China’s real estate collapse hits middle-class wealth

(Bloomberg) — Stock investment: down 30%. Salary package: 30% reduction. Investment properties: down 20%. As Thomas Joe contemplates 2023, his household finances are on his mind.

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“It’s just heartbreaking,” said the 40-year-old financial worker from Shanghai. “The only thing that still keeps me going is the thought of keeping my job so I can support my large family.”

Zhou’s plight will resonate with many people in China, where slumps in the real estate and stock markets are destroying household wealth. And as the world’s second-largest economy struggles to regain momentum after years of Covid-19 lockdowns, there is also a growing threat of unemployment.

Middle-class households are now being forced to rethink their cash priorities, with some pulling back from investments or selling assets to free up liquidity.

Underlying the decline in family wealth is China’s real estate crash, which has had a ripple effect in a society where 70 percent of family assets are tied up in property. Every 5% drop in home prices will wipe out 19 trillion yuan ($2.7 trillion) in housing wealth, according to Bloomberg Economics.

Read more: China says property market to improve, more policies planned

“This could be just the beginning of more wealth losses in the coming years,” said Eric Zhu, an economist at Bloomberg Economics. “Unless there is a major bull market, small gains in financial wealth are unlikely to offset losses in housing wealth.”

While China’s official figures show only a slight drop in existing home prices, evidence from estate agents and private data providers points to a drop of at least 15% in prime areas in the biggest cities.

The value of the housing sector could shrink to about 16 percent of China’s gross domestic product by 2026, from about 20 percent of GDP now, according to Bloomberg Economics. This would put about 5 million people, or about 1% of the urban workforce, at risk of unemployment or reduced incomes.

Rainy days

Financial investments offer a little respite. Earlier this month, Chinese stocks underperformed their emerging market peers by the largest margin since at least 1998. Mutual funds were in the red heading into the third quarter. Yields on banks’ wealth management products remain low, and interest rates on deposits have seen three cuts in the past year.

The $2.9 trillion trust industry, in which wealthy Chinese investors seek high returns from products sold by loosely regulated shadow banks, is showing cracks, with one recent scandal potentially involving tens of billions of dollars in losses.

Net wealth per adult in China fell 2.2 percent to $75,731 in 2022, UBS said in its August Global Wealth Report, while total assets per adult fell for the first time since 2000 as non-financial holdings contracted due to the difficulties in the housing market.

Media worker Echo Huang watched the value of her investment property in Ningbo, Zhejiang province drop by about 1 million yuan from its peak in 2019. She now considers herself lucky to have sold it in May before prices fell even further.

Huang gave most of the proceeds from the sale of the property to his parents for their retirement savings, and invested the rest in time deposits and money market funds that allow for real-time redemptions. It shut down equity investments after its current holdings more than wiped out all of 2018’s gains.

“My company is struggling to survive, so who knows if one day I might be underpaid or even laid off,” the 39-year-old said. “My main goal is the stability of my assets and I want to maintain sufficient liquidity.”

Wealth protection

Even high-net-worth individuals are becoming more conservative, according to a joint study by China Merchants Bank Co. and Bain & Co. mentions of “wealth creation” decline.

Peter Bao, who works at a large technology firm in Beijing, follows a prudent investment strategy.

Its holdings, mostly in US-listed Chinese stocks, at one point halved to the equivalent of about 5 million yuan from a peak in late 2020. In the past two years, it has shifted some of its assets to money market funds and fixed-income products income that require less analysis. He hopes he can withstand short-term volatility and potential losses.

“There is not a single moment without anxiety and doubt, but there are no better opportunities,” Bao said. “I also have to focus on my work to protect my source of income, so I can’t really spend more time researching other investments that are sound.”

There are no options

Faced with little chance of growing her wealth, Danny Wang, 35, said she was “lying still” and hoped the domestic economy and capital markets would improve by 2026.

She has deleted her trading apps and has no plans to adjust her 1 million yuan of positions in stocks and equity funds, or even check prices. She also ignores any volatility in her 50,000 yuan Dogecoin investment made in early 2022, which has halved.

Hangzhou-based tech worker Lily Liu, who manages several million yuan in family savings, agrees. While her parents’ real estate business has seen a sharp drop in income, her husband’s salary increase in recent years has left her with more money at her disposal.

“I feel like my risk tolerance has decreased along with the increase in wealth,” said Liu, who is putting one of her two homes up for sale but has no idea where to invest the proceeds. “I wouldn’t bother spending more time on investments. It probably won’t pay off in this macro environment anyway.”

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