China’s Tightens Regulation of Internet-based Consumer Finance

Last Friday, the People’s Bank of China and China Banking Regulatory Commission issued a regulation to rectify excesses in internet-based consumer finance says Moody’s.

The regulation is credit positive for banks because it will help prevent a rapid increase in consumer leverage, strengthen banks’ risk management and limit disorderly competition. Exhibit 1 shows that outstanding internet-based person-to-person (P2P) loans were RMB1.2 trillion ($181.8 billion) at November 2017, 13.4x the amount three years earlier and far outstripping the growth of traditional micro-credit companies (MCCs).


With immediate effect, the regulation stops any unlicensed firms or individuals from making loans. The regulation also temporarily bans internet-based platform companies from making general-purpose unsecured consumer loans and permanently bans loans to finance down payments of housing purchases and loans for purchases of stocks and futures. The permanent ban on affected loans is in line with the authorities’ policy priority of deleveraging the financial system and the real economy.

The regulation curtails funding available to all MCCs, either online platforms or offline traditional entities. MCCs can no longer sell their loans through internet-based or local trading platforms and MCCs must consolidate on their balance sheets loans that have been sold or securitized.

P2P platform companies are particularly prone to liquidity and solvency stresses, as shown in Exhibit 2. The improved risk management of MCCs will help improve the asset quality of banks that lend to MCCs, which would reduce the systemic transmission of risks. The regulation prohibits banks from investing either their on-balance-sheet funds or off-balance-sheet wealth-management products in structured products with underlying assets sourced from the affected loans.

In addition, the regulation prohibits banks’ outsourcing of credit underwriting and risk management functions to internet-based credit service platforms. Banks must validate consumer credit information against centralized databases maintained by the People’s Bank of China and National Internet Finance Association of China. This will discipline banks to strengthen their internal process of managing the use of consumer credit information in originating consumer loans.

Larger banks are likely to benefit most because their brand recognition is more attractive to customers as the regulation reforms the sector. For the 16 listed banks, which account for more than 70% of the country’s commercial banking-sector assets, new retail loans were 54.3% of the increase of the total loan balance in the first half of 2017.


Four Chinese e-commerce businesses with their eyes on Australia

From Smart Company.

It’s been a big year for global players eyeing off Australian’s retail sector, but if you think Amazon is the only giant force changing the local market, you’re not looking hard enough.

As shoppers stare down the end of 2017, three of the biggest players in China’s digital retail space are executing long-term strategies in Australia, while others have their sights set on capturing Chinese shoppers arriving in Australia in search of locally made products.

Here are four operators that could present big opportunities for local SMEs wanting to connect with the Chinese market — and what you need to know about the plans they already have underway here.


Global revenue: $US23 billion ($30.28 billion) in 2017.

Founded by: Jack Ma.

Australian operations: Alibaba’s Tmall sales platform has been a selling opportunity for local brands like vitamins producer Blackmores for years, but it wasn’t until 2017 that a more formal long-term relationship was established between the e-commerce giant and the Australian market, when Prime Minister Malcolm Turnbull signed a commitment with Alibaba founder Jack Ma to work together to bring more local sellers onto the platform.

At the time, Australia was in the top five nations selling through Alibaba’s platforms. In February, the company launched an Australian and New Zealand headquarters in Melbourne, with local operations headed up by Maggie Zhou, who has been with the company for more than 15 years.

Opportunities for SMEs: Alibaba has been engaging with Australian retailers throughout the year, holding a variety of seller summits and e-commerce expos, including taking 500 businesses through best practice steps for selling through the platform at a two-day event run in October. Alibaba says there are currently 1300 Australian companies and 400 New Zealand companies selling through the platform.

Maggie Zhou said earlier this year that establishing an Australian office was only the very first step for the business in Australia.

“Longer term, Alibaba Group’s vision for the ANZ region is to build the entire operating infrastructure needed to enable local businesses to expand globally,” she said in February.

Global revenue: $US37.5 billion ($49.35 billion) in 2016.

Founded by: Liu Qiangdong, also known as Richard Liu

Australian operations: claims to be the largest e-commerce retailer in China by revenue, and courts more than 266 million active customers through “JD Mall” across all categories, including fresh food. Earlier in 2017, management visited Australia with an announcement it was searching for more than 100 Australian data scientists to develop artificial intelligence retail technologies for the business. At the time, head of digital marketing Paul Yan told The Australian “Australia is a very important market for us”.

