Track China’s Money Supply And Loan Growth For Risks

In this episode of China Money Podcast, hear what Mr. Ewen Cameron Watt has to say about China’s property sector. Mr. Cameron Watt is a managing director and portfolio manager at BlackRock, Inc, and below is an excerpt of his viewpoints.

On the Chinese property market, is it a bubble and is it bursting?

What’s happening in the real estate market in China is fascinating, where the government has deliberately engineered a decline in prices to deflate a bubble. It’s really an experiment because it’s the first time in the fifteen years or so there has been a private housing market in China. The big question for us is to what extent does it hurt activity levels and to what extent does it impact the financial systems.

On the outlook for the property sector and how will it impact other parts of the economy?

One of the big risks in China is that, investors in property invest on the basis that the value will always rise. This is the first real decline in prices induced by the central government in the 15 or so years of the private housing sector in China.

No one knows what’s going to happen for sure. On the positive side, more urbanization, household formation and all that supports the idea that there is an ongoing demand. That’s certainly true. On the negative side, how will that demand manifest itself?

I think that here the rate of return is important because there are very few avenues for real returns for savers in China. They’ve gone into real estate, gold, wine and jade, because they think they get a real rate of return, which they don’t get for bank deposits. Bank deposits are 90 percent plus of the savings vehicles in China. So it’s a critical question how the psychologies recover. If I’m honest, at this stage, I don’t know.

For global investors, what key indicators in China should they monitor closely to better position themselves?

One of the things we have watch closely is the rate of money growth. There are some opportunities for the government to relax restrictions on banks to help the growth of monetary supply. Monetary supply has got to grow at nearly 15 percent to get 10 to 11 percent nominal growth. We will give it an inflation rate of four percent, then you got a seven percent real growth that people have come to believe is minimum growth for Chinese society and Chinese stability.

If you think about what investors would monitor, they should monitor Chinese money supply, loan growth, and watch closely if these really decelerate; if that’s the case, then the global financial risk is rising, not just Chinese risk.

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