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Property Market Nearing a Trough?
Property Market Nearing a Trough? While some key economic indicators in China took a pause in July from their improving trend of recent months, we believe targeted policy stimulus will drive growth higher though the rest of the year and into 2015.
The domestic equity market has shrugged off the recent batch of weak numbers and the MSCI China A Share index has rallied 10% in the past month.
One of the factors weighing on economic performance recently is weakness in the property sector.
According to IMF calculations, the real estate sector together with construction accounts for 15% of GDP, a quarter of fixed asset investment and 14% of urban employment. The health of the property sector is therefore important to the health of the overall economy.
We believe that the property sector is going through an orderly correction and will near a trough in coming months as the effects of policy stimulus kicks in.
We believe the government has the capacity and the policy conviction to stimulate the property market and the broader economy into 2015.
ORDERLY PROPERTY MARKET CORRECTION
The Chinese property market is correcting. Price growth has moderated in year-on-year terms and on a month-on-month basis, more cities have reported declines than ever before. We believe the deterioration in July will prompt further policy stimulus that will lead to a turn in the property cycle. The government is determined to see economic growth measured in GDP terms hit 7.5% this year and is unlikely to let a downturn in the property market derail its plans.
Third tier cities suffering the most
The price moderation has been the most pronounced in third tier cities. Residential real estate inventories in third tier cities have increased the most. The oversupply is in part linked to local governments’ reliance on land sales to finance spending (see China Macro Monitor July 2014). Land is more easily available to developers in these cities as governments are keen to monetise their assets. We believe that reform in local government financing will reduce this source of supply over time.
Real estate investment has moderated, but shows signs of stabilisation
Real estate fixed asset investment accounts for about a quarter of total fixed asset investment. While its growth has been moderating, it has stabilised at a relatively high level of over 14% y-o-y over the past three months. According to IMF calculations, a 1% decline in real estate investment could shave off 0.1% of GDP growth in the first year1. China appears to be very far from seeing an actual decline in investment, but we would expect the government to be vigilant against any downturn that would threaten its growth targets. The IMF projects GDP growth of 7.4% this year, with real estate investment growth moderating to 5% y-o-y.
Property sales subdued while potential buyers wait on the side-lines
Potential buyers talking a ‘wait-and-see’ approach have been blamed for the decline in property sales. The pace of urban migration remains robust and pent-up demand to upgrade properties has certainly not fallen. With the threat of the malaise in the property market becoming self-fulfilling, we expect the government to offer further stimulus the break the cycle. Residential property sales had become less negative in June, but slipped further July alongside other measures of economic performance.
Low household leverage and continued urbanisation bode well for medium term property demand
China is little over 50% urbanised, significantly less than other emerging markets such as Brazil and Russia and will continue to urbanise at a strong pace over the coming 20 years. According to the United Nation’s projections, 310 million Chinese citizens (i.e. a population close to the size of the US today) will migrate from the countryside to cities over the next two decades. The Chinese government’s ambitions are even grander – to move close to 400 million people to the cities. That speed and scale of migration is unprecedented in human history. Even though a number of cities appear to be over-supplied with property today, we believe that excess supply will soon be absorbed.
Household indebtedness in China is also low by international standards. The orderly property market correction we foresee in China is unlikely to lead to a systemic problem for households because their financial leverage is relatively small.
We believe that such low level of indebtedness affords the government headroom to loosen house purchase restrictions (HPR) and lending criteria to stimulate the property market. As more Chinese people aspire to become homeowners, we are likely to see household leverage rise over time.
Policy relaxation will provide a tail-wind
In contrast to 2008 and 2011, when the People’s Bank of China cut the reserve requirement ratio (RRR) to stimulate lending activity across the board, recent stimulus has largely been left to local governments and is therefore highly targeted2.
For example, a number of cities have relaxed rules that previously prohibited households from owning more than one property (house purchase restrictions or HPRs). 37 out of 46 cities that had such restrictions have reportedly relaxed to some extent.
Some cities and provinces have announced tax subsidies to spur demand while others have been buying properties that have already been built to add to their pool of social housing.
The PBoC has also asked banks to speed up mortgage approvals and apply ‘reasonable’ pricing, which could quicken the pace of home sales. Anecdotal evidence from media reports point to banks following through on that request.
Changes to the loan-to-deposit ratio (LDR) made in July will also free up banks’ capacity to lend. By reducing the categories of lending that need to be included in the loan component and increasing the number of items that can be included in the deposit component, banks will be able to avoid hitting their LDR limits so easily, allowing them to lend more to prospective home buyers.
To support real estate development, the central government has increased its social housing target to 7 million units of new starts (of which 4.7 million units will come from shanty town renovation). The central government is also leaning on local governments to see that red-tape does not slow the process of fiscal disbursement and planning approvals.
