THE CHINESE REAL ESTATE BUBBLE: IS IT AN OPPORTUNITY FOR SHORTS?

1
THE CHINESE REAL ESTATE BUBBLE IS IT AN
OPPORTUNITY FOR SHORTS?
Michael Wong and Peter Treadway
2
Reading Questions

• Is China undergoing a massive bubble in real
  estate similar to that of the US?
• How are the specifics of the China bubble
  different or similar to that of the US?
• Does the Minsky/Kindleberger debt deflation model
  apply to China?
• Has the stock market already anticipated the
  bursting of the bubble?
• Does the stock market have further declines ahead
  due to problems in Chinese real estate?

3
The Case-Shiller index

• US house prices
• began their upward March in 1998
• peaked in 2006.

4
The Bubble in China

• Rate of real estate price increase accelerated
  into 2008 and then fell off dramatically
• Global financial crisis in 2008 interrupted
  Chinese real estate price acceleration
• In 2009, real estate price acceleration resumed

5
The Bubble in China
6
The Minsky/Kindleberger Debt Deflation Model

• Massive increase in real estate prices financed
  by bank debt
• Something (government action?) pops bubble
• Real estate prices decline, borrowers in
  distress, banks face loan problems and insolvency

7
Minsky/Kindleberger in China?

• Statistics on bank real estate lending hard to
  come by
• Bank loans increased by 31 in 2009
• Major lending to local government entities which
  probably went into real estate
• Major acceleration in real estate prices

8
Minsky/Kindleberger in China? (cont)

• Where is China on the Minsky/Kindleberger models
  timeline?
• Have the authorities restrictive actions come in
  time?
• Or are they the straw that is breaking the
  bubbles back?

9
The Stock Market

• Prices for bank and real estate stocks have been
  declining since November 2009
• Price action on the Shanghai and Shenzhen markets
  for banks and real estate companies since
  November 2009
• CSI 300 Banks Index (down 28)
• CSI Real Estate Index (down 42)
• Similar declines for Chinese bank and real estate
  stocks on Hong Kong exchange.

10
Is It Too Late to Short Chinese Banks and
Property Stocks?

• Probably not. Problem is more serious than
  markets have anticipated
• Expectations for Chinese banks need for more
  capital, rising non-performers and possible
  government bailout reasonable.

11
Conclusion

• Real estate price acceleration and surge in bank
  lending in 2009 suggest bubble has formed in
  Chinese real estate.
• Minsky/Kindleberger debt deflation model relevant
  to China.
• Ultimate cause of bubble negative real interest
  rates, excessively expansive monetary policy and
  failure to revalue renminbi against dollar in
  2009
• First down leg of declines in Chinese property
  and bank stock prices is over
• Odds favor a second downleg. Still opportunity
  for shorts