In November, the company told Inside Retail it is undertaking more local recruitment with a long-term plan of opening up an Australian headquarters in the neat future.

Opportunities for SMEs: Inside Retail reports the company’s president of international corporate affairs says “thousands” of Australian brands already work with JD to sell through its platforms. In 2015, JD launched an “Australian Mall” product, allowing Chinese shoppers to peruse Australian-made offerings. In March, founder Richard Liu visited Australia to put the call out to local retailers, asking them to start the conversation about selling through JD.

“Even with the Chinese economy slowing slightly in recent years, the retail sector, especially online, has continued to see outstanding growth,” he told The Australian.

Global revenue: $US8.15 billion ($10.98 billion) for parent company vipshop in 2016. 

Founded by: Eric Ya Shen and Arthur Xiaobo Hong

Australian operations: has announced plans to procure more than $500 million of Australian goods in the 2018 financial year as the discount retailer works towards opening a Sydney distribution centre this year. The company’s head of global buying, Hillary Wang, said in a statement last week that the retailer is aiming to become the number one retail platform in China, with Australia being a “very strong market” from which to draw sellers in the future.

Opportunities for SMEs: The company says it is rapidly increasing its order volume quarter on quarter, with the most recent figures of 74 million transactions over three months amounting to a 23% increase on the 60 million orders it saw a year ago. The platform is more focused on female shoppers than others in this space, with 80% of its shoppers being female. VIP says it is focused on pulling more Australian retailers onto its platforms, searching for brands “rich in history, made with the best ingredients to the highest standards”, Wang says.


Revenue: $1.23 million in 2016. 

Founded by: Jiahua Zhou

Australian operations: This Australian-founded, ASX-listed retailer might not yet be at the billion-dollar sales volume of other Chinese retail brands, but it’s still an important one for local SMEs to take note of. The business aims to capture the Chinese “daigou” market by connecting shoppers with locally made products. The business has plans to expand an e-commerce offering and capture a market of Chinese tourists and visitors by selling products through bricks-and-mortar stores within Australia.

Opportunities for SMEs: In a company update released yesterday, chairman Keong Chan signaled a focus on connecting with more local suppliers and brands. The business has secured a strategic alliance with Australian Made, which it says will provide it with access to 2700 local suppliers involved with the Australian Made organisation. The company has also secured the Jumbuck and UGG trademarks to sell these products through AuMake stores.

“We believe the Chinese tourist market has the potential to be equal to the daigou market in terms of brand promotion and raw purchasing power,” Chan said yesterday.

Chinese Homebuilder Outlook Stable, but Market to Cool

China’s housing market is likely to continue to cool in 2018, with sales growth set to slow across most of the country and house prices likely to stay relatively flat, says Fitch Ratings.

However, the authorities have considerable policy flexibility to support housing demand, which limits the risk of a market downturn. We therefore maintain a stable sector outlook for Chinese homebuilders.

The Chinese government has imposed tougher rules on home purchases and minimum loan deposits in higher-tier cities since October 2016 to dampen speculation. We do not expect further tightening in 2018, except perhaps in some lower-tier cities in strong economic regions that could see price increases. Most of the existing restrictions are likely to remain in place, but policies could be adjusted to encourage homeownership for first-time homebuyers or to attract skilled labour migration in some cities where house prices have stabilised.

The curbs have had a clear impact on the market, reining in house price inflation, tempering home sales growth and encouraging destocking. We expect them to limit any gains in house prices in 2018. Contracted sales growth is likely to slow for most homebuilders, and we forecast that overall housing sales will decelerate to 5%, from 10.9% yoy on a trailing 12-months contracted sales at end-October 2017. The destocking cycle could, however, begin to reverse, as some companies now only have land bank reserves for two to three years of development.

A major house price correction is unlikely, given that the authorities directly control many aspects of the housing and mortgage markets. Moreover, the restrictions in higher-tier cities, which have seen the strongest price gains in recent years, have led to considerable pent-up demand that could be released if policy is relaxed.

Homebuilders’ EBITDA margins could begin to narrow in 2018 and 2019 as homebuilders start to work through their higher-cost inventory in a market where prices are under pressure from government controls. Leverage is likely to remain relatively stable over the next two years, with net debt/adjusted inventory averaging 40%-43% among Fitch-rated homebuilders. Cash flow generation is also likely to remain strong.

