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First with Financial Comment from Arabia

Is Shanghai property the next Dubai?

with 4 comments

Stories of rapidly inflating property prices, loose credit and off-plan speculation sound only too familiar to veterans of the Dubai real estate crash, and yet this is what we hear from Shanghai these days. How long before the Chinese property bubble bursts?

Of course it is wrong to compare a wealthy, advanced economy like Dubai with an emerging market economy like China with very low salary levels. And yet this also highlights the severity of the problem in Chinese real estate right now.

Shanghai prices

Shanghai property is presently 50 per cent more expensive than in Dubai, and yet per capita income in Dubai is up with alongside American levels, and higher for most property buyers who still mainly pay in cash and not debt.

Last year real estate investment in China more than doubled to $156 billion, and residential property prices shot up 68 per cent to $450 per square foot in Shanghai. Sounds very much like Dubai in 2008, before the crash in October of that year.

The Chinese authorities have responded belatedly with restrictions on new lending to property developers and buyers. Yet the risk of withdrawing liquidity from an investment bubble is only too clear. Bubbles burst when liquidity is withdrawn.

As in Dubai, Chinese real estate and construction sector has become an important motor of domestic economic growth, particularly after the 16 per cent slump in exports last year which comprise around two-fifths of GDP.

It has been driving purchases of everything from cars to home furnishings and building materials. Pull out the real estate boom and Chinese economic growth is going to undergo a huge correction.

Not different this time!

They said it could not happen in Dubai but it did. Is China really going to be any difference? Is this not the business cycle at work and human folly magnified by official hubris?

All emerging markets are prone to especially dramatic business cycles. It is partly due to a lack of diversification. It is partly due to a lack of past experience to temper expansion plans. It is also due to corporate and government structures that allow uncontrolled expansion until it is too late.

Is the Shanghai property boom going to end like Dubai? Sure it is. Shanghai has had several violent real estate corrections in the past decade. They all bounced back but this time could be different as the Chinese export machine is severely compromised by a weak global economy.

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Written by Peter Cooper

March 8, 2010 at 9:39 am

4 Responses

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  1. Let’s not confuse random anecdotes with economic analysis. Chinese M2 money supply is growing 17%, down from 30% last year. Bernanke could only dream of pumping up this magnitude of inflation.

    It should be plainly obvious how these experiments with asset bubbles end, that is complete disaster. Skilled labour shortages probably stem from the fact that the incoming peasants lack sufficient skills, not that there aren’t enough of them.

    Jacques

    March 9, 2010 at 8:51 am

  2. Not only is China booming but they also have shortage of labor lol.. My wife is in China today and many of the suppliers said that new items are not out yet due to shortage of labor at factories and companies in China. Funny how the US has high unemployment numbers while manufacturers and companies in China are having 1.5 trouble finding laborers to work for them (Don’t forget a country having 1.5 billion people is having trouble finding laborers lol.) Talk about a booming economy.

    There is a lot of shortage in clothes and bags as well as we buy those from Guangzhou in China so we know this first hand.

    http://www.thinkpads.com/2010/03/06/chinese-labor-shortage-leading-to-lcd-shortage/

    Ed Note: Labor shortage? Sounds like demand-push inflation is taking off. People have too much money for the goods now in circulation?

    Andy

    March 8, 2010 at 11:59 pm

  3. “With 1.5 Billion people living in China I think that there will be no shortage of demand for homes in Shanghai.”

    Wait a minute, China has always had an enormous population. That does not speak to the integrity of their economy, or the state mandated property bubble that Peter is warning about.

    Dubai’s property bubble was inflated by foreigners pouring hot money with reckless abandon. It was bad, however it was still basically a free market phenomenon.

    China on the other hand is not a free economy in any sense of the word. Citizens are still subject to capital controls, a sort of monetary prison, which essentially forces Chinese savers into domestic asset speculation.

    Moreover, credit in China is driven by the Communist politburo, who have essentially mandated the insane uneconomical property development for political reasons. China is a gigantic bubble, much worse than Dubai ever was.

    Jacques

    March 8, 2010 at 8:47 pm

  4. I think that prices may drop a bit to correct in Shanghai but they for sure won’t come down crashing like they did in Dubai. In Dubai the expats packed up and left due residency reasons,financing and other high expenses. In Shanghai the local won’t be packing up and going any where. Most that live in Shanghai are usually local or foreign businessmen and those businessmen don’t pack up and leave.

    Those from the rural areas would love to buy a house in the big cities like Shanghai so as soon as they make money they will want to move and buy property in Shanghai. The only reason that prices have corrected a bit is due to government tightening mortgage loans requirement and raising taxes to keep home prices from climbing too high too fast where in Dubai they made the cost of living unaffordable for expats, did not give loans for homes bought and did not offer residency so the few that just immigrated over to Dubai as expats packed up and left. Mistake made was instead of keeping the new immigrants and expats to continue to fuel growth was bad policies that forced expats and immigrants to return back home or look for a more affordable place to live. Those moving into Shanghai are usually those that have made money or doing business in China. With 1.5 Billion people living in China I think that there will be no shortage of demand for homes in Shanghai.

    My $.02 after having visited Shanghai and other parts of China along with Dubai.

    Andy

    March 8, 2010 at 2:54 pm


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