Friday, October 1, 2010

China Investment Guide-II: 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.

A growing number of economists and market analysis have expressed deep concern that the busting of the Chinese Realty bubble has the potential to rattle the world economy that is still struggling to recover from the global meltdown. Chinese economic crisis, which could have been shrugged off a few years ago, is now a considerably more serious event in a world in which Beijing runs the second-largest economy.

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.

  • According to a recent Bloomberg report 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.
  • Statistics from Goldman Sachs showed that over the past six years, housing price hikes have outpaced income rises by 30 percentage points in Shanghai and 80 percentage points in Beijing. In Beijing, the housing price of per square meter is as much as a resident's seven months' salary on average.
  • The average price-to-income ratio in Beijing has reached 27:1, five times the world average, according to data from the Bureau of Statistics of the Beijing Municipality.
  • Economists have expressed concern that when the China Real estate bubble pops, countries with economies heavily dependent on exporting commodities to China, like Australia and Brazil are likely to go down with the China ship.
  • Official government statistics, which are considered to be unreliable, show house prices in Shanghai are rising at 11% a year but agents and local people say the reality is more like 50%. According to the investment bank Goldman Sachs, in recent years housing prices in Beijing have risen 80 percent faster than wages.

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.

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