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Stock market crashes and the reality of the market China

newsI’m just back from a long break and another busy few weeks in China.

In this intervening time there has been a good deal of ‘noise in the system’ around the rather spectacular rise and fall of the Shanghai (and other) stock markets. On the street and in the businesses I meet people have been reminding me that the numbers are not to be taken seriously and that the stock market is no indicator of the health of the real economy. Behind the rhetoric and profit taking there is a stability which is governmenrt managed.

Yes, undoubtedly the market has taken a cold shower. but remember that unlike the West, in China less than 35% of GDP is in  owned stock. On top of that few individuals hold stock, unlike in the US and few have anything other than a passing interest in the share prices of the listed businesses on the exchanges.

There is a widely held view that the governement made some mistakes in supporting the markets and the rather clumsy devaluation did send ripples of worry around the world.

My advice – hold your nerve. This is a short term blip on an otherwise continued, allbeit at a slower rate, rise in the fortunes of China. It is unlkikely we will see a return to the heady days of double digit growth but even if the official figure of 7% growth is inflated by a coule of points then we are still left in China with about 4 – 5% growth and domestic demand steadily increasing. That’s still not a bad performance, just slower.

In any consumer society, the housing market is seen as the barometer and if that is worth anything in China then things are going well.

In figures recently released, new home sales are up by just 0.1%. However, it’s pre-owned home sales that have seen the greatest increase. The growth has been over 9% and it’s Shenzhen, with its proximity to Hong Kong, that is leading the way. Beijing is also doing well with an increase of 6% and most other major cities are also showing.

What is most interesting for me is that until recently, the concept of buying a pre-owned home was unusual. In the old days of China you lived in the family home that your ancestors had built and the family lived there together through the generations. Buying something previously owned by someone else is a departure for most Chinese. It’s why pre-owned car programmes, even those for exclusive brands, have struggled to gain real traction.

However, with the increase in urbanisation and the migration patterns shifting across China it is no longer practical to build the family home as it used to be. To us in the West, buying homes that might have had twenty previous owners is normal. Speaking as someone who has just sold my house in the UK, it was built in 1904 and has had more owners than I can even trace.

Talking to a friend of mine I wonder if we are seeing a a fundamental change in Chinese attitudes towards home ownership. Her view is that the Chinese middle class have no choice. If you want to live in the best areas, then you have to buy something that someone else has pre-owned. The new builds are further and further away from the economic centres of the main cities – so to stop having a 2 hour commute you need to accept you buy what someone else has owned, and left. The Chinese are supremely practical and this change will also see a shift in the home improvement market. Maybe that’s why IKEA is expanding in China!