Tuesday, April 19, 2011

Another Financial Crisis?

In 2006 I wrote an article titled “Another Financial Crisis ?” illustrating the possibility of one in the US, and it happened 2 years later. Now I’m writing for the same title but this time the target is CHINA!

In my recent talk in KL, one participant from China came to me and told me that in China there are more real estate investors than stock investors. Indeed the Chinese investors have seen real estate as the best investment because of its spectacular yields in the recent years.

Due to the Chinese government’s capital control, investors must pay a price to invest overseas, which compels them to invest domestically. In addition, the bank deposits and bonds have low to negative real yields, coupled with volatility in the China stock market, many have turn to real estate instead. In fact, China’s increasing inflation rate has helped housing price bubble growing even larger. More and more millionaires and billionaires are created in China every year. Recently The China Daily reported that there are close to one million millionaires in China with a personal wealth of US$1.5 million or more. Of them, 60,000 are considered super rich with 100 million yuan or more. Hence, no doubt they have all the money to drive the property prices in China and the rest of the world!

On the other hand, can this rising property prices be sustainable? According to Time magazine, many gigantic malls in China are virtually empty. One such example is the Kangbashi in Mongolia which is dubbed as the “Ghost Town” with 95% vacancy rate!

Usually the real estate price bubble comes from the artificially made difference between the price and value of housing. Capital competitions bid up prices that in turn induce builders to build more housing. Eventually, prices differ excessively from values of housing and an apparent overproduction will exist. Overproduction of housing relative to the affordable demand forces prices to fall into line with values. The debt-sustained buying would cause precipitous fall in prices and the loan default would make the bubble burst.

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Happy investing,
Pauline Yong

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