We maintain a stable sector outlook on commercial property. Mall traffic in higher-tier cities is suffering from strong saturation and competition from e-commerce, with only mature malls in prime locations performing well. We believe these first-tier city malls will achieve low single-digit yoy rental growth in 2018, similar to 2017. However, malls of established operators in less-saturated lower-tier cities are seeing strong traffic growth.

Grade A office space in most first-tier cities is likely to remain broadly stable, and we expect the vacancy rate to stay below 15%. However, office assets in Guangzhou and Shenzen, as well as in lower-tier cities, have higher vacancy rates and could be affected by an increase in supply in 2018.

China to tighten regulations on financial firms’ shareholding

From Moodys

On 16 November, the China Banking Regulatory Commission published for public comment a draft regulation on commercial banks’ shareholding. The draft regulation raises the bar for investor qualification, demands the long-term commitment of significant shareholders’ (those owning a 5% or greater stake) investment, and requires annual disclosures of significant shareholders and related parties. The proposed regulation is credit positive for China’s financial firms because it will limit the systemic transmission of financial risks, improve the quality of the firms’ capital and strengthen their corporate governance.

The draft regulation will serve as a benchmark for regulating non-bank financial institutions including rural credit cooperatives, trust companies, financial leasing companies, automobile and consumer finance companies, and financial asset management companies, which are a type of specialist firm that works out nonperforming financial assets. More stringent investor qualifications include a ban on leveraged acquisition of shares, in line with the authorities’ policy priority of deleveraging the financial system and the real economy. In addition, the draft regulation will limit system interconnectedness by restricting any investor from becoming a significant shareholder of more than two banks or a majority shareholder of more than one bank.

The draft regulation also raises the entry barrier for significant shareholders by setting up a prior-approval process to screen out investors that have overdue bank debts or outstanding court judgments against defaults. Investment pools such as funds, insurance asset-management plans or trust plans cannot own more than 5% of a bank if they are ultimately controlled by a single entity. The higher barrier will diversify the investor base for banks and reduce system interconnectedness. The tighter ownership rules are particularly relevant for rural commercial lenders, which are transforming themselves to commercial banks from mutual institutions of credit cooperatives (see Exhibit 1).

In the banking regulator’s view, there is abundant capital to invest in bank shares, attracted by the sector’s higher profitability. As Exhibit 2 shows, rural commercial banks have had profitability and capital metrics second only to China’s big five banks.


Securing quality capital will improve banks’ creditworthiness. The draft regulation will improve the quality of capital that banks receive from significant shareholders by annually certifying a shareholder’s ability to inject capital into investee firms in times of need. The draft regulation also requires a five-year lockup period of significant shareholders’ investment to protect banks’ ability to create long-term value.

Additionally, the draft regulation tightens the enforcement of existing rules on connected-party transactions by expanding the scope of the rule. Emphasizing a “see-through” principle to improve disclosure on the ultimate beneficiaries of shareholding, the draft regulation specifies connected parties include investors’ controlling shareholder, actual controlling entity, affiliated entities, entities acting in concert and ultimate beneficiaries.

Assessing China’s Residential Real Estate Market

The IMF just published a working paper examining real estate in China.

After a temporary slowdown in 2014-2015 China’s real estate market rebounded sharply in 2016. As signs of overheating emerged, the government turned to tighten real estate markets through a range of macroprudential and administrative measures. Many empirical studies point out that the house price surge is driven by fundamentals, while others consider the pickup of real estate activity is unsustainable. This paper uses city-level real estate data to estimate the range of overvaluation of real estate markets across city-tiers, and assesses the main risks of a real estate slowdown and its impact on economic growth and financial stability.

Real estate has been a key engine of China’s rapid growth in the past decades. Real estate investment grew rapidly from about 4 percent of GDP in 1997 to the peak of 15 percent of GDP in 2014, with residential investment accounting for over two thirds of the total real estate investment.

Bank lending to the sector makes up 25 percent of total bank loans, about half of all new loans in 2016, and banks’ increasing exposures to real estate, including through property developers and household mortgages, may pose financial stability concerns. Real estate also has strong linkages to upstream and downstream industries (about a quarter of GDP is real-estate related).2 In addition, land sales are a key source of local public finance, accounting for about 30 percent of local government revenue in 2016, while general government net spending financed by land sales is about 9 percent of the headline revenue in 2016. There has been a rapid expansion of government subsidies on social housing, consisting of nearly 6 million apartment units in 2015-2017.

