Graduate Crisis in China: Quantitative Analysis

China is currently facing a significant graduate employment crisis marked by high youth unemployment rates, an oversupply of tertiary-educated individuals, and a pronounced mismatch between graduates' skills and available job opportunities.

In June 2023, the youth unemployment rate in China hit a record high of 21.3%, prompting the government to halt the release of this figure. After statistical adjustments, the rate was reported at 14.9% in December 2023 and 15.3% in March 2024, nearly three times higher than the general urban unemployment rate of 5% in December 2023.

The record number of college graduates entering the job market exacerbates the issue. In 2024, the number of college graduates is projected to reach 11.79 million. This surge has intensified the mismatch between the supply of educated individuals and the demand for skilled labor. University acceptance rates have jumped from 33% in 1998 to 92% in 2021, with the number of tertiary students increasing tenfold, leading to an oversupply of graduates struggling to find relevant jobs.

The service industry, which makes up 53% of China's GDP, has been unable to absorb this influx of educated labor. Many graduates are reluctant to accept low-skill service jobs, leading to significant overqualification. The COVID-19 pandemic further decimated small- and medium-sized enterprises (SMEs), which previously accounted for two-thirds of urban employment. Additionally, regulatory tightening in sectors like after-school tutoring and real estate has limited job opportunities.

A notable indicator of the competition for stable jobs is the civil service exam. In 2024, a record three million applicants competed for just 39,600 civil service vacancies, highlighting the desperation for secure government positions.

The long-term effects of high youth unemployment are severe, including depressed lifetime earnings, reduced consumer spending, and delayed marriage and childbirth, potentially straining Beijing's welfare system. Socially, the frustration among unemployed graduates could exacerbate social inequalities and reduce social mobility.

From an economic theory perspective, the classical labor market model suggests wages should adjust to equilibrate supply and demand. However, the rapid expansion of higher education has led to an oversupply of graduates, preventing equilibrium. The Keynesian perspective emphasizes the role of aggregate demand, which has been dampened by the pandemic and regulatory changes, worsening the crisis.

Policy measures to address this crisis have had limited impact. While promoting vocational training and entrepreneurship are positive steps, they face challenges in alignment with industry needs and access to capital.

Several policy recommendations can address this issue. The government should enhance the alignment between higher education and labor market needs, promote partnerships between universities and industries, and revise curricula to include practical skills. Supporting SMEs through financial incentives and regulatory easing can create job opportunities. Improving labor market information transparency can help graduates make informed career choices, and addressing regional disparities by promoting economic development in less-developed areas can alleviate the concentration of job seekers in urban centers.

China's Housing Crisis 2024

 

Introduction

China's housing market, once a cornerstone of its rapid economic growth, has entered a severe crisis characterized by declining home prices, plummeting sales, and a significant oversupply of unsold and unfinished properties. This analysis delves into the quantitative aspects of the crisis, examining key metrics and trends to provide a comprehensive understanding of the situation.

Historical Context and Current State

China's housing market has experienced explosive growth over the past two decades, fueled by urbanization, economic expansion, and government policies encouraging homeownership. Real estate development became a critical driver of GDP, contributing nearly 30% at its peak. However, this growth led to over-leveraging by developers and speculative investments, creating an unsustainable bubble.

By December 2023, the market began to show signs of distress. Home prices in major cities like Beijing fell by 10-30% from their peak. Nationally, new-home prices in 70 major cities, excluding state-subsidized housing, decreased by 0.71% in May 2024, marking the most significant monthly decline since October 2014. Existing home prices dropped by 1%, the largest decrease since at least 2011.

Market Decline and Price Reductions

The housing market's decline is starkly evident in various metrics:

Price Declines:

• Beijing: Home prices in Beijing fell by 10-30% from their peak by December 2023.
• National Trends: New-home prices in 70 major cities, excluding state-subsidized housing, decreased by 0.71% in May 2024, marking the most significant monthly decline since October 2014. Existing home prices dropped by 1%, the largest decrease since at least 2011.

Sales and Inventory:

• Residential Sales: Residential home sales were down 31% by March 2024.
• Developer Cash Reserves: Property developer cash reserves fell by 26% by March 2024.
• Top 100 Developers: New property sales for China's top 100 developers fell by 47% year-on-year from January to April 2024.
• Inventory: The inventory of unsold apartments reached a record 25 months, indicating a significant oversupply.

