Savvy Contrarian Investors Gain Ground With China Real Estate ETF

by: Gary Gordon

Why are so many ill-informed analysts determined to “reveal” an ugly property bubble in China? For starters, most of those who write about China have never lived in the region. They understand precious little about Chinese culture or the mainland’s government structure. Equally important, empty buildings or high price-to-income ratios may be indicative of future price declines, but they alone do not cause bursting balloons. That requires extraordinary participation in leveraged speculation.

Those who foolishly make a case for China’s economic demise via a real estate disaster have not done their homework. The 1996-2005 mega-boom in U.S. property was a function of no-money-down and low-money lending to exceedingly weak credit risk (i.e. subprime) buyers. The U.S. government subsequently bailed out everyone from the financiers to the insurers to scores of people who never should have received the loans in the first place. And now the U.S. government has a debt burden so onerous, one can only wonder how it might escape its predicament.

In contrast, the Chinese government has trillions of yuan in reserve. China wouldn’t necessarily need to increase taxes or cut spending or print money if it needed to bail out a segment of its population or prop up a number of business entities.

How is it that “ghost city” commentators see a direct parallel in property bubble scenarios when a well-financed Chinese government can act quickly to minimize the extent of troubles? Less anyone forget, the most important financial institutions in China are well-capitalized and, for all intents in purposes, owned by the Chinese government.

The differences in government structure are critical in recognizing why China would not suffer a bubble-bursting in its real estate or financial sectors. There’s also the cultural disparity. Whereas U.S. citizens regularly consume more than they can afford in an “I’ll gladly pay you Tuesday” existence, Chinese citizens fund their purchases with what they have saved. This includes home purchases. And if they don’t have the money, they’ll ask members of their family for assistance.

So if doom-n-gloomers on the China property sector have missed the boat on government structure as well as Chinese culture, could they be right about leverage? Nope. Most property in China is bought with at least 50% down and Chinese banks have stringent lending requirements. Prices could decline precipitously, but there can be no balloon bursting without the helium-like leverage of horrific underwriting.

Granted, if China’s infrastructure build-out slows considerably, resources-rich exporters would contribute less to global growth. And if China’s property prices fall far enough, Chinese citizens may be more fearful in committing their savings to real estate purchases. In other words, things could turn grim.

But bubble-popping bad? Forget about it.

In fact, contrarian investors may already be looking at ways to profit from China’s eventual reflating of real estate demand. Check out the three-month returns for stock ETFs that track China indexes. That’s correct… Guggenheim China Real Estate (NYSEARCA:TAO) leads the pack.

China ETFs: 3-Month Returns Favor China Real Estate
Approx %
Guggenheim China Real Estate (TAO) 15.1%
Guggenheim China Technology (NYSEARCA:CQQQ) 11.9%
Guggenheim Chian Small Cap (NYSEARCA:HAO) 9.6%
Vanguard Emerging Market (NYSEARCA:VWO) 7.1%
PowerShares Golden Dragon Halter (NASDAQ:PGJ) 2.0%
iShares FTSI China 25 (NYSEARCA:FXI) 0.8%

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.