|10y Shanghai Property Index (000006.SS) - Yahoo Finance|
Even though China is a command economy, at some point there has to be a real estate correction. Right? At the moment, the Chinese government is most concerned about its economy overheating and inflation. China's central bank is trying to fade inflationary pressures and real estate speculation by increasing bank reserve ratios, downpayment requirements, interest rates and letting the Yuan rise [Reads: "China’s Stocks Cap Weekly Decline on Inflation; Yuan Advances" (Bloomberg), "Yuan forwards touch 3-year high on inflationary pressure" (Financial Post), "China's March housing inflation slows, tightening in place" (Reuters), "China Increases Down-Payment Requirement for Second Homes" (WSJ)]. By the way, what is up with these "shark loan" auctions?
|4y Shanghai Properties Index|
Andy Xie, an independent economist and former Asia-Pacific economist at Morgan Stanley, thinks the PBOC is behind the curve on inflation and that China is headed towards stagflation. From his recent article in Caixin Online:
"at this point, China’s monetary-policy makers are too far behind the curve. Inflation is entering crisis territory, as consumer prices for many products and services rise at double-digit rates. Signs of panic have appeared along with hoarding which, when it spreads, could trigger a social crisis."
Mr. Xie thinks the PBOC should raise rates by 300 basis points!
"To change course, policy tightening must shift away from credit rationing and toward market mechanisms. Moreover, the interest rate must be lifted out of the negative column: It should be raised at least three percentage points to allay public fears. These changes are needed as soon as possible."
Recently, inflationary pressures, due to rising fuel costs and port fees, caused truckers in China to go on strike. Read: "Truckers In China Protest Rising Fuel Costs (Oil, Gasoline Price Charts)" and "Strike reinforces China’s fear of inflation" (FT.com, 4/24/2011). Also check out this post at Also Sprach Analyst: "China Is Ageing, And The Rich Are Fleeing". *ASA just tweeted this, "Hong Kong assets have ‘peaked’: analyst" (MarketWatch).
These are quotes from the video transcript. Gillem Tulloch is a Hong Kong-based analyst on China's residential and commercial real estate.
"REPORTER: Is China experiencing a property bubble?
GILLEM TULLOCH Absolutely. A property bubble like which I don't think we've ever seen.
"Yes, I think it will make the United States pale in comparison. It is said that there are 64 million empty apartments in China."
"It's essentially the modern equivalent of building pyramids. It doesn't really add to the betterment of lives, but it adds to the growth of GDP."
"It's basically happening because China is a command economy and the Chinese Government can dictate where the resources are spent."
"That's right. If the central government a GDP target, they have to meet the target and the easiest way to do it is just to build." [source, SBS Dateline transcript]
Quotes and Charts of the Shanghai Property Index (property index of the Shanghai composite): http://www.bloomberg.com/apps/quote?ticker=SHPROP:IND, http://finance.yahoo.com/q?s=000006.SS&ql=1. As you can see in the 5-year chart above, the index is trading inside of a 5-year symmetrical triangle between 2,500 - 4,300. A multi-year direction will be confirmed in one way or another when the higher highs and lower lows converge.