Finance Monthly - October 2021

43 Finance Monthly. Bus i ne s s & Economy boom? That’s right — Japan, and it didn’t end well for the property market. The actual situation is even worse than the chart shows and indicates that the demographic decline will be substantial. First, the one-child policy absolutely gutted one generation, so now there are not enough young parents. Second, selective-sex abortion is common in Chinawhich is whymales outnumber females; and in some regions with more than 20%. The third factor is that industrial companies prefer to hire females because, allegedly, they are easier to manage. That’s why in big cities, females outnumber males, and in the rural regions, it’s vice versa. All in all, the demographic decline seems almost inevitable at the moment, and that puts added pressure on property prices. • CCP’s dilemma The other issue that stands out in this crisis is the tough choice the CCP has to make. A home in China is much, much more than a sanctuary - by some estimates, real estate accounts for more than 70% of household wealth. That fact by itself albeit concerning is not the end of the world. What’s making the situation worse is that the real estate industry is crowding out the other, much more productive industries when it comes to investments which has created a huge headwind when it comes to consumer-led growth in the country. That’s what I refer to as the CCP dilemma: Do you A) let the housing market crash and destroy a huge portion of household wealth, or B) continue on the same road, while not investing enough capital to create a high-tech export sector and a true middle class that can lead to domestic growth. We can see that the Chinese Government is moving in a direction where they’re trying to limit leverage in the construction business. Back in August 2020, the CCP introduced the “3 red lines policy”: • Liability-to-asset ratio (excluding advance receipts) of less than 70% • Net gearing ratio of less than 100% • Cash-to-short-term debt ratio of more than 1x By doing that, I can imagine that they were ready to take some sort of a hit, but perhaps didn’t quite understand just how much leverage there was in the sector. When the measures were introduced, only a few of the B companies were up to par, and hardly any of the CCC. Needless to say, leverage is the oil that fuels every fire and considering that household debt to GDP rose 30% for the past three years to 62%, the amount of leverage is only making policy decisions harder. CHINAHIGH-TECH SECTOR EXPORTS Per cent of China’s total goods exports 20 15 10 5 0 2006 2008 2010 2012 2014 2016 2018 2020 Advance Railway Aerospace Agriculture IT Maritime Engineering Medical Industry New Energy New Materials Robotics Total