Economic Impact

The housing sector's downturn has profound implications for China's economy:

Contribution to GDP:

The housing sector's contribution to China's GDP is projected to shrink to about 16% by 2026, down from its peak of nearly 30%. This reduction reflects a broader economic slowdown and reduced investment in real estate.

Local Government Revenue:

Revenue from land sales, a major source of income for local governments, fell by 33% from RMB 8.7 trillion ($1.2 trillion) in 2021 to RMB 5.8 trillion ($800 billion) in 2023, with further declines expected. This decline has strained local government budgets and reduced their ability to fund public services and infrastructure projects.

Government Interventions

The Chinese government has implemented several measures to stimulate the housing market:

Stimulus Measures:

• Lowering down payment thresholds and mortgage interest rates for first-time buyers.
• Cutting existing mortgage interest rates and allowing loan rollovers to the next generation.
• Encouraging local governments to buy unsold homes and convert them into affordable housing.
• Implementing a 300 billion yuan ($41.5 billion) loan program by the People's Bank of China to support these purchases.

Effectiveness and Challenges:

Despite these interventions, the measures have yet to provide a sustainable solution. Property investment declined by 9.8% in the first four months of 2024, and new property sales plunged by 28.3% in the same period. Analysts argue that the current funding and measures are insufficient to address the magnitude of the crisis, which may require hundreds of billions of dollars.

Structural Issues

Several deep-rooted structural issues exacerbate the housing crisis:

Demographic Changes:

China's ageing and declining population is leading to a natural contraction in housing demand. The one-child policy has resulted in a skewed male-to-female ratio, further reducing the potential for new household formation.

Cultural Factors:

Property ownership is deeply ingrained in Chinese culture, often seen as a symbol of prosperity and a prerequisite for marriage. However, the current economic uncertainty and job insecurity are eroding consumer confidence in the housing market.

Developer Defaults and Financial Strain

The financial strain on developers has reached critical levels:

Major Defaults:

The collapse of major developers like Evergrande and Country Garden has sent shockwaves through the industry. Evergrande defaulted on over $300 billion in debt, while Country Garden faces a liquidity crunch with $205 billion in debt. These defaults have raised concerns about the solvency of other major developers, including Vanke, which has seen its credit rating downgraded to junk status.

Impact on State-Owned Enterprises (SOEs):

Even state-owned enterprises (SOEs) are not immune to the crisis. Sales at top SOE developers have slumped, and some quasi-SOEs have slipped into financial difficulties.

Future Outlook and Policy Recommendations

The future outlook for China's housing market remains uncertain:

Long-Term Projections:

Housing investment is expected to fall 30-60% below its 2022 level and rebound only gradually. This decline is comparable to major housing downturns in other countries with similarly sizable slowdowns in starts.

Should You Buy REITs in Singapore Now?

In the ever-fluctuating world of investments, is now the golden opportunity to capitalize on Singapore REITs (S-REITs)? This question is not merely rhetorical but demands a deep dive into the current market landscape, valuation metrics, and sector-specific opportunities, all while being guided by the timeless principles of Benjamin Graham.

Current Market Conditions

The S-REIT market has faced notable volatility in 2023, primarily due to rising interest rates. However, the tides may be turning. With operational performance remaining robust, certain sectors like logistics and retail are demonstrating remarkable resilience. Logistics sector rents have surged by 11.7% year-to-date, while retail rents saw a modest yet promising 1.4% quarter-on-quarter growth in Q3 2023.

Valuation and Yield

A cornerstone of Benjamin Graham's investment philosophy is value investing—buying securities that are undervalued relative to their intrinsic worth. S-REITs are currently trading at a price-to-book ratio of 0.85x, nearing a decade low. This presents a compelling value-buying opportunity. Furthermore, with average yields around 7.7%, S-REITs offer a substantial yield spread over the 3.5% yield on Singapore Government 10-year bonds, making them an attractive proposition for income-focused investors.

