Yes Virginia...It's a Bubble...

[GRG55]

Re: Yes Virginia...It's a Bubble...

a widely predicted "surprise" seems a bit of an oxymoron. katsenelson joins chanos and andy xie and many others in this prediction. hardly a "black swan," therefore...

Agreed that "black swan" is now almost as overused as "bubble"...nevertheless I think this will be another widely predicted "surprise". I am disturbed by how the reports coming out of China regarding property sound so much like the rationalizations about Dubai in the last couple of years before it finally "surprised" so many and blew up.

That Dubai was an accident waiting to happen was also widely predicted, and a long held view of many non-financial lay observers including myself. Nevertheless, when the artifice finally collapsed it still seems to have taken all manner of local and foreign banks by "surprise", given the very elevated levels of stress I noted in the Gulf [GCC] financial system when there a couple of weeks ago. I have no doubt the same thing - a "surprise" - is going to happen when China finally pops.

It's almost as though the financial system is unwilling, or unable, [would be interested in your views as to which it is] to make any material adjustments to its exposure in these obviously pending bubble collapses...until they happen.

[GRG55]

Re: Yes Virginia...It's a Bubble...

a widely predicted "surprise" seems a bit of an oxymoron. katsenelson joins chanos and andy xie and many others in this prediction. hardly a "black swan," therefore. terminology aside, however, it does look like china has a growth and property bubble. faber and rogers may be right in the longer term, but the intermediate future looks fraught. but then do commodity prices go down? i would think so, but i also think that would be the last, best buying opportunity for the longer term. otoh, i am not so persuaded of a deflationary china crash to sell my current commodity holdings. are you?

No. But I am keeping plenty of dry powder ready to start adding in anticipation for the coming inflation as the decade unfolds...

[Sharky]

Re: Yes Virginia...It's a Bubble...

Reading the above jk, I start to wonder if this may cause an increase in chinese offshore property investment - i.e. buying houses in the US (particularly California, cities with good universities so wealthy Chinese can send their kids to school, and they'll be investing in a place for them to stay)

I think this is already happening (and has been for some time).

It's driven by the weak yuan, through a form of arbitrage. A typical scenario might go like this:

1. Take an unsecured loan in USD
2. Use the money to buy a US-based asset of some kind (real estate, stocks, bonds, etc)
3. Wait for the yuan to appreciate against the dollar
4. Pay off the USD loan by selling yuan that is now worth more, thereby reducing their cost of borrowing

If China collapses and the expectations of an eventual stronger yuan collapse too, there could be a significant negative impact on USD-denominated assets as the above type of investing is curtailed or reversed.

[Southernguy]

Re: Yes Virginia...It's a Bubble...

I have not the faintest idea on how to benefit from such a dramatic outcome as a China´s bubble bursting.
FASTEN YOUR SEAT BELTS LADIES AND GENTLEMEN
Some crazy ideas....keep gold....and old 100 dollar bills stacked in some secure place.
Old dry gunpowder theory probably the best and simplest solution.
When commodities, and mainly agricultural land are on sale, go and buy.
The rest, puts, futures, derivatives of all sorts, too complicated, for myself.
In any case, if you´re not a bread earning worker.......big if, of course, interesting times ahead.
Because China shall come on top of PIIGS bust.
And, of course, on top of deepening USA bust.

Re: Yes Virginia...It's a Bubble...

How would the contributors to this topic recommend "playing" the China Real Estate Bubble Collapse thesis?

I'm pretty much sold on the thesis, but havn't much of a clue as to how to make money off of it.

I completely agree with you, jk. I do think commodities will get "hit", but if they do great as that will present a nice opportunity to get into oil, et al on the cheap. I'm not getting rid of any commodity related assets, regardless of what I think might happen in China.

In the meantime, my FXI puts (I have August 2010 and Jan 2011 strikes) will hedge any decline in commodities. We'll see how that works out.

