Suddenly China's stock market has boomed. In November 2014 the Shanghai Composite Index was around 2700, and today the market has hit 4574.65, a record high in six years. With monetary policies easing and the official media backing, it is no wonder why the stock market is heating up.
It is noticeable that two groups of people, aside from institutional investors, have played a significant role amid this bullish wave. The first group is senior-aged Chinese women, or dama, who in Chinese tradition are treasurers of the family savings. They have abundant experiences dealing with family portfolios, and sometimes the performance of damas even outstrip that of a professional investment banker. The other group is the gen-90 young people (including me), who invested their generous amount of pocket money into the stock. Not only did the market accumulated mass leverage capital, it also absorbed a considerable proportion of household savings, both of which have contributed to inflated asset prices that have nearly doubled in less than half a year.
The bubble theory emerged again for China's stock market rush, although the bubble can only be observed after it collapses. It is reasonable to deem China's stock prices overvalued at present, taken China's not so satisfying first season economic data into consideration. So what will happen after the bubble burst is of greater concern. Of course, there will be people bearing the loss. But more importantly, what would the mass capital turn to invest after they escaped from the stock?
On March 30th, tax and rate cut for real estate purchase were finally announced in order to support China's housing market. With high existing inventory and newly added ones, this policy hasn't really taken its effect until now. However, apartment inventories are now declining at fast rate, and it is very possible that between June and September housing price in China's major cities will rise sharply. Traditionally China's individual investors favor housing investment more than stocks and bonds because of its immovable property nature. However, after the 2014 adjustment, real estate investments in China's minor cities are no longer safe. It is therefore a trend-to-be that the mass liquid capital out of the stock market will move into the estate market of China's mega cities in the second half of 2015, and a similar boom in housing price would be witnessed after the stock market bull makes its curtain call.
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China's stock market boom: what's after the bubble?
The End of Taobao Bargain? China to Tax Online Business in New Tax Law
China's revised draft of tax administration law (Chinese version here) has been put on public notice and will be voted on People's Congress on March. A newly created Article 19 requires that online store owners must clearly exhibit tax registration information on their web-shop's home page. This means individual online shops, particularly Taobao sellers, will be officially taxed.
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| Source: Courtesy Google |
On the other hand, Taobao is almost a perfectly competitive market for common goods and services. Both the entry requirement and maintenance fee are low for sellers, and there are about 0.6 billion active buyers who can choose to purchase the same good, say a Kanebo collagen facial mask, from hundreds of different sellers. Therefore, there is little chance of huge arbitrage and sellers sometimes pay extra to Taobao to promote their product and increase sales. If online business are taxed in value added method, these shop owners will suffer from both squeezed profit and discouraged buyers. It can be expected that one-third of the current Taobao sellers and 10 percent of Tmall store owners will disappear.
However, taxing on Taobao coordinates with business regulations that supervise online transaction, and can address the problems arising from Taobao's popularity. Forgery and products with inferior quality than stated are common phenomenons in today's online business that people trade on a buyer beware basis without standardized regulation. Illegal products ranging from anesthetic drugs, banned weapons to pirated publications can all be found on Taobao by typing specific jargons. For better protection of consumer's rights, Taobao certainly needs such a detox that promotes better transparency and legal activity. It also motivated store owners to improve customer service and strategize better risk management.
At the same time, not all discouraged Taobao dealers will exit from online business. Another regulation vacuum exists in China's online business administration where private social network, namely the WeChat, has become another responsive platform for commodity trading. Many Taobao sellers keep in touch with their VIP buyers through Wechat contacts and they transact directly through Alipay or bank transfers. It might be possible that more exclusive social network apps in favor of online trade will be developed for tax evasion purpose. This negative effect should also be considered and preempted before the proposed tax law takes into effect hopefully in 2016.
OPINION: 2014 Third-Quarter China Housing Market Outlook: Mega Cities Show Signs of Recovery
China’s housing market,
swept by the gloomy sentiment for over half a year, revealed a silver lining in
July. Two leading mega cities, Beijing and Shanghai, have witnessed an increase
in the trading of both new homes and secondhand houses for the first time since
March 2014. For Beijing, trade volume of residential housing stocks rose by
22.49% compared to June, and there are 200 more secondhand homes traded in the
first eight days of August than that in July. Historical data in 2008 and 2011 suggest,
could the trend of growing trading continue for two consecutive months, housing
price will bounce. The market phenomenon, occurring each year and often
referred to as “Gilded September and October”, is also expected to boost
selling as homebuyers tend to settle their deals before the year-end. Therefore,
at the end of the third quarter, China’s mega cities will see busier
buy-and-sells in the housing market, while experiencing a mild increase in the
average price.
First, careful scrutiny
into several housing-market-crash theories revealed incoherence with reality.
The average housing-price-to-income ratio in China’s large cities is over 10, which
is far above the normal interval between 3 and 6. However, a Chinese young
adult’s income is not the only source of financing for homes. Deeply rooted in
most Chinese parents’ minds are that, owning a house is a symbol of happy
family and any thriftiness for the sake of home buying is worthwhile. A newly
married young couple are able to afford up to a 70% down payment on their
housing mortgage loan by using the lifelong savings from their parents and
grandparents. Such traditional ideal also prompted speculators to hoard housing
stocks and seek arbitrage opportunities when housing price rises. This leads to
an observed excess supply of housing stocks in many cities. Commentators fear
that the surplus will eventually bring down housing price, and intensify the
risk of housing market crash and credit default. However, new residential
projects are banned and conditionally infeasible in hub areas of mega cities,
such as Beijing’s central districts inside the Second Ring Road. Thus, it is
equally non-negligible that the temporary surplus in housing stocks is
potentially digestible and even insufficient to keep up with the huge
urbanization scheme in progress.
From a broader
perspective, the macroeconomic condition has twisted the negative expectation
against housing price since June. The 7.5% annual GDP growth is not only an
economic plan, but also a political promise for Beijing to realize its goal of
doubling the GDP by 2020 set by the 18th Third Plenary Session. This
requires rigorous fiscal expansion in the remaining two quarters to offset the
downward pressure on investment growth. Land-based finance is the major
fundraising approach for local governments, whose land revenue is directly
related to the growing housing price. At monetary level, PBoC (People’s Bank of
China) partially lowered the reserve ratio requirement twice, and released ￥1 trillion liquidity to China Development Bank using
PSL (Pledged Supplementary Lending). Correspondingly, previous limitations on
housing market transaction were loosed. For small and medium cities,
property-purchasing restriction was cancelled in succession. Discount rate for
housing mortgage reappeared in Beijing and Shanghai to support households’ demand
for home purchasing, which has been oppressed due to higher borrowing barrier
in the past three years. It is a rational estimation that any administrative
intervention against home purchasing would quit by the end of 2015.
As a conclusion, both
market data and poly forward guidance bode well for resurgence in Beijing and
Shanghai’s housing market. Increasing transaction will be the trend for the
third quarter, and housing price rally at the end of October is a large
probability event.
