Chapter 15 - The Chinese Real Estate Bubble: Is It an Opportunity for Short Selling?

Abstract

This chapter evaluates the arguments on the emergence of the China real estate bubble and the accompanying opportunity for short selling. The lack of reliable data and the short operating history of China as a semicapitalist country make firm conclusions difficult. However, overall the evidence points to further problems in the Chinese banking and real estate sectors. If this is true, then it is not too late to short Chinese banks and property stocks. Some investors predict that China's real estate bubble will soon burst as the property prices in China are relatively high with respect to GDP per capita and as the Chinese government took actions in April 2010 to regulate real estate prices. However, economic activities in China are controlled by central and municipal governments, sizable state-owned banks, and enterprises to a great extent. In 2010, the magnitude of bank lending has been reduced greatly following the change in monetary policy. This is expected to cool down the transaction volume of the real estate market. Even with the drop of property prices, the Chinese central government is taking measures to curb current real estate prices. A decline of 30% or more in real estate prices is widely accepted by the central government, but it is not certain that commercial banks can assume such big declines. Possibly a decline of over 50% in real estate prices is expected to induce a new wave of financial crisis in China. Therefore, a rapid drop in real estate prices is hazardous to the banking system and the government expects a slow decline. The Chinese government has recognized that a bubble currently exists and has opted to contain real estate prices to maintain a “harmonious society.”