In response to an author who I have thoroughly enjoyed reading, Canadian Value, I would like to offer my own perspective to his article "Chinese Real Estate Bubble..."
The premise is flawed. Leverage is not required for a bubble to burst. Simply look at the equity markets which form bubbles and subsequently collapse. The difference is who is impacted by the correction (lenders or equity investors). In the US, the banks were most critically hurt, and the government concentrated its efforts to deal with these relatively few players. If, we had bid up the price of our homes with equity, the home owners would be the primary sufferers.
Also, a country's actions, like that of a family, has an impact across its members regardless of who is at fault. The simple fact that it is the government is the family member engaging in financial exuberance, does not mean that the people will not suffer from this exuberance.
I also disagree that the fact that the "government is indebted to itself" is a reason not to worry. So many people are invested specifically in the thesis that Chinese currency is under-priced because of state monetary policy, that if deflation results from this crisis you could see a mass exodus that greatly alters asset pricing. No one knows for sure, but the question is "given the various potential futures, where would you like to invest your money and time now?"
As for me, I will sit, wait, and study. I think the opportunity cost is minimized by remaining in cash, relative to China, than being invested in China. My thesis is that, at some point Chinese equity prices will fall (as they already have), increasing the opportunity cost of holding cash, and once this equation flips, you are better served converting cash to Chinese equity. When that time comes opportunity "will favor the prepared mind."
The premise is flawed. Leverage is not required for a bubble to burst. Simply look at the equity markets which form bubbles and subsequently collapse. The difference is who is impacted by the correction (lenders or equity investors). In the US, the banks were most critically hurt, and the government concentrated its efforts to deal with these relatively few players. If, we had bid up the price of our homes with equity, the home owners would be the primary sufferers.
Also, a country's actions, like that of a family, has an impact across its members regardless of who is at fault. The simple fact that it is the government is the family member engaging in financial exuberance, does not mean that the people will not suffer from this exuberance.
I also disagree that the fact that the "government is indebted to itself" is a reason not to worry. So many people are invested specifically in the thesis that Chinese currency is under-priced because of state monetary policy, that if deflation results from this crisis you could see a mass exodus that greatly alters asset pricing. No one knows for sure, but the question is "given the various potential futures, where would you like to invest your money and time now?"
As for me, I will sit, wait, and study. I think the opportunity cost is minimized by remaining in cash, relative to China, than being invested in China. My thesis is that, at some point Chinese equity prices will fall (as they already have), increasing the opportunity cost of holding cash, and once this equation flips, you are better served converting cash to Chinese equity. When that time comes opportunity "will favor the prepared mind."
