China's Ghost Towns May Haunt Global Investors

Throughout much of last year, global investors worried about a Chinese economy stuck in low gear. Now, China bears are raising the raising the alarm about the country’s over-heated property market. Take Shanghai: Real estate sales volume shot up 63% in 2012 over the year-earlier period, while prices increased 26%.

A new series of policy measures designed to cool off the housing market hit Chinese stocks and China-focused ETFs. Chinese homeowners now face the prospect of a 20% tax on capital gains and stricter down payment requirements on a second home. China’s State Council also instructed cities to rein in development projects.

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All of this matters because real estate construction remains the primary source of the country’s domestic demand. On top of that, taxes on land transactions is a precious source of local government revenue.

China skeptics such as hedge fund manager  Jim Chanos have been warning for years that country is facing a major economic blowup from its runaway real estate market and reckless lending from China’s politically-connected, state-owned banks. When that day comes, Chanos said back in 2010, the economic impact will be like a “thousand Dubais,” referring to that emirate's property market meltdown.

Mamta Badkar at Business Insider posted some arresting photos of China’s massive ghost towns—sprawling office and residential developments that are empty—taken from a 60 Minutes segment that aired on March 3rd in the U.S. Wang Shi CEO of China’s property giant Vanke warned that developers were deep in debt and that the country would face its own Arab Spring if the housing market crashes.

Another worrying sign, notes Nachum Kaplan at Reuters, is that Chinese borrowers have been big players in the global bond market this year. In late January, developer Greentown China issued $400 million in five-year bonds, up from a planned $300 million. Chinese developers have been eager to lock in capital at low interest rates. That’s good news if they are refinancing to lower debt costs, but bad news if they’re loading the cannon for more real estate development in a glutted market.

Chinese property companies saw their outstanding debt climb 13% in 2012, while loans to developers rose 11%, according to a recent report by Morgan Stanley cited by Reuters.

Meanwhile, Bespoke Investment Group notes in the chart below that the Shanghai Composite Stock Index just broke below key technical supports at its 50-day average--not a good development for China bulls.

 

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