The news organ of the China’s Communist Party cited the China Securities Journal as saying that the global financial crisis will continue to exert pressure on China’s economic health.

The forecast was produced at the recent Central Economic Working Conference. The agenda of the meeting was to set the economic keynote for 2009 as “maintaining growth, boosting domestic demands and adjusting the economic structure,” the People’s Daily reported.

The annual conference is held from Dec. 8 to Dec.10. It helps Beijing set economic goals and reforms for the coming year. Six new challenges were identified for next year in order to maintain growth for the Chinese economy.

First, there was recognition by members of the conference that the international financial crisis will continue batter the country.

Second, both domestic inflation and deflation both domestically and abroad will make planning difficult.

Third, the stock market and real-estate market in China will continue to fluctuate and the possibility of real estate prices dropping will be very high.

Fourth, the living conditions for small and medium-sized enterprises will further deteriorate.

Fifth, the employment situation will continue to deteriorate.

And sixth, the conference expressed difficulty in trying to maintain a balanced national budget.

Some areas of investment for Beijing include agricultural production, employment, social welfare, education, health care, energy conservation and emissions reduction, technical innovation, manufacturing efficiencies and subsidies for entrepreneurs.

The government will also expand social services for the urban and rural poor.

As we’ve seen, China is now a bellwether for the global economy. Based on the results of the conference, investors can expect more of the same in 2009.

On September 30th, I talked to you about Brazil, Russia, India and China. I said that “it’s hard to talk about the BRICs as a whole. But this one thing is true. They’re not immune to the world’s economic problems. And even Brazil will suffer if the U.S. can’t solve the credit crisis.”

That was just three weeks ago. Since then, we’ve had Iceland needing a big loan from Russia in order to avoid going bankrupt. We’ve seen bailouts of huge banks like USB of Switzerland and Royal Bank of Scotland. Asia finally joined the bailout parade with emergency measures to provide funding to ailing banks when needed.

These countries are getting hit hard where it hurts the most: exports and commodity prices. Some countries like Hungary, the Baltic states and South Africa were already in trouble, thanks to large external debts and narrow revenue bases. Now, their economies are on life support.

As you can see, as bad as the Dow has performed over the last six months, emerging markets (the blue line – represented by the iShares Emerging Markets Index) have done much worse. They’ve lost 50 percent of their value and their plunge since mid-September has been much more dramatic than the Dow’s.

But even if they spend a chunk of it, will it be enough? I posed the same question to you three weeks ago. The only difference now is that the whole world seems to be looking to China to save them.

Here’s what the Washington Post said on Saturday: “Perhaps the only major economy that remains robust despite the crisis is China.

“While it is suffering from a collapse of its stock and real estate markets and a decrease in demand for its exports, many economists continue to argue that the global slowdown may actually be beneficial because China’s economy had been in danger of overheating.

“Pakistani President Asif Ali Zardari arrived in China Tuesday … ‘China is the future of the world,’ Zardari said, according to the official state news agency. ‘A strong China means a strong Pakistan.’”

Robust? Really? We’re going to find out if China’s economy is capable of going one way (up) while its stock market, real estate market and exports go the other way (down). But it’s hard to imagine hundreds of companies in China not going under as export sales dry up … hard to imagine China growing as the rest of the world’s markets shrink … and hard to imagine China’s economic growth not falling below eight percent a year for the following few quarters.

China saving the world? I don’t think so. If we’re depending on China to get us out of this mess, we’ve already lost.

Source: No Refuge in Emerging Markets

Beijing is now focusing on helping homeowners buy and keep their properties in the face a global real-estate meltdown.

Whether or not this is enough to sustain some kind of rally on the Hang Seng Index (HSI:HKG), which has dropped 51.4% over the past 52 weeks, is truly doubtful.

Beijing’s maneuver comes at a time when Asian stocks slumped to their lowest since December 2004 on fears that government bailouts may not be enough to prevent a worldwide recession. And with China’s reliance on exports to the West, concerns run deep on the country’s ability to sustain its blistering rate of growth.

Despite worries, China’s commercial real-estate market sees no signs of letting up.

In July, Merrill Lynch raised China’s three-year infrastructure projections from $400 billion to $725 billion – an increase of 81.2%.

Now China must focus on the cash flow of its expanding middle class to ensure that they keep spending.

