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The bubble you know

John Foley 

Chinese real estate/stocks: A Chinese bubble has been deflated. Too bad it’s the wrong one. The main Shanghai stock market index has fallen 23% from its peak at the beginning of August, reversing half of the run-up that started early in 2009. That’s a welcome correction, but it doesn’t mean a return to normality, or address the bigger bubble round the corner.

Shares were driven up by a belief in China’s recovery – and by a rush of liquidity. The fall occurred because both were gently dampened. Politicians have warned that economic recovery isn’t a done deal. Monetary authorities drained some liquidity from the market, curbed certain kinds of lending and asked banks to show restraint.

Shares now trade at around 29 times trailing earnings, according to Bloomberg data. That’s higher than Asia overall, but roughly in line with China’s five-year average. The last peak in 2007 saw Chinese-listed shares trade at 50 times earnings. But runaway stock prices were never the biggest worry. China’s tradable market capitalisation is less than half its nominal GDP for 2008, according to official July data, compared with over 175% in the UK. Even after a recent surge, the number of brokerage accounts in China equals just 1% of the population. China’s masses don’t buy shares – and its companies don’t yet depend on the equity markets for capital.

Real estate is a different story. Housing makes up roughly a quarter of investment spending, which is in turn 40% of gross domestic product. The differences between China’s big cities make a bubble harder to spot. But record bids for land are cause for concern, as is falling affordability in big cities. Meanwhile, stagnant residential rents suggest speculation, not demand for somewhere to live, is pushing up house prices.

A burst real estate bubble could be fiendishly tricky to clear up. While stock markets clear in a day, property gluts can take months – if they clear at all. Liquidity already pumped into the system has only made things worse: cash-rich developers have less pressure to sell houses, so they can keep jimmying prices up further even as demand softens. Whatever the equity markets say, Beijing still has bubble trouble.

First Published: Tue, September 01 2009. 01:33 IST
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