|The Real Face of The Chinese Realty Bubble|
As the world fights deep recession, which is getting murkier by the day, much of the world’s global capital has been flocking to China in recent years in anticipation that China's growth can act as a protective shield. Although this investment route has worked well in the past year but now it seems like a perfect case of putting the cart before the horse as China's inflated equity and real estate growth built largely on government-led economic stimulus measures and soaring asset prices, which lead to low interest rates and massive fiscal deficits, have run out of steam and its quite evident that the Chinese bubble is already on its way to bust bringing an abrupt end to the boom.
According to Andy Xie, an independent economist based in Shanghai, China’s property bubble was about to burst in April this year and the markets have now peaked. It will trend down gradually for the rest of the year. When expectations of a yuan revaluation reverse and capital outflows ensue, probably in 2012, the market will deflate faster. China has entered a property bear market that will last for five years. The average prices in larger cities are likely to decline by half or more. Land values will fall by much more. In the biggest and craziest bubble in Zhejiang Province, they may drop 80 percent or more.
Soaring real estate prices in China's coastal cities, with prices rising as much as 50% a year, have lifted some rents to unprecedented levels. The biggest risk to China’s economy is the desire of the Chinese government to maintain past economic growth rates by maximizing investments in property.
Imminent Realty Price Correction: A recent Bloomberg report has quoted Beijing-based analysts at BNP Paribas as saying that China’s home prices will start declining from this month as the government maintains its lending curbs and increases the supply of public housing, forcing property developers to cut prices to boost sales. China’s property developers, the worst-performing group on the benchmark Shanghai Composite Index this year, will “continue to be affected” as the government maintains its curbs on the industry, the BNP analysts said. With the correction of the Chinese Real estate prices as projected by BNP Paribas, there are bound to be deep economic repercussions in China. Private housing investment accounted for around 15% of total investment volume in urban areas in 2008 and about 13% in 2009 while output in the home construction industry constitutes around 6% of China's GDP, employs around 14% of all workers in urban areas, and consumes around 40% of all steel and lumber produced in China. Hence the slowdown in China's housing production or a significant house price decline on the household sector is going to have a very direct impact on the China's economic growth.
The Chinese Infrastructure segment was helped by the easy money policy by the People’s Bank of China, the Chinese central bank. New bank lending in 2009 went up by 10 trillion renminbi or around 29% of GDP. This was the biggest stimulus provided anywhere in the world and estimates suggest this government-directed investment was responsible for nearly 70% of China’s growth in 2008 and almost 90% growth in the first half of 2009.Since the beginning of this year, the Chinese government has directed banks to go slow on lending, on the concerns of there being a huge property bubble. But the price rise has continued unabated. In the month of April, property prices in China shot up by around 12.8% on an average. The Shanghai Composite Index of stocks jumped 80 percent last year and property prices rose at the fastest pace in almost two years in February, helped by a record 9.59 trillion yuan ($1.4 trillion) of new loans in 2009. China’s 2009 boom, in which automakers sold nearly 14 million cars and trucks, and housing prices doubled, is now being traced as a definite sign of an overheated economy which now stands at a risk of serious recession in the coming months.
Rising Price-Rent Ratio:
As shown below, housing prices-to-rents have increased by at least 30% in each market over the past three years. The increase in price-to-rents has been particularly large in Beijing, where it has risen from 26 times in 2007 to 46 times in the first quarter of 2010.
Given the extremely high price-to-rents ratios in China's cities, and that high rates of capital appreciation are required to maintain these levels, China's home prices are likely to continue correcting in coming months, placing China's banks and households under pressure.
China Real Estate Related ADRs include:
China Cement And Steel: China currently produces 500 Million MT of steel which is more than EU, Japan, US and Russia combined and at 1.35 billion MT, China consumes more cement than the rest of the world combined. What' more, China’s estimated spare capacity is more than the consumption in India, USA and Japan combined. This capacity has been built up to fuel the infrastructure boom in China, which in turn has been helped by the easy money policy by the People’s Bank of China. But since the beginning of this year, the Chinese government has directed banks to go slow on lending, on the concerns of there being a huge property bubble.
