Rogoff Bearish On China Real Estate

On July 6, 2010, AsiaNews reported that Kenneth Rogoff, distinguished Harvard economics professor and former chief economist for the International Monetary Fund, has a very grim outlook for real estate markets in China’s major cities. Rogoff claims rampant speculation poses a grave threat to China’s banking system.

Speaking on the sidelines of the Asian Investor’s Asia-Pacific Debt Investor Forum, [Rogoff said] “It’s a bubble and it’s unpredictable how it will play out in the banking system. Banks have lent too much in real estate and might have to write off a good proportion of the loans.” [Source: AsiaNews.it]

Rogoff bases his assessment on the trends in Beijing and Shanghai real estate prices and an even more careful assessment of the price trends in relation to sales trends. In both major cities, prices rose at an annualized rate above 12%, continuing a boom that began early in 2007. In stark contrast to prices, the aggregate value of sales in the major cities dropped 25%. Saying that investors “taken a departure from reality,” Rogoff criticized Chinese banks for encouraging speculation and fueling “the bubble” with ill-advised loans.

Rogoff also called attention to the realities of Chinese economic growth, of which most North Americans remain blissfully unaware: Like all of the modern industrialized nations, China has burped and coughed through the last several years, maintaining its strength primarily by foreign borrowers’ debt service. Rogoff emphasized that China stands right at the verge of double-dip recession. Moreover, Rogoff openly worries that the Chinese harbor grossly unrealistic expectations for sustained export growth—especially as other industrialized nations re-build, re-tool, and automate their manufacturing bases. “At some point [the Chinese] have to redirect their strategy,” he said.

Asian investors seem to agree with Rogoff’s assessment of the Chinese real estate bubble, and they have begun taking their profits and moving to the sidelines. During a five-day period in early July, 2010, the Shanghai Composite Index suffered its worst losses in a year, tumbling 6.7%.

In 2009, banks lent heavily in real estate. In recent weeks, some banks have had to re-capitalise, a step often undertaken to conceal huge losses, by increasing stock offerings. The Agricultural Bank of China Ltd for example has launched a US$ 20. Billion initial public offering. [Source: AsiaNews.it]