Post date: Mar 12, 2013 10:6:21 AM
Reuters Business Report - Soaring towers across the nation, newly built ghost towns, and still a frenzy to invest.
Property investment in China now accounts for over 10 percent of the nation's growth and the government is stepping in to slow the market down.
Latest measures include a 60% percent down payment on second homes and higher sales tax.But is this enough to calm the market?
I spoke to Gillem Tulloch, Founder and MD of Forensic Asia.
REUTERS REPORTER, TARA JOSEPH,
"So Gillem, you're fundamentally negative on property. I can tell that from your research. What kind of bubble are we in? Is it a U.S.-style bubble for property inChina?"
FOUNDER & MANAGING DIRECTOR, FORENSIC ASIA, GILLEM TULLOCH,
"Well, it's a U.S.-style bubble in that it's been created by vast amounts of cheap money, but it looks slightly different. So the U.S. bubble was really driven by lower-end mortgages being issued, whereas this bubble is really high-end speculation. So the debt dynamics are slightly different so there's no real mortgage debt backing the Chinese property bubble."
REUTERS REPORTER, TARA JOSEPH,
"High-end speculation, is this a bubble that's going to pop? Or has the government put a stop to it?"
FOUNDER & MANAGING DIRECTOR, FORENSIC ASIA, GILLEM TULLOCH,
"Well I've never come across a government that's actually managed to deflate a bubble gradually."
REUTERS REPORTER, TARA JOSEPH,
"Hard work to do that. Or a miracle maybe."
FOUNDER & MANAGING DIRECTOR, FORENSIC ASIA, GILLEM TULLOCH,
"It's easier in a textbook than it is in reality. So what will likely happen is that confidence will suddenly go and that yes, the bubble will pop."
REUTERS REPORTER, TARA JOSEPH,
"Is that what is going to happen next or do you think it's unwinding already?"
FOUNDER & MANAGING DIRECTOR, FORENSIC ASIA, GILLEM TULLOCH,
"I mean at the moment, the bubble is still very much inflated and the government is now introducing various sort of restrictions to try and calm it down. We think that will have varying degrees of success, but we do think that the bubble will burst sometime in the second part of the year once they stop injecting ridiculous amounts of credit into the economy."
REUTERS REPORTER, TARA JOSEPH,
"Now there are stock recommendations out there. A lot of people still recommending firms like China Vanke and some of the big property developers. Is there some value in the sector still?
FOUNDER & MANAGING DIRECTOR, FORENSIC ASIA, GILLEM TULLOCH,
"I mean I would say there's absolutely no value in any of these stocks whatsoever. I mean you're holding a tiger by the tail, isn't that the expression? It will eventually come back to bite you. I mean, the way these companies are running their balance sheets is reckless. The Chinese property companies have the best terms of trade inAsia and yet they're the most highly leveraged in Asia. So when this bubble bursts, they'll all be negatively affected."
REUTERS REPORTER, TARA JOSEPH,
"So you are saying this about every single property developer in China."
FOUNDER & MANAGING DIRECTOR, FORENSIC ASIA, GILLEM TULLOCH,
"All the large major ones, yes. They'll all see their profits fall spectacularly. The state-backed ones will survive and it's the highly leveraged private-owned property companies that will have the most difficult time."
REUTERS REPORTER, TARA JOSEPH,
"Final question then, if this is in a way the tip of the iceberg with a bubble bursting in the property sector, the effect on the rest of China stocks or the other Chinese companies could be huge."
FOUNDER & MANAGING DIRECTOR, FORENSIC ASIA, GILLEM TULLOCH,
"True. Obviously the effects because property accounts for so much of the economy, it's way more than the U.S. bubble did in 2006."
REUTERS REPORTER, TARA JOSEPH,
"It's like 14% I think."
FOUNDER & MANAGING DIRECTOR, FORENSIC ASIA, GILLEM TULLOCH,
"The U.S. was about 6% at the peak in 2005-2006, so it's just way larger, this bubble. But yes, it will have a huge impact on all parts of the economy as asset prices decline and people's savings get wiped out."
REUTERS REPORTER, TARA JOSEPH,
"We'll leave it on that note. A little bit frightening but maybe true. We'll have to see. Gillem Tulloch, thanks very much."
FOUNDER & MANAGING DIRECTOR, FORENSIC ASIA, GILLEM TULLOCH,
"Thank you."