The paper highlighted this week sets out to do one thing but in the process does something more useful for investors in the China property market.
First, what it was supposed to do. Professors Ms. Rose Neng Lai and Mr. Robert A. Van Order, from the universities of Macau and George Washington respectively, wanted to see if there was a correlation between the availability of funds via the shadow banking complex* and home prices in China?
To do this they drilled ten-years of data on home prices from 2005 to 2014 from 65-cities [As I’ve noted before, contrary to folklore, there are now a lot of very granular and reliable data sources in China]. For data on shadow lending they used The National Bureau of Statistics monthly series of ‘Loans from non-banking financial institutions’ which covers the majority of what is referred to as ‘shadow’ financing and they obtained rental-rate data from a private sector source to help reconcile the equations.
They conclude, perhaps unsurprisingly, there is a relationship between the availability of funds from the non-bank sector and home prices. They urge the authorities to keep a weather eye on this as problems in this aggregate can quickly become on-balance-sheet issues for the mainstream banking sector. They conclude though there appears to be no problem with the system over the period of their study.
The above should provide comfort for those who’ve been incorrectly informed of issues here. In addition to this finding though, and what’s more exciting for investors, is their observation that at no point in the study was there anything that could correctly be referred to as a bubble in residential property prices.
Property prices, in all the cities in the study, moved over time in a fashion predicable by fundamentals. If you doubt this have a look at the charts on P.22 and P.23 that show prices relative to rents and interest rates. Sure, from time to time, they jump the rails but in all cases quickly return to the path predicted by local dynamics.
To highlight this point they looked at studies on the U.S. housing market prior to the GFC that describe the unequivocally bubbly nature of that market. Using the same methodology on the Chinese data they can’t find anything nearly as frothy.
You can access the paper in full via this link Shadow Banking and Property in China
Happy Sunday
[*’Shadow’ banking is an unfortunate term. I suspect the authors of the paper went with it because they want it read; an example perhaps of high-brow click-bait? However, this business is better described as ‘Non-bank lending’ as it refers to the financing that’s provided by the Trust Company, Corporate Bond Market and Wealth Management Product sectors. It omits P2P and other informal channels but these are likely to be piffling compared to the mainstream mechanisms.
It is thus not what goes on in the gritty back streets of Wenzhou and elsewhere. It is an activity legitimate and monitored taking place in the antiseptic sunshine of the broad regulatory framework.
It’s been growing rapidly, that should be a cause for concern, no? Yes the growth rate has been strong in recent years; because it comes off a very low base. In the paper (on P.25) there’s another useful table showing 26-countries monitored by the Financial Stability Board in terms of their use of non-bank funding relative to overall GDP. The number for China is 26% placing it at #13, from the bottom. At the top (confusingly it’s the bottom in the table) are the U.S., Switzerland, the U.K. and Ireland where the ratios are 82%, 90%, 147% and 1, 190% respectively. Glass houses and all that.]