Chinease Real-estate a big danger for whole world ?

POSTED BY Jagoinvestor ON November 18, 2010 3:14 pm COMMENTS (13)

I came across an article which talks about why China is on its way to one the biggest bear market for whole economy + real-estate to be specific . Excerpts

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One day, at a research conference in 2009, Chanos listened to an analyst tick off numbers about the scale of China’s building boom. “He said they were building 5 billion square meters of new residential and office space — 2.6 billion square meters in new office space alone. I said to him, ‘You must have the decimal point in the wrong place.’ He said no, the numbers are right. So do the math: That’s almost 30 billion square feet of new construction. There are 1.3 billion people in China. [In terms of new office space alone] that amounts to about a five-by-five-foot cubicle for every man, woman, and child in the country. That’s when it dawned on me that China was embarking on something unprecedented.”

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assuming that a person would need not more than 250 sq feet of space to live in (assuming 4 people living in family with 1000 sq feet) , total space required is only 10% of the current space constructed , who the hell will consume the rest ?

Any comments from others ?  How will it affect indian real estate markets ?

Source : http://finance.fortune.cnn.com/2010/11/17/chanos-vs-china/

13 replies on this article “Chinease Real-estate a big danger for whole world ?”

  1. Muthu Krishnan V says:

    doubt on the maths here

    space being constructed is 25 square feet per person. one person needs 250 sq feet, show current construction is 10% of total space required and not the other way round.

    “assuming that a person would need not more than 250 sq feet of space to live in (assuming 4 people living in family with 1000 sq feet) , total space required is only 10% of the current space constructed , who the hell will consume the rest ?”

  2. Ramesh Mangal says:

    Exactly my thoughts too!

    In addition to the debt/GDP ratio, another important consideration is the return on that debt. If we are not able to generate enough return on the debt incurred, meaning if the interest expenses are more than the overall return on that debt, we should consider decreasing the debt and vice versa.

    And total optimist = almost permanent bull. I would rather be optimistic on India as well as US.
    The only issue that I see is that the foreign / international equity exposure for resident Indians is limited. Over a long period, that should help in decreasing risk / volatility.

  3. Ram says:

    “India has a $2.5 trillion debt. Does that not look staggering?”

    Debt should always be seen as a percentage of GDP. If we cannot maintain growth, yes then we should be worried.

    “Kind of difficult to assess, who is the owner presently?”

    πŸ™‚

    “The day everyone says that there is no more bad news, I would get away from the markets.”

    And I will get out with you. :). But I must say I’m by no means a doomsayer. I’m actually a total optimist as far as India is concerned. But we (rather…our markets) will definitely be affected by mistakes caused by global financial jerks. And, that’s good for us…we can buy into battered markets :).

  4. Ramesh Mangal says:

    Well, we can have our views and opinions. Lets see how the USD/yuan works over time. Also from the same data, India has a $2.5 trillion debt. Does that not look staggering?

    20-25 years back, everybody used to say the Japanese are taking over US. Now it is the Chinese taking over them. Kind of difficult to assess, who is the owner presently? πŸ™‚

    There have been a lot of doomsday predictions having ever since time immemorial. If we continue to have these types of widespread shaky news, it is good for the markets.
    The day everyone says that there is no more bad news, I would get away from the markets. πŸ™‚

  5. Ramesh Mangal says:

    In my view, there is no comparison between the real estate market of US and China. Similarly, you cannot draw similar conclusions between US and China capital markets.

    Within the global economy, any bad news will cause jitters throughout the world. Do you think PIIGS or Ireland are very big as to cause so much correction? So bad news within China will also cause corrections, but I severely doubt that a large bear run in real estate markets in China will cause recession / large bear market in the world. πŸ™‚

    As far as debt of US in chinese hands is concerned, if US devalues its currency as compared to yuan (= yuan increases in value), that debt in today’s dollar term can be decreased simply. (Currently, this is what Fed and China are fighting over).

    If US buys goods from China, it is not because there is some kind of compulsion there. It is because goods from there are cheaper for them. If they get cheaper goods from elsewhere, they will buy from there. China has been growing so fast because they have been able to keep the cost of goods in their country artificially low because of different reasons. For how long, just a matter of time. πŸ™‚

    1. Ram says:

      “Do you think PIIGS or Ireland are very big as to cause so much correction?”

      A resounding yes! As per New York Times, the total debt of these countries is a staggering $3.9 trillion.

