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Monday January 9, 2006 - 11:28:00 GMT
Black Swan Capital - www.blackswantrading.com

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Alternate Scenario: A Chinese housing bust?

Quotable

“If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts, he shall end in certainties.”

Francis Bacon

FX Trading

“First, for the first time in three years the story for the dollar this year will likely be cyclical. The only pent-up pressure I see is in the Chinese RMB. At the same time, the G3 currencies will probably be driven by cyclical, not structural factors, and the US housing cycle is the dominant cyclical driver. I expect the USD to depreciate with the softening US housing market, not because the overall US economy will slow sharply, but because investors are fixated on that sector and are likely to overreact,” writes Stephen Jen of Morgan Stanley.

It seems everyone knows US housing could be a problem for the US economy. But isn’t news everyone is expecting supposed to be discounted and reflected in prices? Could the real surprise be that the US consumer once again defies logic and keeps on chugging throughout 2006?

Many seers see US housing price deflation as the proverbial straw that breaks Mr. US Consumer’s back. It makes a lot of sense. But when we find ourselves firmly in the consensus, we naturally start to get nervous. And it forces us to think about alternate scenarios. Here is our favourite alternative scenario:

The Chinese real estate market breaks down first—adding to rising liquidity concerns—and does to China what is now expected in the US. And the implications are the dollar rises on speculative money flow flooding out of China, as the economics of housing make it clear Chinese policy makers can ill afford to revalue the yuan.

This from the LA Times (our emphasis):

“Once one of the hottest markets in the world, sales of homes have virtually halted in some areas of Shanghai, prompting developers to slash prices and real estate brokerages to shutter thousands of offices.

“For the first time, homeowners here are learning what it means to have an upside-down mortgage — when the value of a home falls below the amount of debt on the property. Recent home buyers are suing to get their money back. Banks are fretting about a wave of default loans.

"’The entire industry is scaling back,’ said Mu Wijie, a regional manager at Century 21 China, who estimated that 3,000 brokerage offices had closed since spring. Real estate agents, whose phones wouldn't stop ringing a year ago, say their incomes have plunged by two-thirds.

“’Shanghai's housing slump is only going to worsen and imperil a significant part of the Chinese economy,’ says Andy Xie, Morgan Stanley's chief Asia economist in Hong Kong.

And this could be the most interesting part we think:

“Although the city's 20 million residents represent less than 2% of China's population of 1.3 billion, Xie says, Shanghai accounts for an astounding 20% of the country's property value. About 1 million homes in Shanghai alone — about half the number of housing starts for the entire United States in 2004 — are under construction.

Maybe this bubble is not quite as big as the one we remember in Tokyo. But it should be something to worry about.

Not to worry, says the assembled mass of Chinese pundits. The next hot market is Beijing—and investors will just move on and rack-up gains there. Yeah…ok!


Jack Crooks
Black Swan Capital

 

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