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nmap
01-02-2010, 13:33
China appears to have a developing real estate bubble. Should that bubble fail, the implications for the Chinese economy are dire. I cannot help but wonder about the political stability of China and the region under such circumstances.

And - will they sell their U.S. treasury securities? Because if they do, we'll experience upward pressure on interest rates and downward pressure on the dollar.

Still...perhaps one can be forgiven a bit of schadenfreude.

LINK (http://www.bloomberg.com/apps/news?pid=20601109&sid=arp0XyPoRxW0&pos=10)

(Excerpt)

Dec. 31 (Bloomberg) -- Li Nan has real estate fever. A 27- year-old steel trader at China Minmetals, a state-owned commodities company, Li lives with his parents in a cramped 700- square-foot apartment in west Beijing.

Li originally planned to buy his own place when he got married, but after watching Beijing real estate prices soar, he has been spending all his free time searching for an apartment. If he finds the right place -- preferably a two-bedroom in the historic Dongcheng quarter, near the city center -- he hopes to buy immediately. Act now, he figures, or live with Mom and Dad forever. In the last 12 months such apartments have doubled or tripled in price, to about $400 per square foot.

“This year they’ll be even higher,” says Li in the Jan. 11 issue of Bloomberg BusinessWeek.

Millions of Chinese are pursuing property with a zeal once typical of house-happy Americans. Some Chinese are plunking down wads of cash for homes. Others are taking out mortgages at record levels. Developers are snapping up land for luxury high- rises and villas, and the banks are eagerly funding them. Some local officials are even building towns from scratch in the desert, certain that demand won’t flag. And if families can swing it, they buy two apartments: one to live in, one to flip when prices jump further.

And jump they have. In Shanghai, prices for high-end real estate were up 54 percent through September, to $500 per square foot. In November alone, housing prices in 70 major cities rose 5.7 percent, while housing starts nationwide rose a staggering 194 percent. The real estate rush is fueling fears of a bubble that could burst later in 2010, devastating homeowners, banks, developers, stock markets, and local governments.

High-End Bubble

“Once the bubble pops, our economic growth will stop,” warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences’ Finance Research Center. On Dec. 27, China Premier Wen Jiabao told news agency Xinhua that “property prices have risen too quickly.” He pledged a crackdown on speculators.

Although parallels with other bubble markets, the China bubble is not quite so easy to understand. In some places, demand for upper middle class housing is so hot it can’t be satisfied. In others, speculators keep driving up prices for land, luxury apartments, and villas even though local rents are actually dropping because tenants are scarce. What’s clear is that the bubble is inflating at the rich end, while little low- cost housing gets built for middle and low-income Chinese.

In Beijing’s Chaoyang district, which represents a third of all residential property deals in the capital, homes now sell for an average of almost $300 per square foot. That means a typical 1,000-square-foot apartment costs about 80 times the average annual income of the city’s residents.

Table Talk

Koyo Ozeki, an analyst at U.S. investment manager Pimco, estimates that only 10 percent of residential sales in China are for the mass market. Developers find the margins in high-end housing much fatter than returns from building ordinary homes.

How did this bubble get going? Low interest rates, official encouragement of bank lending, and then Beijing’s half-trillion- dollar stimulus plan all made funds readily available. City and provincial governments have been gladly cooperating with developers: Economists estimate that half of all local government revenue comes from selling state-owned land.

Chinese consumers, fearing inflation will return and outstrip the tiny interest they earn on their savings, have pursued property ever more aggressively. Companies in the chemical, steel, textile, and shoe industries have started up property divisions too: The chance of a quick return is much higher than in their primary business.

Built on Sand

“When you sit down with a table of businessmen, the story is usually how they got lucky from a piece of land,” says Andy Xie, an independent economist who once worked in Hong Kong as Morgan Stanley’s top Asia analyst. “No one talks about their factories making money these days.”

Newly wealthy towns are playing the game with a vengeance. Ordos is a city of 1.3 million in China’s Inner Mongolia region. It has gotten rich from the discovery of a big coal seam nearby.

An emerging generation of tycoons, developers, and local officials will go to any length to invent a modern Ordos. So 16 miles from the old town, a new civic center is emerging from the desert that could easily pass for the capital of a midsize country. An enormous complex houses City Hall and the local Communist Party headquarters, each 11 stories tall with sweeping circular driveways.

Nearby loom a fortress-like opera house and a slate-gray, modernist public library. Thousands of villas and apartment towers stretch into the distance, all built by local developers in the hope that Ordos’s recently prosperous will buy the places to be near the new center of power.

Serial Drama

Workers get bused daily to the new city hall, but the housing is still largely unoccupied.

“Why would anyone go there,” asks Zhao Hailin, a street artist in the old town. “It’s a city of empty buildings.” Ordos officials declined to comment for this story.

The central government now faces two dangers. One is the anger of ordinary Chinese. In a recent survey by the People’s Bank of China, two-thirds of respondents said real estate prices were too high.

