China has averted the crash landing that its critics anticipated when looking ahead to 2016. That much is clear, given Tuesday's figures for retail sales, industrial output and fixed-asset investment.
But there is one worrying element to the numbers. The bulk of growth came from real estate and government-backed investment from state-owned enterprises. It's the housing numbers that worry me, and I'm not alone.
Yesterday, I explained why the country's strong economic data for August is very good news for China -- and the markets. That's despite all the negative commentary flooding into my inbox. Here's that story, "China's Figures Are Good; Despite What You Hear, That Is Actually Good News."
The property numbers are explosive. Sales soared 25.5% in August, slightly lower than the 26.4% rate in July, but still quite a stunning increase. Although official figures from the National Bureau of Statistics show home prices in China's 70 largest cities have risen 7.9% in the last year, Commerzbank pegs the national figure at 12%.
I didn't really get into the full implications of this when RTHK's drive-time radio show Money Talk asked me along as a guest, this morning. Still, the podcast is online if you would like to take a listen. It was a spirited discussion with host Peter Lewis, a former investment banker who runs his own consulting firm, and Stewart Aldcroft, the chairman of Cititrust and someone I have interviewed often.
What's alarming about the Chinese housing market is not the overall growth. Even 12% isn't a scary figure, given it's a recovery from a time when sentiment turned very negative last year and the buying stopped.
It's the discrepancy in growth that is the problem. China's biggest cities are smoking hot this summer, with prices up 34% in Shenzhen in a year, through July, according to the official figures. The city with the highest per-capita income in China is, not surprisingly, a place where people are putting down hefty sums for an apartment.
But prices are also up 32% in Beijing, and 31% in Shanghai. Guangzhou is the laggard among the Big Four "Tier 1" cities: Prices there are up a "measly" 20%. We'll get the overall August figures for China housing on Sunday.
Hefei, a "Tier 2" city as the capital of Anhui province, is leading the country, with growth of 44%, while prices in the coastal city of Xiamen, near Taiwan, are up 33% in a year. But they are the only cities that are anywhere near Shenzhen's rate. Of the 70 cities that the statistics bureau tracks, 18 are in reverse, all smaller ones.
There's always good with the bad. In the weird way that strong jobs data can be negative for Wall Street, portending future interest-rate hikes, the home-price gains in the big cities may mean those markets are victims of their own success.
Nomura believes the skyrocketing prices have badly hurt affordability, which means the "downside pressures" are piling up in the property sector. It notes that leading indicators, such as the growth in the amount of floor space under construction and the growth of floor space started, are losing ground. They are still growing but the growth is flagging.
Developers, in other words, are beginning to hunker down. The market may self-correct without the nasty bursting of a bubble. And never forget that there are a lot of loaded people in a country of 1.4 billion. China, at 568, has more billionaires than the United States, which has 535, the Hurun Report calculated this March.
CLSA, which as I mentioned yesterday tends to put out pretty thorough and reasonable research on Asia, didn't dwell on the housing component of fixed-asset investment. In fact, it didn't mention it at all in its note. It believes Tuesday's numbers should be reassuring for investors, since China is back on track to hit 6.7% growth, smack in the middle of government forecasts.
So we probably shouldn't get too worked up over those price gains, although they are shocking. But it might not be good news for property stocks if those leading indicators hint at problems down the line.
Watch China Vanke (CVKEY), China's largest developer by value of sales, which is engaged in a drawn-out hostile takeover, a highly unusual event in China.
Evergrande Real Estate (EGRNY) is another big-time player, and one that has massive amounts of leverage. It just appointed a new chief financial officer, but its founder, Hui Ka-yan, continues to expand his empire in random directions. That includes a bottled-water company and a soccer team that has hired two World Cup-winning coaches -- the Brazilian Luiz Scolari is now at the helm of Guangzhou Evergrande Taobao.
The team is 60% owned by Evergrande, and 40% owned by Taobao parent Alibaba (BABA) . Based on the sale of fractional shares in the obscure Beijing-based market NEEQ, as this Wall Street Journal blog post explains, there was a flurry of Chinese coverage in March when it seemed by extrapolation that the soccer club is worth $3.4 billion.
The NEEQ market lists shares of private companies, which rarely change hands. That generated an absurd valuation that would have made the Chinese club bigger in market capitalization than Manchester United (MANU) , Liverpool and Arsenal, which all have U.S. owners.
The developer may not have quite such impressive backing, although Hui -- as China's seventh-richest man -- has $9.9 billion in the bank, according to Forbes. As a mass-market producer, Evergrande relies on huge volume, particularly in the Tier 2 mid-size cities.
The shares turned south in mid-August. It could be worth watching for a short in U.S. trading if things do turn for the worse.
Guangzhou R&F (GZUHY) , concentrated in that city, would be another stock to watch.
