The home of my friend and the end of the world (as we know it)

October 29, 2011

This week a colleague and very good friend came back from China. She went there for 3 weeks to visit her family. I think it has been a couple of years since she has not been in her homeland. After talking a while, I asked her what were the things she found different. She said now there are many more businesses, shops and great restaurants. For her dismay as earning a PhD on Urban Planning & Environmental issues, she also found many more cars and and extremely quick urban sprawl. She also commented how food has doubled price (e.g. vegetables or the same bowl of noodles from 2 yuans to 4). Other things, like transportation had not increased so much, though. An interesting thing, she found that in fashion stores like the Swedish H&M, clothes were more expensive in China than here in Denmark. “Even if they were Made in China!!”. I answered that maybe it was because over there H&M was seen as a luxury European clothes, while here it was more normal. She did not think so, arguing some reasons. [I admit I also thought about some conspiracy theories, such as dumping and others]. All in all, these stories from China are nothing new for the ones we try to follow some a little bit the Chinese economy evolution, it is just nice to confirm the data from a friend.

Then I asked her about the condo. A flat she and her husband bought in the outskirts of city relatively close to Shanghai, about a year ago. They bought it to invest their savings, not really to live there. Upon my wondering when they bought it, they explained to me that prices have increased a lot, and while they may not increase so much as the last years, prices will not go down. It found a good deal, and they rent it right away, and who knows maybe in the future they could temporarily use it, etc… I told them, the story sounds awfully similar to the one repeated over and over, in the Western countries a few years ago. I also showed them some graphs of the housing prices in Europe and the US. They said China is different because, it is not convenient for “the” Government, and that the starting prices in China were very low…. Anyways, you can’t go wrong investing in property in China… Once they bought it, the prices went up a little, but they have become flat.

-”So how’s the price of your apartment, is still stable?” I asked. “Yes -she answered- it is more or less the same as the last months… You’re SO interested about our apartment!! Why?”- She said smiling.

- “Because… your apartment is a symbol, it’s a sign for me. If the price of it goes down, then it’s like a dominoes that will reach the economy everywhere…. If prices go down, the new huge middle class in China will loose financial stability, they will get nervous and highly constrain spending. The Government and elites have been doing whatever they want, and the people won’t complain because they’re getting economically and socially ahead, but if things starts getting shaky and social protests come, they will have to start trying to give better expectations to the people. That could be spending not only in infrastructure as they have done, but they may have to offer more available health care, cheaper education (student loans?), etc. At the same time industrial production will come to halt, and unemployment will rise, then they may have to offer more unemployment benefits, and well connected companies will need more public funding, etc. Same thing as in Europe and US. For all these, China will need to start using their money and deposits in various forms in foreign countries. They will need to stop buying the crappy Western debt. This will unleash bad things. Western countries for sure will retaliate and block their products (kind of a similar thing happened when the Japan stopped buying debt from the US in the 1980s and then coincidentally the US blocked imports from Japan, destroying much of their industry. China and major Asian buyers have a much bigger population that only Japan, so they would not have a lost decade, but), this would not help China’s economy, creating more instability. Probably then China will unpegged the Renminbi from the dollar. The instability will not only be in China but everywhere. Of course, this is all a possibility, but with 65 million empty homes in China, and they’re constructing like crazy, it does not seem so unfeasible there is a housing bubble going on, and that people like in the rest of the world will start asking for more responsibility to their governments. [Ok, I gave her a lighter version]. So that’s why I care about your apartment. So could you please tell me if the prices go down, even a little?

She said she would tell me. I’ll keep you updated.

p.s. Telling this horror story I feel like using a blah, blah, blah from the zero hedge blog.

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2 Responses to “The home of my friend and the end of the world (as we know it)”

  1. max Says:

    Hi Carlos,
    The standard story about housing in China – that people buy investment properties because they have no other investment options – might be largely true. But less examined is the lehming-like rush over a cliff that occurs when everyone imitates everyone else’s investment behaviors. Without having done a rigorous study yet, my slightly more than anecdotal evidence suggests that the massive property buildup is related to unquantifiable euphorias that are not checked by reliable data or ratings agencies or market research.
    Anyway, you cannot build that much property, have it sit empty and not have a crisis eventually. When? Who knows? But crisis is built into the system and China will be no exception — that much you can count on.
    But there are also some good reasons to see pretty stable growth in the near term, despite bumps in the road brought on by excess debt.
    One: with rural-urban migration, there is a strong demand for property.
    Two: with constant demolition in the cities, there is another source of demand for new property.
    Three: both men and women are feeding into a new urban culture that makes (male) ownership of property a prerequisite for marriage. Men who want to marry are a source of reliable demand.
    Four: many properties are purchased with cash savings. If and when property values go down, people will simply hold onto the properties. They will not be “under water” as in the US or Europe. A drop in property values will not reach deep into the banking system, from what I understand. It will just make people feel crappy about the price they paid.
    Five: developers are not lowering prices below a minimum floor relevant to that particular city. Now that the property market in many cities is not very rosy, developers are delaying sales rather than drop prices. In some places, this has the potential to generate localized crises as highly indebted developers and loan networks start to question the ability of borrowers to pay up in time, or at all.
    Six: with the banks state-owned and serving as financial branches of the state, localized crises can be allayed through political lending. Crisis? What crisis?

    Anyway, just some thoughts.

  2. carlos9900 Says:

    Max very interesting remarks. You have a lot of experience researching there, so it’s very refreshing. Thank you.
    Regarding lack of investment opportunities, according to a gallup survey, Chinese, unlike Europeans, are more oriented towards business creations rather than housing. http://www.gallup.com/poll/144413/few-americans-cash-windfall-start-business.aspx Which can explain much of economic situation here and there.
    At the end of the road, and as our respected Prof. Walker would say, and you also suggest. “China wanted capitalism, now you have it”. Concerning the downward cycle, the question is not if, but when…


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