Article by CT Johnson
Three factors in China are having an outsized impact on Australian markets, from real estate to nectarines. What are those three factors?
- New currency controls
- Evolution of the Chinese middle class consumer
- The Chinese housing market
In last week’s newsletter, we discussed the new Chinese currency controls, and their impact on investment and real estate in Australia. This week, we take a look at Chinese middle class consumers and the housing market in China.
The Middle Class Consumer
While the growth in China’s overall economy has slowed from double-digits to around 6.5%, the shift from export-led to consumption-led growth is causing a rapid expansion in consumer spending. A widely quoted study by McKinsey projects that private consumer spending is growing at 10.3% per year, led by the upper middle class households (those earning more than $22,000 per year) at 22.4% per year. Cumulatively, urban households in China will increase their private consumer spending from about $2.0 trillion in 2012 to $5.3 trillion in 2020.
This newfound wealth is having a profound impact on Australian markets because of the things Chinese consumers like to buy. Some of the biggest winners are:
Education
Unsurprisingly, China has more students studying abroad than any other country. According to China’s Ministry of Education, 459,800 Chinese students went abroad in 2015, an 11.1% increase on 2014. The vast majority (92%) were self-funded, meaning tuition and other expenses were paid by their family.
Australia punches above its weight in the Chinese overseas education market, with 46,400 Chinese students studying at Australian universities, colleges and schools in 2015. That figure rose 23% from the previous year and 2016 is likely to show a similar level of increase. Chinese students make up almost 1/3 of all foreign students in Australia.
Tourism
We estimate that 1.5 million Chinese tourist will visit Australia in 2016, a 15% increase from 2015. These visitors are largely motivated by family – they view travel as second only to shopping as a “good way to spend time with the family.” Significantly, Chinese tourists are the highest spending group of visitors, laying out $8,000 per person each time they visit Down Under. That figure includes $2,500 of retail shopping alone.
While Australia remains one of the most popular destinations for Chinese tourists, they consistently complain about the limited accommodations, lack of wait staff in restaurants and stores, and poor understanding of the Chinese as customers in Australia.
Food
The Chinese spend 50% more of their disposable income on food than Americans do (19.0% vs 12.5%). According to a Bain study of 2000 shoppers, the Chinese “were 1.6 times more likely to associate Australia with health and nutrition than the US, Germany, Japan and South Korea, and 2.5 times more likely to associate Australia with words related to ‘natural’”. This preference can be seen in the soaring demand for Aussie beef, seafood and fruit.
Medical & Aged Care
Whereas healthcare in China was a US$140 billion market in 2010, by 2020 that market will have grown to US$438 billion. Demographics and economics drive this growth. Thanks to the One Child Policy, China is ageing at a remarkable pace, about 125 days per year. Because of changing tastes and more disposable income, whereas the average middle class Chinese household was only able to spend US$261 per year on medical and aged care in 2010, by 2020 that figure will be US$1,335.
The Housing Market In China
The remarkable amount of wealth that has been created in China over the past 40 years has largely been plowed into domestic real estate and many are now wondering if that’s such a good thing. The foundations of property ownership in China are rickety – all ownership is via a 70 year leasehold that runs from the date the land was officially converted from rural use. Forty years ago, that seemed like a distant problem but today many people wonder what happens when time runs out.
There’s also a widespread belief that China is experiencing an unprecedented real estate bubble that simultaneously carries the threat of unaffordability and worthlessness. As a friend from Suzhou said to me, “Citizens in 1st and 2nd tier cities worry that they can never afford to buy an apartment, while citizens in 3rd and 4th tier cities worry that their properties are worth nothing at all.”
At the same time, Chinese investors often have few choices about where to put their wealth. Banks in China frequently offer interest rates below the level of inflation, creating significant pressure to find other ways of preserving their savings. Other domestic options are limited, and often loaded with hidden risks; Chinese stock markets might politely be described as disconnected from underlying economic realities; peer-to-peer lending arrangements, which have proliferated in recent years, are remarkably similar to Ponzi schemes.
Because of these factors, Chinese eyes often turn towards Australia, with its natural beauty, proximity to China, political stability and transparent rule of law. The reasons Chinese people are willing to pay such high prices for property Down Under are (A) they perceive a lot of extra value (from the things listed above) that Aussies take for granted and (B) the Chinese middle class don’t have a lot of other choices for where to put their money. In addition, freehold land ownership (compared to a 70 year leasehold) is very attractive to Chinese people. And compared with the extremely high housing prices in 1st and 2nd tier cities, even the more expensive overseas properties can seem like a bargain.
Despite ups and downs, this will continue to drive high levels of Chinese interest in Australian real estate for years to come.
A selection of curated articles on the themes above (more details will be presented at our Investment and Economic Roundup
China home prices, property investment likely to rise in 2017
Financial Review, 8 January 2017
China’s average home prices were forecast to rise 4.1 per cent in 2017 from the previous year, and growth in property investment would rise 5.4 per cent, a state-owned newspaper reported last week.
