News Item on Property Prices in China

[rovo]

Since we in the USA are still feeling the effects of the bursting of a property bubble, I thought it might be interesting to see how they are doing with the same problem in China. The tie-in to investing is the price of Chinese ADRs which may be affected by this item.

What to do about leaping property prices? 7:13p ET January 9, 2011 (MarketWatch)

HONG KONG (MarketWatch) -- Policy uncertainty and questionable numbers go with the territory when investing in China, and we were reminded of this again last week. It emerged that property prices rose much more than previously thought last year, and that a property tax which the government spent months planning, might now not happen.

That combination appeared to buoy mainland property developers, wich are now making bullish projections for New-Year sales. After a sub-index of property stocks on the Shanghai Composite Index slumped 28% last year due to concerns on government home-price curbs, it rose 8.4 % in the past week.

Shortly afterwards, a new policy initiative was unveiled promising to tighten regulations on foreign investments in property in a bid to cool the market. So that is it: Pesky foreigners are to blame for any property bubble.

Data show foreign investment in China's property sector surged 48% year-on-year to $20.1 billion in the first 11 months of the year. Granted, that is a sizeable increase, but put against the 2.7 trillion yuan ($410 billion) of land sales in China last year, it looks like a bit of a red herring.

One explanation for the delay or mothballing of the property tax was that different government departments could not reach agreement. A problem is that so many vested interests are now locked into the property cycle. From the provincial governments, who rely heavily on land sales for revenue, to the state-owned enterprises who bid for the land, to the state-owned banks that provide the financing.

It is likely to take a Herculean effort to push through a property tax. The unspoken fear is that a new tax will tip the property market into a decline, and nobody wants to cop the blame for bursting this massive-looking property bubble.


In Hong Kong politicians have been acutely sensitive to intervening in the property market since former governor Tung Chee Hwa was held culpable for the post-1997 property slump after championing a policy of building 85,000 homes a year.

So whether a policy that targets foreign investment is really appropriate, it could at least provide useful political cover if things go wrong.

Yet there is also some anecdotal evidence of increasing foreign investment in mainland Chinese property.

One transaction that raised eyebrows last week was Wilmar International -- the world's largest listed palm oil firm -- splurging on mainland property. It won a bid in a joint venture with Shangri-La Asia and Kerry Properties for land in Yingkou City in Liaoning Province. It's reportedly now committed to invest a not insignificant sum of 889 million yuan, based on a maximum project investment of 2.57 billion yuan.

While the controlling Kwok family are known as astute investors, veering so clearly away from a core business is usually a red flag. Investors in Wilmar will be asking: What has palm oil to do with China property?

The other question is just how hot is the mainland property market right now?

Some new, unofficial property figures released last week suggest red hot. According to the China Real-Estate Index System, compiled by China's largest online real-estate brokerage SouFun, prices for residential properties rose 47.1% in Hangzhou, 37.9% in Chongqing and 37.1% in Beijing. Official figures from China's National Bureau of Statistics show prices up less than 10% in these cities in the first 11 months of the year

Perhaps this is what Premier Wen Jiabao was referring to when he recently said: "Measures to curb the country's property market were not well implemented."

It also never quite added up that land sales were continually setting new records, while end-user price rises were only increasing by high single digits. In Hong Kong, a common practice is for developers to bid aggressively at land auctions to try to set a high secondary-market price. That practice should be easy to emulate on the mainland, with so many of the parties involved ultimately controlled or funded by the state.

The suspicion must be provinces are under-reporting price increases to the central government to stave off more aggressive and painful measures, such as interest-rate increases or new taxes. To deal with a problem, you first have to recognize it, as measures introduced last year to curb property prices clearly did not work. If this is just ignored, one conclusion is that these measures are designed to be skirted, and meaningful government intervention is unlikely.

The good days for mainland property developers could then continue for some time. But just in case there is a day of reckoning, China's banks at least look to be preparing. Last week, both AgBank and China Minsheng Bank announced they are again seeking fresh capital to bolster reserves.

NOTE: There are some typos in the article but they are in the original source. rovo.

[ModE98]

Good article, Rovo.
Undoubtedly there is extra risk in China investments. The government can change policies at any time to suit the current situation as they see it. If differing governmental departments cannot agree on a policy, it is not good and there is no basis for trusting a policy announced by one department will actually be fully implemented.
Any investment in a China ADR is subject to the national and local laws within China. One just has to hope no ill effects come from conflicts in policy. A company could get caught in the mix. Business planning could be difficult. Beware, if one cannot afford to lose, do not risk funds in those ADR's. That is not saying do not invest there, just be well aware things can change negatively virtually overnight.

:-[Been stuck in the mud on a few of them, now awaiting a dry spell so I can escape (dig myself out) and move on with more US dividend stocks to supplement my income.

[ModE98]

China Daily report on inflation in 2011 ...
www.chinadaily.com.cn/bizchina/2011-01/10/content_11817099.htm