The China Daily reported that up to 18 Chinese cities have unveiled plans to boost their property market, which have seen at least four months of consecutive drops in housing prices.

What Beijing has in store is plan that could lower property taxes and relax lending rules – injecting more liquidity into the economy.

Over the years, home ownership in China has taken off in part due to the Chinese infatuation with fixed assets. Tower apartment complexes opened a whole new world to people who rode the updraft up the Chinese economic miracle.

China’s residential real estate has been on a tear since 2000, mirroring the boom in the U.S. and Europe. Real estate purchases were part of a luxury spending spree that also included cars, jewelry and travel.

To prevent run-away inflation, Beijing introduced higher taxes and related fees in 2007. In addition, it tried to discourage speculation by imposing triple-digit mortgage rates on second homes.

Now the country is seeing real prices drop as much as 72% year-over-year in some of the most desirable regions. As values decline, real estate no longer becomes a reliable fixed asset investment – the same theme that now has most markets everywhere in the throes of a recession.

Whether or not this is enough to turn around China’s stock markets remains doubtful. There may be a slight uptick, but global market forces are conspiring to keep China tied to the rest of the world.

If you read the Wall Street Journal or The Economist dire warnings are now being issued about China’s economic growth.

While China is experiencing “negative growth” you get the feeling that somehow the slowdown is taken out of context – giving investors a somewhat distorted view of the current opportunity.

The bad news started when China’s National Bureau of Statistics announced that economic growth Q3 was 9% year-on-year, down from 10.1% in the previous three months. China’s economic growth could actually drop below 10% for the first time since 2002.

Still, to put that into perspective, the U.S. GDP for Q2 gained 2.8%, up from 0.9% in Q1. That means China’s growth was 221.4% higher than what the Bush administration was able to squeeze out of our economy.

Have there been recent bankruptcies in China? Yes.

Has the workforce shifted from a shortage to a surplus? Yes.

Are commodities prices lower because China is slowing down? Yes.

But the fact remains that China is still perhaps the most robust economy anywhere – especially with rogue petro-fascist states like Venezuela, Iran and Russia suddenly finding themselves nose-diving into a deficit with shrinking oil prices.

The thing to keep in mind is that much of this retraction can be attributed to the post-Olympics blitz. Plenty of jobs were created thanks to China’s $42-billion budget to host the Olympics (including infrastructure build-out) plus another $100 million on the opening and closing ceremonies.

It is any wonder that prices of construction materials are dropping?  Or that all of a sudden there’s an over-capacity of hotel rooms?

At the same time, inflation is China has dipped to 4.6% in September from a peak of 8.7% in February.

Better yet, many of the national banks are still solid and the savings rate for Chinese consumers remains high.

We read about how exports are suffering from tight cash in the West.

But what we’re not hearing is that China will spend massive amounts on infrastructure in the future.

By 2025, an additional 5 million buildings — including up to 50,000 skyscrapers, or the equivalent of 10 New York Cities — could be built in China, said the McKinsey Global Institute.

China will spend $62 billion on 97 new airports by 2020.

As recently as July, Merrill Lynch raised China’s three-year infrastructure projections from $400 billion to $725 billion – an increase of 81.2%.

These ongoing investments in fixed assets means that China is funneling 45% of its GDP into construction and infrastructure, a record-breaking number according to the Standard Chartered Bank in Shanghai.

Admittedly, China’s economy is no longer in hyper growth. But instead of seeing the glass as half empty, it should be seen as half full.

This from Money Morning:

On the surface, it appears as though the Chinese economy is suffering along with the rest of the world. The economic crisis that has ensnared Western economies is expected to dampen Chinese exports and there is already evidence of capital flight.

But the real story is that China’s foreign exchange reserves – at $1.9 trillion – remain at an all-time high, and the outflow of capital, or “hot money,” will actually deflate many of the asset bubbles that speculative investment has created over the past several years.

Ultimately, the so-called “global recession” that many analysts have projected as a virtual certainty will serve as only a temporary correction for China’s economy, which is still projected to expand by at least 8% this year and next – even as its Western counterparts sputter

Is Hot Money Leaving China?

