In recent months, China’s tech industry has suffered a palpable chill. Since February, shares of overseas-listed Chinese tech firms have lost a staggering $1 trillion in value, according to Goldman Sachs analysts. The fear is spreading after China’s clampdown continues to ripple across sectors. What does this mean for US real estate? How will this impact treasuries and in turn mortgage rates?
What happened with Chinese tech companies?
Chinese stocks plummet as traders fear the latest crackdown on the nation’s education, food delivery and property sectors could expand to other industries such as health care, as China looks to tighten its grip on Big Tech and reduce the wealth gap.
Investors in some of China’s most vibrant sectors — from technology to education — have found themselves in the firing line this month as Beijing attempts to rein in private enterprises it blames for exacerbating inequality, increasing financial risk and challenging the government’s authority. Policy makers’ seeming acceptance of short-term pain for stockholders in pursuit of China’s longer-term socialist goals has been a rude awakening for investors.
New rules published over the weekend took aim at fast-growing tutoring companies, barring them from turning a profit or raising funding on stock markets. The announcement from China’s Ministry of Education has wiped billions of dollars off the market value of several major, publicly-traded education firms.
Is increased tension in China a trend or a blip?
There is clearly a trend emerging in China as “There is no anchor for us to justify the stock valuations now given the regulation uncertainties,” said Dai Ming, a Shanghai-based fund manager at Huichen Asset Management. “In the past, the market was expecting normal regulations on certain sectors, but now it looks like the government can even tolerate killing a whole industry or some leading companies when it’s needed.”
How will the rout in Chinese stocks impact US mortgage rates?
The market is concerned with the new regulatory framework in China and investors are swiftly voting with their feet bailing on many Chinese companies due to the uncertainty. As fear sets in, the most logical place for investors to ride out the storm is in the US market which has clear regulatory guidelines (at least clearer than China and many other nations) and enforcement of property rights.
Furthermore, there is concern that China could take steps to control prices/yields in their bond markets which has caused investors to sell and buy in other markets like the US.
Because of the selloff in China, US treasuries will in the short term see an increase in demand as a haven. Remember that bonds work in inverse; as demand increases for bonds, the prices rise pushing down yields. As bond prices increase due to demand, treasury yields will fall/remain low which in turn will keep mortgage rates near rock bottom.
What does this mean for US real estate?
Mortgage Interest Rates were beginning to trend upwards as inflationary pressures were emerging. In recent days the upwards trend has been stopped leading to rates remaining close to their historic lows. This is not all due to China, but the moves in China likely made a sizeable movement in the flight to safety where bonds were bought and in turn rates declined. As interest rates remain low, buying power remains strong which should lead to a healthy real estate market the second half of the year. It will not be the same gang buster appreciation we have seen the last year, but it should continue to appreciate, albeit at a slower pace.
Summary
It is amazing how interconnected the world economy is. As China cracks down on tech stocks, US mortgage rates stay near historic lows due to increasing demand for safe havens. The recent news from China should keep rates low for a bit. I’m not sure how long China will be the dominating factor in interest rates as this will be dependent on how the federal reserve will react to inflationary pressures which could swiftly change this dynamic.
Additional Reading/Resources
- https://www.bloomberg.com/news/articles/2021-07-27/china-s-crackdown-stocks-extend-declines-into-a-third-day
- https://www.cnn.com/2021/07/27/investing/tencent-meituan-chinese-tech-stocks-intl-hnk/index.html
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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