[lsa420]

Re: Yes Virginia...It's a Bubble...

a widely predicted "surprise" seems a bit of an oxymoron. katsenelson joins chanos and andy xie and many others in this prediction. hardly a "black swan," therefore. terminology aside, however, it does look like china has a growth and property bubble. faber and rogers may be right in the longer term, but the intermediate future looks fraught. but then do commodity prices go down? i would think so, but i also think that would be the last, best buying opportunity for the longer term. otoh, i am not so persuaded of a deflationary china crash to sell my current commodity holdings. are you?

I completely agree with you, jk. I do think commodities will get "hit", but if they do great as that will present a nice opportunity to get into oil, et al on the cheap. I'm not getting rid of any commodity related assets, regardless of what I think might happen in China.

In the meantime, my FXI puts (I have August 2010 and Jan 2011 strikes) will hedge any decline in commodities. We'll see how that works out.

[jk]

Re: Yes Virginia...It's a Bubble...

Vitaliy Katsenelson, 'China - The Mother Of All Black Swans'

a widely predicted "surprise" seems a bit of an oxymoron. katsenelson joins chanos and andy xie and many others in this prediction. hardly a "black swan," therefore. terminology aside, however, it does look like china has a growth and property bubble. faber and rogers may be right in the longer term, but the intermediate future looks fraught. but then do commodity prices go down? i would think so, but i also think that would be the last, best buying opportunity for the longer term. otoh, i am not so persuaded of a deflationary china crash to sell my current commodity holdings. are you?

[GRG55]

Re: Yes Virginia...It's a Bubble...

Vitaliy Katsenelson, 'China - The Mother Of All Black Swans'

[GRG55]

Re: Yes Virginia...It's a Bubble...

Let's take a little trip back in time...to the days of Alan Greenspan before the "Sir" was added. To the bucolic days of the spring of 2005:

Greenspan Is Concerned About 'Froth' in Housing

Published: May 21, 2005

WASHINGTON, May 20 - Alan Greenspan, chairman of the Federal Reserve, suggested on Friday that the red-hot housing market is becoming a little too exuberant for its own good...

...Mr. Greenspan emphasized that he sees no sign of a nationwide housing bubble, but he acknowledged concerns over "froth" in the market and pointed to a big increase in speculation in homes - particularly in second homes. As a result, he said, there are "a lot of local bubbles" around the country...

Just imagine the feeling of "déjà vu all over again" when I read this...

What bubble?

January 19, 2010

Residents of big Chinese cities are worried about bubbles. It's easy to see why: Shanghai mortgages rose 1,600% in 2009 from 2008 to US$15.58 billion, while residential property prices in the city shot up 68% from 2008 to US$4,571 per square meter. The rapid growth has prompted moves to curb speculation, including – in Shanghai at least – tightening of tax and financing policies on second-home purchases.


Such high rates of growth are of course unsustainable, but it remains too early to talk of bubbles nationwide. Yes, Wang Shi, chairman of developer Vanke, warned that property markets in Beijing, Shanghai and Guangzhou were frothy, but there is more to China than first-tier cities...

I think we may have found the Chinese equivalent to Dubai's ski hill in the desert...a village of 30,000 with plans to build not one, but two massive towers rivalling the tallest in the world. This is mass insanity...

China New Village Makes Chanos See Dubai 1,000 Times

Feb. 22 (Bloomberg) -- The township of Huaxi in the Yangtze River Delta is a proud symbol of how Chinese communists embraced capitalism to lift 300 million people out of poverty during the past three decades.

Its leaders took a farm community with bamboo huts and ox carts in the 1970s and transformed it into an industrial and commercial powerhouse where today many of its 30,000 residents live in mansions and most have a car. Per-capita income of 80,000 yuan ($11,700) -- almost four times the national average -- allows Huaxi to claim it’s China’s richest village.

