China Housing Market must Rebound for Global Economy to Recover
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Until the real estate sector in China rises again, the global economy will not recover. Even if the housing market in the United States rebounds strongly, the trillion-plus dollar budget deficits emanating from Washington for the foreseeable future will place unyielding demands on domestic capital formations. Only the trillions in foreign reserves booked by Beijing from export earnings can finance a meaningful global economic recovery.
At present, China has its own plans for its $3.2 trillion in foreign reserves that do not consist of the massive buying of US Treasury Bonds, as in the past. Terrified of domestic political unrest, political leaders in the People's Republic are focused on full employment and further developing the consumer economy in the country. As Premier Wen Jiaboa of China recently advised, "the task of promoting full employment will be very heavy and we must make greater efforts to achieve it."
In the book Winner Take All by Dambisa Moyo, this need for full employment in the People's Republic is spelled out: "Simply put, if the Chinese government does deliver on its economic promises...both those laid out explicitly in government speeches and work program reports and implicitly in fueling the hopes and expectations of nearly one billion people..China is likely to face political uprisings and turmoil, as witnessed in 1989 in Tiananmen Square."
For this jobs growth to happen, the real estate sector must recover in the People's Republic. But, according to GK Dragonomics, prices are still about 20% below the peak in China. This recovery is critical for the global economy, particularly in the United States and Europe. As detailed in an article in Bloomberg Businessweek, "Beijing: Between a Bubble and a Hard Place” by Dexter Roberts: “Real estate remains the primary driver of China’s economy, even beating out the export sector. When combined with associated industries including steel, cement, and household appliances, real estate accounts for about 30 percent of China’s $7.5 trillion GDP, estimates Tao Wang, head of China economic research at UBS Securities.”
If that 30 percent of the economy of the world’s largest importer of commodities such as copper, coal and iron ore for its steel industry is not fueling every cylinder, then the engines of economic growth around the world will continue sputtering. At present, China imports about 40% of the world's copper and around 45% of its steel. Roughly three-quarters of the electricity in China is generated by coal. Copper is needed for the piping and wiring in buildings, among other others. Steel is needed for the framing. Coal provides the electricity to heat and cool buildings, and to power machines used in the building. When the real estate sector is depressed in China, that lessens the imports of coal, iron ore and copper from countries such as the United States, Australia and Brazil, among many others. China is the leading trading partner for Africa, Australia, Brazil and China, among many other markets: Its buying and financing is critical.
A depressed housing market also keeps China from exporting capital through the purchase of foreign securities. The United States and Europe desperately need China to buy debt instruments, both public and private. Due to China truncating its buying of US Treasury Bonds, the Federal Reserve was forced to implement Quantitative Easing 2 and Operation Twist. Interest rates for European bonds have soared from China refusing to buy to mitigate the yields paid to attract lenders.
In addition to sovereign countries, companies such as Apple (NASDAQ: AAPL), Caterpillar (NYSE: CAT), Boeing (NYSE: BA), Ford (NYSE: F) and Yum! Brands (NYSE: YUM) have contoured the future profitability of various operations around vibrant consumer demand in China. Yum! Brands, which owns and operates KFCs and Pizza Huts, books about $200,000 in profits per store in China as opposed to only $30,000 from the US facilities. In its most recent earnings report, revenue from China increased for Yum! Brands by over $700M for the period from the previous year.
Like Yum! Brands, Apple too makes more from its stores in China. For Apple, its five stores in China are the most profitable. Revenue from China this year is projected to more than double for Apple to $20 billion. A recent Morgan Stanley research report projected that Apple could sell 40 million iPhones in China in 2013. For the most recent quarter, Apple sold 26 million iPhones...do the math.
As with Apple, Caterpillar has a deep presence in China that is also expanding. The Big Cat has 16 manufacturing facilities in The People's Republic with nine more under construction. The world's largest manufactuer of heavy machinery, Caterpillar needs a vibrant real estate sector in China to buy its construction equipment.
Like Caterpillar, the greater home and office building in China, the better for Ford. Pick-up trucks are a favorite of construction crews. At the Beijing Auto Show, Ford recently announced that models specially designed to be imported into China would include a high performance Focus ST to China and three new sport utility vehicles (the EcoSport economy version, mid-size Kuga and Explorer). Overall, Ford plans to introduce 15 new or updated motor vehicles in China by 2015. About the motor vehicle market in China, Joe Hinrichs, President of Ford Asia Pacific and Africa stated: “It’s a huge market, it’s bigger than the United States. There are many different customer segments and many different product desires.”
The new Boeing 737 Max was designed for regional air travel in Asia, primarily China. From an article about the heavy sales of the Boeing 737 Max from The Taipei Times of Taiwan: "In addition, Boeing expects passenger airlines to rely primarily on single-aisle airplanes to serve not only cross-strait routes, but also many other intra-Asian routes.
The United States is the world's biggest importer of capital and consumer goods, with China being the world's biggest exporter of investment capital. Global economic growth was booming when the Chinese housing market was bursting with new construction. Economic growth in China for the second quarter of 2012 just registered at 7.6%, down from a high of 14% in 2007. This is a tremendous drag on the global economy due to China's role in providing needed financing for business and government entities around the world, importing more commodities than any other country, and allowing for blue chip companies such as Ford and Apple to prosper from selling in the People's Republic. This investment capital will not be flowing again until Chinese property prices float higher from more buying. At almost one-third of the economy for the People's Republic, the real estate sector in China is, by far, the most important housing market in the world.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Ford. Motley Fool newsletter services recommend Apple, Ford, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