      “but I severely doubt that a large bear run in real estate markets in China will cause recession / large bear market in the world”

      Oh…I’m pretty sure it will cause a bear market of the same kind it caused in 2008 in India. It’s not a recession. A recession and a bear market are totally different things.

      “As far as debt of US in chinese hands is concerned, if US devalues its currency as compared to yuan (= yuan increases in value), that debt in today’s dollar term can be decreased simply.”

      And you think China will watch that happen? China is currently not fighting over anything. It doesn’t need to fight. It has all the cards in its hands…why fight? It’s simply warning the US that it will not passively watch what’s going on.

      “If US buys goods from China, it is not because there is some kind of compulsion there.”

      It did not begin as a compulsion, but today it is very much a compulsion. If the US doesn’t scratch China’s back, China has the ability to do a great deal with the “accounts receivable” it has from the US.

  6. Ram says:

    Ramesh…money physically present in China is not what I was talking about. You quite aptly mention that the US has 42%. How much of that is really its own?

    As per US Congressman Ron Paul, and this was way back in 2008, the US owes China 2.5 Trillion Dollars (yes, no spelling mistakes…trillion). Ron Paul is a member of the house banking committee and a Republican Senator who stood for Presidential candidacy from the Republicans during the time of the Obama election.

    Another thought…if China gave the US manufactured goods on such massive credit/debt, you don’t think other nations in the world (Europe?) were offered the same? Chinese products are sold the world over.

    Always look beneath the surface…not at the obvious.

  7. Ramesh Mangal says:

    Can you give evidence regarding the statement that “today the world’s money is in china”?.
    As per ACWI (MSCI All country world IMI), china is 2% while India is 1% while US has 42%.

    1. You mean US has 42% money in world and India has just 1% , does it mean that ? I doubt that !

      Manish

      1. Ramesh Mangal says:

        The ACWI just gives the percent of weightage of different markets. Most of the large investment groups like pension funds or equivalents take into consideration the weight given in the ACWI (accordingly have an overweight / underweight status according to it). So, huge sized groups would likely invest 42% in US and 1% in India, if they go exactly as the ACWI index. That was what I meant to say. The point to be stressed is that they dont put 100% money in India in one year and then remove it the next year. If they are overweight on India, they can give 2% weightage to India (that is 100% more than the normal weightage = quite a lot of money in absolute terms).
        Hope I am able to satisfy the query. πŸ™‚

  8. Jagadees says:

    @Manish
    Thats really an in-depth article about the real estate market bubble in china. Its indisputable that chinese real estate market is in bubble, but i guess there wont be any economic collapse as in the case of US because the mortgage taken by the consumer is not more than 50% in most case (In US case it is 80-100%). But there will be very severe slowdown in realty sector & economic growth and commodity prices like steel will also plummet across the world. May be it can come as “real buster” to the myth that everything in emerging economies are bright and rosy.
    Recently chinese govt came down heavily on the speculators and enforced a law that a family should not hold more than 2 housing units. But guess what people did? they applied for fake divorce (i.e. in paper they are divorced, but in real life they are living together) and each husband and wife is owning 2 housing units each πŸ™‚ such was the real estate madness in china.
    guys can also watch this video – http://www.youtube.com/watch?v=KLC8XFlxJIo shown parag in financial opportunities forum about the ghost town where everything in place for a perfect town i.e. space for malls, library, theme parks, market etc) and guess what, the only thing they are lacking is people to inhabit it πŸ™

    1. Jagadees

      Yea .. I agree with your views .. I have seen that video already . Not sure when this bubble with bust !

      Manish

  9. Ram says:

    That’s a great article. It clearly tells that the builders are grossly overestimating the demand.

    If there is a major bear run in the real-estate market in China, I think it will affect real estate all over the world. We saw how the US bear market affected us. At that time, the US was the hot destination and it was where the world’s money was. The fact is that today the world’s money is in China (other emerging markets like India, Brazil, Russia, Indonesia too but majorly in China). If there is a chance of a lot of money going into a black hole in China and not coming back, then obviously it will be a case of China sneezing and the world catching a cold in this specific case.

    I don’t know how it will affect stock markets over the world. It will surely affect stock markets in China very badly because money going into a black hole comes with a great side-effect (the US is already seeing that). In a way it could be good for India that the China story fails. Then people might run to India. But it probably won’t be immediate or even short-term. It will take time for people to find money again and also to gain lost confidence before they can go ahead and make the same mistakes again :).

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