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Under the Banyan Tree - China property: the lost decade
18 Plays2 years ago
Fred Neumann and Herald van der Linde discuss volatility in Asian markets, other vagaries of life, and take a deep dive into the China property wobble with Michelle Kwok, Head of Asian Real Estate Research. Disclaimer. To stay connected and to access free to view reports and videos from HSBC Global Research click here
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Transcript
Podcast Introduction
00:00:00
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening, and now onto today's show.
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This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify.
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You can also tune in via the HSBC Global Banking and Markets page on LinkedIn.
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Wherever you're listening from, analyst certifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Meet the Hosts
00:00:44
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Hello, my name is Fred Neumann.
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I'm the Chief Asia Economist at HSBC in Hong Kong, and I'm joined today by the inimitable Harold.
00:00:51
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Harold van der Linde, indeed, that's me.
00:00:53
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I am the Chief Asian Equity Strategist, so I look at all the stock markets across the region.
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And we're here to talk in a podcast called Under the Banyan Tree.
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That was your title you came up with, Fred.
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Why?
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Well, under the banyan tree, because a banyan tree is a beautiful tree, of course, it's a symbol across Asia.
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And it's really the tree where historically the elders in the village met to discuss politics and commerce, but also markets.
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Absolutely.
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The first stock market in Asia was set up officially in Mumbai in the 1880s.
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But before that, people met under a banyan tree to trade stocks.
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Eventually, there were so many people that didn't fit in the shade, I presume, anymore.
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And they moved to a street called Dallal Street.
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And that street is still now like Wall Street in the US.
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If you refer to Dallal Street, you talk about finance.
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So it's very appropriate for
Asian Stock Markets Analysis
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that.
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So markets have evolved a little bit since then, Harold.
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And looking at equity markets to date, how have we done here in Asia?
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It's a sea of red.
00:01:52
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Is it really that bad?
00:01:53
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Yeah, it doesn't look so good at the moment, at least if you look at what has happened since the beginning of the year.
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Asian stock markets are down.
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The broader index is down 10 percent.
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Some of these stock markets were down over 20 to 25 percent until March, April or so.
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But since then, we've seen a bit of a recovery led by China to a certain extent because the lockdowns were maybe coming to an end.
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And also some of the global macro factors started to help Asian equities, the dollar strength,
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is still strong, but not as much.
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And there's a belief that maybe the inflation story in the US is over.
00:02:28
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And on the macro side, the markets, of course, have suffered as well, right?
00:02:31
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We saw currencies weaken quite a bit against the dollar in the last few months.
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We saw in the bond market, of course, yields rise very sharply.
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That means the bonds lost value.
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So even in macro side, a lot of volatility, as we would characterize
00:02:47
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And one thing that plagues market, of course, is inflation rising U.S. rates.
00:02:52
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How big a challenge is that really for equity markets across the region?
00:02:56
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Yeah, that's just not very good news.
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And I'm really talking about central banks rising interest rates, in particular in the West at the moment, right, in the U.S. That is just not good.
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But the market is looking at it slightly differently.
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And that's what we have to look at, what bond markets are pricing in.
00:03:10
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And they're saying we're at peak inflation at the moment and maybe peak dollar.
00:03:14
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Well, the macro side as well, you hear a lot of talk about peak inflation, but we've been talking about this for three months.
00:03:19
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You'd be very careful to call the peak on inflation.
00:03:22
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But having said that, there are signs of that things are cooling.
00:03:26
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Commodity prices, for example, have sold off quite a bit.
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Exactly.
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Oil in particular and also food.
00:03:33
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You mentioned wheat, for example.
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It matters, of course, for Asian CPI baskets.
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Now, central banks are still raising rates, but look a little bit further out.
00:03:42
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And the expectation is that those interest rate hikes will start to slow down.
00:03:46
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And that, of course, could be, I suppose, then also a turning point.
China's Market and Property Sector
00:03:51
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Yeah, they could be a bit supportive for the Asian equity universe in general, I must say.
00:03:55
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What we've done, of course, is that maybe central banks in Asia seem to be starting to raise interest rates.
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Is that correct?
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Yeah, they've really just hit their stride a little bit later.
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They moved later than in other parts of the world, raising interest rates.
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But of course, there are two central banks in Asia who are not raising interest rates.
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There's a Chinese central bank and the Bank of Japan.
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They're not doing anything.
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Those are the two stock markets that actually have done quite well quite recently, somewhat related to those factors as well.
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Yeah.
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Is that because of lower interest rates or other factors driving the markets in Japan and China?
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Well, for example, in China, it's not just the interest rate.
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They are stimulating because growth is weak.
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And Chinese equities have been weak over the last, what is it, 18 months now.
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But we do see things picking up.
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There's more traffic jams on the roads.
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People are coming out of their lockdown.
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But we also see that some kind of stimulus is there to revive the property sector.
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And we're going to later on talk with our specialist on Chinese property or Asian property, Michel,
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And she has some really interesting insights there.
