Asia Business Forum
@ London Business School
Humbert Pang
27. Apr. 2013

0
Coming from the Past
1980s

2010s

1990s

Pudong,
Shanghai

1
Coming from the Past (cont)
now
1980s

Night view of Zhujiang
new city in Guangzhou

Guangzhou
2
Economic Overview
- In 2012, China GDP reached 51,932 billion RMB and a 7.8% annual growth rate,
which is the lowest since...
Economic Overview
 Economy stabilize in Q4
- In Q4 2012, all economic indicators started rebound includes, manufacturing,...
Economic Overview
- In 2012, both of the interest rate and required reserve ratio had been reduced twice .
- The stimulati...
Urbanization in Process……
 The number of migrate workers* increased 3% to 163 million people in 2012.
 Disposable income...
Urbanization in Process……
 By the end of 2011, the average urbanization rate in China was 51.27%. The government
expects ...
Investing in Income Per Capita Growth
 In 2000, only about 1% of the Chinese population earned an annual income of
over U...
Housing Built & Sold in China
 In 2011, 1.46 billion sq. meters of housing was built in China.
 From 2001 – 2011, the to...
Low Mortgage Debt Ratio
 The recent housing upturn comes despite almost no new mortgage leverage in the system
 And the ...
Characteristics of Chinese Housing Market

High down payment; low leverage
1998-2003 privatization scheme
Culture reaso...
Major Fundamentals Issue:
 Pending demand is strong.

Sense of security

12
RE Regulation Policy
 5 new regulations issued by the state council
1. Local governments should strictly implement the me...
上有政策
Regulations from the king

下有對策
Solutions from the peasants
14
Market Response
 “Panic” transactions get ahead of the regulation effective date.
 The 20 percent tax on second hand hou...
Market Response
 Real passion – Real demand
Scene of Shanghai Real Estate Exchange Centre on the 4th March

Glass door is...
Market Response
 Real passion – Real demand, a matter of life.

5th . March
A hospitalized middle-aged couples queuing ou...
Market Response
 Fever in Nanjing
- Many people want to be qualified as a single asset owner for tax avoidance purpose.
-...
Market Response
 Fever in Nanjing
Scene inside the Nanjing Real Estate Exchange Centre on the 4th March

19
Rise of Domestic Consumption
Next Economic Driver?
 In 2010, China was the 3rd largest consumer market in the world, foll...
Domestic Consumption
China Annual Retail Sales
RMB
Billion

1=100%

25000

0.35
20717

20000

0.3
0.25

15000

0.2
0.15

1...
2012 Tough Year
 Shoes giant Belle group reported a 10% sales growth, but 1% drop in profit margin.
 Department store gr...
Luxury Sales Growth Drops
 Chinese consumer is getting more rational on luxury goods.
 Reduce conspicuous consumption at...
Consumption Growth Potential
 Compared to other developed countries/area, China’s consumer spending is
still relatively l...
Wage Inflation
From 1990
- 14.6% p.a growth in the nationwide.
- 18.6% p.a growth in private sector.

RMB
50000

Annual W...
The Growth Challenge
 Air pollution becomes a major challenge in many cities.
 PM 2.5 is escalating.

26
The Growth Challenge
 Mainland parents have been buying baby milk powder in Hong Kong, after the
contaminated milk powder...
Reasons to be Optimistic
Mortgages as a share of disposable income
140%
120%

Percentage

100%
80%
60%
40%
20%
0%
UK
Sourc...
Reasons to be Optimistic- Entrepreneurs

Suning – Wal-Mart/Amazon
1,500 stores
250 cities

Alibaba - Taobao

RMB 1.1 tr...
Reasons to be Optimistic- Innovations

Haidilao Hot Pot

15 cities; 71 owned stores; 14,000 employees
30% new staff at n...
Reasons to be optimistic

China

India

1990

57,800

62,367

2010

93,000

65,000

Passengers Carried

1990

263,530

295...
Strong Government  Over-correction

Asset
Value

Time
32
New Government

33
2013
President of the People’s Republic of China
Chairman of the State Central Military Commission

2003-2013
President...
Rebalancing Chinese Economy

 Long term strategy for domestic demand
 Enhance people's ability to consume
 Ratcheting u...
Policies Signal
 Xi Jinping followed the famous southern tour of Deng xiaoping. The message is
clear: open policies and r...
Administrative Signal
 No drinking in military gathering
Anti- Corruption, Improvement in local
government efficiency
 ...
Simplified Government Organizations
 Ministry of Railway is now split into 3 departments.
- The policy making and plannin...
Policies Signal
Li Keqing’s New Urbanization Theory:
- Emphasis on the importance in urbanization process to stimulate do...
Transition Volatility Opportunities

 FAI  Domestic consumption
Regional Gateway  Global Gateway
Limited Investment...
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China Property Market

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Humbert Pang, Managing Principal & Head of China, Gaw Capital, was one of the keynote speakers at the Asia Business Forum, organised by London Business School's Asia Club, on 27 April 2013. He spoke about the characteristics of the Chinese housing market and the future outlook for the industry.

