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For those that missed the SBS documentary ‘China’s Ghost Cities’, it is worth watching if you are interested in China and its property market. It covers some old ground (e.g. New South China Mall in Dongguan which has been covered before by PBS, Ordos in Inner Mongolia covered before by Al-Jazeera, etc). However, it is a good summary of the risks that are rarely talked about in the local market or media which tends to focus on the strong demand out of China that some analysts seem to forecast in a straight line for the next 10-20 years.

The SBS documentary leads with the anecdote that there are ‘around 64 million empty apartments in China’ representing huge oversupply (driven by investors). The 64 million empty apartments is obviously an amazing statistic. However, no one really knows how realistic this number is (it is based on a local survey which revealed that 64.6 million urban electricity meters are registered with no electricity usage). Whilst it’s almost impossible to fully verify the full extent there do seem to be many empty apartments (sitting there as bare shells) in China, particularly in the tier one cities. One only has to travel from the airport in Beijing to the centre of town at night and attempt to count how many lights are on in the large (new) apartment blocks that line the ring roads around Beijing.

Therefore, without knowing all the exact numbers it does highlight the risks of believing all the data and phenomenal growth that has been coming out of China. The poor quality of data argues for a high risk premium whilst most investors (and corporates) have in the past just focussed on the quantity of the growth and not necessarily its quality. As the likes of Pivot Capital have argued before when it comes to Chinese data one can also quibble with the true urbanisation rate in China, the true debt level in China (local Government debt is not reported), and pretty much any piece of economic data that comes out of China.

Likewise we recently heard from a contact a similarly amazing statistic on the property sector that he was told by locals in Beijing that the ‘value of Beijing’s residential GFA (gross floor area) is greater than that of all residential GFA in the United States’ (said as a proud statement or as an April Fools joke!). In a traditional western model this looks like a bubble. However, many properties are not held as investments in the manner we in the west think of as property investment. They are held as a ‘store of value’ that people put their cash into as real interest rates are negative and the A share market is seen as too risky. It is also commonly understood that a significant portion of these properties is held without debt. There is some gearing, but it is held by property developers, more than the end-buyer. Therefore, Chinese property is held a bit like gold in the west, which means it is very hard to predict what would cause the system to roll over.

Whilst we struggle to verify these numbers and it is very hard to be totally definitive on the exact numbers it does at least highlight (for Australian investors, for example) the risks of putting all your ‘eggs in one basket’. As with sub-prime (and the US property bubble) timing is always difficult to forecast. China might continue to grow strongly for a number of years, but history shows us there are often great risks with great opportunities. The Australian miners, the Australian dollar, and even Australian house prices (and by extension the Australian Banks) are leveraged to these risks given the importance of China to all things Australian in its ‘two-speed’ economy.