Interest Rate Environment

The Federal Reserve's current stance suggests that the interest rate hike cycle may have concluded. Historically, pauses and cuts in interest rates have spurred strong S-REIT performance. Lower interest rates can reduce financing costs, enhance dividend yield spreads over bonds, and potentially lead to higher property valuations—all favorable conditions for S-REITs.

Sector-Specific Opportunities

• Industrial and Logistics REITs: Benefiting from structural tailwinds like growing e-commerce and supply chain resilience. For instance, Mapletree Logistics Trust reported a 2.1% year-on-year increase in gross revenue for Q3 FY2024.
• Data Centre REITs: With digitalization and the rise of generative AI, the demand for data centers is increasing, making this a promising sector.
• Retail REITs: Despite challenges, retail REITs such as Frasers Centrepoint Trust have maintained high occupancy rates and made strategic acquisitions, showcasing resilience.

Risks and Considerations

• Economic Slowdown: While S-REITs provide stable cash flows, an economic downturn could impact tenant demand and rental income.
• Regulatory Changes: Any adverse regulatory shifts could affect the REIT market.
• Market Volatility: Investors must brace for short-term volatility influenced by shifting market expectations regarding interest rates.

Conclusive Call to Action: Decisive Investment Direction

In light of the attractive valuations, high yields, and the potential benefits from a favorable interest rate environment, I recommend a decisive "buy" on S-REITs. Focus particularly on sectors with strong structural demand, such as industrial, logistics, and data centers, to leverage their resilience and growth potential. However, maintain a diversified portfolio to mitigate risks associated with economic and regulatory uncertainties.

By adhering to Benjamin Graham's principles of value investing and thorough analysis, this strategic move could position you for robust returns in the evolving market landscape of S-REITs.

Should I buy Singapore stocks now?

Q: Should I buy Singapore stocks now?

A: Investing in the Singapore stock market during its current rally can be enticing, but let's dissect this with a value investing lens, rooted in Benjamin Graham's philosophy and enhanced by modern considerations.

1. Market Momentum and Fundamentals:

• Straits Times Index (STI) Performance: The STI has surged by 7.3% year-to-date, with total returns, including dividends, up 10.2%. This highlights strong current performance, primarily driven by robust banking sector gains and attractive dividend yields.
• Historical Context: The STI reaching a six-year high signals strong momentum, but it's crucial to assess whether this growth is sustainable or a short-term spike.

2. Challenges to Consider:

• Low Trading Volumes and Liquidity: Despite the rally, low trading volumes and liquidity issues persist, which can impact your ability to buy and sell stocks efficiently, potentially leading to higher bid-ask spreads and price volatility.
• Market Revitalization Efforts: Potential interest rate cuts by the US Federal Reserve and strategies to enhance market attractiveness are positive signs, yet their impact remains uncertain.

3. Value Investing Perspective:

• Margin of Safety: Benjamin Graham emphasized a margin of safety to protect against downside risk. In the context of the Singapore market, look for stocks trading below their intrinsic value, factoring in the market's liquidity constraints.
• Dividend Yield: High dividend yields are attractive, but ensure the underlying companies have strong fundamentals and sustainable payout ratios.

4. Modern Considerations:

• Innovation and Growth Prospects: Identify companies that not only exhibit value characteristics but also have strong innovation potential or are positioned to benefit from market disruptions.
• Global Economic Impacts: Consider how global economic trends, such as interest rate adjustments and trade policies, might affect the Singaporean market.

5. Historical and Recent Examples:

• Case Study: In 2008, during the financial crisis, companies like [Bank] saw their stock prices plummet despite strong fundamentals. Value investors who recognized the intrinsic value and bought during the downturn were significantly rewarded as the market recovered.

Engaging Call to Action:

"Do you believe the current Singapore stock market rally is sustainable, or are we seeing a short-term spike? Share your insights and let’s debate how value investing principles can guide our decisions in this dynamic market!"

Conclusion:

While the Singapore market's rally is promising, a prudent approach rooted in value investing principles is essential. Evaluate individual stocks for intrinsic value, consider the market's liquidity challenges, and factor in global economic trends. Stay informed, stay cautious, and stay engaged with evolving investment strategies.

Remember, investing is not about chasing trends but about making informed decisions that align with your long-term financial goals.