Drying Chinese Imports: The Baltic Dry Index (BDI), which measures the demand to ship raw materials and is a leading indicator of commodities demand and raw materials production, recently experienced its longest fall in 15 years. This fall in the BDI reflects in part a strong reduction of Chinese steel demand and production and a corresponding slowdown in orders of iron ore.
Worried Market: Amid concern the nation’s property market is overheating, most investors are now demanding greater yields to lend to China property firms, which is a clear indication that they expect borrowers to have a harder time meeting debt payments amid a government clampdown down on lending. Chinese property bubble cannot go on for long. And as when it pops, Chinese manufacturers will start dumping all the steel and the cement that they produce, on other parts of the world. As and when then happens, steel and cement prices will crash.
RE Bubble Could affect the following Chinese companies:
Global Impact Of China Bubble
Emerging Market Funds and ETFs: These are the most obvious losers if China falters. It's not just that China represents 17 % of the MSCI Emerging Market Index, the single largest country weight, but that so many of the other emerging markets, especially those rich in resources such as Brazil and Russia are likely to suffer strong jolts of the Chinese recession.
Australia: China's prosperity has had huge future impacts for Australia's economy in the past, but there are now fears the economic giant has developed a bubble economy. As the clouds surrounding China's bubble economy theory are moving away, making the reality of the huge bubble stark naked, economists have expressed concern that countries like Brazil and Australia which have so far benefited from Chinese markets, are also very likely to left stranded with a heavy dent with the blowing up of the over hot Chinese economy.
China's Human Resource Abuse
Another very important element of the Chinese growth story is the government-sponsored abuse of the country’s human resource, the largest in the world. China is the manufacturing base of the world with cost effective products but not many people seem to understand that China has cheap labor mainly because the government literally robs most of their hard earned money by printing trillions and trillions of Yuan that were used to finance infrastructure project and to maintain cheap labor through a cheap currency. Not only are the Chinese workforces fighting with their lives, majority of Chinese peasants are hand to mouth farm labor who have no other alternative but to work at any cost to survive or to sustain their families in rural areas. What’s more shocking is that the migrant workers are forced to commit suicides in order to get a raise, but with the growing high misallocation of wealth, a petty wage increase is unlikely to solve the problem.
Ghost Towns Of ChinaOrdos: Meant as home for one million people, the Kangbashi district remains nearly empty five years after construction began. Ordos is a hyper modern city, full of brand new glass walled residential and commercial buildings, but the only problem is that its devoid of any inhabitants. Though many of the properties in Kangbashi have been sold and a million people were projected to be living in Kangbashi by 2010, the city is still empty.
Bloomberg reports that Designed for 300,000 people, Kangbashi, the new urban center of Ordos prefecture west of Beijing, may have only 28,000 residents, Bank of America-Merrill Lynch said in a May 10 note. In fact work has already stopped in this Ghost town , as local leaders who planned the town ran out of money long before it was finished.
Chenggong: Construction of this city in Yunnan province started in 2003. Seven years later, there are more than a hundred-thousand new apartments with no occupants, lush tree-lined streets with no cars, enormous office buildings with no workers, and billboards advertising cold medicine and real estate services – with no one to see them. Basically the city has got everything except for the one major ingredient a thriving city needs: people!
According to the McKinsey Global Institute , Chinese cities are expected to add more than 350 million people by 2030, which will bring their urban-dwelling population to more than a billion. In the next 20 years, McKinsey estimates that China will have to build around 50,000 skyscrapers and literally millions of apartment buildings, as well as thousands of hospitals and universities, 170 new mass-transit systems, and hundreds of thousands of parks, schools, fire stations, and community centers. These cities must be built with levels of efficiency and sustainability that has never before been achieved. There simply is no other option. China needs to innovate or, essentially die.
Worldmarketpulse analysts believe that China is the perfect example of attaining too much too soon and the problem of such high huge growth is that the country never had the time to pause or time to rethink and reflect causing enormous inequalities, a vast distance between people so much so that now a new super rich elite class has emerged clearly showing that first Maoism failed, second Chinese elite went many steps ahead of what Ten Xiao Ping professed two decades ago that primary goal of any business should be to bring prosperity to the common people. Its time that China takes a time out from all the maddening hoopla surrounding its economy to digest all this extreme exponential growth to consolidate and settle down with economic disparities that have suddenly caused fissures and conflicts.
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