Opinion: Is Property Boom Source of China’s Unorthodox Liquidity Trap?

HasChinafallenintoanunorthodoxliquiditytrap?Onpaper,it’sinconceivabletothinkthiswaywithavarietyofmonetaryinstrumentsonthetableforthePBOC,especiallywithaninterestratewayabovezero.Butinreality,Chinahasalwaysbeenfacingwiththesameparadox–anover-leveredcorporatesectortogetherwithanunder-leveredhouseholdsector.

LiquidityhasbeenanissueforChinesecorporates,butforhousehold,itislockedupinproperties.Banksmayhavethewaysandmeanstomakedistressedcorporatessolventonpaper,butitstrugglestoprovideanymeaningfulrelieftoaslowingindustrialsector,orinthiscase,pricerecoveryorgrowth.Ontheotherhand,risingpropertypriceshavebecomeanothersourceofconcernforaneconomyyearningformoreconsumptionspending.Peoplearenotjustsavingfortherainydays,theyareinfearofaconsistentinflationintheassetmarket,whichconsistentlyoutperformstheirincomegrowthandrenderstheirliquidsavingsmeaninglessinvolume.

Nopersonalbankruptcysystemakey

TheproblemwithChina’sbankingsectoristomaintainanoverallcreditgrowthtosustaintheeconomy,whiledeferringcorporatesfrombeingover-levered.Itisveryhardtocontrolbanks’behaviorsonamicro-level,especiallygivenChinaasarelationship-basedsocietywherelendingpreferenceisnotpurelyrisk-based.Buttheoverallcashflowofthecorporatesectorisnotideal,especiallycomparedtothehouseholdsector.

YoumaythinkChinesehouseholdsaredumb,becausetheyare“definitepessimist”inPeterThiel’ssenseastheyneverspendaheadoftime.Butinfacttheyweren’t–notonlytheyaresavingforsubsistence,theyarealsoanticipatingahugespendingitemforthemselvesorchildren–buyingaproperty.Oneofthekeystrategythegovernmentisworkingon,isadebttoequityswapofthecorporatesector–viamorelistingandfollow-ons.Theideaisagoodone,asChinesecorporatesectorwasindireneedofadisintermediationofthebankstoachievecheapermeansoffinancing,andChinesehouseholdsareindesperateneedofasoundassetclasstoinvest,butclearlythemarketscreweduplastyear.Inthisyear’sNPC,registrationreformledbythepreviousCSRCregimewasnotmentioned.Therootcausetothatwascomplicated,butitwasclearthatanartificialboomintheequitieshaveledtoanexpensivepricecheck–bothforthegovernmentandhouseholdstoswallow.

(InPeterThiel’sFromZerotoOne,hecorrectlylabeledChineseasdefinitepessimist,astheytrustnothingbuttheirsavings/assets)

Butthesolvencyalarmcontinuestoring,despitethatbankscannotsimplyacceptallzombiefirmstobankruptimmediately.Theyarereplacingtheolddebtwithnewones,butitdoesn’tsolvetherealissue–companiesintheindustrialsectorwasover-leveredandtheyneedbothrestructuringandanimpetusforgrowth.TheplanBcame,whichisusingpolicyleversto“destock”theresidentialpropertymarketvialeveringupthehouseholdsectors.

Thekeyconsiderationpointhereisstraightforward:Chinadoesnothaveapersonalbankruptcysystem,whichmeansanyliability/debtonapersonisdebtwithfull-recourse.ThereisnoprecedentincourtssoastospeakonaChineseinnegativeequitywhoisunabletopayitsdebt,butthegovernmentcertainlycanmakestakesmuchhigherthanonecouldevenimagine–youcouldhavenoaccesstoanypublicservice,notabankaccount,asocialinsuranceaccountorjointhepublicsector.Thefullrecoursecanbeextendedtoyourchildren.WhileafirmcanjustgobankruptandcausebanksheadachesonitsheadlineNPLratio,aleveredhouseholdsectorismucheasiertocontrolforboththegovernmentandChinesebanks.

Leveringuphouseholdsector–Adouble-edgedsword

China’shousingreformstartedwaybackin1994.Backinthedays,Chinesefirmsorgovernmentsofferedpracticallyfreeorlow-costhousingtotheiremployeesorpublicservants.Thereformdidn’tpickupsteamuntilearly2000s,whenlocalgovernmentsstartedtoenjoythefruitsoflandtransfersandencouragemorerenovationsandnewstartsinresidentialhousing.Inretrospect,Chinamayrethinkofitspolicytooffersubstantialsupplyofpublichousingtothosewhosimplycannotaffordanysortsofhousingpricedinthemarket.Unfortunately,thishasnotbeenthecase.

Thatsaid,aclassofaffluentresidentsbenefitingfromthepropertyboomhasarisenfromthehorizon.Thesepeopleareclearlysmartandhaverolledtheirdicesmultipletimes,astheymayhavelittlechipsintheirpocketfromthebeginning.Housepurchaserestrictionsinmajorcitieshaveconstrainedthemfromhoardingvaluableassetsfurther,andtheyhaveresortedtodiversifyviaimmigrationandluxuryspending.Butthemajorityisstayingput,notbecausetheyarenotsavvyenough,buttheylacktheincentivetodoso.Meanwhile,onadata-drivenperspective,China’saccumulatedpropertysales(first-handonly,dataseriesstartedsince1991)hasnowaccountedformorethan90%ofhouseholdsavings,showingthata“healthy”householdbalancesheetmaybeindispute.

Thisisnotaperfectproxythough,byallmeans.PropertysalescanbedrivenbyhiddenFXinflowofnon-residentsandevenfinancingoverseas;thereareclearlystatisticalissuesofconsistencyregardingthepropertysalesnumbersincetheearly1990s;mostimportantly,savingsgrowthcanbedrivenfromsellingpropertiesatahighprice.Nevertheless,itistimetorethinkaboutaffordabilityaspriceshavedrivenupdramatically.Thereisapointwhenevenaffluentclassfinditridiculoustotrade.Ontheotherhand,mortgagesasoftotalwassubduedat14%,muchlowerthanthatofUSat31%orotherOECDcountries.

Chineseconsumersstillunwillingtouseleverage

In2015,China’soverallconsumptionspendingwasroughlyabove30trillionRMB.6.7trillionofwhichwasdoneviacreditcard,butonly44%ofwhichcomesdowntorealcredit,whichislessthan10%oftotalconsumerspending.Ontopofthis,creditcard“baddebt”,definedasoverduecreditfor6monthsorabove,wasonly0.57%oftotalcreditcardlending.Ontopofthis,autoloanwaslessthanhalfofatrillionin2015,almostnegligiblepercentagewise.Chineseconsumerswerestillextremelyrisk-averseintermsofconsumercredit,fearingdefaultandsocialsecurity.WhileittakestheriskofwideningwealthgapinChinaviaproppingupthepropertymarket,itissurelymoreeffectivethantopromoteconsumercredit.The“unorthodoxliquiditytrap”isjustareflectionofasocialperception,whichishardtomean-revertintheshortterm.