AN INTERVIEW WITH A CHINESE REAL ESTATE INSIDER
There has been much chatter in recent week’s regarding China’s potential bubble economy. As we now know, the Chinese government poured in more stimulus per GDP than the United States and with their economy rebounding substantially faster it looks like they are having trouble containing the red hot growth in the broad economy and in asset prices. This has been nowhere more apparent than it is in Chinese real estate where there is now enough commercial real estate to provide a 5X5 cubicle for every man, woman and child in China.
China International Business recently sat down to interview Zhang Xin, CEO of SOHO China, Beijing’s largest commercial property developer. Her comments are startling to say the least and are all too reminiscent of the environment we saw here in the United States in 2006 & 2007 where anyone and everyone wanted a piece of the real estate market – except for some of the largest developers like Sam Zell who were selling.
To say that a collapse in Chinese real estate prices would be devastating is an understatement. A slowdown and asset collapse in China would be potentially catastrophic for the global economy which has become largely dependent on China during this weak recovery. Attached are a few highlights from the interview:
What is your overall approach to the real estate market today?
Basically – other than Qianmen [Street] in Beijing, which is the only project we decided to hold long term, our strategy for today is to sell everything we have. The real estate business should really be looking at rental yield; build a building and then lease it out with the rent giving a decent return. But, because of where China is with asset bubbles, people want to buy the assets regardless of whether they can be leased out or not. People just want to hold [property], even if it is empty.
Prices are too high, rent is too low, so if you hold property in order to get yield you are likely to get very little. For us it makes no sense to hold property, so our strategy is to sell everything. We see ourselves very much as a manufacturer. We buy land, we build, and then we sell. And the asset bubble has compelled us to be even more of a manufacturer.
When do you think the bubble will burst?
I don’t know. We don’t really have a view on when it will end; [but] we do have a view that this is a bubble. Real estate is very much driven by government policy. This year we have RMB 4 trillion through the stimulus package, another RMB 6 trillion from municipality bonds, another RMB 10 trillion from bank loans: We have RMB 20 trillion in the system and it all finds its way to real estate. If the government next year decides to continue the relaxed monetary policy the market will continue like this, regardless of whether this is a wasteful investment or not – people will still buy and we will still be building and selling.
These buildings are not fully occupied and people should be worried about it. I am sure the government is worried about it, but what do you do, they want the stimulus and if you want to create jobs then this is a by-product. There are a lot of dilemmas in this area – it is not a black and white easy decision.
What is your time period for selling properties?
As soon as possible. We came in [for the Exchange] when it was 30% full and now it’s selling out very quickly. I think in the next few months it is all going to be sold out. People want to buy. It has already reached 50% occupancy.
[Beijing's] CBD has 35% vacancy but our buildings are all over 95% occupied because we push all these Chinese companies to come in. [Normally] if you go to Guomao as a small Chinese company there is no chance they will lease it to you, they won’t even talk to you.
Jim Chanos just might be right after all and it appears China’s government is keenly aware of the troubles as they begin to implement measures to slow China’s growth….
Source: China International Business
China’s rewal estate bubble Tulip-like in extent
Last night I was listening to a show on TV on Shanghai, “Paul Merton in China- final, a UK based Tourist show made in 2006″.
In the show he was talking about the number of new billionaires in China and their investments. They showed a whole suburb of large “English style” houses as investments, immaculate lawns, gardens etc. Noone lives in these houses as their investment value is lowered if the houses are used? How stretched is that?.. and shot in 2006??
It is simple. Chinese are trying to protect themselves from inflation by buying assets, i.e. rela estate. What else do they have available to them? I also heard even farmers are stockpiling copper. That is what you get when you print money, it has to go somehwere. But the party ends sooner or later because inflation spiral keeps escalating and eventually has to be stopped to save the economy. I’d give China one year max before they have to do that. It looks like they already started tightening but they dobn’t yet seem to understand how serious the prpoblem is and how painful the solution will be. But in a few monthts they will.
In US the housing bubble gave us 3 years of repreive , that wasn’t that miuch given that we have to suffer for it now.
I agree, it’s a protection against inflation, and un-used houses hold their value, and hopefully or presumably so far have at least risen with inflation (and probably more than the inflation rate). Once used, the price of the houses drops. The drop is greater than any income that could be derived from rental. Just seems there is something wrong with this here!
If you take a long enough time frame, it would be preferable to just hold the land, as the houses will eventually decay. In a shorter time frame I guess the real estate is inflating far faster than any maintenance.
It’s just that the demand is driven as a demand for investment, not for actual housing for living (similar to copper stockpiling as you say).
When demand is based only on being an asset in which to invest, does the price have to implode or will inflation keep its price rising?
Not to mention, if I was the Chinese govt, with presumably still a socialist lean, I’d be thinking of incentives surely to influence houses being occupied and moderate the too-glaringly-obvious imbalance at least in this. And yet, my understanding is nothing has been changed, so I presume the “imbalance in society” escalates.
Chinese “haves” are those connected to ruling party. Remember, they do have political will and power to go to hyperinflation. Counterfeiting all Chinese’ saving, that is not something new for them, lol.