Real estate markets vary significantly in China because of its large economic size, economic and social diversity, and fragmented local government policies. The real estate cycles tend to be more pronounced in top-tier cities in terms of price volatility, but they account for a small fraction of real estate inventory and investment.  Smaller cities constitute over half of residential real estate investment, but the price increase on average was much lower during 2013-16.

Distortions render China’s property market susceptible to both price misalignment and overbuilding. On the supply side, the market is distorted by local governments’ control over land supply and their reliance on land sales to finance spending. On the demand side, the market is prone to overvaluation—housing is attractive as an investment instrument given a history of robust capital gains, high savings, low real deposit interest rates, a lack of alternative financial assets, as well as capital account restrictions.

The government has closely monitored real estate activity given its importance in the economy. Policies are highly decentralized, with local governments (often with local branches of the financial regulators) deciding land sale and infrastructure development, granting construction and sales permits to developers, and setting purchases restrictions. The central government and financial regulators can also affect the housing market through financing conditions and macro-prudential tools for mortgage lending.

If house prices rise further beyond “fundamental” levels and the bubble expands to smaller cities, it would increase the likelihood and costs of a sharp correction, which would weaken growth, undermine financial stability, reduce local government spending room, and spur capital outflows. Empirical analysis suggests that the increasing intensity of macroprudential policies tailored to local conditions is appropriate. The government should expand its toolkit to include additional macroprudential measures and push forward reforms to address the fundamental imbalances in the residential housing market.

Note: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Beijing Restrictions Will Cause Chinese Buyers To Retreat From Global Property Market

According to the South China Morning Post, cash-rich Chinese firms – the big spenders in the global property market in the past four years – are getting cold feet as Beijing tightens controls on outbound investment.

“Requests for overseas acquisitions are already drying up,” said Paul Guan, a partner with global law firm Paul Hastings who advises Chinese institutional investors on overseas real estate.

“Business owners all know the Chinese government has sent a clear signal this time that they want to curb overseas investment in the property sector,” Guan said.

The move will put pressure on prices in key property markets from New York to London. The top three overseas destinations for Chinese property investors in 2016 were the United States, Hong Kong and Australia, while pending deals have accumulated mainly in Britain and the US over the past six months, according to Real Capital Analytics.

Chinese were the biggest foreign investors in US and Australian real estate last year, accounting for 25 per cent of deals in the US and 26 per cent in Australia.

They also accounted for 25 per cent of all central London commercial property acquisitions in 2016, while some 80 per cent of residential land sold in Hong Kong so far this year was bought by Chinese firms, according to data from Morgan Stanley. Chinese investment in the city has quadrupled since 2012, the financial services firm said.

“Transaction volumes will definitely go down in the hot destinations, and property prices could also be affected,” said Hans Kang, chief investment officer of InfraRed NF Investment Advisers.

On Friday, the State Council said it would restrict overseas investment in a number of areas including property, hotels, the film industry and other forms of entertainment, and sports clubs. Investors would have to seek special approval from the regulators for such ventures.

Dalian Wanda Group on Tuesday backed away from a £470 million (US$605.63 million) acquisition of the Nine Elms Square site in London, after the government’s new capital controls were announced.

Outbound investment by Chinese companies has surged since 2013, with Beijing pushing for more of them to go global and as foreign exchange reserves continued to pile up.

But the government has since 2015 become worried about the scale of capital outflows, particularly in property, at a time when the yuan has sharply depreciated and there are fears of a domestic property bubble, creating problems for the country’s balance of payments.

Added to those fears are companies that borrow money on mainland China to buy overpriced overseas assets, which runs counter to President Xi Jinping’s deleveraging efforts.
“That could hit the financial stability of China’s banking system if there are any fluctuations in outside markets,” Kang said.
“Chinese buyers accounted for 25 per cent of all central London commercial property acquisitions in 2016, according to Morgan Stanley.

In past months, policymakers have tightened regulations on “irrational overseas investment” and ordered banks to check the credit exposure of a number of aggressive dealmakers including Wanda, Fosun International, HNA Group and Anbang Insurance Group.

All of those companies had been on a shopping spree in overseas property markets in recent years.

Anbang, for example, made headlines in 2014 with its US$2 billion purchase of New York’s Waldorf Astoria hotel.

