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

1. Asia Business Forum
@ London Business School
Humbert Pang
27. Apr. 2013
0

2. Coming from the Past
1980s
2010s
1990s
Pudong,
Shanghai
1

3. Coming from the Past (cont)
now
1980s
Night view of Zhujiang
new city in Guangzhou
Guangzhou
2

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. 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. 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. 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. 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. 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. 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. 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. Characteristics of Chinese Housing Market
High down payment; low leverage
1998-2003 privatization scheme
Culture reasons
11

13. Major Fundamentals Issue:
 Pending demand is strong.
Sense of security
12

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. 上有政策
Regulations from the king
下有對策
Solutions from the peasants
14

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. 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. 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. 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. Market Response
 Fever in Nanjing
Scene inside the Nanjing Real Estate Exchange Centre on the 4th March
19

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. 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. 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. 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. 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. 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. The Growth Challenge
 Air pollution becomes a major challenge in many cities.
 PM 2.5 is escalating.
26

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. 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. 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. 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. 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. Strong Government  Over-correction
Asset
Value
Time
32

34. New Government
33

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. 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. Policies Signal
 Xi Jinping followed the famous southern tour of Deng xiaoping. The message is
clear: open policies and reform continue...
36

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. 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. 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. Transition Volatility Opportunities
 FAI  Domestic consumption
Regional Gateway  Global Gateway
Limited Investment Outlets  Financial Reform
40