Find out more about the Asia Club:
Website: https://clubs.london.edu/asiaclub
Facebook: https://www.facebook.com/LBS.AsiaClub
Twitter: https://twitter.com/LBSAsiaClub

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China Property Market

  1. 1. Asia Business Forum @ London Business School Humbert Pang 27. Apr. 2013 0
  2. 2. Coming from the Past 1980s 2010s 1990s Pudong, Shanghai 1
  3. 3. Coming from the Past (cont) now 1980s Night view of Zhujiang new city in Guangzhou Guangzhou 2
  4. 4. Economic Overview - In 2012, China GDP reached 51,932 billion RMB and a 7.8% annual growth rate, which is the lowest since 1978. - China 2013 GDP growth forecast at 8.4%, as foreign trade, consumption and investment will outperform last year. China GDP Annual Growth Rate % 14 12 10 8 12.1 11.2 10.7 10.4 9.7 9.6 9.4 9.2 8.1 7.8 7.7 7.9 6 4 2 0 Q1. 2010 Q2. 2010 Q3. 2010 Full Year. Q1. 2011 Q2. 2011 Q3. 2011 Full Year. Q1. 2012 Q2. 2012 Q3.2012 Full 2010 2011 Year.2012 Source: National Bureau of Statistics of China 3
  5. 5. Economic Overview  Economy stabilize in Q4 - In Q4 2012, all economic indicators started rebound includes, manufacturing, investment, fiscal revenue. However export is still weak. - CPI rose to 3.2% in Feb 2013, a seasonal peak, due to Chinese New Year. CPI YoY Growth % 7 6 Chinese New Year 5 4 3 2 2.1% 1 Mar.13 Feb.13 Jan.13 Dec.12 Nov.12 Oct.12 Sept .12 Aug.12 Jul.12 Jun.12 May.12 Apl.12 Mar.12 Feb.12 Jan.12 Dec.11 Nov.11 Oct.11 Sept.11 Aug.11 Jul.11 Jun.11 May.11 Apl.11 Mar.11 Feb.11 Jan.11 0 Source: National Bureau of Statistics of China 4
  6. 6. Economic Overview - In 2012, both of the interest rate and required reserve ratio had been reduced twice . - The stimulation measures are taking effect, the sales volume of real estate is increasing gradually. Real Estate Sales Growth Rate % (2011-2012) National Beijing Source: National Bureau of Statistics of China 5
  7. 7. Urbanization in Process……  The number of migrate workers* increased 3% to 163 million people in 2012.  Disposable income of migrate workers increased 13.5% to RMB 7917 in 2012.  With the increase in the cost of living in the 1st tier cities, a lot of migrate workers will move back to their hometown in the lower tier cities. *workers working migrate of their home town Source: National Bureau of Statistics of China 6
  8. 8. Urbanization in Process……  By the end of 2011, the average urbanization rate in China was 51.27%. The government expects the rate to reach 60% within the next ten years, equivalent 1.5% p.a  18 million people per year will migrate from rural areas to cities, within the next ten years.  Urbanization rate in 2nd tier cities are much lower than the 1st tier.  30 billion sqm space needed at 70% urbanization rate. 100% Nationwide Urbanization Rate 2012 90% 80% 70% 60% Developed Countries Potential Room to Growth National Average: 51.27% 50% 40% 30% 20% 10% 0% Source: Research Report Issued by State Council 7
  9. 9. Investing in Income Per Capita Growth  In 2000, only about 1% of the Chinese population earned an annual income of over USD 10,000. It is estimated that the percentage will rise to over 57% by 2020.  Disposable per capita income is growing at 13% a year on average.  Economists expect China’s sustainable GDP growth to moderate towards 8% by 2015. China Income Distribution, 2010 – 2020E China’s Household Income 5% Distribution 1% 8% 50%+ 57% 8
  10. 10. Housing Built & Sold in China  In 2011, 1.46 billion sq. meters of housing was built in China.  From 2001 – 2011, the total sales of housing in China reached 6 billion sq. meters. Cumulative housing built and sold in China, 2001 - 2011 Mn. Sqm 2000 Sales Newly Built 1500 10000 Sales Newly Built 8000 6000 1000 4000 500 2000 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 0 0 2001 Mn. Sqm Housing built and sold in China, 2001 - 2011 Source: ChinaScope Financial 9
  11. 11. Low Mortgage Debt Ratio  The recent housing upturn comes despite almost no new mortgage leverage in the system  And the cumulative household mortgage position is still extremely low Net new mortgage relative to residential transactions 80% 70% 60% As a share of total sales As a share of new completions (Cumulative average) 50% 40% 30% 20% 10% 0% 02 03 04 05 06 07 08 09 10 11 12 10
