Empty Cities: China's phony construction boom

[specuvestor]

http://im.ft-static.com/content/images/e...ebc863.img

This chart from the Financial Times roughly explains what is going on and the risks involved.

LGFV has been monitored and discussed for AT LEAST 2 years now. Also note that few people understand that the local govt are very cash poor while the central govt is very cash rich because revenue is centralised. Many confuse between the two "governments" when they talk about getting into "trouble"

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Residential property is an expense because it doesn't produce cashflow generally, unless you have an investment property. That's why a bubble (vs gradual inflation beating appreciation) in residential is almost always bad because it is just funny money capital gains, feel good wealth effect with no cashflows nor value added productions (except of course commissions and constructions).

Nonetheless my point is that though it is a problem in China, it is not as dramatic as the west painted it to be. They don't understand Chinese obsession with real estates, as they understand correctly that it is an expense to be managed.

I always read western article on property bubble in China, with a pinch of salt. The value of "Home" is quite different between Westerner and Chinese.

Bubble is there, but not as bad as painted, especially so in tier-1 cities, IMO.

But could all these evidences be untrue ?

http://www.youtube.com/watch?v=pbDeS_mXMnM

As I pointed above: "there is a big difference between "sold" and "unsold" empty houses, and domestic demand vs foreign demand "

The issue is real but note most of the journalists/ TV show u the empty houses, but only a few mention that little fact: most of them are actually sold. A big property crash will have huge ramifications but LTV is about 50% in China. And as discussed above investment in residential is not productive, but the issue is overblown by the western media

[Clement]

http://im.ft-static.com/content/images/e...ebc863.img

This chart from the Financial Times roughly explains what is going on and the risks involved.

LGFV has been monitored and discussed for AT LEAST 2 years now. Also note that few people understand that the local govt are very cash poor while the central govt is very cash rich because revenue is centralised. Many confuse between the two "governments" when they talk about getting into "trouble"

---

Residential property is an expense because it doesn't produce cashflow generally, unless you have an investment property. That's why a bubble (vs gradual inflation beating appreciation) in residential is almost always bad because it is just funny money capital gains, feel good wealth effect with no cashflows nor value added productions (except of course commissions and constructions).

Nonetheless my point is that though it is a problem in China, it is not as dramatic as the west painted it to be. They don't understand Chinese obsession with real estates, as they understand correctly that it is an expense to be managed.

I always read western article on property bubble in China, with a pinch of salt. The value of "Home" is quite different between Westerner and Chinese.

Bubble is there, but not as bad as painted, especially so in tier-1 cities, IMO.

But could all these evidences be untrue ?

http://www.youtube.com/watch?v=pbDeS_mXMnM

As I pointed above: "there is a big difference between "sold" and "unsold" empty houses, and domestic demand vs foreign demand "

The issue is real but note most of the journalists/ TV show u the empty houses, but only a few mention that little fact: most of them are actually sold. A big property crash will have huge ramifications but LTV is about 50% in China. And as discussed above investment in residential is not productive, but the issue is overblown by the western media

I meant that the chart roughly illustrates the story behind why there are so many ghost towns, not about government financial health. In any case, can we be certain that the local governments will be bailed out should trouble arise? How about the developers who purchased the plots?

[Behappyalways]

Jim Chanos on China......I always love his views.....

http://investideas.net/forum/viewtopic.p...5&start=50

[specuvestor]

^^IMHO Chanos is overrated. He even got the correlation between GDP growth and stock market growth wrong. It is profit growth that matters end of day.

http://im.ft-static.com/content/images/e...ebc863.img

This chart from the Financial Times roughly explains what is going on and the risks involved.

LGFV has been monitored and discussed for AT LEAST 2 years now. Also note that few people understand that the local govt are very cash poor while the central govt is very cash rich because revenue is centralised. Many confuse between the two "governments" when they talk about getting into "trouble"

---

Residential property is an expense because it doesn't produce cashflow generally, unless you have an investment property. That's why a bubble (vs gradual inflation beating appreciation) in residential is almost always bad because it is just funny money capital gains, feel good wealth effect with no cashflows nor value added productions (except of course commissions and constructions).

Nonetheless my point is that though it is a problem in China, it is not as dramatic as the west painted it to be. They don't understand Chinese obsession with real estates, as they understand correctly that it is an expense to be managed.

I always read western article on property bubble in China, with a pinch of salt. The value of "Home" is quite different between Westerner and Chinese.

Bubble is there, but not as bad as painted, especially so in tier-1 cities, IMO.

But could all these evidences be untrue ?

http://www.youtube.com/watch?v=pbDeS_mXMnM

As I pointed above: "there is a big difference between "sold" and "unsold" empty houses, and domestic demand vs foreign demand "

The issue is real but note most of the journalists/ TV show u the empty houses, but only a few mention that little fact: most of them are actually sold. A big property crash will have huge ramifications but LTV is about 50% in China. And as discussed above investment in residential is not productive, but the issue is overblown by the western media

I meant that the chart roughly illustrates the story behind why there are so many ghost towns, not about government financial health. In any case, can we be certain that the local governments will be bailed out should trouble arise? How about the developers who purchased the plots?