“Hot money” refers to foreign funds that are temporarily transferred to a financial center and can be withdrawn at any time, or to the massive quantities of capital that international speculators can shift from one market to another across the globe – whipping a market into a frenzy when it flows in, and potentially leaving it flat and shattered when it’s whisked away. It’s a boom-and-bust cycle that’s occurred time and again throughout history: In the early 1990s, for example, hot money flowed into such emerging-market economies as Hong Kong, causing some stock markets to double in a year. But all those gains – and then some – were given back a year later when speculators pulled out of the emerging markets in pursuit of the next “hot money” investment opportunity.

The emerging economies have been the target of the hot-money crowd again in recent years, as investors and speculators scoured the planet for the highest-possible returns. But with the onset of the current financial crisis and drum-tight credit markets, much of that hot money is on its way back to where it came from.

The Institute of International Finance estimates that capital inflows to 30 emerging markets will decrease by nearly a third this year, from $900 billion in 2007 to $619 billion this year, before declining to $560 billion in 2009.

Analysts estimate that anywhere between $10 billion and $25 billion fled China in September, as the global financial crisis worsened.

To support this claim, analysts point to China’s massive foreign exchange reserves. Foreign exchange reserves increased $96.8 billion in the third quarter to a record high $1.9 trillion, but even though China’s currency stockpile grew, it expanded at a slower rate than previously seen. China’s broad measure of money supply grew by 15.3% last month, down from 16% in August.

China recorded a $29 billion trade surplus in September, and nearly $10 billion in foreign direct investment, yet the country’s reserves grew by just $21.4 billion – a red flag for many analysts.

“I think it’s pretty certain that we are seeing an outflow of capital at this stage,” Glenn Maguire, Asia economist for Société Générale SA (OTC ADR: SCGLY), told The Wall Street Journal. However, he said, “what we are seeing is an unwinding of the hot-money flows that occurred earlier in the year, rather than outright capital flight.”

Indeed, roughly $120 billion in hot money poured into China throughout all of 2007, and Michael Pettis, a finance professor at Peking University, estimates that more than $200 billion flooded in during just the first half of 2008. But as credit tightened over the past several months, it’s likely that many financial institutions called much of that money back in an effort to shore up their own balance sheets and ensure adequate liquidity.

“This outflow likely reflected foreign financial institutions attempting to repatriate capital and hoard dollar liquidity in the midst of the credit crisis,” Logan Wright of Stone & McCarthy Research Associates in Beijing told The Journal.

The dollar’s appreciation against foreign currencies, including China’s yuan, is another reason for the recent shift in hot money flows The yuan has appreciated 17% against the dollar since the peg between the two currencies was dissolved in 2005. It rose roughly 7% in the first nine months of the year, drawing in speculative investors looking to cash in on the currency’s continued appreciation.

However, Beijing likes to keep the yuan artificially low as a means of boosting exports, and the currency has climbed far too fast in the first half of the year for the government’s liking.

“Worries about the economy have escalated,” Yang Bin, a Beijing-based dealer at Bank of China Ltd., the country’s biggest foreign currency trader, told Bloomberg News. “A return to the fast pace of appreciation in the first half would stifle struggling export industries at this difficult time.”
Indeed, a dealer confirmed to the Economic Times, that “despite the global dollar weakness, the market believes China’s slowdown won’t allow the yuan to strengthen too much in the near future.”

Additionally, the dollar has rallied nearly 20% against the euro since April, and because China’s reserves are reported in dollars, the value of its non-dollar holdings has been shrinking. That, too, has contributed to the apparent slowdown in China’s reserve growth.

“We think the (reserve-growth) slowdown is related to the dollar’s recent strengthening,” Li Heng, a Beijing-based economist with TX Investment Consulting, told the AFP. “We believe [the] forex-reserves growth will stabilize in future. So far, significant growth in capital outflows is not happening.”

So long as there is no dramatic withdraw of cash from China – and there hasn’t been so far – a slight correction or pullback would actually be beneficial for an economy that has been growing too fast for its own good in recent years.

All of the speculative capital flowing into China over the past decade has fueled inflation, driven up stock prices, and helped accelerate a worrisome bubble in the real estate market – similar to the one created in the United States. So, in that respect, the recent outflow of capital is actually restoring fair value to the marketplace.

“The excessive influx of hot money will expand market liquidity, cause excessive money supply, and will eventually push up inflation,” Zhao Qingming of China Construction Bank told the Beijing Review. “The hot money inflow also poses more pressure for yuan appreciation. It can also create bubbles in the property and stock markets.”

