Author: Joshua Adler
The article mentions the recent decline in residential property in major Chinese cities. Chang questions if this decline in prices is the end of the Chinese property bubble. The decline in price has started in cities such as Shanghai, Beijing, and Shenzhen. Chang mentions one company based in Hong Kong, Hutchison Whampoa cut prices of its properties by 32 percent. The decrease in residential property is due to the pressure on developers to meet revenue targets for next year. This started a sell-off in real estate inventory. Oscar Choi from Citi believes that the prices will decline another 10 percent next year. Investors are dumping bonds and shares of Chinese developers. The Chinese government is trying to cool down the real estate market before the bubble bursts through increases in mortgage rates and prohibitions on second-home purchases. These measures have not calmed Shanghai citizens’ nerves. There were 300 people in Shanghai smashing windows at Longfor Properties offices after the residents received a 30 percent loss on their property. The problem is that the Chinese government has been supporting the inflationary property prices through stimulus; however, the government has encouraged a real estate bubble to be created.
The Chinese government needs to incorporate stronger regulations around real estate and development of real estate. The Chinese government needs to look at the collapse of the U.S. real estate market and learn from the mistakes of the U.S. government. Dubai is another example of a real estate collapse due to the decrease in funding and credit. Fortunately for the Chinese markets the financial industry of China has not established a strong chain of securitization. Securitization is the main reason the U.S. real estate crisis was so systemic. Financial institutions created Mortgage Backed Securities and Credit Default Swaps that created speculation and tied the risk of default from one institution to another institution. China does not have systemic risk to the extent of the U.S. markets. The lack of securitization in China has created an environment that is not too big to fail. If there is a collapse of the Chinese real estate then it will not interfere with other industries as much as the collapse of the U.S. real estate market. The question is, would the Chinese quasi-communist government bailout companies like the more capitalist U.S. government? And if the Chinese real estate does collapse, how will this affect the U.S. financial institutions that invested in these Chinese real estate companies?