  12. 12. Characteristics of Chinese Housing Market High down payment; low leverage 1998-2003 privatization scheme Culture reasons 11
  13. 13. Major Fundamentals Issue:  Pending demand is strong. Sense of security 12
  14. 14. RE Regulation Policy  5 new regulations issued by the state council 1. Local governments should strictly implement the measures to contain housing price and to enforce the target of affordable housing provision. 2. Greater level of bank loan support and government investment on affordable housing, to ensure that 10 million units of affordable housing will be under construction in 2013. 3. Strictly implement purchase restriction order, restrain speculative investment through a 20% levy on second hand housing transactions. 4. Upon sufficient land supply for affordable housing, local government can then release more land supply for commodity housing. 5. Regulate leasing market to prevent rapid rental growth. 13
  15. 15. 上有政策 Regulations from the king 下有對策 Solutions from the peasants 14
  16. 16. Market Response  “Panic” transactions get ahead of the regulation effective date.  The 20 percent tax on second hand housing transactions is likely to divert demand towards new housing products. Tax 15
  17. 17. Market Response  Real passion – Real demand Scene of Shanghai Real Estate Exchange Centre on the 4th March Glass door is broken due to over crowded (Min hang District Real Estate Exchange Centre, Shanghai) 16
  18. 18. Market Response  Real passion – Real demand, a matter of life. 5th . March A hospitalized middle-aged couples queuing outside the Shanghai Yang pu District Real Estate Exchange Centre with an oxygen bottle. 17
  19. 19. Market Response  Fever in Nanjing - Many people want to be qualified as a single asset owner for tax avoidance purpose. - Nanjing Civil Affair Bureau recorded 537 couples divorced in 2 days, which is 100% increase compared to its usual level. Scene outside the Nanjing Real Estate Exchange Centre on the 4th March 18
  20. 20. Market Response  Fever in Nanjing Scene inside the Nanjing Real Estate Exchange Centre on the 4th March 19
  21. 21. Rise of Domestic Consumption Next Economic Driver?  In 2010, China was the 3rd largest consumer market in the world, following the United States and Japan.  China has the lowest consumption spending to GDP ratio among the top 10 ranked countries.  China (as 19.5% world population) consumes 5.89% of World’s goods. Consumption as % of GDP by Countries, 2010 80% 70% 60% 71% 59% 57% 58% 57% 30% 20% 10% 0% 60% 61% 56% 58% 3.46% United States 2.39% 2.61% Japan 3.59% 4.07% 50% 40% Consumption as % of World’s Consumer Market, 2010 35% 26.49% 4.38% China Germany France United Kingdom 5.22% 5.89% 9.00% Brazil Italy India canada Source: The World Bank 20
  22. 22. Domestic Consumption China Annual Retail Sales RMB Billion 1=100% 25000 0.35 20717 20000 0.3 0.25 15000 0.2 0.15 10000 0.1 5000 0.05 0 0 2000 2001 2002 2003 2004 2005 Retail Sales 2006 2007 2008 2009 2010 2011 2012 Growth Rate % Source: National Bureau of Statistics of China 21
  23. 23. 2012 Tough Year  Shoes giant Belle group reported a 10% sales growth, but 1% drop in profit margin.  Department store group Golden Eagle recorded a significantly decline in SSSG, from 28.7% of last year to 8.6%, although the total sales revenue slightly increased 3%. Belle Group RMB Million Golden Eagle Group Operating Profit Profit Margin 60% 2800 2600 58% 2400 2200 56% 2000 1800 54% 1600 RMB Million Operating Profit SSSG 900 80.0% 800 70.0% 700 60.0% 600 50.0% 500 40.0% 400 30.0% 300 52% 1200 1000 50% 2011 Interim 2012 Interim 200 20.0% 100 1400 10.0% 0 0.0% 2011 Interim 2012 Interim Source: Belle 2012 interim report Golden Eagle 2012 interim report 22
  24. 24. Luxury Sales Growth Drops  Chinese consumer is getting more rational on luxury goods.  Reduce conspicuous consumption at time of uncertainty and new regulation.  Import tax is high, luxury items are generally around 30% cheaper overseas.  Good news for Premium Outlet Mall business!!! Luxury Consumption in China RMB Billion 350 300 280 250 200 9% 307 79% 155.6 150 100 50 0 2010 2011 2012 Source: Bain & Company Report 23