A serial drama with the ironic name The Romance of Housing, featuring the travails of families unable to afford apartments, was one of the most popular shows on Beijing Television until broadcasting authorities pulled it off the airwaves in November. The official reason was that the show was too racy -- one woman got an apartment by becoming the mistress of a corrupt local official --, but online chat rooms speculated that the show was cut because it was upsetting to people unable to afford apartments.

(More at the link)

nmap
04-30-2010, 16:31
More hints at an upcoming slump in China.

If China fails - what of the rest of the global economy? And from whom will the U.S. borrow trillions?

LINK (http://www.worldaffairsjournal.org/articles/2010-MarApr/full-Chang-MA-2010.html)

I've attached the article as a PDF.

akv
04-30-2010, 17:16
And - will they sell their U.S. treasury securities? Because if they do, we'll experience upward pressure on interest rates and downward pressure on the dollar.

IMHO, No, it is precisely because of their income gap they can't dump their US treasuries. China's economy is based upon importing commodities and exporting cheap goods, selling treasuries would end up bidding up their currency, this is the last thing an economy based so heavily on export can afford, remember 80% of their population makes less than $2k a year, they have no middle class or domestic consumer base, if and when the US stops buying their goods they are as their Korean competitors say " In Deep Kim Chee". Think of their economy like a business which is just meeting expenses, surviving but not profiting. Even if they decided to dump treasuries, the liquidity scale would be very painful.

They are frankly really in a pickle either way, if the income gap continues to widen they face political upheaval from a silver tongued rascal who can charm the have nots ( remember this is what Mao did). But they also can't afford to slow down the economy too quickly either since that could also lead to the same outcome.

Historically they have too many people per acre of arable land, either they open up to trade/western influence and income gap, or they go back to poor isolationism. Unless they can maintain this delicate balancing act for some time, I believe China will implode. I do agree we will feel the economic impact back in the States.

nmap
04-30-2010, 17:20
AKV, you might find the PDF (in my second post) of particular interest.

They agree with you, that China must export - but it suggests they cannot maintain the balance. At 5 pages, it is a bit long - but, perhaps, worth the time.

jatx
05-01-2010, 10:30
I've been spending some time in China on business lately. It is a well-known fact in country that the bubble is being sustained at least partially by the government's refusal to let banks put foreclosed properties back on the market.

Last hard class
05-01-2010, 15:42
Disclaimer: I am not an economist, only a small businessman who both imports and exports products to and from China. (Like the U.S., I import more than I export). My opinions here are based primarily on my personal observations from the 3-4 yearly trips I conduct.


Clearly the real estate bubble is a very real, dangerous situation. Inspired by greed and the neccessities of polital preservation. There is a wonderful dynamic taking place in China today. It's called keeping up with the Chin's. I am tired of dumping my piss jar every morning while my neighbor has a toilet. This is a generational change, the old have been willing to sacrifice everything for the greater good. The young are much less willing to do so. Ingrates!:) People in power never give it up willingly. So how do you stay in power but keep a population of 1 billion plus in the information age happy about being poor. No easy trick.

Take Shanghai as a Microcosm of the real estate issue. With 20 million people in the surrounding area and a mandated growth rate of 9% they are adding a population the size of San Diego to their city each year. Just imagine the infrastructure issues this entails. Shanghai utilizes more high rise cranes than the entire U.S. But, as this thread has correctly noted, the average citizen cannot afford to live in many of these. There will be many failures as described in your article about empty buildings. However just as the U.S. banks have maintained a shadow inventory of foreclosed homes, so to this is happening in China. And in much greater numbers. This is still a top down government. If you are the local party member you helped your brother get the bank loan. His empty high rise will not be foreclosed upon. The banks make loans as directed. Think of wall street with absolutely no one to answer to. This however, is exactly why we should be concerned. By many measures, China is broke. Yes even with all of the U.S. treasuries.

Meanwhile millions of people continue to flock to the cities for a chance to make $.80 per hour. Another thread recently touched on the idea that income pressure will rise. True, but only slightly. There are still 300 million people in China who are out of work or employed for less than the city rate. This means that there is at least 10 years until china will have to deal with their competitive manufacturing issues. Yes Vietnam and such can already make things cheaper but they will never be able to produce the quantities needed to quench the advanced economies thirst for consumable items. Remember also, U.S. companies have made gigantic investments in China with regards to production facilities, personnel training and distribution networks.

From a business perspective, the free market system is alive and well in China. While there is no middle class per se, there are thousands of new millionaires minted every day. That genie is out of the bottle. The government understands that ultimately, it is jobs that will keep them in power. Entrepreneurship is encouraged at all levels. There is very little pollution regulation. Health care system? What’s that? My driver once hit a pedestrian while driving on a sidewalk because the street was jammed. You cannot sue for more than $2,500 regardless of the injuries. He wrote the guy a check and drove on.

The real estate market and the devalued Juan are fueling this insanity. Everyone understands that people with jobs become consumers. Ironically, China is not as interested in importing as the rest of the world is in exporting to them. Ultimately China thinks just like we do. Their 1 billion plus people are the customers of the future. They want to transform to less exporting and more selling within. I believe it was Jamie Dimon who noted that if only we could give each Chinese citizen a 1,000 credit card the world recession would end immediately. U.S corporations that understand this have been racing to invest in China. Our countries are becoming more entwined daily. So the race is on, can China create a self sustaining economy while maintaining its current political structure before it collapses like a house of cards.

We shall see.

GratefulCitizen
10-19-2010, 18:01
It looks like the day of reckoning may be approaching for China.

China's strategy of mercantilism will work. Until it doesn't.
Might not be a good time to be in commodities.

http://www.ft.com/cms/s/0/58ac2d38-db79-11df-ae99-00144feabdc0.html?ftcamp=rss

(Need to follow link, FT doesn't want the article copied...)

<edit>
link might not work

google: china rate rise triggers market fall
Look for the Financial Times link

GratefulCitizen
10-20-2010, 13:43
Interesting to see how the Chinese will get out of this.

http://scottgrannis.blogspot.com/2010/10/pity-chinese.html

The Chinese own about $1 trillion worth of Treasury securities, whose average yield is now probably in the range of 1-1.5%, and they are being forced to take a beating on those holdings. They are in a real bind, because they are being pressured to appreciate their currency by U.S. politicians who are sadly ignorant of how global trade and capital flows work, and by the Federal Reserve, the architect of the ongoing loss of the dollar's value. In the past four months, China's central bank has allowed the yuan to appreciate over 8% against the dollar in an attempt to alleviate those pressures.

China's reasons for doing this are twofold: to appease U.S. policymakers who are arguing for a much more dramatic appreciation of the yuan, and to minimize the inflationary impact of being tied to a weak and falling dollar. Pegging its currency to the dollar is the cornerstone of China's monetary policy, and if the dollar weakens, then the yuan also weakens, and this is equivalent to a monetary ease which will sooner or later show up as higher Chinese inflation. In fact, China's CPI has already risen, on a year over year basis, from a low of -1.8% in July '09 to 3.5% as of August '10. The weakening of the dollar, which has carried the yuan down with it, is the proximate cause of this reflation.

Revaluing one's currency doesn't come cheap, however, especially when the currency you are revaluing against is also the currency in which the majority of your reserve assets are denominated. The appreciation of the yuan over the past four months has effectively wiped out a little over 3 year's worth of interest on their dollar security holdings. Further yuan appreciation, which seems likely, will wipe out even more of the value of China's foreign bond holdings. They are truly caught between a rock and a hard place.

This reminds me of the massive losses that Japan suffered as result of the appreciation of the yen, which rose from 250/$ in 1985 to 80/$ at its peak in 1995. This 200% yuan appreciation destroyed fully two-thirds of the value of the countless billions of dollar assets that Japanese savers had accumulated. Recall that Japan was a major export engine at the time, its aging population had a high savings rate, and the destination of choice for those savings—which were larger than could be accommodated by Japan's own economy—was the U.S.

Remember the book "Rising Sun," by Michael Crichton? His thesis was that the U.S. was monumentally stupid to allow the Japanese to buy so much of our real estate and so much of our industry. As a resident of Los Angeles, I recall that Japan's purchases of a number of downtown office towers occurred almost precisely at the peak of real estate prices in the early 1990s. Prices then proceeded to drop by one-third, at the same time the dollar fell from 130 yen to the low 80s—real estate bought in the early 1990s lost over one-half its value when translated back into yen. Japan's savers lost a fortune, thanks to the Bank of Japan's extremely tight monetary policy. And as it turns out, Japan never acquired the nefarious control over U.S. industry that Crichton warned about in his book. On the contrary, we took them to the cleaners. We bought their cheap cars and cheap electronics; they invested their export earnings in the U.S., only to see a huge portion of those savings wiped out by the weak dollar/strong yen.

And so it is with the Chinese. They sell us mountains of cheap goods, then turn around and invest most of the proceeds (equivalent to our trade deficit with China) in U.S. Treasury securities. We get the goods, and we get to keep the money. Then we devalue the dollar, and they lose on their investment. Why we would want them to stop doing this is beyond me, though if I were a Chinese citizen, I would be furious with my government for directing such massive quantities of my country's export earnings to Treasuries. The central bank of China has no need to further increase its already-massive reserves; instead, the government should be relaxing capital constraints, allowing Chinese citizens more freedom to save and invest abroad in the types of vehicles with which they feel most comfortable. China's workforce is aging daily, and like Japan a few decades ago, China's economy cannot accommodate all the savings of the Chinese people—they are essentially forced to save overseas.

Contrary to what you read in the press—which mistakenly believes that our large trade deficit with China is something we need to worry about—China is the one that needs to worry, not us.