Chapter 18 - Short Selling the Real Estate Bubble in China

Abstract

This chapter investigates the real estate bubble in China and presents some tips and suggestions for short selling the real estate bubble there. China is an emerging market in terms of the real estate market since the reform on resident housing in urban areas was initiated in the late 1980s. Historical data depict a picture that real estate prices in China have been growing rapidly in recent years whereby the current real estate price level is beyond the affordability of urban residents. Compared with current rental price levels, purchasing a home is not a reasonable choice, whereas urban residents prefer renting a home. This kind of evidence suggests that a current real estate bubble in China. So some suggestions on how to short sell the Chinese real estate bubble are provided for investors. Short selling stocks in China started on March 31, 2010 and so investors can now short sell stocks related to China's real estate industry. One can either hold a short position in index futures by using the Shanghai and Shenzhen 300 index futures contract or can short sell stocks that have a high positive correlation to real estate stocks. In the commodities market, investors can short sell China's real estate bubble by short selling commodities related to the real estate in the international market. In addition, the finance industry is closely related to the real estate industry, as major sources of funding for real estate companies are Chinese commercial banks and the decrease of housing prices will deteriorate the value of banks' assets. So one can also short sell bank stocks to short sell the real estate bubble.