Chinese Bubbles

Chinese bubbles have been a topic of hot debate this summer. Most of the discussion is continued speculation about real estate with apartments in Shanghai now going for $200,000 plus (in a country where the average wage is $4,000). Informed opinions vary widely. Either China’s real estate market is based on speculation and teetering on the brink, or proactive government policy has successfully cooled it down.

Real estate isn’t the only market where Chinese bubbles may be blooming. The idea of bubbles in solar panel manufacturers and fine French wine (favored by China’s business class) have been floated too.

The US has had plenty of bubbles too — dot com,  more recently housing — and the most famous bubble of all, the Dutch Tulip Mania, dates back to the 1630s.

Investopedia lists three definitions of bubble:

  1. An economic cycle characterized by rapid expansion followed by a contraction.
  2. A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs.
  3. A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts.

For investors who are relatively unlikely to participate directly in China’s property market, one reason to pay it some attention is that question of how well the Chinese government can keep these trends in check.  Morgan Stanley’s Stephen Roach makes the argument that Beijing is quite good at it.

Chinese authorities have a completely different approach in dealing with maters of asset bubbles (and) credit bubbles…they are preemptive, the U.S. is reactive. China wants to build firewalls between the asset markets and the real economy so they certain do have, or they did have, I should say, a high-end property bubble…in April they took extremely tough actions to curtail multiple purchases by speculators and they stopped! And they did that before the housing bubble got bigger and ended up distorting the real economy, so they’ve done a good job. […] I think it’s really wrong to view China as an enormous macro property-bubble story.

One reason for the great interest in real estate in China, is that the Chinese do not yet have the same access to global securities markets that westerners do.  In an ongoing series on the rise of consumers in Brazil, Russia, India and China, the Financial Times notes that the average Chinese person is both getting wealthier (see the following chart from StanChart’s chief China economist Stephen Green, showing the annual growth in disposable incomes) and likely to have more ways of investing that money soon.

FT Author Josh Noble notes:

As wages go up, so does spending. Although typically a nation of savers, China’s government has taken a number of steps recently to help boost domestic demand and consumption as a driver of growth.

That has had some unintended consequences, including a housing market subject to high volatility, and sometimes eye-watering prices.

But as China opens up new avenues of investment – including Hong Kong share listings, gold, and even ETFs, the Chinese could gradually turn into a nation of investors, and of spenders.

Estimates of the size of China’s middle class start at 100 million. That would be quite an investor base.

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