Transcript Short Selling the Real Estate Bubble in China

Short Selling the Real
Estate Bubble in
China
Kaiguo Zhou
Sun Yat-sen University,
Guangzhou, China
Reading Questions
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What’s the relationship between real estate bubble and financial
crisis?
Why is there a bubble in the Chinese real estate market currently?
How about the development of real estate price index in recent
years in China?
How about the affordability of urban residents under the current
housing price level?
What is the Chinese government doing to stop the bubble?
When will the bubble burst?
How can the domestic investors short sell the real estate bubble in
China?
How can the overseas investors short sell the real estate bubble in
China?
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The role of real estate bubble in
financial crisis
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Real estate bubbles may induce financial crisis.
An increase in real estate prices will increase the supply of credit to
the real estate industry, which in turn, will lead to further increases in
real estate prices.
A decline in real estate prices may diminish bank capital by
decreasing the value of real estate assets owned by the bank.
A drop of this type may possibly shrink the value of bank loans
collateralized by real estate which in turn can result in additional
defaults and thereby reducing the bank’s capital.
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Why is there a real estate
bubble in China currently?
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Speculation has caused housing prices to increase rapidly in the
past three years.
Although the GDP per capita and disposable income per capita are
both increasing in China, the growth rate of housing prices is far
greater than the GDP and disposable income.
Most of urban residents in China cannot afford a house or even a
down payment in a city where they live and work, according to the
current level of their personal income.
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The development of real estate
price index in recent years
2010-04
2010-01
2009-10
2009-07
2009-04
2009-01
2008-10
2008-07
2008-04
2008-01
2007-10
2007-07
2007-04
102.0
101.5
101.0
100.5
100.0
99.5
99.0
98.5
98.0
2007-01
Price Index
Monthly Price Index of Real Estate Sales, on a Month-to-Month Basis
Month
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Affordability of urban residents under
the current housing price level
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Guangzhou, the second largest city in China in terms of GDP per
capita, as an example
It will cost a couple an equivalent to 19 years of salary (ignoring the
time value of money) to buy a house of 90 square meters.
Compared with current rental price levels, purchasing a house is not
a reasonable choice while renting a house is preferred by urban
residents.
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The government’s reaction
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The government has realized that the real estate bubble does exist
and has started to implement some measures to suppress the real
estate price.
it requires the commercial banks to enhance the proportion of down
payment of mortgage loan to the borrower who buys the second
house, from 30% to 50%.
The mortgage loan rate is enhanced by 10% for the purchase of the
second house.
The required reserve ratio of commercial banks was enhanced for
three times within this half year (on January 18, February 25, and
May 10, respectively).
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When will the bubble burst?
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The high real estate price can not sustain for a long time
in the future.
By forecast, during the second half of this year, the real
estate price will start to go down.
The real estate price will return to the reasonable level
during the second quarter of next year.
The real estate bubble will burst then.
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How do domestic investors
short sell real estate bubble?
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Short sell the stocks related to China’s real estate
industry (Short selling stocks in China started on March
31, 2010.)
Hold a short position in index futures using the Shanghai
and Shenzhen 300 index futures contract
Short sell stocks having a high positive correlation with
real estate stocks, e.g., steel companies, wood
producing companies, cement and brick producing
companies, financial companies, etc.
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How do overseas investors
short sell real estate bubble?
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Simply short sell stocks on the Hong Kong stock market
that are closely related to Chinese real estate firms
Short sell Chinese companies listed both in mainland
China and in Hong Kong (called “A+H shares”)
Short sell ADRs issued by mainland Chinese and Hong
Kong firms in the US market
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Other strategies for investors
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The demand for many commodities such as steel,
cement and wood will significantly decrease due to the
shrink of real estate market.
Investors may choose to short sell such kinds of
commodities in the international market.
The raw materials of such commodities can also be short
sold.
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