Stephen Green, of Standard Chartered PLC, told the Financial Times that, given the exodus of foreign capital in the third quarter, the problem of too much hot money is “beginning to sort itself out.”

“This is certainly reducing some of the pressure, which will be welcome in Beijing,” Green said.

China’s Leaner, Meaner Economy

When China’s foreign-exchange reserves jumped to their world-record high in the third quarter, its currency holdings were up 33% as of the end of September, from a year earlier.

The Chinese market “remains liquid and the financial system is broadly sound,” said central bank Deputy Governor Yi Gang.

Indeed, liquidity is not an issue in China. Instead, the question is how will the economy hold up in the face of a severe global downturn. So far, the signs are encouraging.

Of the world’s large economies, China has fared the best throughout the duration of the current economic crisis. Whether Chinese banks were “wise, lucky, or better regulated,” they avoided exposure to the risky subprime mortgages and derivative products that caused the current financial firestorm, said Liu Erh-fei, managing director and chairman for China at Merrill Lynch & Co. Inc. (MER).

“There is no systemic risk in China’s banks that could spill over into a full blown financial crisis,” Liu said. “China is not affected by this virus that permeates the U.S. and European economies.”

Liu added that China would be able to maintain “reasonable” growth at, or above, 8% so long as it is able to tame inflation and increase domestic demand.

There are already signs that inflation is subsiding, and the outflow of hot money may be, in part, responsible for that. Another factor is the decline in commodity prices that has accompanied weaker global demand and a stronger dollar.  The price of oil, for instance, has plummeted more than 50% from its record high of $147.27, set July 11.

Inflation in China receded to 4.9% in the year to August from 8.7% in February. And Goldman Sachs Group Inc. (NYSE:GS) forecasts that it will fall as low as 1.5% in 2009. That means the biggest task ahead for China will be spurring domestic demand to compensate for a decline in exports.

Exports rose 21% in August from a year earlier, after soaring 27% in July, and that growth rate will likely continue its downtrend as economies in the United States and Europe, China’s two biggest trade partners, continue to weaken if not contract.

Fortunately for China, domestic retail sales are up, having jumped 23.2% in August from a year earlier.

According to Merrill’s Liu, Beijing is well enough equipped to steer its domestic economy towards stable growth by aiding rural development and sponsoring infrastructure projects.

“The government has all this cash and it should use it,” Liu said.

China has a budget surplus of 2% of gross domestic product (GDP), according to Standard Chartered’s Green. And public sector debt is just 16% of GDP.

Beijing already has plans increase the number of rural banks and lending firms to 100 by the end of the year, from 61 at the end of August, Bloomberg reported. This will improve farmers’ access to credit.

The government could also change current land ownership laws to give farmers the ability to transfer (lease or sell) the rights to 30.5 million acres of rural residential land, to market-oriented farm corporations. That would give those farmers looking to sell their property more access to capital and income, as well as aid companies in need of land to develop Bloomberg said.

Additionally, China still has strong growth in its burgeoning cities. Fixed asset investment in urban areas rose 27.4% in the first eight months of the year.

“Despite negative shocks of the financial crisis, China will accelerate transformation of the growth model, promote domestic demand – especially household consumption – and maintain fast and stable growth,” said Deputy Governor Yi.

The Chinese economy accounted for one-third of global GDP in the first half of the year. It could play an even greater role in 2009.

Source: Although “Hot Money” Flees China the Red Dragon Will Emerge From Financial Crisis Unscathed

China is preparing a $58 billion economic stimulus package, says Jason Simpkins in today’s Money Morning. Despite double-digit growth, this year’s commodity price boom, a stronger currency, and weakening export demand are concerning policymakers in Beijing.

Such a move would mark a shift in policy priorities away from controlling inflation, even though annual producer price inflation reached a 12-year high of 10% in July. More from Jason…

China’s policymakers are considering a $58 billion (400 billion yuan) economic stimulus package, and will ease monetary policy later this year, as focus shifts from taming inflation to promoting economic growth, said Frank Gong, chief China economist at JP Morgan Chase & Co (JPM).

The stimulus package would be equivalent to 1%-1.5% of the nation’s gross domestic product (GDP) and aimed at smaller businesses struggling with high material and energy costs, a strong yuan, narrowing export demand, and the government’s credit tightening.

