Our team has been following the developments in the Chinese economy and stock-market for over a year now. The recent developments caught the attention of the wider public (in Cyprus). We believe that the spill-over effects of China create three big themes.
The first is the sharp drop of the oil prices. Brent crude, the global benchmark, fell to $43 per barrel. We think that this is going to be sustained through the remaining course of the year. And that has two big effects that affect the property market in Cyprus;
- The first is that it’s going to provide some inflection release in the Asian countries, and this will allow some central banks to cut rates, or perhaps hike rates less than they would otherwise do. We’ve already see China lower rates earlier this week. The People’s Bank of China (PBoC) also injected billions of yuan into the interbank money market via a short-term liquidity operation to shore up slowing economic growth and waylay investors’ fears of a “hard landing.” If the PBoC is successful in convincing investors that there’s no “hard landing”, then these measures should allow more funds to move from bank deposits into real investments. However, this remains to be seen. Many investors have suffered tremendous losses in the last few month, and might be particularly cautious.
- The second effect is that you effectively are taking income away from oil producers and you’re giving it to oil consumers. We have both groups heavily represented as buyers of properties in Cyprus today. So what you’re going to find is that the environment for the oil consumers, countries like India, China, Korea, mostly Asian countries, those economies are going to be helped quite a lot from lower oil prices. On the other hand, oil producers like Russia, Ukraine, Saudi Arabia and the Gulf and some of the other commodity producers like South Africa, Qatar, i think you will find that these economies will continue to be more challenging, so we’ll find that this split is going to be important.
So that’s one big theme.
The second big theme, as always, is what’s going on in China. Growth in China is surely slower right now and maybe in the years to come, as they try to solve the issue of the imbalances which have been built over the course of the last few years. And the problem with China is that there are no second-breakers. The crisis does not come from the USA or Europe where we would have had confidence in the Fed or the ECB to solve the problem. It comes from China. So the market has to correct itself. We’ll probably see a bigger dip, more sellers and more losses.
The third big theme is the value of the rubble against the euro. The rubble has dropped significantly in the last few months. The drop of oil prices is forcing the Russian economy to go into budget deficit, and despite recent movements from the Russian market, we believe that the reduced value of the rubble should significantly affect the buyers from Russia in the months to come.
Don’t get me wrong; this is not 2008 all over again. It is an old-fashion repricing of assets, fuelled by a slower growth. It will bring financial asset prices closer to fundamental. What we need to worry about is for a spil-back into the global property market. We need to keep an eye from financial disruption to properties.