HNA Group, which owns Hainan Airlines, meanwhile bought a 25 per cent stake in Hilton Worldwide Holdings for US$6.5 billion last year. It has also paid a record HK$27.2 billion for four residential sites in Hong Kong since November.

And Wang Jianlin, who runs one of China’s biggest property developers, Wanda, has invested some A$2 billion (US$1.58 billion) in two mega mixed-use projects in Australia since 2014.

Wang Jianlin, who runs Wanda, has invested US$1.58 billion in two mega mixed-use projects in Australia since 2014.

But now those dealmakers find themselves under intense government scrutiny, their ambitious global plans have come to a screeching halt and their focus is shifting back to the domestic market.

Wang told financial media outlet Caixin last month that his company would “actively respond to the state’s call and divert its main investments to China” after it sold off US$9.3 billion of assets to rivals in order to repay debts.

The retreat is already being felt in global markets. Outbound property investment by mainland Chinese firms was down 82 per cent in the first half from a year ago – and it’s expected to plummet 84 per cent for the whole year to US$1.7 billion, according to Morgan Stanley. The total investment in 2016 was US$10.6 billion.

That trend will create headwinds for prices in Hong Kong, the US, Britain and Australia over the medium term – especially for office assets in Manhattan, central London and Hong Kong, which is the most exposed, it said.

Guan from the law firm said prices in the high-end residential market in New York were also likely to be hit by the loss of Chinese buyers.

For the first time since October 2012, no contracts worth over US$10 million were signed in the city last week, according to data from Olshan Realty.

Others were more positive, and believed the impact of the restrictions would be limited to related markets, which would continue to be shaped by broader macroeconomic trends and fundamentals.

“Fortunately, the United States’ key markets are still desirable enough that without one particular flow of capital from a region, the impact should be nominal if all economic and market conditions are normal and healthy,” said Andrew Feldman of New York-based real estate agency Triplemint.

Added to that, many Chinese companies had already moved currency overseas and could continue to issue debt or equity through offshore platforms if they wanted to invest in property, according to Ben Briggs, executive vice-president of Briggs Freeman Sotheby’s International Realty based in Xiamen.

“They will just do the investments in a more quiet and sophisticated way,” Briggs said.

Thomas Lam, senior director of Knight Frank, agreed that the restrictions would not stop Chinese companies from investing abroad.

“In the longer term, going global will continue and it will remain an essential means for Chinese companies to diversify risks and secure sustainable returns,” Lam said.

China’s Growth Sustainable Says IMF

The results from the 2017 Article IV consultation with China have been published. The IMF acknowledged that China’s continued strong growth has provided critical support to global demand and they commended the authorities’ ongoing progress in re-balancing the Chinese economy toward services and consumption.

They noted that economic activity had recently firmed and saw this as an opportunity for the authorities to accelerate needed reforms and focus more on the quality and sustainability of growth. They supported the importance of reducing national savings to help prevent domestic and external imbalances and emphasized the need for greater social spending and making the tax system more progressive. Stronger domestic demand helped further reduce China’s external imbalance, though it remains moderately stronger compared to the level consistent with medium-term fundamentals

Amid strong growth, the authorities have pivoted toward tightening measures, reflecting a greater focus on containing financial sector risks.

Debt is now expected to continue to grow as the IMF now assumes that the authorities will broadly maintain current levels of public investment over the medium term and not substantially consolidate the “augmented” deficit, reaching 92 percent of GDP in 2022 on a rising path. Private sector credit is projected to continue increasing over the medium term. Thus, total non-financial sector debt reached about 235 percent of GDP in 2016 and is projected to rise further to over 290 percent of GDP by 2022.

They say downside risks around the baseline have increased. A key consequence of the new baseline is that it envisions China using up valuable fiscal space to support a growth path with slower rebalancing and a higher probability of a sharp adjustment. Thus, if a sharp adjustment were to materialize, China would have lower buffers with which to respond. Such a potential adjustment could be triggered by several risks, including:

