Over the year, many well-known investors and speculators have warned on the Chinese real estate bubble. In my article in December 2011, I mentioned the most famous short-seller in the world, , Jim Chanos, and his view on China. He thought that China’s economy was driven by an unsustainable real estate bubble, so it would be subject to a crash sooner or later. And he has been shorting anything involved with the China real estate boom, including Agriculture Bank of China (ACGBY), the country’s largest county lender. Not only Jim Chanos, but Jim Rogers has once commented on the government effort to ease the real estate boom for more than two years, by raising interest rates and reserve requirements.
Since the beginning of 2011, the government data, published by Credit Suisse, has shown that the average transaction price for land sales across China has been falling dramatically. From the beginning of the year until April, it fell 51% and 32% in the two months of March and April. For the whole year in 2011, the official data would not be published until later this month, but there is little doubt that the there would be a sharp fall for the year. Huang Yu, vice president of China Index Academy, told the country media that the national land market was beginning to enter a “deep freeze” period. The nationwide signal for the slowdown has been the auctions without the buyers. Since November, Guangzhou suffered from multiple failed sales. And Shanghai, China’s financial center, attracted no one at one auction in December.
Looking back just an over decade ago, the housing market was not very popular in China. However, just after Beijing decided to privatize housing stock, the market took off and the local government started to sell land for residential developments for higher and higher prices. According to the data from HSBC Finance Corporation (HSBC) and CEIC China Databases, it went from nothing a decade ago, to a total land transfer value of nearly $500 billion now — more than 70% of total local government revenue.
China overall relies on large investment projects to boost and maintain its GDP growth rate, running at around 9.1% in the third quarter. The drag in land sales makes the GDP growth rate slow and the banks, which accepted land as collateral for local government loans, could potentially be overwhelmed with bad debts. Ou Guangyuan, a senior member of Guangdong’s provincial congress has said: “Some local governments only focus on winning political points by using loans for construction projects. These 'face projects' look glorious, but are based on debts.” In another view, Wang Tao at UBS said that even if local government bad debts amounted to 30% of the country’s GDP, it was still manageable and the probability of a fiscal crisis in coming years is quite low.
The Chinese government has come in several years ago to address this issue. The revised rules drafted, but not yet in effect, by Ministry of Land Resources is that the real estate developers must begin construction on plots of idle land within three months of receiving government notice or they would lose their rights to develop the land. And if developers fail to start construction within three months of receiving a notice to start building, the government will get into negotiations with developers to find a way to dispose of the land.
And following Jim Rogers' laying out his opinion that real estate is not everything to the Chinese economy, he said that some parts of the Chinese economy would be in a boom no matter what has happened in the real estate conditions in China, particularly in Beijing or Shanghai.
Since the beginning of 2011, the government data, published by Credit Suisse, has shown that the average transaction price for land sales across China has been falling dramatically. From the beginning of the year until April, it fell 51% and 32% in the two months of March and April. For the whole year in 2011, the official data would not be published until later this month, but there is little doubt that the there would be a sharp fall for the year. Huang Yu, vice president of China Index Academy, told the country media that the national land market was beginning to enter a “deep freeze” period. The nationwide signal for the slowdown has been the auctions without the buyers. Since November, Guangzhou suffered from multiple failed sales. And Shanghai, China’s financial center, attracted no one at one auction in December.
Looking back just an over decade ago, the housing market was not very popular in China. However, just after Beijing decided to privatize housing stock, the market took off and the local government started to sell land for residential developments for higher and higher prices. According to the data from HSBC Finance Corporation (HSBC) and CEIC China Databases, it went from nothing a decade ago, to a total land transfer value of nearly $500 billion now — more than 70% of total local government revenue.
China overall relies on large investment projects to boost and maintain its GDP growth rate, running at around 9.1% in the third quarter. The drag in land sales makes the GDP growth rate slow and the banks, which accepted land as collateral for local government loans, could potentially be overwhelmed with bad debts. Ou Guangyuan, a senior member of Guangdong’s provincial congress has said: “Some local governments only focus on winning political points by using loans for construction projects. These 'face projects' look glorious, but are based on debts.” In another view, Wang Tao at UBS said that even if local government bad debts amounted to 30% of the country’s GDP, it was still manageable and the probability of a fiscal crisis in coming years is quite low.
The Chinese government has come in several years ago to address this issue. The revised rules drafted, but not yet in effect, by Ministry of Land Resources is that the real estate developers must begin construction on plots of idle land within three months of receiving government notice or they would lose their rights to develop the land. And if developers fail to start construction within three months of receiving a notice to start building, the government will get into negotiations with developers to find a way to dispose of the land.
And following Jim Rogers' laying out his opinion that real estate is not everything to the Chinese economy, he said that some parts of the Chinese economy would be in a boom no matter what has happened in the real estate conditions in China, particularly in Beijing or Shanghai.