The central government could go further by relaxing Hukou policies, which currently apply laws asymmetrically to migrants from the country and native city dwellers. Easing of these laws, could allow the freer movement of people ratio and cut mortgage interest rates (either as part of an overall cut in rates or independently).
Developers display cautious optimism
The annual decline in floor space started has been narrowing in recent months, in a sign that property developers are becoming more optimistic about future demand. Developers need to plan ahead of the actual turn given the lag between starting development and the actual completion of properties to sell in the market. Nevertheless, if their optimism proves to be timely, we could see the property market trough soon.
CHINA A SHARE SENTIMENT MARKEDLY IMPROVES
Despite the string of weak data in July, including disappointing loan and money supply growth, equity markets rallied. The MSCI China A Share index gained 9.5% last month.
The China A Share market is also likely to benefit from the launch of the Shanghai-Hong Kong Connect, which expected in October 2014 (see Shanghai-Hong Kong Stock Connect: A Boost For China A Shares) . The initiative will open up access to the Shanghai stock market for foreign investors trading through Hong Kong. Systems testing for the initiative will start at the end of this month. We believe that the manner in which the quotas are applied will drive net flows into the mainland. At the moment, dual-listed stocks are trading at approximately an 8% discount on the A shares market compared to the H share market. The introduction of the Shanghai-Hong Kong Connect should see that discount dissipate over time. Valuations of the China A share market indicate that it is cheap. Its prospective PE now stands at 10.2, 63% below its peak in 2007. It is not often that the stock market of one of the world’s largest and fastest growing economies is trading at one of the world’s lowest valuations. The imminent implementation of the Shanghai-Hong Kong Connect programme should help to speed the process of valuation normalisation.
Important Information
This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).
• $TRUMP & $MELANIA: The launch of both memecoins dominated headlines, with $TRUMP reaching a $73B fully diluted valuation. These launches are indicative of a late-stage bull market, often characterized by speculative exuberance.
• Solana Continues to Outperform: Solana reached an all-time high of $286, cementing its role as the leading blockchain for retail activity due to its high performance, low costs, and user-friendly ecosystem.
• Solana Remained Robust: Despite congestion and the rate of failed transactions rising by 20%, the network remained stable compared to prior years, avoiding outages even under unprecedented demand.
• Bitcoin Quietly Hits ATH: Ahead of the inauguration, Bitcoin surged to a new ATH just shy of $109K, largely under the radar amidst the memecoin frenzy.
• DeFi Momentum Builds: Trump’s World Liberty Fund continued its aggressive crypto accumulation, totaling $350M in cryptoasset holdings. This signals potential regulatory leniency for DeFi under the new administration.
• A New Crypto Era Dawns: With crypto-friendly cabinet nominees, initiatives such as the Bitcoin Strategic Reserve (BSR), a Presidential Crypto Council, an SEC-driven crypto task force, and moves to simplify regulations, the administration signals its intent to foster innovation while solidifying the U.S.’s leadership in the cryptoasset industry.
The crypto market surged in anticipation of Trump’s inauguration, especially following the launch of his official memecoin, $TRUMP, in the early hours of Saturday. The token’s fully diluted valuation soared to $73B, attracting around 850K holders and significantly boosting Trump’s net worth in Solana-based assets. Following this, First Lady Melania Trump introduced her own memecoin, $MELANIA, on Sunday. It briefly reached a market cap of approximately $2B before experiencing a 75% retracement, as seen below in Figure 1. The frenzy surrounding these tokens propelled Solana to reach an ATH of around $286 as investors rushed to buy the asset and participate in the ecosystem. However, it’s important to remember that this level of market exuberance typically signals the late stages of a bull market, warranting a more strategic approach from investors. Nevertheless, while vigilance is called for, it’s crucial to recognize that markets still have room for growth, particularly as asset prices often exhibit explosive upside movements in the latter stages of a bull market.
Figure 1: TRUMP & MELANIA Price Performance
Source: 21Shares, Dune
Despite $TRUMP’s questionable tokenomics and potential risks for inexperienced investors, its launch likely signals a shift toward a more crypto-friendly regulatory environment under the new administration. Further, the token’s controversial success highlights memecoins’ role as an effective tool for onboarding crypto newcomers. Unlike complex blockchain projects, memecoins offer a simpler entry point into the crypto world. They can serve as a ”trojan horse,” attracting retail investors with their accessibility and cultural appeal. This initial engagement can then potentially lead users to explore more sophisticated aspects of the crypto ecosystem, including decentralized finance (DeFi) applications and AI-based projects.
That said, their extreme volatility poses significant risks as inexperienced traders may suffer losses from the tokens’ wild price swings, potentially discouraging them from further engaging with crypto.