“The top leadership is carefully considering an economic stimulus package,” Gong wrote in a note to clients. “This will include tax cuts and measures to ‘stabilize domestic capital markets’ and support ‘healthy development of the housing market’.”

Gong, who in 2005 correctly predicted that China would end its currency peg to the dollar, also said the central bank will ease monetary policy “later in the year” as inflationary pressures subside and exports slow in the face of a global economic downturn.

The People’s Bank of China has kept interest rates unchanged this year after six increases in 2007 in an effort to undercut inflation and keep the economy from overheating. Of course balancing inflation and growth are proving tricky for China.

While consumer prices, which hit a 12-year high of 8.7% in February, receded to 6.3% in July, producer prices jumped 10% from a year earlier – an indication that corporate profit margins are caught in a vice.

There is now a growing concern that corporate profit growth will hit a virtual standstill in 2009, causing an economy that has experienced double-digit growth for five straight years to finally fall back down from orbit and into single-digit territory.

Those fears were exacerbated by Lehman Brothers Holdings Inc. (LEH) recent prediction that China’s GDP growth would fall to 9.5% in 2008 and 8% percent in 2009.

China’s economy grew at 10.1% in the second quarter, still the fastest rate of growth among the world’s 20 largest economies, but a slight decline from last year’s 11.9% annual expansion.

The benchmark Shanghai stock index is also on the way down, having plunged 56% since the start of the year.

“China’s economy is suffering from unstable global factors, increasing challenges and hardships,” Xav Feng, China head of research at Lipper Inc., told China Daily.

“China’s top priorities for macroeconomic control in the second half are maintaining stable but rapid economic growth and controlling inflation. This is proof that the government has become more cautious on macroeconomic controls, and monetary policy won’t be so tight in the future,” he added.

This sentiment was corroborated by China’s second quarter monetary report, released Friday, which dropped any reference to monetary policy as “tight.” In the previous report, released in May, China’s central bank said it would “place a higher priority on containing price rises and curbing inflation, and implement a tight monetary policy.”

The second quarter report, however, said the central bank would “make its top macroeconomic priorities maintaining stable and relatively fast economic growth.”

Inflationary risks “can’t be neglected,” the report noted, but added that “external demand will continue to weaken, and the negative impact on exports, economic growth and employment will emerge further.”

That shift in priorities was evidenced in July, when the Bank of China raised lending quotas for national banks by 5% and regional lenders by 10%, potentially allowing banks to extend about $26.3 billion (180 billion yuan) in extra loans over the rest of 2008. Those limits previously had been put in place to crack down on excess liquidity flowing freely through the market.

“Concerns over China’s export health will translate into a complete reversal of the current tightening policy,” Donald Straszheim, vice chairman of Roth Capital Partners LLC told Bloomberg News. “Maintaining economic growth is now number one.”

Source: China Plans $58 Billion Stimulus Package and Rate Cuts as Policy Shifts from Inflation to Growth

What do Starbucks (NASDAQ:SBUX) and China have in common? A lot! Both got us hooked on consumption: one of fancy, expensive caffeinated liquids; the other on cheap foreign made goods. Both have defied the conventional wisdom – they grew faster and longer than common sense told us was possible. They also share another striking commonality: both are suffering from late stage growth obesity (LSGO).

The Starbucks story

With the beautiful benefit of hindsight we know what happened to Starbucks – it grew too fast, opened too many stores, and sacrificed its own standards to meet unrealistic targets. The company first claimed that it only had a few hundred stores that it needed to close, and then the few hundred spilled into six hundred. Weak consumer spending will likely push Starbucks to re-examine its store count again, doubling or tripling the store closures.

Starbucks percentage of new stores growth in 2007 was only slightly lower than it was in 1999. But in 1999 it had 2,000 stores; in 2007 it was pushing a 10,000 company owned stores mark. Let’s put this in perspective: in 1999 Starbucks opened 447 stores – 1.8 stores per working day; in 2007 that number more than tripled to 1,403 stores a year – 5.5 stores per working day. At this level of growth physical limitations come in: there is only so much real estate that fits a company’s criteria at a certain point in time. Management started sacrificing on the quality of their decisions, compromises were made that were unthinkable several years before. Stores were opened too close to each other or on the wrong side of the street, expensive leases were signed, they even hired baristas that would have fit in better at McDonalds (NYSE:MCD) – you get the idea.

