4月 19 / admin Why gloom and doom is good for China – MoneyWeek

Imaginetheresultsifyoudaskedfundmangerstheirviewsontechduringthedotcomboom。

Orrealestateagentsduringthepropertybubble。

Youdhavebeenknockeddownbyastampedeofrip-roaring,turf-poundingbulls。

Ortakeamoreflippantexample。

GoogleUShousingbubbleandyougetabout394,000results。

ThisisforanEnglish-speakingcountrythathadanundoubtedbubblewhichhasfirmlyburst,butwhichwasnotpredictedbytheconsensusbeforehand。

NowtryChinahousingbubble。

Thatgetsyouabout316,000results,whileChinapropertybubblegets651,000hits。

Bycomparison,UKhousingbubbleturnsup67,000pagesandDubaipropertybubblefinds43,000。

SoifChinadoesturnouttohaveahugerealestatebust,alotofpeoplewillbeabletoclaimtheyforesawitall。

AndthatsonereasonwhyIdoubtitsatruebubble。

Thistime,realestategenuinelyislocal

Obviously,theressomeexcessinChineserealestate。

Prices–bothflatsanddevelopmentland–havesoaredinTier1citiessuchasBeijing,ShanghaiandShenzhenafterthepastyear。

Insomecasesandsometypesofproperty,weretalking50%-100%increases–albeitafterasharpdropin2008/09。

Butthisisnotanationwideissue。

Officialdatashowsmuchsmallerchangeselsewhere。

AndarecentsurveyofpropertydevelopersbyStandardCharteredbacksthatup。

SellingpricesfornewflatsinTier2and3citiestypicallyroseby10-20%frommid-2009toMarch2010,developersreported。

Thatmaysoundalotbydevelopedworldstandards–butbearinmindthattheeconomyandincomesaregrowingatasimilarpace。

Propertyspeculationisobviousinsomeofthesecities,includingtheTier2and3ones。

TheStandardCharteredsurveysuggestedthataround30%ofrecentpurchasesareforinvestment。

Travellingaround,youllseelargelyemptybuildingswheretheflatshavebeensoldandareclearlybeingheldsolelyinthehopeofcapitalgains。

ButasIvewrittenbefore,thisisnotquiteasirrationalasitseems。

OpportunitiesforinvestmentarelimitedwithinChinasunderdevelopedfinancialmarketsandcapitalcontrols。

Realestateisseenasasolidplacetoparkyourcash。

Itbeatslowbankdepositratesorthecasinothatisthelocalstockmarket。

Andkeepingitemptyactuallymakesmoresensethanrentingitout,becauseinChina–likemanyAsianmarkets–manybuyersprefertoownhomesthathaveneverbeenoccupiedbefore。

Thereseemslittledoubtthatfuturedemandforpropertyisgoingtobestrong。

Whilemanycriticsfocusontheamountofhousingthatsbeenbuilt,ahugeamountoftheexistingstockisoldandofpoorquality。

Residentswanttoupgradetosomethingbetterwhentheycanaffordto。

Butwillincomesgrowstronglyenoughtomakethesespeculativepurchasesprofitable?

Afterall,theresabigoverhangofinvestmentpropertytoeventuallycomeontothemarket。

Thisisaveryvalidquestion。

Andmyguessisthattheanswerisno。

Toomanypeopleareinvestinginhigh-endproperty。

Theaverageemergingmiddleclassorurbanworkerneedssomethingmoreaffordable。

Buttheimportantpointisthatthesepurchasesarenotbeingfundedthrough125%buy-to-letmortgages。

Instead,theyrefundedthroughcashorthroughmortgageswithaloan-to-valueratiosomewaybelowthepurchaseprice。

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Debt-fuelledbubblesareverydamagingwhentheyburst。

Theassetfallsbutthedebtdoesnt。

Butaslongasdebtstaysundercontrol,propertypricescanbeveryvolatilewithoutdoingpermanentharm。

ThisisquitecommoninAsia,withHongKongbeingtheextremeexample。

Thegovernmenthasitseyesopen

Crucially,thegovernmentisawareoftherisksofawidespreadbubbleandiskeentokeepitundercontrol。