Hi Clement

Sorry I misunderstood your intent but think your idea is misguided just as the chart implied conclusions are. For those who follow China, we know the crunch in LGFV is not from drop in demand. It is the govt curb on supply. Land sales are curbed, bank financing to these vehicles are curbed. If not curbed they would balloon out of hand as the demand is there.

The reason why the local govts need the revenue is to boost infrastructure (excluding other personal agendas) and land sale is the fastest way to do that. LGFV ballooned during the 2009 crisis exactly because the central government wanted to pump prime but didn't give a solution to the financing issue. Only recently have they started to allow and launch "municipal" bonds for funding. But with all these curbs, local govt has to scale down or extend their infrastructure plans, and like all debt junkies some will likely get into cashflow problems which so far the banks are helping to manage.

Township and top down urbanisation drive is part of this infrastructure build up. Most of these ghost towns are govt initiatives. Even if private developers were roped in, I do not recall seeing any listed chinese developers stuck with ghost towns on their books as most are sold, which I have been emphasizing.

We will never be sure if local govt will be bailed out or they will be allowed to bankrupt as in the US system as there are no precedents. The general consensus under Hu/ Wen is that it is a likely bailout as they would want to contain the damage and more importantly save the masses. However under Xi/ Li it seems they are more tilted towards removing the moral hazard and give more market discipline.

The recent money market funding shortfalls from PBoC is sending a signal to the market that the govt shouldn't be taken for granted, vs the misguided commentaries I've seen from western observers that China is short on liquidity.

[CityFarmer]

Hi Clement

Sorry I misunderstood your intent but think your idea is misguided just as the chart implied conclusions are. For those who follow China, we know the crunch in LGFV is not from drop in demand. It is the govt curb on supply. Land sales are curbed, bank financing to these vehicles are curbed. If not curbed they would balloon out of hand as the demand is there.

The reason why the local govts need the revenue is to boost infrastructure (excluding other personal agendas) and land sale is the fastest way to do that. LGFV ballooned during the 2009 crisis exactly because the central government wanted to pump prime but didn't give a solution to the financing issue. Only recently have they started to allow and launch "municipal" bonds for funding. But with all these curbs, local govt has to scale down or extend their infrastructure plans, and like all debt junkies some will likely get into cashflow problems which so far the banks are helping to manage.

Township and top down urbanisation drive is part of this infrastructure build up. Most of these ghost towns are govt initiatives. Even if private developers were roped in, I do not recall seeing any listed chinese developers stuck with ghost towns on their books as most are sold, which I have been emphasizing.

We will never be sure if local govt will be bailed out or they will be allowed to bankrupt as in the US system as there are no precedents. The general consensus under Hu/ Wen is that it is a likely bailout as they would want to contain the damage and more importantly save the masses. However under Xi/ Li it seems they are more tilted towards removing the moral hazard and give more market discipline.

The recent money market funding shortfalls from PBoC is sending a signal to the market that the govt shouldn't be taken for granted, vs the misguided commentaries I've seen from western observers that China is short on liquidity.

In this topic, our views are mostly aligned.

Central gov is cash rich but asset poor, but local gov is asset rich but cash poor. I don't think local govs need central gov to bail them out. As far as I recalled, only major banks were bailed out for their excessive NPL.

[Behappyalways]

China's Official Local Debt Could Exceed CNY14Trl, Some Hidden Debt Excluded
http://english.caijing.com.cn/2013-10-28...ba-1820733

[CityFarmer]

China's Official Local Debt Could Exceed CNY14Trl, Some Hidden Debt Excluded
http://english.caijing.com.cn/2013-10-28...ba-1820733

The GDP of China is 52 trillion Yuan. A debt of 14 trillion, means gov debt as % of GDP is 27%, of course excluding the hidden part. Is this a alarming level?

Ref from Wikipedia: http://en.wikipedia.org/wiki/List_of_Chi...ons_by_GDP

[valueinvestor]

China's Official Local Debt Could Exceed CNY14Trl, Some Hidden Debt Excluded
http://english.caijing.com.cn/2013-10-28...ba-1820733

The GDP of China is 52 trillion Yuan. A debt of 14 trillion, means gov debt as % of GDP is 27%, of course excluding the hidden part. Is this a alarming level?

Ref from Wikipedia: http://en.wikipedia.org/wiki/List_of_Chi...ons_by_GDP

Usa and EU should compare their debt levels and let others to judge .

[BlueKelah]

China's Official Local Debt Could Exceed CNY14Trl, Some Hidden Debt Excluded
http://english.caijing.com.cn/2013-10-28...ba-1820733

The GDP of China is 52 trillion Yuan. A debt of 14 trillion, means gov debt as % of GDP is 27%, of course excluding the hidden part. Is this a alarming level?

Ref from Wikipedia: http://en.wikipedia.org/wiki/List_of_Chi...ons_by_GDP

Usa and EU should compare their debt levels and let others to judge .

The problem with China is the lack of transparency, who knows what the true numbers are. The ghost cities there are actually the same as those in Spain. China will probably go the way of Spain in terms of economy in the near future.

[valueinvestor]

Only China lacks transparency ? USA and some EU members are even worst.