Despite the mixed short-term and long-term effects, last week’s events revealed a clear beneficiary: Solana. Thanks to its high performance and low costs, the network has now cemented its position as the go-to platform for retail activity. Despite intense usage over the weekend, it avoided typical outages seen in 2022 and 2023, demonstrating improved stability. While some applications, like Coinbase and Phantom, faced challenges with unprecedented demand, causing temporary transaction failures to increase by almost 20%, as seen below, Solana’s network remained robust compared to previous years. What’s worth remembering is that Solana’s resilience during this surge of activity, marked by zero outages, bodes well for its ambitious goal of becoming the ”NASDAQ on the Blockchain.”
Figure 2: Solana Failed Transaction Rate
Source: 21Shares, Dune
It’s worth noting that Solana’s robust performance during this activity surge, handling up to $45B in transactions on January 20 without any outages, demonstrates the network’s progress towards their North Star of becoming ”NASDAQ on the Blockchain.” This feat is particularly impressive when compared to Nasdaq’s average daily volume of $120B, underscoring Solana’s growing capacity to handle significant financial throughput.
As depicted below, even with a significant fee increase, Solana maintains cost-effectiveness, reinforcing its appeal to retail users. However, it’s crucial to look beyond its association with speculative activities. The network is now making significant inroads in diverse sectors, demonstrating its versatility and real-world utility. Notable examples include Decentralized Physical Infrastructure (DePIN) projects like Helium, Render, and HiveMapper; AI initiatives such as Griffain and Ai16z; and tokenization efforts supported by traditional financial institutions, including Franklin Templeton, Hamilton Lane’s SCOPE, and Ondo Finance. This broad spectrum of applications underscores Solana’s potential as a robust platform for innovation across multiple industries.
Figure 3: Solana Transaction Fees
Source: 21Shares, Dune
Similarly, Trump’s endorsed DeFi initiative, World Liberty Financial, has steadily expanded its cryptoasset holding over the recent weeks. In its latest round of acquisitions over the weekend, the project added $47M in ETH and WBTC and $4.7M each in Aave, LINK, TRX, and ENA to its portfolio. This takes the total amount of World Liberty’s holdings up to $350M worth of cryptoassets. It is worth noting that the yet-to-launch protocol is staking ETH with Lido, further echoing the idea that Trump is bullish on DeFi and that the industry will likely grow under his administration.
In this context, despite widespread anticipation, crypto was not mentioned in President Trump’s inaugural address or a leaked Republican policy document outlining national priorities. This omission contrasts with earlier speculation that crypto would become a central focus of the administration. However, it’s crucial to maintain a long-term perspective: Trump’s administration remains one of the most crypto-friendly globally, as evidenced by key pro-crypto appointments and proposed policies. In the following sections, we will explore these initiatives and their potential impact on the digital asset industry.
Bitcoin Strategic Reserve
While it may have gone under the radar, BTC also reached a new ATH, just shy of $109K, ahead of Inauguration Day. Relatedly, Trump’s administration has proposed creating a Bitcoin Strategic Reserve (BSR) to position Bitcoin as a critical financial and strategic asset, similar to gold reserves. The reserve would utilize approximately 80K Bitcoin seized by the U.S. Marshals, redirecting these assets into national holdings rather than auctioning them. Expanding the reserve to a rumored 1M BTC would require Congressional approval for market purchases or over-the-counter acquisitions, potentially funded by U.S. gold reserves.
Figure 4: Theoretical Bitcoin Strategic Reserve If 1M BTC Held Since 2016
Source: 21Shares, Coingecko
The BSR would classify Bitcoin as a strategic asset, held for at least 20 years and only sold to address U.S. debt. Advocates argue this could hedge against inflation, stabilize the dollar, and leverage Bitcoin’s appreciation to reduce national debt. Additionally, it could trigger a global race among nations to accumulate Bitcoin, driving its price higher and positioning the U.S. as a leader in the emerging digital economy. However, such a move would require significant regulatory changes and face challenges like volatility and opportunity costs.
Presidential Crypto Council
Trump’s administration plans to form a presidential crypto council of about 20 industry leaders, including CEOs and founders of major crypto companies. This advisory group would provide insights into the digital asset landscape and help shape innovation-friendly policies while addressing regulatory concerns. Rumored members include Michael Saylor (MicroStrategy), Brian Armstrong (Coinbase), Jeremy Allaire (Circle), Charles Hoskinson (Cardano/Ethereum), and Brad Garlinghouse (Ripple). The council aims to ensure crypto regulation reflects real-world challenges and opportunities, demonstrating the administration’s commitment to industry engagement and positioning the U.S. as a global blockchain leader.
