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China's Real Estate Bubble ??


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Though this subject has been discussed on several threads, I thought an individual thread may be worthy.


We know the theme from Chano's 'China Syndrome' to H&W's concern about a potential real estate bubble.  However and in the disconfirming mode, I have spoke to a few China nationals that discussed something that I had not recognized before.  That is who owns the land?  Much like in Mexico when an expat buys land, they are only buying a 100-year lease.  My China nationals explain to me that in China all the land is owned by the government and you only buy a 70-year lease even if you are a national. 


Of course the market for condos and such may have bubbled up, but is the real estate actually bubbled over?  And if so, will the government actually allow it to deflate.  I suspect, and suspect only, that the bigger fear is the recapitalization of the banks in the provinces and the unintended consequences of taking capital out of the system (e.g. the money velocity slows).  I see some select public opportunities in Singapore, Hong Kong, and Australia, but have pause about currency and impact to Asian equities.





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China hasn't had a recession since 1977 unlike the U.S which has periodic boom and bust cycles.




China has done some impressive things 

    - built an impressive railway with no debt ( unlike the U.S railroads )

    - rebuilt cities with no external debt


If the real estate prices burst, I think China has more than enough cash to stimulate the economy. It has some 3 trillion in foreign currency reserves and growing which will make sure that the yuan is stable.


China's local and municiple governments hold the debt that was used to rebuild and build cities. The government implicitly guarantees all the local state owned debt. Chanos has said that if you add up all this implicitly guaranteed debt it equals between 100-200% of GDP.


Most local governments are surviving off of profits from land sales, which will reverse to losses if the real estate market busts.


As for the 3 trillion in foreign currency reserves, those reserves have liabilities against them. The liabilities are Chinese Yuan currencies. So that's not free money, or equity for that matter. Besides, the last two countries who have had higher foreign currency reserves relative to their GDP/the size of their economies were Japan in late 1980's and the US in late 1920's.

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Now the question is how long will this situation last and what will be the catalyst?


The Chinese government controls all the banks and large sums of the foreign reserves.

They can still last a lot longer, i mean they can just cove it up and the public would never know the difference.

They also can just printing more money to cover the debts and just blame the inflation on currency warfare from the American or Japanese.

They still have absolute power and control in China.

They still have a lot of options, to kick the can.

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No one can stop a Real estate collapse, not the japanese, not the U.S, and I would certainly wager that a socialist government would do no better. All that's needed now is a change in perception- a slowing down in growth, a little drop in real estate prices, a bank or construction companies collapse, and the cycle begins. Having a central government does not enable the chinese to control minds, and as a matter of fact a crisis in china may very well finally bring to a revolution in china.


Part of the growth in china is almost fake. when the chinese announce that in the next year GDP will grow by by 8 percent, they are not forecasting- they are ordering. To fulfill this goal they will build redundant and massively indiotic things, like a super train that's so expensive the vast majority of  the population can't buy a ticket (typical socialist ego boosting), and ghost towns on massive scale, or universities with a capacity of 2 million students , and actually being used by 30-40 thousand.  So you get your GDP growth you have only grown in terms of BS.


I believe this can not work. I believe not in some central government planning but in having millions of tiny brains thinking of how to make money and letting them do as they please and letting the invisible hand do its job.


BTW, there is a chance the fall in china will bring a drop in commodity prices, and especially some like steel, which china is buying in unimaginable amounts to build redundant railroad systems and ghost towns. Maybe this will make some more commodities drop and maybe even... gold. on the other hand, maybe it will make gold rise.. I just don't get this thing..

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No one can stop a Real estate collapse, not the japanese, not the U.S, and I would certainly wager that a socialist government would do no better.


Remains to be seen. When they hold 3 trillion in foreign currency reserves, no one can do a run on the currency.


If the real estate market collapses, a totalitarian government has the option of printing money and keep the economy going. They can give the yuan to the local governments. They can fight deflation without any problems like in the U.S and they don't have to take any debt.



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I don't think you appreciate the magnitude of Real estate and construction in a country like china-. printing money is just a form of tax, but it is not smart when a huge part of your population live on nothing but necessities and make in a month what you make in an hour. it won't solve anything if people don't buy anything if tens of millions have no jobs, and in country like china- for millions to reach complete poverty (I talking about starvation levels poverty).


Besides, I don't see that overspending on the government level helped Japan shorten its 20 years of financial weirdness, even though they are now at 250% debt GDP or so.


About the reserves- beyond the fact that a few billion or even a trillion in reserves is nothing compared to the debts the banks and the municipalities are accumulating, they did not keep reserves "for a rainy day" but to lower the price of the yen to keep the manufacturing advantage. Now, let's imagine they do sell a trillion dollars and buy an equivilant amount in yuan- this will be enough to raise the value of their currency, not lower it!!


and in combination with the drop in commodities and the drop in real estate, and a billion chinese now trying to save money (such is their culture), the risk here is a huge, huge deflation, with huge unemployment and suddenly- buying things from china won't be so cheap anymore. And then, what will a billion point three chinese do for a living? 


The common error is that the US depends on china, when really China seems like it's operating as a country for the sole purpose of making pretty things for americans for cheap. They are in a risky place right now..



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I'm not attributing this to any one here, but it's amusing to watch some staunch conservatives, who shudder all government involvement in US fiscal matters, confident that the communist dictatorship in China will step in and fix the economy/Real Estate bubble.


Eventually the free market wins. Mild riots in Chinese RE sales offices have already started...

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  • 5 months later...
  • 2 weeks later...



The part related to real estate:



"  Once you’ve purchased the necessary baubles, you’ll want to invest the rest somewhere safe, preferably with a decent return—all the more important because one day you will have to pay your own medical bills and pension, besides overseas school and college fees. But there is nowhere to put it except into property or under the mattress. The stock markets are rigged, the banks operate in a way that is non-commercial, and the yuan is still strictly non-convertible. While the privileged, powerful and well-connected transfer their wealth overseas via legally questionable channels, the remainder can only buy yet more apartments or thicker mattresses. The result is the biggest property bubble in history, which when it pops will sound like a thousand firework accidents.


In brief, Chinese property prices have rocketed; owning a home has become unaffordable for the young urban workers; and vast residential developments continue to be built across the country whose units are primarily sold as investments, not homes. If you own a property you are more than likely to own at least three. Many of our friends do. If you don’t own a property, you are stuck.


When the bubble pops, or in the remote chance that it deflates gradually, the wealth the Party gave the people will deflate too. The promise will have been broken. And there’ll still be the medical bills, pensions and school fees. The people will want their money back, or a say in their future, which amounts to a political voice. If they are denied, they will cease to be harmonious."



One of the biggest thing holding up real estate in China is that so far it's the only way for "private wealth" to be "preserved" if you are stuck in the country.  Businesses can get confiscated, books of companies can all be fake.  But private real estate, if you had properly documented ownership from even prior to 1949, was in fact returned to your family post Cultural Revolution when Deng initiated reform, (at a much reduced value at that time, but at least it was still recognized as yours, which then subsequently sky rocketed in value).  Such is the psychology surrounding real estate in China. 

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