00:04:59
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But that sector seems to be driving the Chinese stock market higher after being ignored, I would say, by investors for a good 12, 18 months now.
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So from an economic perspective, when we think about Asian growth, there are two big cycles we tend to worry about.
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One is a trade cycle and then there's a property cycle.
00:05:16
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Now, trade looks like it's going to weaken because of weaker global growth.
00:05:21
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Property also looks a bit wobbly in some of the markets.
00:05:24
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How much does that matter for equity markets, these two big cycles, trade and property in general?
00:05:30
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Well, if you think about some of the equity markets, trade was really important 10, 15 years ago.
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But take, for example, the Chinese equity market, but you can say Indonesia, India would be the same.
00:05:40
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They are really now domestic equity markets.
00:05:42
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So what happens with trade is important in currencies, but what happens with the domestic consumer, what happens with property very often is important because property is a large part of that.
00:05:52
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that market, but also of course a large part of people's wealth, right?
00:05:56
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And property comes always in cycles that gives all kinds of new complexities to the stock market, you could say.
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Well, and seeing some of the headlines from China around the property market, I'm reminded of these big historical property market cycles we had.
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Remember Japan in the 1980s with really property going through a massive bubble and then a correction, but we see then elsewhere too.
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Singapore, Hong Kong, Korea,
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So I was in Jakarta in the late 90s.
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There was the Asian crisis going on.
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It wasn't just a property bust, but property went bust as well.
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I remember a colleague of mine whose monthly interest payments were about as big as the whole mortgage that he had borrowed to buy his household.
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So, yeah, that fell onto the banks.
00:06:45
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We have these worries a bit in China now as well, right?
00:06:47
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We've had people saying, I can't service that debt.
00:06:49
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And that is a problem for the banks.
00:06:51
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And we should ask Michelle about what she thinks about that.
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So these cycles come quite often in Asia, properly.
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They do come often.
00:06:59
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The one thing we should say is that generally speaking, the financial systems are much more robust in this cycle.
00:07:05
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So even though there are some property market wobbles in Asia, probably we're not going to face the same financial stress issues we had, for example, during a global financial crisis.
00:07:16
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in the in the u.s um but still weaker property weighs on the economy overall weaker construction weaker consumer spending of course that's something that china may face but and and i guess china is talking about a new growth model whereby they want to go for high-end tech as as a new growth model but that is presumably still too small to overtake the role that that property has in the economy correct
00:07:39
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That's probably right.
00:07:39
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Property still matters, 25% of GDP.
00:07:42
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But given the headlines, we should really bring in Michel Kwok here, our head of Asia Real Estate, to get the real expert take on what's going on there.
00:07:51
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Good.
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Let's do that.
00:08:01
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Michelle Kwok, welcome to Under the Banyan Tree.
00:08:04
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Hi, Harold.
00:08:04
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Hi, Fred.
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Michelle and I have a bit of history.
00:08:07
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We used to look at the real estate sector in China in 2007, I think it was, or something like that.
00:08:12
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Yeah, time flies.
00:08:13
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It's been 10, 15 years.
00:08:14
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It's been 10, 15 years.
00:08:15
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Exactly, yeah.
00:08:16
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Well, a lot has changed because in those days, it was the glorious sector.
00:08:20
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Everybody wanted to invest in it.
00:08:21
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It was growing.
00:08:22
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And now you're talking about that this decade, the coming years, is kind of a lost decade.
00:08:26
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Right.
00:08:27
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Yeah, it's a tough time for the China property market.
00:08:30
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10, 15 years ago, everybody grew.
00:08:32
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All developers, wherever you are, everybody land bank.
00:08:36
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Everybody were able to borrow very cheap funds, either in the bond market, in the form of syndicated loan, and really just through banks and construction loans.
00:08:45
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Funding, access to funding, no issue.
00:08:48
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But since last year, we had default out from Evergrande.
00:08:52
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Defaults followed.
00:08:53
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20-odd developers defaulted.
00:08:55
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And I think the market looked at China property with really a different perspective today.
00:09:00
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So it's a lost decade in the next 10 years.
00:09:03
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So, Michelle, how challenging are things really on the ground today?
00:09:08
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We see a lot of headlines, but give us a sense of how much are sales down compared to previous peaks and the average city in China.
00:09:16
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How do things look at just like empty construction sites or how should we picture it?
00:09:21
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So it's really tough.
00:09:23
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Sales are down on the company level anywhere from 30, 40, 50 to even 70, 80% year in year.
00:09:30
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But what I think is more challenging is if we look at the land sales data, it's really now at a new trough level.
00:09:38
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The first six months of the year, I think it's down 46% year in year.
00:09:43
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That's a new low.
00:09:44
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That's worrying because that also leads to the question as to how local governments are funding projects and how we are to revive the market.
00:09:53
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But the sector has started to perform recently again.
00:09:56
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So is that because of stimulus from the government?
00:10:00
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What is going on?
