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Monday, 10 May 2010

Chinese Property and Tech Demand

Lets begin with what we know: China’s appetite for high tech gadgets is exerting a mighty influence on global demand. The recent results from Samsung Electronics, Asia’s leading technology company, give one reason why. The South Korean giant estimates that China’s flat screen TV market is now as large as America’s, and is doubling. 
Industry wide smartphone shipments were up 50% in the first quarter and as Apple’s astonishing first quarter results demonstrate, China is making its weight felt. iPhone sales in China were up 900%.  China is also having an impact on the PC market. It is likely that close to 350 m PCs will be shipped this year, a 17% gain on 2009. As the recent results from Microsoft and Intel illustrate, consumer demand in both China and other emerging markets has more pull than Western corporate buyers. Yet it will serve investors well to remember an old stock market adage: news follows share prices.
China’s stock markets have been among the worst performing indices this year. On queue over the last few weeks concern has risen about the nation’s property market and slower economic growth during the second half of the year. Some analysts are citing a drop of 40% in property transactions during the second quarter, in some of the largest cities. There is also the realisation that the shockwaves spreading out from Greece might hit China. 
A quarter of China’s exports go to Europe. Yet the Euro has been sliding against the dollar, as the markets worry that growth might falter.  China pegs its currency to the dollar, which has been rising against the Euro and so making its goods more expensive.  
China’s Property Market
Late last year Jim Chanos, one of the world’s leading short sellers, began voicing concern that China’s property market was in a bubble. You do not have to look very far to see that he has a point: last year, according to Morgan Stanley, sales of residential property were up 87%.  There can be no surprise then that residential construction has also taken off, rising some 20% according to CLSA. It is still expected that growth will be of the same level this year. 
With low interest rates and limited opportunities for alternative investments, property speculation is a popular way to make money. Particularly, as buyers of second homes were offered mortgage discounts. Chinese state enterprises have also been encouraged to join the property market. In a report earlier this year CLSA estimated that nearly a fifth of recent properties bought were kept vacant.
However, China’s many bulls will point out that the picture may not be quite as dire as critics, such as Chanos, make out. The four leading cities, Beijing, Shanghai, Guangzhou and Shenzen only represent 9% of the urban population and 8% of property sales by floor space. There are a 150 other cities with  populations of at least a million. When it comes to floor space, China’s second tier cities represented 33% of residential sales last year. Prices in these cities are 60% below the tier one cities. In the third tier of cities prices are 74% below places like Beijing and Shanghai.
Another encouraging feature of the Chinese property market is the high proportion of cash transactions. The ratio of consumer debt to GDP in the country is just 17% compared to 95% in the US. Mortgage loans as a per centage of GDP are also low when compared to that of the Anglo Saxon economies. In China the figure is 14% compared to the US, where it is just below 80%. All the same, the cost of servicing a mortgage for the average family is 43% of income, according to Morgan Stanley estimates. 
A Bear in the China Shop
China’s bulls have many convincing arguments, but so far this year, Chanos’ view has been the more accurate. He pointed out that investors ought to focus their attention on international stocks that were exposed to China’s infrastructure and building markets. In other words, steel and cement. In the month to 7 May, the SLX steel ETF had shed 18%, and Cemex, one of the world’s leading cement companies, lost almost 14% last week.
Falls like these, in combination with the growing nervousness shown by some of the analysts and strategists who follow China, give us reason to be nervous. Yet, for the time being, most of the evidence from the tech sector has been very upbeat. However, if the Chinese property market is weakening as some say, there is still time for the shock waves  to be felt in Silicon Valley. 
Over the medium and longer term China will  become  the biggest consumer of PCs, smart-phones and the like. What worries me is the following few quarters, we need to pay close attention to what is happening to tech demand in China.