China has been the investment darling for the last couple of years. As US economic woes continued to mount and the EU ran into debt problems, many an analyst continued to talk about China as if it had decoupled from the rest of the world.
The Chinese government, much like the rest of the world’s industrialized nations, injected billions upon billions of stimulus into their economy, sending auto sales, home sales and stock prices soaring.
Chinese citizens, with an average income of roughly $4,000 a year, piled into the aforementioned assets in droves, looking to flip property and paper in the spirit of capitalist speculators here in the US.
But, like the US, the dream of profits for the citizen proles will soon come to an end:
Authorities have tightened restrictions nationwide on advance sales of new property developments, introduced new curbs on loans for third home purchases and raised minimum down payments for second homes.
The Beijing city government has gone even further, limiting families to one new apartment purchase and barring people who have not paid taxes or made social security contributions in the city for one year from getting home loans.
“Sellers have started to lower the prices,” said Hu Jinghui, vice general manager of 5i5j, a real estate agency chain that has around 600 outlets in eight cities across China.
“But the buyers are still waiting.”
Since the capital put in place the austerity measures on April 30, prices have dropped an average 10-15 percent, with the number of home purchases slumping by 50 percent, according to Hu.
Jack Guan, a securities firm executive from the coastal city of Qingdao, searched last year on the outskirts of Beijing for his first home, but said he could not make a deal as prices “went insane”.
China’s asset appreciation was due not to any sort of real, sustained growth from increased consumption of Chinese goods abroad, but government stimulus. Sound familiar?
If global stock markets, bond markets and economies tank in the latter part of 2010, we suspect China will also feel the pain of their government’s tightening of lending policies and capital flight from risky Chinese assets.
China’s recent rise in real estate prices is akin to what we saw in the US in the mid-2000’s and is nothing more than an illusion.
We would expect Chinese asset prices to take a hit in the near-term. As trend forecaster Gerald Celente pointed out recently, it’s no time to gamble now. Speculating in stocks or real estate in the US or abroad is a dangerous game, and one’s focus should remain on preservation, rather than growth, especially if we’reÂ talking about retirement accounts.
However, we’ll note that because of China’s large population and internal consumption, as well as export expansion into new markets, they will decouple at some point in the future. While the rest of the world crumbles around them, the Chinese, with massive reserve of not just US dollars, but manufacturing capacity and an as of yet unknown store of precious metals, may be able to better weather the storm than western nations.
Thus, in an effort to diversify wealth, considering well run Chinese companies that cater to internal Chinese interests, such as wireless carriers, agricultural farms, industrial construction companies and energy firms, may be good investments after the next round of crashes. We will, however, warn would-be investors that you are investing in a country with a communist political government, so there is always the risk of manufactured corporate earnings, government intervention into personal assets, and changes in the law without consideration of how those laws may affect your wealth. Oh wait, we’ve got pretty much the same thing here in the US – so have at it.
China will grow, and likely overtake the US as the largest economy in the world within the next decade or two. As an American, it’s difficult to make this suggestion, but the numbers don’t lie, and unless some massive global war were to take place, the trends for the next few decades will see China grow exponentially.
But in the short-term, we wouldn’t be too excited about China. They’ve created a bubble over there and it is going to deflate somewhat while the rest of the developed nations see their bubbles popping.