THE BRIEF: Household deposits and home sales update, China's 70-City price change data, CNY weakness linked to sentiment, Youth unemployment situation and Notable reads

Trying to make sense of things

May 26, 2023

Today’s post has an update on the new household deposit and home sales chart we originally posted on January 10th. Basically, net deposits have flattened which has coincided with home sales halting their decline.

We think households would prefer to spend their high deposits on home purchases, but that is no longer a sure-bet. We’ve begun hearing people say the last 10 years housing boom is done (or some variation). 过去十年房价猛涨结束了。

Feel free to comment or reply: what you think could replace real estate as China’s major wealth generator(s)? Or is real estate still it?

We also look at the 70-city price change data (from NBS) and posit a theory that consumer confidence has been heavily linked to rising second hand home prices.

And more. But, before we dive in, here’s a map of provincial debt-to-income ratios (link below).

I. Household Deposits and Home Sales

This is an update of a chart we shared on Jan 10, 2023 “What’s behind high household net deposits?” Here’s an excerpt from that post:

If we are right—that home sales are causing high net deposits—then the argument high deposits represents pent-up consumption demand is weakened. It is more likely cashing up (out of an illiquid asset) due to a lack of confidence about the future.

Deposit growth has slowed, and recently even reversed, which coincided with a slight recovery in home sales in 2023 so far.

Heads up: There is a seasonal effect in January and/or February each year when annual bonuses (red envelopes) are given which causes a big jump in net new deposits. Usually the remainder of the near never reaches those highs.

Here we break out net deposits into new loans and deposits. (Sidenote: Do you see how closely homes sales track household loans?)

New loan growth in the first three months of 2023 nearly set a new record (CNY 2.54 trillion), second only to first three months of 2021 (CNY 2.56 trillion).

II. 70-City Price Change Data

We also looked at the 70-city home price change data that's released by the NBS. The data aggregates price changes in the 70-cities, so a lot of granularity is lost.

This dataset has two categories of homes (more like condos in apartment buildings): (1) newly constructed or new homes and (2) second hand homes. Within those categories, NBS also breaks it down by size of apartment: 90 square meters and less, between 90 and 144 square meters, and above 144 square meters.

Here we show April year-over-year data for all 70 cities: new and second hand homes. Note how much worse second hand (orange) is performing.

The next two charts show the new homes have been increasing in more cities than the second hand homes since Oct-2018.

The second hand homes MoM drop (chart directly above) is concerning and means the recovery of second hand homes (household balance sheets) is stumbling. A bad sign if it doesn’t recover in May.

We posit a theory that second hand home prices have a larger impact on confidence/sentiment because they represent current household assets, a.k.a. balance sheet. Basically, it appears consumer confidence has been heavily linked to second hand home prices rising, at least since the 2015 stock boom/bust. New construction represent opportunity for households’ cash (+ liquid equivalents) and leverage potential (high for first home purchases). Also, new home prices are heavily managed by the developers.

III. CNY weakness linked to sentiment

“Sentiment is extremely weak, driven by the dual effect of the depreciating yuan and a loss of hope for the property sector,” said Wang Mingli, executive director at Shanghai Youpu Investment Co. “Funds are starting to lose their calm as northbound selling continues, and it looks like its going to be a tough period for the economy.” - Quoted in Bloomberg

We believe CNY will be above 7.5 before year-end and have an 8-handle sometime next year. As Wang Mingli suggests above, this will not help weak sentiment.

There are three tailwinds to CNY weakness:

Interest rate differentials with USD. Mid-to-long term US Treasuries yielding 100-150 basis points more than China Sovereign debt.

Weak domestic demand and uncertain policy environment, leading to reduced desire to invest. Policy stimulus alone is unlikely to fix damage to investor confidence over last few years.

"You can lead a horse to water, but cannot make it drink."

Weak real estate market, adds to poor sentiment in second point. As long as policy vision is "房主不炒" (homes are for living, not speculation), a resurgence of the property market as a wealth generator is extremely unlikely.

Over the last decade+, the housing market was increasingly driven by speculation, creating an affordability problem that China is trying to solve without crushing household balance sheets. While not easy, persistent affordability problems are untenable.

IV. Youth Unemployment Situation

China's young workers shifted from agriculture and manufacturing (2010) to education, retail, hotels and other services (2020). In the chart below, Bloomberg used China's 10-year census data (the most complete and accurate) to show the changes for China's youth employment in just 10 years time.

Education had the largest increase in youth workers from 2010 to 2020, followed by retail. Astute readers will know both of these sectors have suffered the last few years. For us, there is little doubt that the crackdown on private education and after school training programs has damaged young jobseekers’ prospects. Additionally, we believe zero-covid policies, while bad for retail, likely created many more jobs in the ‘transport, storage, post’ sector.

It's no longer news, but China's youth jobless rate hit a new high in April. This is concerning to us because it is outside the usual seasonal high in July when schools are on summer break. We expect this number to again peak in July, which means youth joblessness will get worse before it gets better.

V. Notable Reads

Chinese Consumer

Analysis: China’s Holiday Spending Boom Masks Patchy Recovery (Caixin Global)
Western companies warn of hit from China’s slow recovery (FT)

Debt Situation

Industries

Xi Remade China's Tech Industry in His Own Image With Crackdown (Bloomberg)
China Buys More Australian Coal as Appetite for Quality Builds (Bloomberg)

US-China

Longer Reports

IMF’s China 2022 Article IV Report

Opinion

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Fixed typo in 房住不炒

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