Unfortunately the present and the future will pay for the decisions of the past: stores will need to be closed, long-term leases terminated, charges taken, corporate costs created in hopes of high growth eliminated, and corporate culture of partnership strained by barista layoffs.

Starbucks needs to go on a permanent growth diet (at least in the US), and realize that it has the metabolism of a 37 year old and can digest fewer new stores. By tightening its standards for opening new stores the company will be on the way to recovery, though at slower growth. Starbucks is blessed with financial strength, capable management and unbelievable brand. If management admits to themselves that the heydays of growth are behind, recovery should be fairly painless. Starbucks generates tremendous operating cash flows, which in the past were completely consumed by opening new stores. If the company were to go on the LSGO diet, its capital expenditures would decline and free cash flows balloon – the value unlocked.

But this discussion is not about Starbucks, it is about what is taking place in China.

The Great China story

The benefit of hindsight that provides clarity in analysis of Starbucks today is not there for China, at least not yet. But if you were to open your mind and look past today’s cheery newspaper headlines you’d see that China is suffering from a severe case of LSGO.

Ten for ten. Since 1998 its GDP has grown at about a 10% annual real growth rate, and its economy more than tripled in size (in real terms). There were no recessions, just expansion – the Chinese miracle growth? The origins of China’s tremendous growth are well known: large population migrating from low (farming) to higher productivity (manufacturing) activity, cheap labor, a capitalism-friendlier communist government, and insatiable demand from the US and the rest of the developed world for cheap goods.

Unlike Starbucks – a private enterprise that has free market principles deeply inbred in its DNA – China is a communist country. Though it is moving towards free market capitalism, it is not there yet. The rule of law is weak, the country infested with corruption, and due to central planning and tight government control of the banking system capital is often allocated based on cronyism (or political relationships) not merit.

Prolonged high growth in this environment results in inefficiencies that are compounded year after year. In other words, though the growth is high, the quality of growth is low, thus asset allocation decisions are likely to be poor. The ten year super-high growth marathon put China at high risk, actually more likely of a certainty, of a severe case of LSGO.

From today’s perch we can only guess of the consequences of LSGO, but we’ll gain that clarity after the fact – a luxury we don’t have. Newspapers that are praising the Chinese growth miracle today will write exposes on what went and is going wrong in China.

I have absolutely no facts to back up what I am about to say, but it is not hard to imagine future stories about poverty stricken farmers that moved to big cities for a better life and found despair; or that inland migration (from farming to factories) only brings a onetime productivity jump as poorly educated farmers-turned-factory-workers add little to productivity improvements afterwards; or how weak and debt ridden the financial system is; or the devastating impact that pollution has on health and productivity; or how the biggest shopping mall in the world, that happens to be in China, is almost completely empty.

Oh wait, the story about the shopping mall is not a figment of my imagination (I am not that good) but has already taken place. In 2005 NY Times ran an article titled China, New Land of Shoppers, Builds Malls on Gigantic Scale, it talked about the biggest shopping mall in the world that happened to be in Dongguan, China. The article said:

“Not long ago, shopping in China consisted mostly of lining up to entreat surly clerks to accept cash in exchange for ugly merchandise that did not fit. But now, Chinese have started to embrace America’s modern “shop till you drop” ethos and are in the midst of a buy-at-the-mall frenzy…. by 2010, China is expected to be home to at least 7 of the world’s 10 largest malls… Already, four shopping malls in China are larger than the Mall of America. Two, including the South China Mall, are bigger than the West Edmonton Mall in Alberta, which just surrendered its status as the world’s largest to an enormous retail center in Beijing.” (emphasis added)

]]> http://www.contrarianprofits.com/articles/a-value-investor-looks-at-china/4604/feed 0 http://www.contrarianprofits.com/articles/investing-in-chinese-real-estatemr/3231 http://www.contrarianprofits.com/articles/investing-in-chinese-real-estatemr/3231#comments Wed, 25 Jun 2008 16:15:27 +0000 Wayne Mulligan http://www.contrarianprofits.com/articles/investing-in-chinese-real-estatemr/3231 Editor’s Note: Wayne Mulligan, founder and CEO of TickerHound.com is traveling in China. Writing for Penny Sleuth, he says that the housing market boom has reached its limits for now. More losses are likely in the near future, making shorting a good option for investors…

China’s housing market has shown signs of cooling this year, as tighter credit conditions limit financing options. Sameer Nayar, head of real estate finance at Credit Suisse Group, told Bloomberg that financing costs have soared 500-700 basis points (5-7%) in China.

