Chinese stocks (
) endured a massive drop in Monday trading with the Shanghai
Composite falling 3.6% on the back of
concerns pertaining to the domestic housing
[caption id="attachment_70233" align="alignright" width="300"
caption="Housing in inland provinces like Guangxi may be suffering
Worried over a potential housing bubble, the Chinese government
finally implemented long-rumored measures designed to curb housing
prices. Beijing enacted new property taxes as well as other
disincentives in an attempt to cool down the red-hot sector.
While speculation has existed for months that the government
would put such measures into place, Chinese stocks had evidently
not priced in these measures. The announcement saw the property
sector head substantially lower, with some equities with exposure
to the sector dropping more than seven percent.
Real estate stocks were not helped by
an interview on 60 Minutes
with the head of China Vanke, a developer, during which the
chairman expressed his opinion that China was indeed in the middle
of a housing bubble.
Although many refer to the Chinese housing market in its current
state as a bubble, in order to accurately grasp the sector, one
must not treat it as a monolithic entity. Essentially,
the Chinese housing market is bifurcated
; prices are slipping in third and fourth-tier cities as oversupply
has become a problem, while apartments in first-tier cities remain
in high-demand. A recent increase in rental prices may indicate
that these housing prices may be justified on a price-to-rents
As illustrated by the
, Chinese housing prices appear far healthier than those of Canada,
Hong Kong, Singapore, and Australia. As well, although prices
remain elevated based on average Chinese income, because of
substantial wealth inequality and significant high-end demand,
these metrics may not necessarily indicate a housing bubble in
Even though housing in first-tier cities appears to be in fine
shape, a collapse of third and fourth-tier real estate could be
problematic for Chinese stocks in the sector; highly-leveraged
developers, in particular those with disproportionate exposure to
inland cities, could be in trouble. As well, banks with large real
estate loan portfolios could also be adversely affected.
In terms of Chinese equity markets as a whole, today's
developer-lead drop saw the Shanghai Composite break through
technical support at the 50-day moving average. If today's market
action is any indication, the fantastic run in Chinese stocks from
December to February could be over.