China's real estate recession is getting worse. Real estate prices are falling within China, causing a "reverse wealth effect" that is slumping consumption. Meanwhile, money from wealthy Chinese is flowing into real estate in urban areas of Japan, benefiting them in unexpected ways. However, Japan also just suffered a major drop in stock prices at the end of July. What impact will the Chinese economy have on Japan's luxury watch market? Economic journalist Tomoyuki Isoyama offers his analysis.
Illustration by Mikio Ando
[Article published in the July 2024 issue of Kronos Japan]
China's real estate slump shows no sign of ending. "Negative wealth effect" hits watch market.
Economic journalist and professor at Chiba University of Commerce. Born in Tokyo in 1962. Graduated from the School of Political Science and Economics at Waseda University. Served at the Nikkei Inc. as a securities reporter, deputy chief of the same department, Zurich bureau chief, Frankfurt bureau chief, and deputy editor-in-chief and editorial committee member for Nikkei Business. Left the company in 2011 to go independent. Covers a wide range of political, government, and business figures. His books include "The International Accounting Standards War: Final Chapter" and "The Secrets of Switzerland, the Brand Kingdom" (both published by Nikkei BP).
[Tomoyuki Isoyama Official Website]http://www.isoyamatomoyuki.com/
There is no end in sight to China's real estate slump. The August new home price index released by the National Bureau of Statistics of China on September 14, 2024, showed a decline compared to the previous month in 67 of 70 cities, with no sign of the decline stopping. Reuters calculated the year-on-year decline of 5.3%, expanding from 4.9% in July and marking the largest decline since May 2015. This was the 14th consecutive month of declines compared to the previous month. Second-hand home prices also fell in 69 cities.
Cumulative real estate development investment from January to August was down 10.2% compared to the same period last year. Residential sales floor space fell 18.0%, and sales values fell 23.6% due to falling prices. Just one year ago, in the January-August period of 2023, real estate development investment was down 8.8% compared to the previous year, with sales floor space down 7.1% and sales values down 3.2%. Looking at the figures, the deterioration in real estate development investment has not stopped.
Swiss watch exports to China fall sharply
The severity of China's real estate bubble collapse is still unclear. The accounting fraud scandal at Evergrande Group, a major Chinese developer that went bankrupt, continues, and the actual scale of China's real estate-related debt remains unclear. This has left people anxious about the future of the economy, affecting consumption as households cut back on spending. Falling asset prices, such as real estate, are causing people to tighten their purse strings, creating a "negative wealth effect."
Retail sales, an indicator of consumer trends, increased 2.1% year-on-year in August 2024, slowing from the 2.7% increase in July. The slowdown in major cities is clear, with urban areas growing at just 1.8%, significantly lower than the 3.9% increase in rural areas, and retail sales in first-tier cities such as Beijing and Shenzhen are particularly negative. Debt burdens such as mortgages are believed to be dragging down household consumption, with people cutting back on purchases of luxury goods, with automobiles down 7.3% and cosmetics down 6.1%.
This impact is also being felt in luxury watches. According to statistics from the Federation of the Swiss Watch Industry (FH), exports of Swiss watches to both mainland China and Hong Kong continue to decline significantly. Looking at the month of August alone, global exports of Swiss watches increased by 6.9% to 1.95 billion Swiss francs (approximately 3298 billion yen). Of the top 30 export destinations, only four - China, Hong Kong, Thailand, and Ireland - saw a decrease compared to the same month last year.
China saw a 21.1% decrease in cumulative sales from January to August compared to the same period last year, while Hong Kong saw a significant decrease of 18.6%. It is believed that the collapse of China's real estate bubble has led to a "negative wealth effect," which has led to fewer luxury watch purchases among wealthy Chinese.
Active "asset flight" to Japan
There is one country that seems to be benefiting from the actions of these wealthy Chinese: Japan. With the future of China's real estate market uncertain, it is said that the wealthy are increasingly moving their assets overseas. In particular, money from wealthy Chinese continues to flow into high-rise apartments along Tokyo Bay and luxury homes in the city center. While these properties are no longer affordable for Japanese people, due to the weak yen, they still appear cheap to Chinese people. Furthermore, with political stability and other factors, geopolitical risks are seen as low, and this has led to an active movement of "asset flight" to Japan.
In Japan, stock prices fell sharply after the Bank of Japan raised interest rates at the end of July, but recovered within a short period of time. There were concerns that the sharp decline in stock prices would lead to a "negative wealth effect" among Japanese consumers, leading them to cut back on their spending on luxury items, but sales of luxury jewelry at department stores in August did not appear to have declined significantly.
Statistics from the Federation of the Swiss Watch Industry (FH) show that Swiss watch exports to Japan increased by 14.4% in August, indicating that demand for luxury watches is actually strong. This is due to the fact that wealthy Chinese people staying in Japan for long periods of time are believed to be spending their money on luxury goods here, and inbound spending by foreign tourists continues to be strong. The number of foreign tourists visiting Japan, which reached a monthly record of 329 million in July, continues to reach a new August record of 293 million, showing no signs of slowing down. For the time being, sales of luxury watches in Japan are likely to remain solid.