Regulatorsclampeddownhardonlendingbothtobuyersanddevelopersearlierthisyear。

Therestrictionshaveledtosharpfallsinprices,salesandconstructionintheTier1cities。

ButTier2and3citiesseemtobemuchlessaffected。

This,liketheinitialriseinprices,suggeststhatanyexcesswasmostlyconfinedtoafewhotspots。

Whatsmore,Chinasbankingregulatorhasjusttolditsbankstostresstestagainsta60%fallinpropertypricesinkeycities。

Somewillundoubtedlyseethementionofafalllikethatasverynegative。

ButIthinkitsagoodthing。

Itsbettertoseearegulatorthatintendsitsstressteststobestressful,ratherthanacontinuationofthepretencethatGreececaneverrepayitsdebts。

(AnditsnotjustChinathattakesthesethingsmoreseriously。

Taiwansbankingregulatorisnowsaidtobetellingitsbankstotesta25%fallinhomeprices。

AsiaisincreasinglyoutdoingtheWestinrealismandpragmatism。

)

ThisdoesntmeanImoptimisticonChinesebanks。

Obviouslyarealestatebustinthehottestmarketscouldcreatemorebadloans。

Theresalsotheproblemoflendingtolocalgovernmentprojects,asIdiscussedhere:WhyyoushouldavoidChinesebanks?

AnotherareaIvementionedbeforeisloansmadethroughtrustcompaniesthatarethensoldontoinvestors。

(TrustcompaniesareamorelooselyregulatedtypeofChinesefinancialinstitutionvaguelyakintohedgefundsorprivateequitygroups。

)Supposedlythebankshavenoremainingliabilityonmostofthose。

Butinpractice,iftherewasasubstantialdefaultproblem,thebanksthatdistributedthemmightbetoldtomakegoodthelosses。

Butagain,regulatorsaregettingtogripswiththis。

Bankshavebeentoldtoreportontheirlocalgovernmentrisks。

Preliminaryleakssuggestthataroundone-fifthoftheseprojects–whicharemostlyinfrastructureandpublicworks–maygobad。

Andtheyvebeentoldtostopworkingwithtrustcompanies。

IthinkitsquiteclearthatbadloanswillriseintheChinesebankingsystem。

Thebigbanksarealreadyraisingfreshcapital。

Morewillprobablybeneeded。

Andsortingoutthesmallbankswillbeabigheadache。

OnereasonImnotkeenoninvestinginthebanks–eventhoughtheyvebeenlookingcheaper–isthatIfearthegovernmentmightforcesomeindustryconsolidation,dumpingsomeoftheproblemsonthelargebanks。

Nationalinterestswilltrumpshareholderinterestsinstate-controlledfirmsintheend。

Expectaslowdown,notadepression

Weshouldbepreparedforallthis。

Weshouldexpectpricestofallquitesharplyinsomeoverheatedcitiesaslongasthegovernmentkeepspolicytight。

Andlatestannouncementslikethestresstestdontsuggesttheyllbeslackeninganytimesoon。

Speculatorscouldlosemoney。

Andtheeconomywillcertainlynoticetheimpactofanyrealestatecrunch。

ConstructionisasignificantpartofGDPandemploysalotofmigrantworkers。

Thegovernmentcanprobablycompensateforthissomewhatbypushingmoreconstructionoflower-endhousing,whichisbadlyneeded。

Butthatwontclosethegapentirely。

However,itsimportantnottooverstatethescaleofthis。

ThisisnotanationwideproblemlikeJapanin1990ortheWesttoday。

Andseeingheadlinesabouttheseissuesshouldbeencouraging。

Itmeansthattheyarebeingnoticedandcanbedealtwith。

Wedidntseemanyheadlinesaboutsubprimelendinguntil2007orGreeceuntil2009。

Thefactthattheseproblemswereoverlookedforsolongiswhytheyturnedouttobesoenormous。

Obviously,weshouldalsobepreparedformuchworse。

Noinvestorshouldhavealltheirmoneyinemergingmarkets,noralltheiremergingmarketinvestmentsgearedtoChina。

(Iwrotemoreaboutbuildingabalancedportfolioacoupleofweeksago)。

Butoverall,themorebadnewsstoriesIseeaboutChina,themoreoptimisticitmakesmethatthingswillturnoutokayintheend。



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