If anyone wants to know more about China I think you should read Andy Xie. If someone like to listen to Jim “in long time we are all dead” Rogers, he certainly will not live long enough to admit he never really understands these Chinese things. lol
Read recently that core CPI in China is low (<2%), which makes it even worse (here or maybe ZH). The Chinese are not protecting themselves from inflation; it looks like pure unadulterated speculation since real interest rates are Communist party put. End of Fed put 2010-2011; end of China put 2015-2017 (wild ass guess of 2007 + magic 8 double bubble period)! Pfff!!!
Back in the 90s, when there was real inflation, the Chinese use to hoard refrigerators (absent other investable alternatives). Ironically, because of the US bust, they have more refrigerators then they know what to do with.
sorry … somehow some text got deleted … try again …
Read recently that core CPI in China is low (<2%), which makes it even worse (here or maybe ZH). The Chinese are not protecting themselves from inflation; it looks like pure unadulterated speculation since real interest rates are <=0. The bubble could blow even bigger as everyone there knows the Communist party put will be there to save them. End of Fed put 2010-2011; end of China put 2015-2017 (wild ass guess of 2007 + magic 8 double bubble period)! Pfff!!!
Back in the 90s, when there was real inflation, the Chinese use to hoard refrigerators (absent other investable alternatives). Ironically, because of the US bust, they have more refrigerators then they know what to do with.
Ahh
eliminates fear of the one step forward, two steps..
Is it valid to extrapolate for all of China based on Beijing’s (and perhaps Shanghai’s) real estate markets? I mean China is a large country and there are around 20 major cities (though Beijing and Shanghai are the 2 largest metros). And remember China is still a developing economy, with the world’s largest population (probably the largest middle class population in the world), quite unlike the US in 2005-07.
Does anyone know how does the leverage of major Chinese banks compare with that of major US banks in 2005-07 and Japanese banks in the ’80s? The impression I have is that Chinese banks are far better capitalized. And so can absorb potential losses from bad loans much better. Can TPC throw more light on this? Thanks.
“where there is now enough commercial real estate to provide a 5X5 cubicle for every man, woman and child in China.”
as you know this is a quote from chanos…however, i believe he said that once all of the current planned and commenced construction is finished there will be that capacity…the word “now” is not correct…details, details
i wonder what the comparable statistic would be for the US?
Yes, a comparable statistic would be for the US would be interesting.
It is amazing to see how bubbles can play out again and again, and how repeatedly while on the way up people try and justify why certain fundamentals, such as home price/disposable income multiples, rental yields, etc. don’t apply. This time is different. Well, it’s not. If you’re betting on future price appreciation then that is pure speculation, particularly when you have occupancy rates this low. Real estate does not add to the productive capacity of a nation, but is rather a cost of doing business. When real estate prices get out of whack, that actually drains the productive economy of resources, both through misallocation of capital as well as higher operating costs. Rents are not rising because businesses in China cannot afford additional opex.
China is importing US monetary policy, which is completely inappropriate for a country that is supposedly growing at 10% per annum. All of that excess credit growth can’t be sterilized effectively and so goes into the price of assets. Once the credit cycle reverses, asset values will also reverse, just as they did in 2008. China’s economy is in a symbiotic relationship with the Western consumer, which is not a good thing.
You can’t Trust the Chinese Government growth figures they are all False. They continually rig & re-rig & adjust & re-adjust the growth rate to “Prove” growth. Chinese Banks are shaky & the Real Estate is beyond a bubble. The Chinese inflated their currency last year & front loaded it into the first half of the year. If you think we have problems here in the U.S. – how do you explain expanding Chinese money supply equal to 50+% of their annual GDP in a 6 month time frame? When this Chinese Miracle blows up I would be more concerned about China Imploding & facing a very large & very Unhappy Population of 600-700 million lower-class, poor, peasants & farmers. Good Luck China.
Decades of communist rule where individuals couldn’t own property have created considerable pent up demand. This was compounded by the experience property owners have had in Hong Kong. Everything went up so few know any different. Millions of people will learn a hard lesson. It is only a question of when. Ignorance and easy access to cheap money are a bad combination.
50 facts about China’s Bubble:
http://israelfinancialexpert.blogspot.com/2010/01/50-facts-about-chinas-bubble-economy.html
The international media has been following reports of record commodity imports by China. The surge is being portrayed as reflecting China’s recovering economy. Indeed, the international financial market is portraying China’s perceived recovery as a harbinger for global recovery. It is a major factor pushing up stock prices around the world.
8. For four decades before 2003, fine iron ore prices fluctuated between US$ 20 and US$ 30 a ton. As ore was plentiful, prices were driven by production costs. After 2003, Chinese demand drove prices out of this range. Contract prices quadrupled to nearly US$ 100 per ton, and the spot price reached nearly US$ 200 a ton in 2008.
9. China’s steel production capacity has skyrocketed, even though capacity is fragmented.
http://israelfinancialexpert.blogspot.com/2010/01/50-facts-about-chinas-bubble-economy.html