Huaxi is also emblematic of the country’s construction and real estate boom. Communist Party officials there are building one of the world’s 30 tallest buildings, a 2.5 billion yuan, 328-meter (1,076-foot) tower. The revolving restaurant atop the so-called New Village in the Sky offers sweeping views of paddy fields, fish ponds and orchards, Bloomberg Markets reports in its April issue.

Marc Faber, publisher of the Gloom, Boom & Doom Report, says China is overdoing it. “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity,” Faber told Bloomberg Television on Feb. 11. “I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”

Huaxi has an even more ambitious project coming up: a 6 billion yuan, 538-meter skyscraper that would today rank as the world’s second tallest. The only loftier building is the new Burj Khalifa in Dubai...

...Instead of concentrating on their core businesses, giant state-owned enterprises, or SOEs, have bet on real estate, according to Zhang Xin, a former Goldman Sachs Group Inc. analyst who’s chief executive officer of Soho China Ltd., the biggest property developer in Beijing’s central business district. “All the SOEs are bidding the prices up to the sky,” Zhang told China International Business, a magazine backed by China’s Ministry of Commerce, in December. That’s despite office vacancies in China’s capital being at record highs, according to Boston-based commercial real estate company Colliers International...

...Local-government officials have wasted stimulus funds by replacing infrastructure that was fine in the first place. State media complained in May 2009 that party chiefs in Jianyang, Sichuan province, decided to help boost the local economy by rebuilding a bridge that was in such good condition it had emerged unscathed a year earlier from the earthquake that killed 70,000 people. The so-called Bridge of Strength withstood a demolition crew that tried to blast it to pieces with dynamite, the official China Daily reported...

...Still, even Mobius says investors have to be wary. He got rid of an investment in a Chinese food company after discovering that it was using funds to buy apartments instead of to process soybeans.

[touchring]

Re: Yes Virginia...It's a Bubble...

Xie estimates that new property sales in China in 2009 rose to 14% of GDP, which he called "unprecedented", rental yields are 2% to 3% and described the amount of sold but vacant property as "humongous".

If you include the empty properties, rental yield maybe only 1%. A property tax is enough to wipe out all rent.

[GRG55]

Re: Yes Virginia...It's a Bubble...

I remember hearing the same thing about Florida real estate in 2006 how all those wealthy South Americans were going to buy it all up.

On every speculative run-up the standard real estate story in Vancouver ['GoinUp] is that the Chinese are going to buy every damn house, condo and apartment in the city...:p

[GRG55]

Re: Yes Virginia...It's a Bubble...

lots of others like to quote xie, and leave out the 2012. he's still fixated on 2012. i posted another piece of his this morning. staflation, currency problems, chinese crash: 2012
http://www.itulip.com/forums/showthread.php?t=14211

I read your post earlier jk, and noted the 2012 date reference, which is consistent with Xie's various interviews and writings for the past couple of months at least.

However, I listened to the roughly nine minute Bloomberg HK interview [available on AOL Video here] and he does say that property developers could "get trapped" this year. Summary of the interview:

• Liquidity still plentiful so China will still see reasonable growth in 2010, but perhaps not as quick as last year;
• Domestic investment is overheating, particularly in property, despite the fact that the overall economy with its large export sector cannot grow very fast [due to employment situation in the USA];
• Monetary policy needs to be tightened before the domestic investment bubble gets out of hand;
• In the wake of the US Budget and deficit announcement yesterday, expects US Treasury yields should rise significantly this year. Expects that China will continue to buy US Treasuries, but will need a higher yield to buy the same or more "There is a price for everything";
• Situation in China driven mainly by the property market and local government investment, both of which were "blown up" by excessive bank lending. Chinese government now in a dilemma as cutting back lending too fast will halt this growth, but doing nothing will create a bigger bubble and inevitable crash;
• Xie estimates that new property sales in China in 2009 rose to 14% of GDP, which he called "unprecedented", rental yields are 2% to 3% and described the amount of sold but vacant property as "humongous". Said "There is a bubble and property prices may be 100% overvalued";
• Property bubble in China differs from the bubbles in the USA and Japan as it involves new property, not existing property. Possibly half of local government revenues come from property sales and this is why land sales at record prices continue as revenue raising activity despite efforts by Beijing to cool things off.
• Lending conditions for buyers of second and third flats have been tightened considerably. This market is dominated by speculators. Difficult to see this demand continuing this year. Developers paying record prices could get trapped this year. After 7 years of rising prices [up 10 to 20 times depending on location] developers believe that land prices only go up, and that may not be the case this year, and some could "lose big money";
• Thinks the resource sector story will be much more long lasting than other stories, like the "economic recovery story" or the "property story". China has a "huge resource shortage" and "huge foreign exchange reserves" so a significant amount of money will be put into the resource sector. "It's not just a 2010 story...it will last for the next few years. This is the only story I have faith in"

