Wednesday, January 20, 2010

China Experiencing Vegas-Like Property Inflation

With China's housing prices increasing a staggering 7.8 percent in December, China has taken strong measures to cool the market and prevent a Dubai-like property crash. They have reimposed a sales tax on homes sold within five years and are requiring that second homes are purchased with a 40 percent down-payment. See the following from The Mess That Greenspan Made.

News reports about dangerous asset bubbles in China are now reaching a crescendo as the government continues to take steps to rein them in. Bloomberg has a number of reports today about soaring home prices, soaring stock prices, and one famous investor who now sees a bubble. First up, a story about the bubblicious property market

China property sales jumped 75.5 percent to 4.4 trillion yuan ($644 billion) last year, led by the eastern cities of Zhejiang and Shanghai, as record new loans boosted buying.

The sales data follows last week’s announcement that December property prices rose 7.8 percent, the fastest pace in 18 months, adding urgency to government efforts to rein in speculation. China this month reimposed a sales tax on homes sold within five years of their purchase while the country’s cabinet on Jan. 10 urged strict application of a 40 percent down-payment requirement for second homes. The measures are likely to weigh on first-quarter sales, economist Lu Ting said.
While the steps being taken to curb the speculative fever are shocking by U.S. housing bubble standards, so too are the statistics above which are said to - amazingly - understate the home price gains last month.

After the various housing bubbles the world has seen in recent years, the 7.8 percent gain (that, according to one economist may really be as high as 20-30 percent) is simply astounding. The biggest monthly gain for the S&P Case-Shiller 20-City Home Price Index over the last ten years was only two percent.

Even in Las Vegas - what used to be housing bubble central, but is now better known as the national leader in foreclosures - the biggest monthly gain was just 6.0 percent in 2004.

They certainly have their work cut out for them in Shanghai trying to reel the property bubble in and they're no doubt hoping that stocks will obey as well. This report provides the latest details on equity markets where, after a huge run-up last year, some calm has been restored.
China’s stocks advanced for a third day on the prospect the nation’s economic recovery and the Shanghai Expo will boost earnings for airlines and hotels.

China Eastern Airlines Corp., the nation’s third-largest carrier by fleet size, added 5.1 percent after saying it may have swung to a profit last year. Shanghai Jinjiang International Hotels Development Co., the biggest hotel operator, advanced 7.5 percent after President Hu Jintao visited the site of the exhibition that starts in May.
The Shanghai Composite Index rose 12.95, or 0.4 percent, to close at 3,237.1. The gauge has lost 1.2 percent this year on concern the government will tighten lending standards to avert asset bubbles. The index rallied 80 percent in 2009. The CSI 300 Index added 0.5 percent to 3,500.68.
Foreign exchange reserves were also on the rise last year, climbing to $2.4 trillion as noted at the end of the report. That's not helping to make the post-2008 crash financial world less prone to spawning even more bubbles.

Jim Rogers seems to be getting a little concerned about all of this. After lambasting Jim Chanos in recent days about his calls for a China collapse of epic proportions (Dubai times 1,000 was the characterization), Rogers seems a bit less sure of himself in this story.

Shanghai and Hong Kong property prices may fall after being driven higher by speculative demand, said investor Jim Rogers, author of “A Bull in China.”

Efforts to restrain lending underscore the government’s attempt to take “some of the heat out of the economy,” he said in an interview in Bloomberg’s Singapore bureau today. The rest of the Chinese economy is “hardly in a bubble,” he said.
“Certainly, Shanghai real estate or Hong Kong real estate should decline,” said Rogers, 67. “My goodness, if anything’s in a bubble in the world, that and U.S. government bonds are certainly very overpriced.”
“China now realizes that they’ve created too much money, that prices are going up too much and they’re trying to slow things down,” Rogers said. “These things are designed to take some of the heat out of the economy. Let’s hope it works.”
Has Rogers ever commented on all the copper being stored on Chinese pigfarms?

That would seem to be an important consideration regarding his current view that other parts of the Chinese economy and financial markets are not similarly bubbly (see here and here for more on that subject).

While Rogers has a tremendous track record over the years and has been quite good on nearly all of his long-term market calls, he has been famously wrong on a number of important occasions. About five or six years ago he repeatedly poo-pooed the idea of gold as an investment because he thought the central banks had too much of the stuff and would be willing sellers - not buyers - in the years ahead.

It turns out that central banks have been net buyers for a year now with no end in sight.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

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