Some Chinese companies starting to resemble their Japanese counter-parts from the 80's

Thanks to a mention at Calculated Risk, I ran across an interesting article in The New York Times on the shift of some state-owned and municipality-owned Chinese corporations into the real estate business.

Anhui Salt is hardly alone among big state-owned companies. The China Railway Group is developing residential complexes in Beijing after winning the auction for a huge piece of land there.

Likewise, the China Ordnance Group, a state-led military manufacturer best known for amphibious assault weapons, paid $260 million for Beijing property where it plans to build luxury residences and retail outlets.

And in one of China’s biggest land deals yet, the state-run shipbuilder Sino Ocean paid $1.3 billion last December and March to buy two giant tracts from Beijing’s municipal government to develop residential communities.

All around the nation, giant state-owned oil, chemical, military, telecom and highway groups are bidding up prices on sprawling plots of land for big real estate projects unrelated to their core businesses.

Land records show that 82 percent of land auctions in Beijing this year have been won by big state-owned companies outbidding private developers — up from 59 percent in 2008.

A recent study published by the National Bureau of Economic Research in Cambridge, Mass., found that land prices in Beijing had jumped by about 750 percent since 2003, and that half of that gain came in the last two years. Housing prices have also skyrocketed, doubling in many cities over the last few years.

The report pegged a big part of the increase to state-owned enterprises that have “paid 27 percent more than other bidders for an otherwise equivalent piece of land.”


Asked why Anhui Salt wants to be a developer, Mr. Su said the central government had encouraged state companies to be more profitable, and that real estate was incredibly lucrative.
I wasn't into investing in the 80's but based on my limited understanding, the above situation resembles what Japanese companies were doing in the 80's.

In the 80's, many Japanese businesses entered the real estate business because it was so profitable. From what I understand, unlike the Chinese situation above, these companies didn't really become property developers; instead, they took ownership of real estate. In any case, once real estate started collapsing in 1990, the balance sheet of many of these companies imploded.

The Chinese companies in the article appear to be vulnerable to a similar blow-up if real estate collapses (or goes flat.) Companies that appear to have nothing to do with real estate are entering the property development arena and it basically amounts to a gambling strategy predicated on ever-rising property prices.

It'll be interesting to see what ultimately comes of all this. It's very difficult to identify bubbles except in hindsight. Even if you think there is a high probability of a bubble, very few can get the timing right. I believe there is a real estate bubble in China but I have held that view for a few years and been completely wrong. When Japan was moving from a developing economy to a developed one, real estate prices were rising essentially from the 1960's to 1990. It is quite possible that China may see rising prices for several decades.

Another thing to note is that high real estate prices does not necessarily mean prices will fall. Also, the losses may not accrue to the speculators and others gambling on ever-rising prices. For instance, it is quite possible that, instead of falling real estate prices, Chinese workers will end up paying a greater share of their income for residency than in other parts of the world. Regions such as Hong Kong and Tokyo have very high occupancy costs and a typical worker likely pays more of their income for occupancy than in, say, Los Angeles or New York. Tokyo is a very good example because residential and commercial rents are very high even though their economy has been in a slump for 20 years and they have been undergoing a massive real estate bust. Yet, workers and businesses still pay a fortune to locate there.

I still maintain my bearish view of Chinese real estate but the outcome is not certain by any means. I could be writing a similar article in 5 years and the bubble would seem even larger by then. For what it's worth, some bears, like Jim Chanos, was expecting a collapse very soon, possibly even this year so the final resolution may not be far.


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