09/06/2011 - 00:00

China’s housing market at tipping point

09/06/2011 - 00:00

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China has become too cheap and too expensive at the same time – and something has to give.

China’s housing market at tipping point

FALLING property prices worry Perth homeowners, but there is another property market that’s overdue for a fall – and when it happens the damage will be far more widespread, potentially delivering a painful blow to Western Australia’s mining industry.

Chinese residential property is emerging as the world’s next big asset bubble, which appears to be staying fully inflated thanks to a flow of hot air from that country’s central government.

In a way the Chinese property market is an exquisite puzzle, with prices having become too expensive partly because pay rates are too low.

That might sound confusing but it isn’t really, because cheap Chinese labour is what lies at the heart of the country’s success and the property boom it has spawned.

The confusing aspect of what’s happening is that China has become too cheap and too expensive at the same time – and something has to give.

The old world of Europe is where the impact of cheap Chinese labour is being felt hardest, as entire manufacturing industries are undercut and governments lurch from debt-fuelled crisis to debt-fuelled crisis.

There is no doubt that mismanagement and an overly generous social welfare system has played a big part in Europe’s woes, but losing jobs to China is an equally important factor.

So far, Australia has been able to benefit from this massive transfer of wealth from West to East, though perhaps for not much longer.

Just as European economies have been driven to the brink of bankruptcy by governments failing to understand that manufacturing has migrated to China with its cheap wage rates, so too has China mismanaged its newfound wealth.

Much of the money pouring into China has been spent on a residential property boom that has created entirely new cities – built with Australian raw materials from the iron ore that went into the steel to the zircon in the bathroom tiles.

Government in China is struggling to handle the problems it has created by trying to run a market-based economy inside a communist regime, because forces that drive the markets are moving at a faster pace than the government making the rules.

What happened with residential property is a fascinating example of a market running amok because it wasn’t until 1998, just 13 years ago, that the government privatised residential housing and created a market where one did not exist before.

The result was the chaos we see today. Too many houses, flats and home units priced at levels the average workers cannot afford because wage rates have not kept up with property prices.

What happens now?

The smart money says China will not sacrifice its cost advantage over the rest of the world by allowing wage rates to rise too quickly, further fuelling inflation and risking job losses in its own factories, unleashing China’s greatest fear, social unrest.

The solution will be to deflate the property bubble, blaming capitalist speculators for the pain, and hopefully avoiding a bursting of the bubble, which could cause almost as many problems as factory closures.

Whether the bubble is pricked or the hot air released in a controlled manner, the point is that demand for house-building raw materials will decline, which potentially means reduced demand for Australian raw materials.

Short sold

FIRST signs of the world becoming worried about the outlook for China as it juggles its problems of high property prices and low wage rates can be seen in the way Western investors are withdrawing from China-exposed companies.

In the US, a number of companies listed on that country’s second biggest stock market, Nasdaq, have been heavily sold off amid fears of a Chinese slowdown.

China MediaExpress, a bus-side advertising business, led the way down, plunging by almost 50 per cent in May. China Agritech has fallen further.

The big China sell-off has been described by some analysts in New York as an anti-China bubble, with hot money rushing to place bets through short-selling on the next Chinese company to be dumped.

For readers unfamiliar with short selling, it is a technique of selling something you don’t own in the hope of buying it back at a later date when the price is lower.

A cute problem for investors, according to investment banks hunting deals, is that the pool of Chinese companies open to short selling is drying up.

What becomes interesting from an Australian perspective is whether US share traders, who are running out of pure-play China stocks to short sell, will look further afield at short selling companies that sell raw materials to China.

The theory behind this possible expansion of short selling is valid because it revolves around a possible slowdown in China.

The trick will be watching out for ASX-listed stocks that can legally be short-sold and then wondering whether their lower price represents a buying opportunity.

Green in Germany

AUSTRALIA’S biggest carbon tax test will not occur in Australia. It will be in Germany, where a courageous experiment is under way in the business of green electricity.

Shortly after Japan’s earthquake, tsunami and nuclear power plant melt down, Germany decided to mothball eight of its reactors, about 40 per cent of nuclear capacity, until detailed examinations could be undertaken.

The rest of the reactor fleet will be permanently closed over the next 10 years. What this means is that Germany has become the Western world’s biggest experiment in solar and wind power.

On a good day, when the sun shines brightly and the wind blows, solar power and wind turbines can make a major contribution to Germany’s electricity demand.

On a bad day, coal kicks in as the base-load power source with supplies of electricity bought from France and the Czech Republic.

Said quickly and Germany’s bold decision to exit the nuclear power business sounds manageable; but the jury is out as to whether solar and wind will fully plug the nuclear gap, given the inability to store large amounts of electricity and the simple fact for solar cells that night follows day.

As for burning more coal, or sourcing nuclear-fuelled electricity from across its borders, well, that sounds like the green-hearted Germans are planning to do a bit of cheating.

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“I am not young enough to know everything.”

Oscar Wilde

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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