Now A Top Goldman Banker In China Now Warning Of A China Real Estate Bubble

[Watchman]

Now A Top Goldman Banker In China Now Warning Of A China Real Estate Bubble
Joe Weisenthal | Jan. 20, 2010, 11:12 AM

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It's not just perma-skeptics like Jim Chanos warning about a massive real estate bubble in China.

The latest is Fred Hu, the Goldman Sachs Group chairman of Greater China.

ChinaPost reports (via Alphaville) that Hu told a conference in Taipei that Singapore, Hong Kong, and Mainland China all need to be on the lookout.

Bear in mind this isn't just talk from the bank. Earlier this month it emerged that Goldman has been dumping real estate holdings in Shanghai.

The whole world felt the reverberations of China imposing leverage limits on its banks. Regulators there are clearly freaked out by the heat of its economy.

Meanwhile, Jim Chanos and Thomas Friedman are going back and forth about whether China is a bubble, and whether there's money to be made shorting it.

So we thought we'd adjudicate the question.

Our answer is yes, China's real estate is the most obvious bubble ever. More obvious than the Dubai bubble in fact.

Even residents find it peculiar:

Gloria Gu paid $483,000 for an apartment near Shanghai’s financial district so her 3-year-old son could attend one of the city’s best kindergartens. Six months later, a similar place in her building sold for $615,000.

“Prices are way past reasonable,” said Gu, 31, a food company manager who bought her three-bedroom, 140-square-meter (1,507-square-foot) apartment in the Pudong area in May. “The market is too good to be true.”

Borrowers are maxing out all available lines of credit, fearing that they might miss out on this extraordinary opportunity. Luo Yan and her husband took out the maximum amount of money possible according to China Daily:

Thirty-year-old Luo Yan and her husband raced to complete the purchase of a three-bedroom apartment in Shanghai with the help of an 800,000 yuan ($117,000) mortgage. The amount they borrowed was the maximum they qualified for.

"I am afraid that if we don't do something now, we will certainly miss the boat," Luo said.

Joe Zhou, research head at property consultants Jones Lang LaSalle, said in the following months, "we expect house prices will remain at a high level, bolstered by increasingly strong demand and limited supply."

 

[Watchman]

The government is aware of the issue.

The government is ostensibly trying hard to prevent a financial bubble, warning banks to increase their deposits and capital on hand in a bid to control lending.

They're also putting restrictions on property purchases. From The Washington Post:

"Any resident trying to purchase a second home in China will require a minimum 40% down payment, which isn't a half bad idea considering some of the deals cut here in the U.S. in recent years."

Those waiting for real change may have to wait awhile to get it. The Chinese government has no intention to substantially slow the pace of economic growth. Analyst Clement Luk of Centaline Property Agency Ltd.:

China’s leaders won’t make major policy changes because they are preoccupied with economic growth and social stability, overriding concerns that rising property prices are forming a bubble, said Clement Luk, an analyst at Centaline Property Agency Ltd. in Shanghai.

“The government is clearly in a dilemma,” Luk said. “It wants to address the surging property prices and concerns on bubble-bursting, yet it dares not take drastic measures for fear of hitting the market too hard.”

 

[GoFlyKiteNow]

The damn problem and worry is..where to park the money
for those who are about to exit China..???????

US dollar and gold ????????

 

[Watchman]

Developers still hoarding properties
2010-01-15 11:07 BJT

Developers are required to put properties on sale once they have obtained official permission for the pre-sale stage. But many have found their own ways to get round regulations. They hope that holding on to completed units long enough will give them the chance to sell when prices are higher.

At a sales center of a new property project in Beijing, the salesperson says many units with three bed rooms are available. But they have fewer numbers of two bed room units.

A real estate agent said, "The developer is holding on to many units and wants to sell them later at higher prices."

Developers have managed to find their own way to dodge regulations.

A real estate agent said, "If the developer doesn't want to sell units in a new building, they will avoid applying for permission for pre-sale by telling the regulator they don't have money."

At another sales center, the agent says they have obtained permission for pre-sale of units for the properties of a building in January and they have just started to sell a group of them.

A real estate agent said, "All the developers are hoarding properties. If you want to buy an apartment, you can only register now and wait until March or April. Because the developer says the price of a unit will be more than 100 thousand yuan then."

Sources say developers in China started to slow the pace of supplying properties in January as the central government put forward tightening polices on commercial properties. Data shows only 22 projects being offered in Beijing so far in January.

 

[Watchman]

http://www.bloomberg.com/apps/news?pid=20601109&sid=aqiNuxetDZbg&pos=15

 

[Watchman]

Chinese Bank Valuations Dirt Cheap As They Collapse To Crisis Levels
Vincent Fernando | Jan. 27, 2010, 12:06 AM | 1,087 | 2

Industrial and Commercial Bank of China down nearly one standard deviation...

Stock market panic over the effects of Chinese tightening efforts may have gone too far. In particular, bank valuations have collapsed (as a result of collapsing share prices) and are now heading back to financial-crisis levels.

One would imagine that efforts to keep China's banking system from exploding should be positive for banks in the longer-term... unless of course you think it's already too late to save their balance sheets from an explosion of bad loans:

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Simon Ho, CFA @ Citi: Both PE and P/B multiples are now substantially below the historical mean – Chinese banks are on average trading 19% below the mean price/book and 12% above -1 standard deviation (SD) price/book level (Figure 1). The big state banks in particular are on average about 8% above the - 1SD P/B level – a level we think should offer defensive valuation support. While continuing to see the sector range-bound, we believe we are coming closer to the lower end of the range as prices continue to fall. Our sector preferences by order are CCB, BOC, CNCB, and CMB.

Are banks cheap because they're priced for almost zero future growth?

Simon Ho: Minimal long-term growth implied – By backing out long-term growth from the Gordon Growth Model, using 2009E ROEs as sustainable levels, we believe current prices of the big state banks are implying an average 2.6% long-term growth, assuming a somewhat conservative 12% cost of equity in our view (Figure 3). With 11% cost of equity, implied long-term growth for the big state banks falls to zero.

Maybe, but that's assuming that their book values won't fall due to losses. Fear of future losses is the reason bank shares are being sold, not simply worries about slower growth potential.

Add my twitter for more analysis-only like this: @vincefernando

(Via Citi Investment Research, Chinese Banks: Valuations Approaching Defensive Levels, Simon Ho, CFA, 26 January 2010)

 

[longbow]

Must look both in short and long term

Short term - there definitely is a bubble and Beijing knows about it and thus we see the increase in bank reserve requirements. As for the danger of the bubble and its impact on the financial system - I think it is not as bad as US as many of these loans have a downpayment, consumers have lots of savings and Beijing has lots of $$$. The biggest bubbles are concentrated in major cities where foreigners invest in property. It is not like in the US where the whole was involved in prop bubble.

Very interesting to watch. Another test for the country and lets see how they handle it. So far Beijing seems pretty pragmatic and they move swiftly!

Long term - China remains as most formidable export machine in the world. They can make high end electronics (ipod, tablet, LCD, electronics) in the coastal cities and compete with Korea and Japan but yet can continue to compete in the low margin toy, garment and shoes in the inner cities and compete with Vietnam, Cambodia, Indonesia, etc. They road infra allows goods to be shipped from inner China to the ports in a timely fashion.