China Bubble?

David Chapman

China continues to enjoy considerable growth. Its 2012 GDP growth is forecast to be 7.8%, yet its stock market is nowhere near the all-time high of October 31, 2007. The Chinese market, as represented by the China 25 Index Fund, is down 44% from its all-time high. Not only that, but it’s down about 10% in 2013 alone.

It’s not as if the Chinese aren’t pumping their currency supply just as the US is doing. China has its own form of QE and a massive infrastructure-spending program as well. Some of that infrastructure is real estate. Specifically it has built entire cities – with no one in them.

Property values have tripled and more, but not because of end buyers. Real estate is being purchased for investment purposes. Apparently, between 12 and 24 ‘ghost cities’ are built each year. Most people cannot afford the housing; only investors can.

China is trying to prick the bubble but it is not easy. Investors will lose fortunes, property developers will go bankrupt and thousands of workers would be unemployed. That in turn could lead to social unrest.

Does the Chinese stock market sense trouble? After all, the housing market blew up the US and the Eurozone.

As for the US, the indices are moving higher because the economy appears to be growing. But investors, not end buyers, are driving housing sales. Personal income is falling while personal spending is rising, suggesting that the consumer is digging into credit cards again. Median income has been falling for a decade. Many potential homebuyers no longer qualify for a mortgage.

The Chinese market could be living on borrowed time. When the real estate bubble bursts, it could take the US market down with it. On the other hand, Chinese authorities have ways of papering over the problems. There are many people in China that need housing. The question is how to get them into these ‘ghost cities.’ In the interim, buyer beware.