The equity market is a leading indicator in many ways. Sometimes its movement anticipates the actual reality six to eight months ahead of time. The present divergence between the Chinese real estate stocks and its real estate prices is raising red flags.
Since the Chinese National Development and Reform Commission (NDRC) began to publish its housing price index in late 2005, we can see that the first year over year percentage change in Chinese real estate prices peaked by the end of 2007. However, the CSI real estate stock index peaked about three months ahead of time and by the time the physical real estate property began to fall, the stocks already plunged over 20%. Then the CSI real estate stocks bottomed by early October of 2008 post the Lehman collapse and began its recovery. However, the physical real estate property price continued to fall until early February of 2009. Again Chinese real estate stocks led the actual real estate market by about three months.
The current situation between the Chinese real estate stocks and the Chinese real estate is interesting and it clearly breaks the previous pattern. As we can see, the CSI real estate index concluded its uptrend by the beginning of June in 2009 and has since plunged close to 40% from the June 2009 peak. However, the Chinese real estate market continued to surge and breached 12% year over year price appreciation by March of this year. This is a time lag of over 9 months, much longer than the previous two occurrences. In addition, the reality gap between the real estate stocks and the real estate market has more than doubled.
What this tells us is that the equity market is pricing in information that the public real estate market is not reflecting and the divergence at this point is so large that when the real estate does reflect reality, things are going to get extremely ugly.
It is not hard to explain why the actual real estate market is having such a huge divergence with the real estate stock market. What is different about the re-inflation of the Chinese real estate market since 2009 its that unprecedented trillions of dollars were pumped into the real estate market as the focus of its $600 billion stimulus package instituted in 2009. This centralized government effort not only re-inflated the real estate bubble but was able to take Chinese real estate frenzy into new heights in a matter of months.
Now the central government is worried. Premier Wen Jiabao in late December of 2009 expressed his worries about the rapid real estate surge in China and vowed to curb easy lending and increase the amount of down payment on land. But at this point it is too late. Never in history has a government sponsored asset inflation campaign ended successfully without some sort of a collapse or hard landing. With the Chinese growth story now predominantly rested on domestic real estate growth, that story will collapse soon and the consequences will be devastating.
Is there an SRS type of ticker for China that we can buy in the US?
Short TAO?
Hey there Kenji,
Like my analysis shows, the Chinese Real Estate stocks have already plunged by 40% leading the Chinese real estate market.
Yea TAO is good representation of Chinese REITs. Claymore is the only firm that I know of that created the ETF that follows Chinese real estate directly.
IMHO, if the EURO weakens and the RMB strengthens China is in real trouble. Manufacturers have a 3-4% profit margin, have to pay employees more and the EU is their biggest export partner who is about to tighten their belt big time. There is no way the Chinese can have a stronger RMB and a weak EURO and not have their bubbles pop or face other major issues. Not to mention that their banking system is not as liquid as they would like based on comments made by several leaders. I am not sure why no one is worried about the Euro/RMB situation. Frankly, it has me extremely worried and while I might be wrong even if I am half way right it is not good.
Demsco,
I cannot agree with you more. I think the insiders are worried the hell about it but the media won’t talk about it. China has fallen into a death trap. I saw this coming as early as two years ago. Is it any wonder why the U.S began to aggressively push for the Yuan appreciation and at the same time allowed China to become its biggest creditor? This is all planned out. It’s going to get ugly.
so…when are you anticipating all this to fall apart? and is that why they are dragging their heels unpegging their currency against the USD? what opinions do you have on the other emerging markets? Brazil? India?
Based on the chart. The crack in the real estate bubble is already beginning. We should see some major developments in the next 8 months or so.
Well china wants to delay the appreciation as long as possible because many leading scholars and economists see the train wreck ahead. But it has no choice due to international pressure.
No one is safe this is a global crisis.
conform stocck
Don’t know what you meant there. But short TAO or buy FXP.
So, what CAN we buy to benefit from this ?
What’s the point in being right otherwise …
Like the comment above. If you want to gain direct short exposure to Chinese real estate. Short TAO. FXP is not a bad choice either since the Xinhua Index has a significant exposure to real estate.