  • Funding. A funding shock could come from at least two (related) pressure points. The first is the mostly short-term, “interbank” wholesale market (which includes banks’ claims on each other and on NBFIs). The second is a loss of confidence in short-term asset management products issued by NBFIs, or a run on the WMPs which fund them.
  • Retreat from Cross-Border Integration. Should higher trade barriers be imposed by trading partners, the impact would depend on their coverage and magnitude, how exchange rates respond, and whether China retaliates. For example, an illustrative simulation in the IMF’s Global Integrated Monetary and Fiscal Model suggests that if the U.S. puts a 10-percent tariff on Chinese exports and China allowed its real exchange rate to adjust, real GDP in China would fall by about 1 percentage point in the first year. If China retaliated with similar tariffs on U.S. imports, its GDP would contract further. However, given the complexity of global trade relationships and uncertainty regarding how  exchange rates would adjust, the effect could be larger and more disruptive.
  • Capital Outflows. Pressure on the exchange rate could resume because of a faster-than-expected normalization of U.S. interest rates, much weaker growth in China, or some other shock to confidence. In an extreme scenario, the pressure could lead to renewed large reserve loss and eventually a potential disruptive exchange rate depreciation. However, this risk is likely small in the short run due to the stronger enforcement of CFMs, the prominence of state-owned banks in the foreign exchange market, and ample foreign exchange reserves.

While agreeing on the growth outlook, the authorities disagreed about the associated risks. The authorities agreed that 2017 growth was likely to exceed marginally the 6.5 percent full year target. This implied some deceleration during the course of the year and would result in inflationary pressure remaining contained and a broadly unchanged current account. For the medium term, though the authorities shared the view that their 2020 target of doubling 2010 real GDP would likely be reached, they viewed the debt build-up thus far as manageable and likely to slow further as their reforms take effect. They also explained that their “projected growth targets” were anticipatory and not binding. They underscored that reaching the desired quality of growth was a greater priority than the quantity of growth. The authorities viewed domestic concerns, such as high financial sector leverage, as manageable considering ongoing reforms and Chinese-specific strengths, such as high domestic savings. They saw the external environment as facing many uncertainties, such as an unexpected fall in global demand or a retreat from globalization.

The IMF conclude that:

China continues to transition to a more sustainable growth path and reforms have advanced across a wide domain. Growth slowed to 6.7 percent in 2016 and is projected to remain robust at 6.7 percent this year owing to the momentum from last year’s policy support, strengthening external demand, and progress in domestic reforms. Inflation rose to 2 percent in 2016 and is expected to remain stable at 2 percent in 2017. Important supervisory and regulatory action is being taken against financial sector risks, and corporate debt is growing more slowly, reflecting restructuring initiatives and overcapacity reduction.

Fiscal policy remained expansionary and credit growth remained strong in 2016. Growth momentum will likely decline over the course of the year reflecting recent regulatory measures which have tightened financial conditions and contributed to a declining credit impulse.

The current account surplus fell to 1.7 percent of GDP in 2016, driven by a sharp recovery in goods imports and continued strength in tourism outflows. It is projected to further narrow to 1.4 percent of GDP this year, due primarily to robust domestic demand and a deterioration in terms of trade. Capital outflows have moderated amid tighter enforcement of capital flow management measures and more stable exchange rate expectations. After depreciating 5 percent in real effective terms in 2016, the renminbi has depreciated some 2¾ percent since then and remains broadly in line with fundamentals.

Home Prices In Hong Kong Climb To Record Highs Even As Chinese Buyers Pull Back

From Zero Hedge.

Chinese banking regulators’ efforts to force the country’s largest conglomerates to deleverage after an unprecedented binge on foreign assets has already spurred a pullback in foreign real-estate investment, part of a broader decline in foreign investment more generally.

But with wealthy Chinese buyers suddenly out of the real-estate market, housing analysts are anticipating a wave of sharp declines in housing prices in some of the world’s most expensive markets like New York City, London and Hong Kong.

But during the first half of the year, real-estate prices in these markets have continued to climb. Even in Hong Kong, one of the most expensive markets, and also one of the first places one might expect the impact of a mainland pullback to be felt, prices have instead climbed to all-time highs, according to Bloomberg.

The Centaline Property’s Centa-City Leading Index of existing home prices surged to a record high 160.3 as of July 30. The index has climbed 11 percent this year, and more than 50% in the past five years.

Over the past five years, the rapid runup in home prices has caused densely populated Hong Kong to become the world’s most expensive housing market.

“Hong Kong’s housing affordability ratio, which measures the proportion of income spent on mortgages, worsened to about 67 percent for the quarter, the government said Friday, up from 56 percent in the year-earlier period.”