Meanwhile, Thomson Reuters reports that residential transactions were down over 50% in April, according to China Index Academy.

Investing in Chinese Real Estate

By Wayne Mulligan

I landed in China about seven days ago and have been completely amazed by how much…

]]> Editor’s Note: Wayne Mulligan, founder and CEO of TickerHound.com is traveling in China. Writing for Penny Sleuth, he says that the housing market boom has reached its limits for now. More losses are likely in the near future, making shorting a good option for investors…

China’s housing market has shown signs of cooling this year, as tighter credit conditions limit financing options. Sameer Nayar, head of real estate finance at Credit Suisse Group, told Bloomberg that financing costs have soared 500-700 basis points (5-7%) in China.

Meanwhile, Thomson Reuters reports that residential transactions were down over 50% in April, according to China Index Academy.

Investing in Chinese Real Estate

By Wayne Mulligan

I landed in China about seven days ago and have been completely amazed by how much it’s changed in the last few years. I haven’t set foot in Beijing since late 2005 and the difference between then and now becomes evident as soon as you hit the airport.

But the biggest change I’ve seen is in a sector many thought was invulnerable: China’s real estate market.

So when I saw this question on TickerHound, I thought it was a PERFECT opportunity to share some firsthand experiences with you:

How can U.S. investors profit in the Chinese real estate market?

Now, just to be clear, my analysis isn’t complete yet but I think it’ll be helpful to share some of the observations I’ve made by speaking with local businessmen and homeowners.

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The Phone Call That Saved You $4,872

She was furious when she called Addison up on the phone.

“Addison, look, there’s a lot of people who want the ‘all access’ pass, they just need a lower price to give it a try… So let’s just give it to ‘em already. OK?!?”

Find out what she was talking about and what he said here…

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Is a Bubble Popping?

When I was last here people were falling all over themselves to buy a new home and hopefully sell it for a quick profit in a year or two. I saw this trend everywhere from Beijing, to Shanghai and all the way down south in Fujian.

Prices were rising every month and developers couldn’t put up new apartment complexes fast enough.

But things have certainly changed in a few short years.

Whenever I speak to homeowners or prospective homeowners this time around, I keep hearing the same thing: prices are too high.

Many people are content with holding out until the market pulls back a bit before investing in a new home, and the developers are starting to feel it as well.

Not only are they providing discounts and rebates if buyers put more money down (for example: if a buyer were to put up the entire cost of the home upfront, then he’d get a 10% discount on the entire home) but they’re also engaging in some creative marketing campaigns as well. The most interesting one I’ve seen so far is, “Buy a home and we’ll give you a car for free!”

To me, this is like walking into a retailer and seeing that they’re discounting their entire inventory. Meaning, people don’t like the merchandise enough to pay full price and it’ll inevitably be reflected in the company’s bottom line at the end of the year.

I think we’re seeing the same thing in China right now and the summer might mean a serious downturn in the once red-hot real estate market.

But Don’t Take My Word for It

Keep in mind that these are just my general observations after being here and speaking with dozens of people for the last week.

But I think there’s a more telling indicator that we can look at which not only confirms my suspicions, but could also help us profit from this coming downturn.

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In December 2007, Claymore launched a China Real Estate ETF (NYSE: TAO). The fund was setup to capture the upside in one of the world’s hottest real estate markets. And with prices rising by double-digit percentages every month it seemed like a good idea.

But if you take a look at the ETF’s chart since it launched then you’ll see that its performance has been less than stellar.

In fact, it’s down about 25% in the last six months:

My bet is that we’ll see some negative news from this sector over the next quarter and shorting this ETF might be a smart way profit from it.

However, I have to warn you that you need to be careful here. People have been predicting a downturn in China’s real estate market for years now and while there were certainly hiccups along the way, this market has continued to skyrocket.

I have a tremendous amount of faith that the overall real estate sector will continue to do well here over the long term, but for now I think it’s a buyers’ market and profits in the sector will suffer for the time being.

Source: Investing in Chinese Real Estate

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