We don’t really hang with the deflation crowd much, but a hard landing in China is the one scenario that keeps us up at night. China is the locomotive of the global economy and we monitor events there very closely. In fact, we wrote early this week that the Shanghai Composite would have to rally off the bottom of its trading range to confirm Monday’s S&P500 breakout.
Real Estate Bubble
A couple of informative articles out of Hong Kong this week have rung our [alarm] bell. William Pesek’s excellent Bloomberg article, Bubble City’s $3.2 Million Flat Spells Danger, warns of the danger of Hong Kong’s property bubble,
On the surface, everything is great. The city’s $215 billion economy is growing 6.5 percent, confounding the skeptics. It’s good to be the gateway to China’s boom while the most developed economies fret about a double-dip recession.
Yet that proximity comes with a price, and a growing one. Few doubt that Hong Kong has a property bubble on its hands. Home prices have surged about 47 percent since the start of 2009. Who’s buying? Wealthy mainland Chinese.
The Federal Reserve’s zero interest rate policy (ZIRP) is the other force fueling the bubble, as Hong Kong’s currency peg to the dollar is a superconductor of U.S. monetary policy. Hong Kong has even been referred to as the 13th Federal Reserve District.
Pesek writes Hong Kong is a microcosm of the mainland,
And even if Hong Kong is hot, it’s less of a bubble than, say, Shanghai. For now, at least.
China’s property bubble is nothing new and has been the subject of ongoing debate in the global markets. But, even just a whiff of a hard landing would generate a massive sell-off in global asset and commodity markets. No wonder Jim Chanos, one smart dude, maintains his negative view on China and short positions in commodities.
Prices for Château Lafite Rothschild, the market leader, have doubled in the past six months. China’s largest bank, ICBC, is reported to have started buying wine on behalf of its clients. Classes on wine investing are taking off. Sniff its bouquet, however, and the wine boom has hints of tulip mania
The Economist’s, Days of Wine and Tulips, was even more surprising. We linked last week to the WSJ, China Pushes Bordeaux Prices Higher, and it appears speculation may be a major force driving up wine prices.
After Hong Kong cut the sales tax on wine to zero in early 2008 imports skyrocketed,
The zero tax rate has attracted big auction houses to the wine trade in the ex-colony. David Elswood, the top wine man at Christie’s, says that Hong Kong has become more important than New York and London combined…
Although most of the new demand has a mainland-China connection, there have been buyers from South Korea, Japan, Indonesia and Thailand, all of which still tax wine heavily…Moving wine into these countries would be costly. But for many buyers that is beside the point. They are buying to invest, not to imbibe. Their bottles will remain in the vaults…
If people were buying to drink, one might expect the surge in prices and volumes to be broad-based. Instead, it is focused on a handful of famous names. These are, ahem, a more liquid investment: they can easily be resold. And using reputable auction houses reassures buyers that the wine is not counterfeit.
There you have it. What appear to be late stage bubbles that, we know, rarely end without tears. Pass the Ambien!