Monday, April 13, 2009

China Resorts to U. S. Tactic of Fraudulent "Growth"

If you are a believer along with Jim Rogers and many others that the future belongs to China, you may be interested in China property prices 'likely to halve' by the Financial Times.

Recall that this winter, the L. A. Times reported on massive overbuilding of commercial office buildings in Beijing. Now, please consider the following regarding residential real estate in China:

Property prices in China are likely to halve over the next two years, a top government researcher has predicted in a powerful signal that the country’s economic downturn faces further challenges despite recent positive data.

The property market, along with exports, were leading drivers of the booming Chinese economy over the past decade and the slumps in both have taken a heavy toll.

Cao Jianhai, professor at the Chinese Academy of Social Sciences, a leading government think tank, said an apparent rebound in the property market was unsustainable over the medium term and being driven by a flood of liquidity and fraudulent activity rather than real demand.

He told the Financial Times he expected average urban residential property prices to fall by 40 to 50 per cent over the next two years from their levels at the end of 2008.

. . . Mr Cao said preliminary government investigations had turned up numerous examples of real estate developers using fake mortgages to offload apartments on to the books of state-run banks facing enormous pressure from Beijing to rapidly increase lending to boost the economy.

. . . At a national level, average housing prices tripled between 2003 and the peak in mid-2008 and are now 10 to 12 times average income, which means 60 per cent of homebuyers’ monthly income must go to mortgage repayments, Mr Cao said.

The volume of empty apartments across the country hit 91m sq metres at the end of last year, up 32.3 per cent from a year earlier, according to official figures.

Those numbers included neither the huge volumes of completed real estate projects whose owners are waiting for market conditions to improve before they put them on the market, nor the estimated 587m sq m or apartments sold in the past five years but left empty by their owners.

This report sounds like the U. S. several years ago.

Massive fraud and overbuilding in Chimerica. I would thus simply rate both countries: Avoid.

Switching gears, the Goldman Sachs rumors were false re a fantastic quarter: GS simply reported a standard "beat" of the Street estimates, itself an almost ludicrous concept given that GS is, more or less, the Street! It sounds as though Goldman made its money because of wide bid-asked spreads in bond trading; how the AIG payment entered into its earnings is not clear to EBR.

There are not (yet) many bullish charts to or bullish fundamentals. While both Dow stars from 2008 should be doing well if the consumer were truly about to rebound, WMT and MCD have mediocre, down charts and declining earnings estimates. Operational and technical strength is found in the truly down-market companies such as Family Dollar (FDO), to which shoppers go when they trade down from Wal-Mart. Imagine that Wal-Mart is a stock pick for optimists on the economy!

A positive secure yield is found in the mutual Ginnie Mae funds offered by Vanguard and Fidelity, symbols VFIIX and FGMNX. The charts demonstrate full-fledged bull moves and may be mature, but if they were charts of a commodity or a growth stock, you would consider these to be break-out moves. Most stocks have broken their short-term downtrends, but there may be too much complacency that the economic banana has almost run its course, so you've got to own those suckers before the boom comes.

After all, China was not the only Asian news tonight; consider that Singapore has just lowered its forecast for its 2009 economy once again, to a 6-9% contraction.

Not everything turns out for the best in this not best of all possible worlds. Caution continues to be advised.

Copyright (C) Long Lake LLC 2009

1 comment:

  1. This article is very timely and relevant. As I quote Cameron Muir, an economist, "Home sales are unlikely to fall much further..That being said we expect home sales not to decline much further."

    But it's never too late, with the right business plan set up, it will lead to valuable outcome. This is what most counselors would give as an advise.