Subscribe/RSSSince late Dec., I have been on the road in China, India and Colombia. The next few blog reports will briefly discuss some of what I learned and experienced.
Three weeks or so in China and Hong Kong certainly doesn’t make me an expert on their economy. But, that won’t keep me from giving some observations and maybe an opinion or two. I did a fair amount of research before the trip and talked with many people during the trip.
In late Dec. – late Jan., I spent a few days in Hong Kong and Shenzen and a bit over two weeks in the southwest including Guongsho, Kunming, Dali, Lisang and Yangshou, avoiding the worst of the winter weather in the north. These are all prosperous areas from business, manufacturing, agriculture or tourism. I was fortunate to travel with a native Chinese speaker. That doesn’t mean I had deep conversations with the locals but at least got some feel for what they think and how they feel.
At least a small part of the Chinese population has prospered greatly the past ten years or so. But the majority still live in smaller towns at a subsistence level with little disposable income. They are not in the market for new flat screen TVs, the latest cell phone or other high end, high profit consumer products.
Chinese real estate has had a speculative run up the past few years with 15%-30% annual gains that make Manhattan property look cheap. Literally every day I read about the real estate situation in the English language papers in China. Everyone is aware that property is at an outrageous value, but NO ONE believes it is a bubble with a potential to crash like it has in North America and Europe. EVERYONE believes because the situation is recognized, the Chinese government will manage the situation and prevent a crash. I think the worst case outlook I read was property may only go up about 10% this year.
Here’s my take on the China real estate situation. Real estate is in a bubble and there will be a significant decline over the next few years with a peak in values this year. I believe Chinese real estate is now in the same position as the US and Europe in 2006-2007. If markets are a result of herd instinct, crowd psychology and speculative excess, the Chinese government is powerless to fully manage the situation as everyone believes. They may be able to soften the blow (I doubt it), but not able to prevent the normal course of a speculative excess cycle which is to eventually retrench to pre-speculation levels. In other words, levels that make economic sense relative to typical income levels and ability to purchase by the lower to middle class buyers.
I believe China is in a real estate and stock market bubble. If you have exposure to Chinese real estate or stock markets, act defensively.
Hi Robert,
The situation you’re describing in relation to the Chinese RE market reminds me of the situation in Dubai in 2006, 2007 and 2008. The majority of the demand was coming from speculators who made massive profits by paying only the down payment and flipping the property a few months later. As speculators got greedy, the majority believed Sheikh Mohammed (ruler of Dubai) would never allow the RE market to tumble as much as it did (50% down).
Once you live in a place like China today (or Dubai in 2007) you become susceptible to the “boiled frog phenomenon” whereby only outsiders can assess the local market realistically.
Let me know if you happen to stop by in Dubai and I’ll be more than glad to tell you more about this region.
Harmen
I’ll look you up if I get to that part of the world. However, I bet it is not as much fun as Latin America: Colombia in particular.
Sorry, I mean the stochastic was overbought for stocks.
We can classify countries by under development, developing, and developed, like wave 1, 3 and 5. As wave 1 and 5, both are impulse, has five sub waves, and followed by correction, but you always teach me to look for end of wave five, for high probability setup.
Welcome to China, the children of dragon, maybe who master China will rule the world.
Regards,
Steven