  25. 25. Consumption Growth Potential  Compared to other developed countries/area, China’s consumer spending is still relatively low. Consumption Contribute to % GDP 80% 70% 60% 50% 40% 30% 20% 10% 0% US China (mainland) Japan Hong Kong India OECD 24
  26. 26. Wage Inflation From 1990 - 14.6% p.a growth in the nationwide. - 18.6% p.a growth in private sector. RMB 50000 Annual Wage Inflation 45765 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: National Bureau of Statistics of China 25
  27. 27. The Growth Challenge  Air pollution becomes a major challenge in many cities.  PM 2.5 is escalating. 26
  28. 28. The Growth Challenge  Mainland parents have been buying baby milk powder in Hong Kong, after the contaminated milk powder scandal in 2008.  China has unveiled a plan to elevate the food and drug regulator to a ministry-level in order to have a tighter control through strong administrative power. 27
  29. 29. Reasons to be Optimistic Mortgages as a share of disposable income 140% 120% Percentage 100% 80% 60% 40% 20% 0% UK Source: US 8th Germany Canada Japan France China 2002 2010 2012Q1 Annual Demographia International Housing Affordability Survey; CEIC, GK Dragonomics 35 biggest cities: P/I ratio peaked 2010 National-wide Affordability Ratio: 5.5 28
  30. 30. Reasons to be Optimistic- Entrepreneurs Suning – Wal-Mart/Amazon 1,500 stores 250 cities Alibaba - Taobao RMB 1.1 trillion (2012) 5% total China retail sales 2% profit margin S. F. Express RMB 15 billion revenue 150,000 employees Small packages < 1kg 29
  31. 31. Reasons to be Optimistic- Innovations Haidilao Hot Pot 15 cities; 71 owned stores; 14,000 employees 30% new staff at new stores First store in the US to be opened in summer 2013 We Chat – Product of Ten Cent Jan 2011 300 million in 24 months 30
  32. 32. Reasons to be optimistic China India 1990 57,800 62,367 2010 93,000 65,000 Passengers Carried 1990 263,530 295,644 (million passanger-km) 2010 791,158 903,465 Goods Transported 1990 1,060,100 235,785 (million ton-km) 2010 2,451,185 600,548 GDP 1990 356,936,901,184 326,608,014,286 2010 5,930,529,470,799 1,684,315,379,525 Rail lines (km) 31
  33. 33. Strong Government  Over-correction Asset Value Time 32
  34. 34. New Government 33
  35. 35. 2013 President of the People’s Republic of China Chairman of the State Central Military Commission 2003-2013 President of the People’s Republic of China 2005-2013 Chairman of the State Central Military Commission 34
  36. 36. Rebalancing Chinese Economy  Long term strategy for domestic demand  Enhance people's ability to consume  Ratcheting up Spending  Healthcare : 27% increase to 260.25 billion Education :9.3% increase to 413.25 billion Environmental : increase of 18.8%  Social welfare for 200 million migrant workers  Protection for farmer's land rights 35
  37. 37. Policies Signal  Xi Jinping followed the famous southern tour of Deng xiaoping. The message is clear: open policies and reform continue... 36
  38. 38. Administrative Signal  No drinking in military gathering Anti- Corruption, Improvement in local government efficiency  Retrench extravagant entertainment & receptions Unveiling more advanced weapon, J18 Fighter RMB Share Price of Mao-tai 260 250 240 230 220 210 200 190 180 170 160 Source: Shanghai Stock Exchange 37
  39. 39. Simplified Government Organizations  Ministry of Railway is now split into 3 departments. - The policy making and planning function is now merged into Ministry of Transportation. - The new established China Railway Corporation will take the daily operational function. - The state administration of railway will take charge of administrative affairs. People are taking picture out the ministry of railway before removed 38
  40. 40. Policies Signal Li Keqing’s New Urbanization Theory: - Emphasis on the importance in urbanization process to stimulate domestic consumption and generate sustainable growth.* - Urbanizing 1 billion people becomes an urbanization process of modern China.** Source: * Li Keqiang, 2009 Qiushi (求是)Magazine, Issue 15 **Li Keqiang, 2012 Administrative Management Reform(行政管理改革) Magazine, Issue 11 39
  41. 41. Transition Volatility Opportunities  FAI  Domestic consumption Regional Gateway  Global Gateway Limited Investment Outlets  Financial Reform 40

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