This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Chinese Real Estate Is a Bubble, Not a Disaster

The Tier-2 cities, generally speaking the provincial capitals and the remaining central-government-direct-report cities (Tianjin, Chongqin), are more or less in balance in my opinion. Again, my main rationale is the supply of demand in each city's lower rungs on the sociopolitical ladder.

The Tier-3 and lower cities, or at least with tremendous over-building problems, are where the trouble lies. These would be the ghost cities many western reports have been obsessing with, meaning that the bubbles there have already burst. Some of the over-building goes way beyond the realm of plausibility. This is due to the combination of the local governments' obsession with nominal GDP numbers and the moral hazard, the blind belief by developers, investors, and local banks that whatever the government supports will never fail. I'm not sure if more ghost cities would surface.

But even if they do, who cares? It wouldn't matter to anyone except the investors and local banks, and hopefully a few local government heads. If anything, it would mean cheap good housing for the locals, and might even provide some incentive for people to move into these under-developed regions, therefore helping balancing out the economic structure that's been overly tilted toward the eastern region. Good riddance.

China's development has been, and continues to be, very un-balanced, both geographically and in terms of income disparity in any given region. The real estate market, in comparison, has lagged the growing geographic imbalance as prices shot up in absurd places as some investors went bargain hunting. Rebalancing is inevitable; but it will be in the form of the peripheral crashing, not the core.

But the issue of Chinese debt, especially that of local governments, has also caught attention abroad. Could the real estate bubble, even if just in the peripheral, cause a contagion similar to the subprime crisis in 2007? To that my answer is a very clear no.

Yes, most, if not all, local governments in China have been guilty of over-building capacity in pretty much all aspects of the economy except R&D, food safety and pollution control. And their debt can only be much larger than official stats, as by way of The Wall Street Journal, since there are untold amount of implicit liabilities based on the governments' habit of assuming authority and responsibility on everything, along with the ensuing, above-mentioned blind faith in such implicit "guarantee."

Real estate is a critical pillar of any credit-based economy, of which China is one despite the fact that the financial system works on a very different set of assumptions and rules (mostly the former). They know this, of course. And equally of course, they will try to prop it up with all they've got. And again of course, they will fail, eventually -- and not quite in the sense that, eventually, we all fail.

But when they do fail, it will not be a systemic disaster as subprime of 2007. The reason is very simple: there's neither a panic button nor a chain reaction mechanism -- no securitization, high equity ratio (30% down is still the norm), a culture that values property ownership to totally irrational heights, a culture that still attaches tremendous shame to personal bankruptcy, and a culture that calls all generations of the extended family to band together to avoid such shame.

Sorry, fellas, it's a different country.

China will have its baby-boomer moment as Japan and the west have. But that's 10 to 20 years later. Not today.

2 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,943.81 +28.74 0.17%
S&P 500 1,967.57 +2.89 0.15%
NASDAQ 4,415.49 +19.2860 0.44%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs