Soft Landing in the Chinese Property Market

Andy Xie, the former Morgan Stanley economist and one smart dude, pens a great piece for Bloomberg on the Chinese property and reverses his previous view of an imminent crash. The fallout from a potential hard landing in China’ s property market is one of the reasons we keep an ample supply of Ambien close at hand. Xie writes,

“Recent developments have changed my mind. This bubble may not end suddenly, but with a slow leak. Previously, I thought the government would relax its credit-tightening policies in the fourth quarter, leading to another surge in property prices. The bubble would pop with a big bang in the second half of 2011 or in 2012.”

The money quote:

As Chinese real-estate prices deflate slowly now, and faster in 2012, the economy will hold up. Exports, consumption and infrastructure should sustain a 7 percent to 8 percent growth rate for the next decade. That seems low compared with recent years, but it will be much better for lifting wages, household living standards and corporate profits.

China has no home-equity loans for consumption. Those who hold more than 20 million empty flats will become poorer or bankrupt. The sales of Mercedes cars may shrink. But the middle class will be able to consume more as they pay less to buy flats from speculators.

Since we monitor global capital flows very closely, we find this interesting,

“In addition to credit policy, liquidity is tightening… After waiting for years [currency revaluation] without seeing the real thing, the hedge funds are fed up and don’t want to hang around anymore…The yuan non-deliverable forward market isn’t expecting significant appreciation for the next year.

That is having a big impact on hot money flow into China. The competition for deposits is heating up. Banks are offering products that are like deposits and with much higher interest rates than the policy rates.”

The lower probability of a hard landing in China the better for risk assets.   It will be interesting to see if Chinese equities can bounce off the lower end of their trading range given the country’s tighter liquidity conditions.  This, in out opinion,  would confirm the recent breakout in the U.S. market.   Stay tuned!

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