00:10:01
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Yeah, so our view is that the government has got to do something.
00:10:04
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And one option out of this is to think about a property fund whereby the government or banks can step in to help fund projects or help developers think about financing channels.
00:10:15
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So you mentioned a government-led property fund as one option here.
00:10:19
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What are some of the other policies you'd like to see or sort of think would help to turn market sentiment around?
00:10:25
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You're highlighting really that it's partly a confidence issue, isn't it?
00:10:30
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Yeah, so I think here we like to think about the large-scale shantytown project that was implemented back in 2016, 17, 18.
00:10:40
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Effectively, back then, the government handed out cash.
00:10:43
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It was a cash compensation mechanism that really helped reinstall the market's confidence and also helped the market think about purchasing a flat and helping them on the affordability fund.
00:10:57
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Michel, another issue seems to be that a lot of people are not willing to service their mortgages or cannot do that.
00:11:03
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Now, that's bad for banks, but also for property developers, correct?
00:11:07
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Yeah, so it's actually been brewing in the background.
00:11:11
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It's not new news, but it's been really reported in the media.
00:11:16
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I think what this caused is really a confidence crisis.
00:11:19
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We had a confidence crisis.
00:11:22
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Market recovered a bit.
00:11:23
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It felt better when we saw it picked up in the June sales numbers.
00:11:27
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And now we see this in the news.
00:11:29
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And so this confidence crisis effectively has been extended.
00:11:33
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So, Michel, you've seen a lot of cycles here as well.
00:11:38
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Is there ever going to be growth left in China's property?
00:11:41
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We have a shrinking population potentially.
00:11:44
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You've oversupply, etc.
00:11:46
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How do you think long term about the sector?
00:11:48
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Is it really looking here at 10 years of another lost decade?
00:11:53
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Yeah, so the sector will shrink in our view, pretty much starting from this year.
00:11:59
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Last year was really the peak of the market.
00:12:02
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And from here onwards, we're looking at a shrinking industry.
00:12:06
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Some companies have staying power, but, you know, broadly speaking, the sector will struggle the next 10 years.
00:12:12
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Well, thanks for all those insights, Michel.
00:12:14
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Yeah, thanks for stopping by, Michel.
00:12:16
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Thank you very much for having me.
00:12:26
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Well, it's great to have Michelle on, a little bit further expertise from our real estate specialist here.
00:12:31
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It was interesting also the long-term prospect don't seem to be that encouraging.
00:12:35
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And she really looks at it as a market share game from now on rather than an expanding sector overall.
00:12:41
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I thought that was very interesting.
00:12:42
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Yeah.
Personal Insights and Podcast Closing
00:12:43
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But we're here on the Banyan tree.
00:12:45
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People talk about politics, markets, but they also talk about all sorts of other things.
00:12:50
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Fred, anything interesting on your mind?
00:12:53
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Well, it's hard to peel yourself away from markets these days, but I'm reading a fantastic book by Simon Winchester.
00:12:59
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It's a travel impression along the Yangtze River.
00:13:03
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He wrote that in the 1990s, but of course, historical context there as well.
00:13:07
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And that preamble has this very nice kind of anecdote where he describes how the Yangtze River is flowing through a massive horseshoe bend really upstream.
00:13:17
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And the reason why there's a horseshoe bend is because there's a massive mountain around
00:13:21
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in the way of the Yangtze River.
00:13:23
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And if that mountain hadn't been there, the Yangtze River would have, instead of flowing through China, would have flown through Vietnam.
00:13:29
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And that would have changed the course of history, certainly for Lower China.
00:13:33
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And he was traveling there in the 1990s when you and I were backpacking across the region as well, right?
00:13:37
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We were, and that's actually nice memories also and a reminder of how far China really has come, even from the 1990s in terms of development and so forth.
00:13:46
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But Harold, what's on your mind?
00:13:48
Speaker
Well, I am traveling to Indonesia in about two weeks' time.
00:13:53
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There's a family reunion.
00:13:55
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But I also want to go to East Java and visit a bunch of temples there.
00:13:58
Speaker
And I've decided to pick up my photography skills, or at least to sharpen them up.
00:14:03
Speaker
So I've signed up with a photography course, got myself a new camera, and just want to make sure that when I get there, I can make some nice pictures of these old temples.
00:14:11
Speaker
Well, and I hope you find a banyan tree that you can take a picture of.
00:14:14
Speaker
I will see.
00:14:15
Speaker
I'm going to look for one and see if we can use that one.
00:14:17
Speaker
That would be a good idea.
00:14:19
Speaker
Well, thanks, Harold, and thanks, everybody, for listening in this week.
00:14:22
Speaker
We'll be back next week, same time.
00:14:24
Speaker
Absolutely.
00:14:25
Speaker
Talk to you next week, Fred.
00:14:26
Speaker
Thank you very much.
00:14:33
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:14:36
Speaker
We hope you enjoyed the discussion.
00:14:38
Speaker
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