Thursday, June 19, 2014

Gary Shilling: Could China real estate cause huge losses to investors

Real estate has been an investment darling since 2009, when China countered the global recession with massive bank lending. Thrifty Chinese households save almost 30 percent of their incomes and have few other investment opportunities. Stocks continue to slide with the Shanghai Composite Index off 67 percent from its October 2007 peak. Government regulation prevents the widespread movement of investment funds abroad. Government-controlled bank deposit rates pay a trivial 0.35 percent, well below the 2.4 percent inflation rate.

So beyond the shadow banks, real estate has been the star -- much to the displeasure of Chinese leaders, who hate the related speculation. Government attempts to curb the earlier leap in real estate prices by limiting multiple apartment ownership and restricting financial leverage may finally be working.

Prices for new real estate in major cities such as Beijing, Shanghai, Shenzhen and Guangdong leaped 45 percent between February 2012 and this February, but then fell 7 percent through April. 

Given the ghost cities and other measures of extreme overbuilding, the recent slide in real estate values could evolve into a rout, with considerable loss of Chinese wealth and financial institutional failures.