Reining in housing prices in the former British colony is a top priority of the HKMA – the city’s de facto central bank – and its incoming Chief Executive Carrie Lam. Home prices have been a major driver of inequality; for example, now takes a household earning the median income 18 years to afford a home, according to data from Demographia. Every housing auction is hopelessly oversubscribed.

Back in May, HKMA’s current Chief Executive Norman Chan warned about the bubble-like behavior in the city’s housing market, saying levels of demand were reminiscent of 20 years ago, just before Hong Kong suffered a property bust. Chan cautioned people with limited financial resources to stop speculating in property based on the expectation that prices would rise indefinitely.

With wealthy foreign buyers stepping away, there’s probably enough repressed demand in the local market to keep prices buoyant for now. The number of residential transactions surged 43 percent to 18,892 in the second quarter, helping to push prices higher.

Unfortunately for investors, without a supply of wealthy mainland buyers willing to pay the “Chinese premium,” prices will soon slide back to Earth.

China’s Cooling Housing Market Set to Weigh on Economy

China’s housing market is likely to continue to cool in response to stronger restrictions on home purchases across many cities and tighter credit conditions, say Fitch Ratings. Housing is the key cyclical sector in the Chinese economy, and will weigh on growth in the second half of the year and into 2018.

There is already evidence that the housing market is slowing. Growth in new residential property sales decelerated to 24.0% yoy (on a trailing 12-month basis) in May 2017, down for the fifth straight month from the 36.2% peak in December 2016. Price gains have also moderated. Secondary home prices in Tier 1 cities rose by 28.7% in 2016, but increased by just 3.6% in the first five months of 2017, and fell for the first time since September 2014 in May.

The downturn has been policy driven, with the authorities stepping in to prevent excessive froth in the market. Tightened rules on home purchases and mortgages are curbing buying by speculators and upgraders. Some first-time buyers might also be postponing purchases in the expectation that prices may fall. Meanwhile, the increased focus of the authorities on controlling leverage and limiting financial risks has led to a significant rise in money-market interest rates since last December, and some banks have recently increased mortgage rates.

The near-term outlook for China’s housing market is closely linked to the domestic credit cycle. As the chart below shows, housing sales move broadly in line with the “credit impulse” – or the change in the flow of new credit (including local government bonds) as a share of GDP. A weaker credit impulse, along with the tightening of home purchase restrictions, is likely to drag down home sales growth further in 2H17.

That said, the government will want to avoid causing significant volatility in the market. Home sales dropped by 9% yoy in early 2015, following the last tightening of restrictions, which contributed to a strong release of pent-up demand when policies were subsequently relaxed. We expect a more cautious approach this time, which is likely to result in home sales stalling, but not falling, in 2H17.

House prices are likely to decline slightly in 2H17, as demand weakens. We expect prices in Tier 1 cities to hold up better than in lower-tier cities. Prices in Tier 1 cities have risen by almost 90% in the last four years, compared with increases of 10%-25% in lower-tier cities. However, demand in Tier 1 cities remains strong and land supply is tight, which gives the authorities more scope to support the market if the downturn is sharper than expected. In lower-tier cites, demand is weaker and developers’ housing inventories are higher.

A likely weakening in the housing market is one of the main reasons behind our forecast that GDP growth will slow in 2H17. Investment in housing alone accounts for around 10% of GDP, and most estimates place its contribution to GDP much higher once supporting industries are included. There tends to be a six- to eight-month lag from sales to housing investment growth, which means that the economic impact of the housing market slowdown will continue well into 2018, when we expect GDP growth to slip slightly below 6%.

How much has China grown?

From the FRED Blog.

There’s some debate on how reliable the GDP growth rates from China are. In part, this worry comes from the pre-reform era in which all levels of production had to reach targets and may not have been entirely truthful. Also, the string of very high growth rates over the past two decades is unprecedented. Can FRED shed some light?

Well, it has seven different series that measure GDP in different ways. One is from the World Bank, one is from the OECD, and five are from the Penn World Tables. Differences pertain to how currency conversions are treated. For example, there’s the issue that exchange rates may drift away from so-called purchasing power parity (PPP) and which side of the GDP equation is used. Indeed, technically, there are three ways to measure GDP: add up all output, all expenditures, or all incomes. All three should get to the same number, but in practice there are some residual errors. So what does this graph show? These different measures essentially come to the same conclusions, the differences being relatively small and not systemically biased in one direction. However, these statistics are based on information that is coming out of China.