SOS China Boom or Bubble?

http://xieguozhong.blog.sohu.com/

By Andy Xie (ex Morgan Stanley strategist for Asia)

The most basic approach in studying bubbles is to look at valuation. For property the most important measures are price to income ratio and rental yield. China’s average price per square meter nationwide is quite close to the average in the US. The US’s per capita income is seven times China’s urban per capita income. The nationwide average price is about three months of salary per square meter, probably the highest in the world. As far as I can tell, a lot of properties can’t be rented out at all. Those that can bring in 3% yield, barely compensating for depreciation. The average rental yield, if one including those that can’t be rented out, is probably negligible. China’s property price doesn’t make sense from affordability or yield perspective. Some argue that China’s property is always like this: appreciation is the return. This is not true. The property market dropped dramatically from 1995-2001 during a strong dollar period.

A special angle in China’s property bubble is its role in local government finance. As land sales and taxes from property sales account for a big portion of local government revenues, they have powerful incentives to pump up the property market. Land sales are often carefully managed to spike up expectation. For example, those who bid extraordinarily high prices for land are laurelled as land kings. Lately, the land kings are often state-owned enterprises. When state-owned enterprises borrow from state owned band and give the money to local governments at land auctions, why should the prices be meaningful? The money circulates within the big government pocket. Tomorrow’s non-performing loans, if land prices collapse, are just today’s fiscal revenues. If private developers follow the SoEs to chase the skyrocketing land market, they could be committing suicide.

MyView

It is simple logic, as what Andy Xie pointed out clearly above. Of course one will ask, how and when will USD appreciate? I believe, over time of one to two years, i.e. 2010 and 2011. This is due to the deleveraging effects, and weak consumer spendings (due to unemployment) and return to savings by the Americans (as shown lately the swing from negative saving to 2-3% savings).