Is There a Bubble in the Chinese Asset Market?


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Comparing Chinese real estate market with Japanese 80's market crash

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Is There a Bubble in the Chinese Asset Market?

  1. 1. Is There a Bubble in the Chinese Asset Market?<br />
  2. 2. Agenda<br />Introduction<br />The Japanese Case<br />China’s Economic Development<br />Is there a Bubble?<br />Conclusion<br />
  3. 3. Introduction<br /><ul><li>Unprecedent Growth in the Chinese Economy
  4. 4. More than a decade of growth in the GDP
  5. 5. Asset Prices skyrocketing
  6. 6. Japanese Crisis
  7. 7. Asset prices increased rapidly between 1985-1991
  8. 8. Burst of the bubble in 1991
  9. 9. Is China heading for a similar crisis?</li></li></ul><li>The Japanese Case: BeforetheCrisis<br />Beforethecrisisbegan, theJapaneseeconomyunderwentdecadesofunusuallyhighgrowth – the so-called „Japanesemiracle“<br />
  10. 10. The Japanese Case: BeforetheCrisis<br />Steadygains in productivitypromotedeconomicgrowth in theyearsbeforethecrisis<br />Japanesegoodswereoftensuperiortoforeignproducts – both in qualityandprice<br />The resulting large tradesurpluseshelpedtheJapaneseeconomygrowevenfaster<br />Simultaneouslysavingswereextremelyhigh due to stringent tariffsandregulation<br />The result was thatmoney was readilyavailableforinvestment<br />ThisinvestmentintocapitalresourcesmeantthatJapaneseproductscouldevenbecomebetterandcheaper<br />Tocounteractthis spiral ofincreasingJapanesecompetitiveness, thePlazaAccordwas established<br />
  11. 11. The Japanese Case: BeforetheCrisis<br />The PlazaAccord<br />Agreement in 1985 byconsortiumofthelargesteconomytodevaluethe U.S. dollaragainstJapanese Yen and German Deutschmark<br />Tookplace in New York Plaza Hotel<br />
  12. 12. The Japanese Case: Whathappened<br />As a resultofthePlazaAccord, theJapanese Yen appreciatedagainstthe US-Dollar<br />Exports from Japan becamemore expensive andlesscompetitive<br />Imports to Japan becamecheaper<br />ThustheJapanesetradebalanceworsened…<br />Tocounteractadverseeffects on GDP, the Bank of Japan followed a more expansive monetarypolicy<br />Y = C + I + G + NX<br />
  13. 13. The Japanese Case: IS-LM Diagram<br />i<br />2.<br />LM Curve<br />LM Curve‘<br />i1<br />1.<br />i2<br />2.<br />i3<br />1.<br />1.<br />IS Curve<br />IS Curve‘<br />2.<br />Y<br />Y1 =Y3 <br />Y2<br />
  14. 14. The Japanese Case: Effect on Rates<br />As wesawfromthe IS-LM diagram, thecombinationofbotheffectsleadsto a decrease in interestrates<br />
  15. 15. The Japanese Case: Effect on Asset Prices<br />The extremelylowinterestratesmeantthatmarketliquidityincreasedsignificantly<br />Someofthismoneywentintospeculation in sharesand real estate<br />
  16. 16. The Japanese Case: Effect on Rates<br />Tocounteractthebubble, the Bank of Japan startedtoincreaseinterestrates<br />Thismadespeculationmore expensive<br />
  17. 17. The Japanese Case: Effect on Asset Prices<br />Mortgagepaymentsbecamemore expensive<br />New creditfinancedpurchasesof real estateandsharessufferedfromhigherrates, too<br />The assetpricebubblebursted..<br />
  18. 18. The Japanese Case: Result<br />The dropdown in assetpriceshadadverseaffects on thefinancialsystem<br />Loans (banks‘ assets) defaultedleavingthebankingsystemwithseverelosses<br />The followingcreditcrunch was underestimatedbythe Bank of Japan andslowed down growth in thefollowingyears<br />The so-called „Lost Decade“ began<br />Severeassetpricebubblesputtheeconomicdevelopmentof a wholeeconomyatrisk!<br />
  19. 19. China‘s Economic Development<br /><ul><li>China’s GDP has increasedeveryyear in the last decade
  20. 20. The annual growth rate is between 5% to 15%
  21. 21. PBOC’s Monetary Policy
  22. 22. ExpansiveMonetary Policy
  23. 23. Money Supplyincreases</li></li></ul><li>Chinese Fiscal Policy<br />From 21st, July 2005, start system of managed floating exchange rate <br />Before July 2005: 1 RMB=0.1208USD<br /> Now 1 RMB =0.1502USD<br />Growth: 24.3%<br />China‘s Economic Development<br />
  24. 24. China‘s Economic Development<br />Chinese Trade BalanceChinese export enjoyed a continuous growth after 1980 with the only exception in 2009Four trillion investment plan for two years announced by China government in 2008, about 13% of GDP in 2008<br />
  25. 25. China‘s Economic Development<br />IS-LM curve shift of China<br />
  26. 26. China‘s Economic Development<br />China annual disposable income per capita for urban households<br />
  27. 27. Chinese Real Estate & Stock Market<br />China‘s Economic Development<br />
  28. 28. Is China following the path of the Japanese Crisis?<br />Both Japan and China followed loose monetary policy & huge fiscal stimulus<br />Japan GDP growth rate 3-4%, compared to Chinese GDP growth close to 10%<br />Japan’s bubble was driven primarily by commercial real estate market, which is not the case in China<br />50-60% of Japan bank Lending was in real estate market compared to 40% in China<br />Post-liberalization China faced huge shortage of residential property that meets new living standards.<br />State-controlled measures and regulations – second property restrictions, bank reserve requirements<br />80<br />
  29. 29. `<br /> Is there a bubble in theChineseAsset Market?<br /><ul><li>Post-credit crisis, China central government dolled out 15% of its GDP
  30. 30. China banks loans stand at $1.4 trillion, a 30 % increase from 2008
  31. 31. China real estate prices continue to rise in 2009 </li></li></ul><li> `<br /> Is there a bubble in theChineseAsset Market?<br /><ul><li>In Short term, China is likely to enjoy high growth
  32. 32. China GDP growth over the past 10 years is close to 10% p.a. Which partially explains the price trends over the past five to six years within a tolerable range (2-3 fold increase)
  33. 33. We see little risk in the foreseeable future that increases in loans to the real estate sector will pose a threat to the financial system but a rapid increase in lending could lead to a rise in bad debt in the future and might curb the Chinese financial system.
  34. 34. In Long term – yes, there is a bubble in the Real Estate market
  35. 35. Most of the bank lending is finding its way in over-priced real estate as the financial markets are still incomplete in China
  36. 36. 64.5 million electricity meters registered zero consumption over a 6 month period
  37. 37. Real estate development at present is directed mainly toward luxury properties, with mass-market housing accounting for only around 10% of total residential sales – growth in real estates not catering to domestic demand</li></li></ul><li>Thank You<br />