Shanghai residential real estate prices are headed down.  This is a buying opportunity in China¨s most attractive long term market. 

Like politics, real estate markets are a locally driven.   In the Shanghai residential real estate market, a number of local factors!most particularly a relentless stream of new supply, but also (the scariest part) the coming onto the market of resale units previously taken up by small and large speculators, against a situation in which virtually all currently available buyers have already bought--are pointing to a medium term correction and drop in (now artificially inflated) prices.  I expect a 30 percent drop over a period of two to three years.  

Longer term, however, the best properties in the best locations are good investments, even now.  Shanghai is without any doubt the best place in China to own property.  And many successful people within China, and!a very big factor, never to be neglected!Chinese around the world, will be buyers in Shanghai over time.  This is why the coming correction is a buying opportunity.

Economic growth in China is headed lower, and the reason is not SARS.  It is the weakness of demand from domestic consumers and deflation of the investment bubble that has!together with exports!been the key driver of growth during the past year. 

The investment bubble will certainly deflate!and could implode, with highly negative consequences!for two reasons:  First, the Central Bank has (too late) begun to rein in bank lending to the real estate sector.  Actually, the new lending standards would be considered minimally prudent in healthy market conditions in the U.S.  In China, where the real estate sector is definitely overheated, they are being called Draconian, which only indicates how reckless!if not criminally corrupt!the banks have routinely been in relations with property developers.  

The second reason is that government spending on infrastructure projects!financed almost entirely by borrowing!is being cut.  The government is reaching limits on its ability to pursue Keynesian demand management.  

 What I expect to follow now is loose money and inflation.  This will help the banks, but will do nothing to slow the decline in real GDP growth to a level of 5-6 percent for this and, probably, new year.

China¨s banks will not get a big bailout because the government cannot afford to give them one.  Read my June 4, 2003 Op/Ed piece in The Asian Wall Street Journal.

 

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