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Friday 18 October 2013

Becareful What You Wish For, Priced Out From Your Own Backyard

Finance media are replete with editorials celebrating China's rise and the pivot of economic hegemony from the West to the East.  The saviour comes in the form of newly minted Asia's consuming class unleashed on the global stage as salvation to the problems of the West - over indebtedness and the lack of economic opportunities. 

The political class have taken up the cause voraciously promoting the arrival of the Asian century. The UK Chancellor, George Osborne, a bit late on the stage, was staggered (hopefully did not drew breath) by what he saw on his recent trip to China.  Fortunately for him he did not get to drink from the contaminated cesspool that is China's rivers, lakes and ground water.  Nor did Mr. Osborne had the pleasure to chew beef made from pork, munch on carcinogenic rice and drink apple juice made from rotten apples.  Perhaps the un-breathable air in Beijing did not choked him enough as he spent most of his time indoors cavorting with the noble class.  Luck rescued the Chancellor, he actually missed the onset of the smog which arrived the week after he left.

The short-trip punctuated with souvenir shopping; Mr. Osborne obviously missed the delights of visiting off-beaten tourist tracks like Ordos or South China Mall where over 95% of the mall is empty.  M&S take note: you can pick and choose the best spot.

Cashed up and heading for the exit

The Chinese are not as blinkered, they want out.  Those that can leave, have left.  Those who are preparing to leave are hollowing the country as fast as they can.  And those with aspirations to leave are sending their young lings overseas in preparation for that eventual migration.  Company executives sense it too, hence rushing for the exits, Mr. Li Ka Shing, Wing Hang and Chong Hing, both family owned banks, are eager to cash out having missed the boat when the global financial crisis took hold in 2008.

Chinese people have for hundred of years been a people on the move.  Upping stakes and moving to another country is built into our DNA.  In 1995, I once bumped into a Chinese immigrant who found himself stranded in Mo I Rana in the early 70s.  He was a cook on a cruise ship.  Don't ask me where, find out for yourself. 

But, unlike the last century where world population was only 1.65 billion in the 1900s, today we are a bit crowded with 7 billion.  This round of migration is going to be dizzying and more so with the West stuffed for ideas to prop up their failing economies, have opened wide the doors to foreign money making it even easier for cashed up Asians to emigrate.  Asia's penchant for real estate, again a cultural construct, is helping to distort long held assumptions and linkages between income and employment and property prices.

China, belatedly is merely following what the Japanese did in the 80s, the Koreans in the 90s go shopping in foreign lands. 

The global community's faith in the Chinese Yuan - never mind most provinces in China, like Greece, is completely bankrupt or that the true level of debt wipes out whatever foreign reserves China has - is indeed misplaced.  The clever ones are cashing out and buying foreign properties/businesses/commodities.  See my previous article here because they see the price disconnect that is allowing them to participate in the global real estate market. 

Anecdotally Posha is even considering moving to LA after realising that real estate is cheaper than in Shenzhen.

Whilst a lot of the bounce in property prices in the West have a lot to do with low interest rates, the Chinese are the marginal buyers, who can outbid many because they hardly need to go begging for a bank loan after cashing out on their Beijing or Shanghai or Guangzhou property.  The hot spots are in areas cities like London, Paris, LA, NY, Sydney, Melbourne, Singapore and HK.

So just like the FED have lost control bond market with the 10 Year Treasury peaking on 25 July 2012 at 1.43% well before the onset of QE3 in September 2012, China too have lost control of its housing market with housing prices seeing no signs it will fall anytime soon.  To date, Premier Li Keqiang have been largely silent on the need to implement any serious property cooling measures instead trying to drain liquidity from the system (in June 2013) in the hope that banks are more careful about extending anymore credit to the red hot property sector. 

This financial reforms and new monetary approach is bound to fail because it is already too late.  Property prices in China need to crash, not fall to make it affordable again. The main street banks and shadow banks depend on the ever increasing 'value' of the collateral to prevent any write downs or prevent the masses to just hand the keys back to the bank.  The banks know it and the government know it.  And more importantly the smart people game it to cash out into greener pastures - overseas real estate.

The Ponzi scheme that is China's housing where prices have only one trajectory - up, is in turn, helping to inflate global real estate prices.   We are now all sucked into the game.  There are no winners or losers outside the 1%, just losers and that feeling of pain and pleasure - is just timing.  I recently purchased an apartment in July in Hornsby, Sydney for A$470,000 and already the apartment three floors above me with the exact same layout just sold for A$560,000 within a week of listing.  Oh by the way, it is cheap because a similarly sized apartment away from Shanghai CBD? Well it is going for US$1m+.

Am I smart?  Should I celebrate? No. When the whole house of cards come tumbling down because these rises have no sound economic basis for it, some of us will feel the pain more than others.  So be careful what you wish for politicians, forecasters and Wall Street do not have your long term interest at heart.

"As long as the music is playing, you've got to get up and dance." July 2007, Charles Prince, ex-CEO citibank

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