China’s housing market has clearly entered a downturn
Business Insider, 13 December 2016
China’s housing market has clearly entered a downturn, primarily because of a government push to slow rampant price growth in some of the nation’a largest cities. That’s the view of Wei Li, China and Asia economist at the Commonwealth Bank, who says that data released on Tuesday suggests that market conditions are cooling.
http://www.businessinsider.com.au/chinas-housing-market-has-clearly-entered-a-downturn-2016-12
China’s Soaring Housing Market Finally Takes a Breather
Fortune, 18 November 2016
China’s runaway housing market is slowing down ever so slowly, in what amounts to an early win for Chinese officials worried about its steep rise.
http://fortune.com/2016/11/18/china-housing-prices/
China’s Housing Market Isn’t in a Bubble After All
Bloomberg News, 16 October 2016
China’s housing market is starting to resemble a Bermuda triangle for economists: time and again the smartest forecasters wade in only to get it wrong.
That’s the view of Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong, who describes the latest talk of a housing bubble in the world’s second biggest economy as a recurring myth.
Fixing China’s overheated property market
Financial Review, 23 October 2016
There is never a dull moment in China’s property market. In August, surging demand led to scores of people lining up to file divorce applications in Shanghai because separated couples can buy more houses. Then in the first week of October, Chinese cities rolled out new measures to cool the home-buying frenzy that has seen prices skyrocket, marking a new round of tightening since policies were eased two years ago.
The rotten foundations of China’s real-estate market
Economist, 15 October 2015
Just over a year ago, policymakers were having conniptions about China’s tumbling stockmarkets. Now it is China’s frothy property market that is causing worries at home and abroad.
Chinese property prices skyrocket, leaving many wondering if they will ever own a home
ABC News, 13 October 2016
As property prices in China’s biggest cities skyrocket and the Government moves to rein in the bubble, an entire generation increasingly despairs over their chances of ever owning a home.
http://www.abc.net.au/news/2016-10-13/chinese-property-prices-skyrocket/7928534
China’s housing market is going nuts again
Business Insider, 15 September 2016
China’s housing frenzy is still very much alive. Credit growth roared back, with medium and long-term new loans to households in August, which are comprised of mostly mortgages, jumping 32.2% year-over-year. That’s the fastest pace of growth since 2010, and suggests homebuyers are trying to get ahead of the game as they expect further tightening of housing and credit regulations, according to a note led by Credit Suisse’s Ray Farris.
http://www.businessinsider.com.au/chinas-housing-market-is-going-nuts-again-2016-9?r=US&IR=T
Mapping China’s middle class
McKinsey Quarterly, June 2013
The explosive growth of China’s emerging middle class has brought sweeping economic change and social transformation—and it’s not over yet. By 2022, our research suggests, more than 75 percent of China’s urban consumers will earn 60,000 to 229,000 renminbi ($9,000 to $34,000) a year.
http://www.mckinsey.com/industries/retail/our-insights/mapping-chinas-middle-class
The Modernization Of The Chinese Consumer
McKinsey, March 2016
The eyes of the world are on the Chinese consumer. Cooling economic growth, a depreciating currency, and a gyrating stock market are making political and business leaders concerned that China’s economic dream may have finally ended, and tough times lie ahead. Despite the gloomy news about the state of the economy, consumer confidence has remained surprisingly resilient over the past few years, as salaries have continued to rise and unemployment has stayed low. Chinese consumers remain upbeat about their futures.
http://mckinseychina.com/the-modernization-of-the-chinese-consumer/
China’s Middle Class, the Middle Minority
CKGSB Knowledge, 28 September 2016
A significant new force is beginning to take shape in Chinese society; Chia’s emerging middle class.
http://knowledge.ckgsb.edu.cn/2016/09/28/all-articles/chinas-middle-class/
Meet the Chinese consumer of 2020
McKinsey Quarterly, March 2012
Most large consumer-facing companies realize that they will need China to power their growth in the next decade. But to keep pace, these companies will also need to understand the economic, societal, and demographic changes shaping the profiles of consumers and the way they spend.
http://www.mckinsey.com/global-themes/asia-pacific/meet-the-chinese-consumer-of-2020
China’s growing middle class our mega-market
The Australian, 9 April 2016
China buys one-third of Australia’s exported products and one-seventh of our traded services, and is our No 1 market.
The Chinese Overseas Education Market
Gentleman Marketing Agency, 24 October 2016
The Chinese overseas education market is the largest in the world with more Chinese students studying abroad than any other country. According to data from China’s Ministry of Education, 459,800 Chinese students went abroad in 2015, an 11.1% increase compared to the year before.
http://marketingtochina.com/chinese-overseas-education-market/
Chinese student boom hits new record
Financial Review, 20 May 2016
Almost 50,000 Chinese students started courses in Australian universities, colleges and schools this year, up 23 per cent on last year, making students from China more important than ever to the booming education export industry.