potential for substantial crashes, while bonds carry the risk of default. Moreover they can't be 'enjoyed' after sinking in the capital. As for properties, one 'can see can touch' and even live in it. This utility surpasses what most other investment avenues can provide.
Moreover, the appreciation of real estate prices over decades and numerous stories of property millionaires have given confidence to the Chinese that buying real estate won't go wrong. Developers aggressively bid for land because they saw huge demand to satisfy, escalating land prices and inadvertently fueling a bubble.
We believe the Chinese has an unhealthy obsession over real estate. This property meltdown is necessary to eliminate the excess. It is painful in the short-term but better for the long-term.
The question is why it didn't burst earlier? A considerable number of China's challenges were addressed under Xi's leadership. Alongside tackling the property bubble, another significant endeavor was combating corruption. So, why didn't the preceding presidents address these issues earlier? Probably because these are systemic issues and pose far-reaching consequences, much like what we are witnessing now. No one wants to be a bad guy and leave a negative mark in history.
Interestingly, during the height of the property market fervor, analysts often highlighted its risks. In times of greater corruption in China's history, doing business there was criticized as being unscrupulous. Yet, now that the property bubble has burst and corruption has been addressed, some individuals label Xi as anti-capitalistic and accuse him of leveraging corruption to quell his political adversaries. We're not implying that Xi is a commendable leader. We don't care who did it as long as the right thing, even if it is unpopular, is done.
As the property aspirations fade, one can hope that the Chinese will approach property purchases with greater rationality. Hopefully this situation will also serve as an awakening, leading them to recognize that there are other wealth building avenues other than properties. Ultimately, time will reveal whether there's a shift in the Chinese mindset and a subsequent recovery from this situation.