SEC Repeal of SAB 121
A key rumored executive order from Trump’s administration involves repealing SAB 121, an SEC accounting rule requiring companies to treat client cryptoassets as balance sheet liabilities. This repeal would:
- Reduce operational risks for firms
- Encourage broader institutional participation
- Accelerate crypto service adoption in finance
- Signal a business-friendly regulatory approach
By easing regulatory friction, this move could enhance U.S. crypto firms’ competitiveness and position the country as a global leader in cryptoasset custody and management.
SEC and CFTC Joint Collaboration on Crypto Market Structure
Another key executive order reportedly under consideration by Trump’s administration involves directing the SEC and CFTC to collaborate on a crypto market structure bill, building on the foundation laid by the FIT21 framework. This initiative aims to establish a unified regulatory framework for digital assets, addressing long-standing jurisdictional ambiguities that have left cryptoassets caught between classifications as securities or commodities. The bill would create clear and consistent rules by fostering cooperation between these two agencies, reducing regulatory uncertainty, and fostering innovation.
Ending Operation Chokepoint 2.0: Restoring Banking Access for U.S. Crypto Companies
Trump’s administration plans to address the FDIC’s debanking of crypto companies and end ”Operation Chokepoint 2.0,” a controversial initiative that restricted banking access for the crypto industry with the likes of Kraken, Coinbase, Signature Bank, Paxos, and Binance.US all sharing a similar experience. The administration aims to restore fair treatment and financial access for crypto companies by instructing federal agencies to cease discriminatory practices. This move would provide stability, attract institutional players to the U.S. crypto market, and reaffirm the administration’s commitment to fostering a competitive financial environment.
SEC’s Shift in Stance Could Pave the Way for Expanded Crypto Spot ETPs
A revamped SEC under the new administration is set to redefine crypto regulations, legitimizing the industry and fostering innovation. Clear and fair rules would signal that the U.S. is open for business, attracting top talent and projects. This regulatory clarity is expected to unlock institutional capital as traditional finance gains the confidence to invest in digital assets with legal protections. The SEC’s progressive stance increases the likelihood of approving multiple spot crypto ETPs, enabling broader adoption and integration into traditional investment portfolios. This shift validates the crypto industry and positions the U.S. as a leader in financial innovation. Further, the newly established crypto-focused task force led by Commissioner Hester Pierce is designed to establish clear regulatory guidelines, practical registration paths, and sensible disclosure frameworks for crypto companies. Thus, this new body could help approve a broader range of ETPs.
Trump Cabinet Members
While Trump’s proposed appointees are yet to go through Senate approvals, here’s a quick overview of key pro-crypto members.
• Robert F. Kennedy Jr. (Secretary of Health and Human Services): A Bitcoin advocate who views it as the ”currency of freedom” and hedge against inflation, with most of his net worth invested in Bitcoin.
• David Sacks (Crypto and AI Czar): Early Bitcoin investor and backer of projects like Solana and dYdX, bringing deep expertise to blockchain innovation.
• Paul Atkins (Chair of the SEC): Former SEC commissioner with extensive experience helping crypto-native companies navigate regulatory compliance.
• JD Vance (Vice President): A Bitcoin supporter and venture capitalist with investments in blockchain startups and a crucial advocate for pro-crypto legislative initiatives.
• Elon Musk (Co-Head of D.O.G.E): A vocal supporter of blockchain innovation, holding Bitcoin, Ethereum, and Dogecoin, with Tesla’s $1.5B Bitcoin investment under his leadership.
• Vivek Ramaswamy (Co-Head of D.O.G.E): A vocal crypto advocate and co-founder of Strive Asset Management, Ramaswamy launched the Strive Bitcoin Bond ETF, proposed backing the U.S. dollar with Bitcoin, and champions clear regulations and wallet protections to drive innovation and financial freedom.
• Howard Lutnick (Secretary of Commerce): CEO of Cantor Fitzgerald, managing Tether’s U.S. treasury portfolio while acquiring a 5% stake, and holds personal Bitcoin investments worth hundreds of millions.
• Scott Bessent (Secretary of the Treasury): Founder of Key Square Group, Bessent advocates for balanced crypto regulations and has made sizable personal investments of $250K–$500K in Bitcoin ETPs.
For a deeper dive into their backgrounds and potential impact, check out our full breakdown on our latest blog.
All in all, while Trump did not address crypto in his inauguration speech or through executive orders, he has already begun appointing key figures supportive of the industry. Thus, he is starting to follow through with his promises. It seems he’s headed towards fostering a pro-crypto environment that provides a clearer path for companies to operate within the U.S.
Nevertheless, with the exuberant market activity we’ve seen in the last few days, it’s an opportune time for investors to stay mindful and ensure their positions remain aligned with their long-term objectives and risk tolerance.
What’s happening this week?
Research Newsletter
Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com
Disclaimer
The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
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