Some initial signs that the Chinese equity market slump is starting to affect the real economy have come to light over the past 24 hours.
Chinese media is now reporting that some prospective buyers of property have forfeited their deposits and cancelled planned purchases in an attempt to conserve capital and meet margin calls. Moreover, according to a report published by CNBC, several Shanghai-based real estate agents have told the Chinese media that investors are now looking to sell existing property holdings in a hurry to recoup their losses by selling their properties.
Quick sale
According to CNBC some Chinese real estate agents seen investors put their properties on the market at a 10% discount to the prevailing market price as they look for a quick sale. The big unknown is how much more of this ‘forced selling’ is to come.
On July 5, China’s securities regulator announced that property had become an acceptable form of collateral for margin traders. In late March, the government unveiled a series of measures aimed at encouraging home buyers into the market. These measures included lowering the minimum down payments for buyers of second homes and cutting to two years the length of time a seller must own home before selling to avoid paying a business tax.
UBS AG (NYSE:UBS) believes that forced home sales and order cancellations are isolated events, and analysts at Nomura Holdings, Inc. (ADR) (NYSE:NMR) (TYO:8604) agree. The reason cited for this belief is the fact that equities only account for around 24% of household financial assets on average. Around 55% of household assets are cash and China has one of the highest household savings rates in the world, which should offer some cushion and minimize contagion. A much greater proportion of household wealth is tied up in real estate. According to Bridgewater’s analysis, around 50% of household wealth is tied up in property — the rest in financial assets such as equities, bonds and cash.
