The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- Why are so many ill-informed analysts determined to "reveal" an ugly property bubble in China?
For starters, most of those who write about China have never lived in the region; they understand precious little about Chinese culture or the mainland's government.
Equally important, empty buildings or high price-to-income ratios may be indicative of future price declines, but they alone do not cause bursting balloons; that requires extraordinary participation in leveraged speculation.
Those who foolishly make a case for China's economic demise via a real estate disaster have not done their homework.
The 1996-2005 mega-boom in U.S. property was a function of no-money-down and low-money lending to exceedingly weak credit risk (i.e., subprime) buyers. The U.S. government subsequently bailed out multiple parties, including the financiers and the government-sponsored enterprises such as
. And the government now has an onerous level of debt, causing some to wonder whether it will ever be able to repay it.
In contrast, the Chinese government has trillions of yuan in reserve. China wouldn't necessarily need to increase taxes or cut spending or print money if it needed to bail out a segment of its population or prop up a number of business entities.
How is it that "ghost city" commentators see a direct parallel in property bubble scenarios when a well-financed Chinese government can act quickly to minimize the extent of their troubles? Lest anyone forget, the most important financial institutions in China are well-capitalized and essentially owned by the Chinese government.
There's also the cultural disparity. Whereas U.S. citizens regularly consume more than they can afford in an "I'll gladly pay you Tuesday" existence, Chinese citizens fund their purchases with what they have saved. This includes home purchases. And if they don't have the money, they'll ask members of their family for assistance.
So if doom-and-gloomers on the China property sector have missed the boat on government situation as well as Chinese culture, could they be right about leverage?
Nope. Most property in China is bought with at least 50% down, and Chinese banks have stringent lending requirements. Prices could decline precipitously, but there can be no balloon bursting without the helium-like leverage of horrific underwriting.
Granted, if China's infrastructure buildout slows considerably, resources-rich exporters will contribute less to global growth. And if China's property prices fall far enough, Chinese citizens may be more fearful in committing their savings to real estate purchases. In other words, things could turn grim.
But bubble-popping bad? Forget about it.
In fact, contrarian investors may already be looking at ways to profit from China's eventual reflating of real estate demand. Check out the three-month returns below for stock ETFs that track China indices. That's correct.
Guggenheim China Real Estate
leads the pack.
China ETFs: 3-Month Returns Favor China Real Estate
Guggenheim China Real Estate is up 15.1%.
Guggenheim China Technology
is up 11.9%.
Guggenheim Chian Small Cap
is up 9.6%.
By contrast, the
Vanguard Emerging Market
is up just 7.1%, while the
SPDR S&P China
is up only 5.2%.
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Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.
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