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How China's property bubble works

GoFlyKiteNow

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How China's property bubble works
Andy Xie

The dollar has always been the safe-haven asset for Chinese. This is why Chinese banks had a large dollar deposit base.

''My maid just asked for leave,'' a friend in Beijing told me recently. ''She's rushing home to buy property. I suggested she borrow 70 per cent, so she could cap the loss.''

It wasn't the first time I had heard such a story in China. Some friends in Shanghai have told me similar ones. It seems all the housemaids are rushing into the market at the same time.

There are benefits to housekeeping for fund managers. China's housemaids may be Asia's answer to the shoeshine boy whose stock tips prompted Joseph Kennedy to sell his shares before the Wall Street Crash of 1929.

Another friend recently vacationed in the southern island-resort city of Sanya in Hainan province and felt compelled to visit a development sales office. Everyone she knew had bought there already. It's either buy or be unsocial.

''You should buy two,'' the sharp sales girl suggested. ''In three years, the price will have doubled. You could sell one and get one free.''

How could anyone resist an offer like that?

The evidence in official-corruption cases no longer involves cash stashed in refrigerators or starlet mistresses in Versace clothing. The evidence is now apartments. One mid-level official in Shanghai was caught with 24 of them.

China is in the throes of a vast property mania. First, let me make it perfectly clear that calling China's real-estate market a ''bubble'' isn't denying China's development success. As optimism is an essential ingredient in a bubble, economic success is a necessary condition. Nor am I saying that prices will drop tomorrow. A bubble evolves and bursts in its own time. When it is about to burst, I'll let you know.

Expectations of a Chinese currency revaluation are, perhaps, the most important force inflating the bubble. First, it plays to the latent human desire for a free lunch. You just need to exchange your money for Chinese yuan. According to all the experts on Wall Street, you can only gain. The money has been gushing into China.

Second, the revaluation story has kept Chinese money inside the country. The dollar has always been the safe-haven asset for Chinese. This is why Chinese banks had a large dollar deposit base. Of course, anybody who was somebody had dollars offshore. Now all that money is back. More importantly, any income, legal or otherwise, now stays in China.

Flats beat cash

Why would corrupt officials keep apartments rather than cash? Well, according to Wall Street, the yuan is going to appreciate. So holding dollars is out of the question. And why hold Chinese cash when property prices are always going up? The corruption money can be turbocharged in the real-estate market. Only when they are caught do they understand the downside of holding fixed assets.

The massive liquidity waves have prompted Chinese banks to lend as much as possible. One Wall Street tradition adopted quickly in China was bonus recipients signing company checks to themselves. All you need is to report eye-popping quarterly earnings. It is an easier game than on Wall Street: The Chinese government keeps the lending spread wide by fixing both the deposit and lending rates. You just have to lend. The earnings will follow. Might the loans turn bad in three years? Well, I'm not going to give back my bonuses, right?

For a bubble to last you need a force to hold it together when it stumbles. Wall Street kept pumping out new natural or synthetic products to turn debt into demand for assets. Local governments play this role in China.

Welcome to China, the land of getting rich quick.

(Andy Xie is an independent economist based in Shanghai and was formerly Morgan Stanley's chief economist for the Asia- Pacific region. The opinions expressed are his own.)
 

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Fear empty flats in China’s property bubble
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By Barry Ritholtz - August 6th, 2010, 8:30AM

Commentary: Even worse than price bubble is quantity bubble of vacant flats

BEIJING (Caixin Online) — How many flats in China are sitting empty? The media recently floated a story — denied by power companies — that 64.5 million urban electricity meters registered zero consumption over a recent, six-month period.

Statistical transparency is lacking in this area, so the truth about empty apartments remains under wraps. Publishing accurate data should be of the highest priority, since the size of the nation’s unused apartment stock is perhaps the most important measure of the extent and seriousness of China’s property-market bubble. Indeed, it’s a grave concern for policy making, since unpublished data may indicate not only a price bubble but a quantity bubble burdening the market.

Real estate is prone to price bubbles because unique factors restrict its supply response. Inflated prices have been the mark of most modern-day property bubbles. Price bubbles occur frequently and can last a long time.

In the 1980s, Tokyo saw a tremendous rise in property prices not in tandem with supply. The Hong Kong property market experienced a similar phenomenon in the 1990s.

One reason for limited supply is that property development is subject to government regulations, especially local rules. Established communities usually restrict building heights and density, for example, making it virtually impossible for mature communities to increase supply quickly. London, which is now experiencing a price bubble, and Tokyo in the past are cities that tightly control building heights.

Second, infrastructure development takes time and is always relative to land availability. Even in an island-city such as Singapore, land can be reclaimed from the sea at low costs, pointing to the correlation between land and infrastructure. But when property prices are high, and even when money is available for infrastructure development, one should be cautious about plunging in for fear that property prices could later fall. Thus, even over extended periods of time, property supplies may not respond to price increases.
 
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