China's Real Estate Bubble

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Is China Following America Into a Real Estate Bubble?

This analysis if from Martin Denholm, Senior Editor, Investment U
Wednesday, January 20, 2010

“Progress, far from consisting in change, depends on rententiveness. Those who cannot remember the past are condemned to repeat it.” — George Santayana

China would do well to remember the lessons from the real estate collapse in the United States – because it’s heading down the same rocky path.

China’s National Bureau of Statistics just reported that property sales in the country surged by a massive 75.5% in 2009, adding up to a total of 4.4 trillion yuan ($644 billion). A 7.8% jump in December – the fastest pace in 18 months – ensured that 2009 ended with a bang. Shanghai alone saw a 126% leap in sales value last year, while Hong Kong’s real estate prices saw the biggest jump of any major world housing market, according to property firm, Knight Frank.

At first glance, you might think that such sizzling growth is a great sign for China’s continued progress. But a record number of new home loans merely gives the Chinese government a headache, as it tries to restrain what looks increasingly like rampant U.S.-style speculation.

Two of the world’s most successful investors and prominent, respected authorities on Asia just weighed in on the topic – and you can use their wisdom to profit…

China Applies the Brakes to Its Red-Hot Real Estate Market

Mark Mobius is an emerging market guru – and the man in control of $34 billion worth of assets at Templeton Asset Management Ltd.

He’s had his finger on the Asian economic pulse for many years and kicked off 2010 by reassuring investors that China’s red-hot real estate market isn’t about to tumble.

Mobius declares: “The Chinese will act rationally and they’re not going to kill the market. Prices are high, but I don’t see a crash.”

Hmm, that’s what people said about the U.S., too!

Still, the Chinese government seems to be doing what Mobius says and taking proactive steps. It just announced new measures aimed at slowing the pace of real estate growth without stifling the broader economy, which it expects to grow by 8% this year. Among them…

It’s re-introduced a law that imposes sales tax on a home sold within five years of being bought.
Banks must increase the amount of money they set aside for reserves.
More rigorous requirements for anyone wishing to buy a second home – stricter enforcement a 40% down-payment.

Such restrictions should ease the market’s frantic pace somewhat and we may see a sharp drop in first quarter Chinese home sales.

But will it be enough?

This Renowned “China Bull” is Calling for Consolidation

It’s one thing to be bullish on a country or region. But when you move yourself and your family to the area in order to capitalize on that growth, you’re making an even bigger statement.

That’s what renowned investor, Jim Rogers, did in 2007. He also penned a book, entitled A Bull in China, which details the country’s enormous growth opportunities – and how to profit from them.

So when such a noted China bull calls for a consolidation, it pays to listen. And that’s exactly what Rogers predicts for China’s real estate market.

In an interview with Bloomberg, Rogers states: “Certainly, Shanghai real estate or Hong Kong real estate should decline. If anything’s in a bubble, 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. These things are designed to take some of the heat out of the economy.”

So what should you do? Amid the speculative fever, Rogers says he hasn’t bought Chinese stocks since late 2008. And while he hasn’t sold either, he does say “a consolidation is long overdue.”

This is a view that our own Louis Basenese shares. In fact, Lou’s been bearish on China since September, noting ten reasons why China will sell off. He reiterated that again in this “Bye-Bye, Shanghai” piece last week, so be sure to check them out to get Lou’s advice on how to profit.

And with the Shanghai Composite Index up 58% over the past 12 months, if you share this view on consolidation for China’s real estate market and broader stock market, here’s another quick way to profit. Consider a downside play on one of these ETFs:

~ iShares FTSE/Xinhua China 25 Index (NYSE: FXI): This is the most common and widely held Chinese ETF. The fund invests in 25 of China’s top publicly traded firms (on the FTSE/Xinhua China 25 index) and aims to track their performance. It’s up 72% over the past 12 months and is arguably best-placed to capitalize on a rise/fall of China’s fortunes.

~ SPDR S&P China (NYSE: GXC): This fund bases its returns off the S&P/Citigroup BMI China index. The portfolio holds China-based publicly traded firms that are available for foreign investors to trade. The fund has much less trading volume than FXI (a daily average of 120,000 shares, compared to FXI’s 19.4 million), but still has plenty of return potential. It’s chalked up an 88% gain over the past 12 months.

Best regards,

Martin Denholm