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Speculative Fever in China: Part 1 A View from the Ground

|Includes: FXI, Invesco China Real Estate ETF (TAO)

Chinese people love status symbols. While it is true that Chinese people in general are big savers, they save for a single purpose: to buy things that show people how rich they are. In the past six months the volume of luxury cars I see every day on China’s clogged streets has exploded. A year ago I would see a few Mercedes and BMWs each day, but now I daily see dozens of them along with Porches, Lexus’ and the occasional Lamborghini (usually driven by a 20-something with a baseball cap listening to rap music.)

Being rich is everything in China. These days a woman’s parents insist that any man she marry must have a new car and a new apartment (no small feet in China.) This weighs men down with enormous pressure and has fostered an out of control get-rich-quick mentality of using all the capital you have and all that you can borrow to make as much money as soon as possible.

I meet so many more rich Chinese people than I did two years or even ten months ago. I have made a hobby in China of always asking anyone with money, “how did you make your fortune?” Invariably, the answer is always the same: real estate. Whether it is putting up apartment buildings, speculating in real estate or the corrupt government official who gets paid off to award a no-bid contract, everyone is getting rich off of the real estate boom (it’s used to be exporting whenever I asked, but in the past two years everyone I ask always attributes their wealth to real estate.) Speculative fever has gotten to almost everyone I know: professors are pre-buying un-finished student dormitories then flipping them, businessmen are taking their profits and buying three or four apartments, anyone who has a relative working at a bank is trying to leverage that connection to get as many loans as possible to buy before getting “priced out of the market.” This is a phrase I hear all the time, and it always reminds me of scared Americans in 2006 who took out jumbo mortgages to “buy before it’s too late.”

Look out of any window in a Chinese city and you will most likely see one or more cranes constructing 20+ storey apartment buildings or a shopping center. Yet, when I look out at night at recently completed apartment complexes I see something astonishing: there are no lights on – no one is home. I remember a few months ago going to a six building, thirty storey apartment mega-complex with more than four hundred units just to ask about what kind of people lived in such place. The guard I ran into said he didn’t know what kind of people lived in such a place either, because as of yet, no one had bought one of the units and actually moved in. It was all speculators anticipating future demand. The place was a ghost town.

Drive to the outskirts of a Chinese city and you will encounter, among the fields where China’s poor peasants still toil, monolithic residential complexes – all empty. Think of the future, I am always told. The peasants will all move to the cities, the immigration will be endless and the profits bigger than endless. I too wish that one could see the future by shining a mirror on the history of the past and guide oneself like Perseus slaying Medusa, but it isn’t always that easy folks.

In my next post I will give you the hard facts about why a sustained real estate boom in China is not only unlikely, but impossible. I will outline some Chinese ADRs that have an interesting non-linear relationship to the Chinese housing sector and thus have not yet accumulated significant short interest from the China bears who have begun to speculate against China this past year. For now please think twice before buying real estate ETF (NYSE:TAO), or a Chinese banking and large-cap ETF (NYSEARCA:FXI), or making a physical investment yourself in Chinese real estate, as so many Westerners and Western corporations are now doing.

I am short FXI