[Quincy K]

Re: Yes Virginia...It's a Bubble...

Reading the above jk, I start to wonder if this may cause an increase in chinese offshore property investment - i.e. buying houses in the US (particularly California, cities with good universities so wealthy Chinese can send their kids to school, and they'll be investing in a place for them to stay)

I remember hearing the same thing about Florida real estate in 2006 how all those wealthy South Americans were going to buy it all up.

[jk]

Re: Yes Virginia...It's a Bubble...

Looks like he may not believe his original 2012 date now?

China Property Market ‘Bubble’ Set to Burst, Xie Says

Feb. 2 (Bloomberg) -- China’s property market “bubble” is set to burst as the government curbs credit growth and clamps down on speculation, according to independent economist Andy Xie.

As bank lending slows, “it’s very difficult to see this demand continuing,” Xie, formerly Morgan Stanley’s chief Asian economist, told Bloomberg Television in Hong Kong today...

...“We’re seeing some significant measures that have been introduced in the last couple of weeks,” Xie said. “If these changes are implemented, the demand from third-flat buyers is going to dry up and it’s going to have a major impact.”

Many properties bought for investment are now left vacant and rental yields are low, pointing to a “bubble,” Xie said...

lots of others like to quote xie, and leave out the 2012. he's still fixated on 2012. i posted another piece of his this morning. staflation, currency problems, chinese crash: 2012
http://www.itulip.com/forums/showthread.php?t=14211

[GRG55]

Re: Yes Virginia...It's a Bubble...

andy xie sees it popping in 2012

----------------------------

By Andy Xie 01.10.2010 18:32
Trapped Inside A Property Bubble

When China's real estate bubble finally bursts while exports become less competitive, the consequences could be severe.

The next 10 years will be more challenging than the past decade. Indeed, unless economic policies are adjusted, China's inflated real estate market could suddenly shrivel while the decade is still young...

...The liquidity environment, however, is likely to turn against the bubble soon. The killer is inflation driven by a surge in money printing. The average lag between currency creation and inflation is 18 months in the United States. China's lag could be two years since the government uses subsidies to suppress inflation. By 2012, China could experience 1990s-like inflation. And that's when the property bubble will probably burst.


http://english.caing.com/2010-01-10/100106991.html

Looks like he may not believe his original 2012 date now?

China Property Market ‘Bubble’ Set to Burst, Xie Says

Feb. 2 (Bloomberg) -- China’s property market “bubble” is set to burst as the government curbs credit growth and clamps down on speculation, according to independent economist Andy Xie.

As bank lending slows, “it’s very difficult to see this demand continuing,” Xie, formerly Morgan Stanley’s chief Asian economist, told Bloomberg Television in Hong Kong today...

...“We’re seeing some significant measures that have been introduced in the last couple of weeks,” Xie said. “If these changes are implemented, the demand from third-flat buyers is going to dry up and it’s going to have a major impact.”

Many properties bought for investment are now left vacant and rental yields are low, pointing to a “bubble,” Xie said...