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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?
Agenda
Introduction The Japanese Case China’s Economic
Development Is there a Bubble? Conclusion
Introduction
Unprecedent Growth in the Chinese Economy More than a decade of
growth in the GDP Asset Prices skyrocketing
Japanese Crisis Asset prices increased
rapidly between 1985-1991 Burst of the bubble in 1991
Is China heading for a similar crisis?
The Japanese Case: Before the Crisis Before the crisis began, the Japanese
economy underwent decades of unusually high growth – the so-called „Japanese miracle“
-5
0
5
10
15
20
25
Japan GDP Growth 1960-2008
GDP Growth (annual %) GDP per capita growth (annual %)
Inflation Consumer Prices (annual %) Inflation GDP Deflator (annual %)
The Japanese Case: Before the Crisis Steady gains in productivity promoted economic
growth in the years before the crisis Japanese goods were often superior to foreign
products – both in quality and price The resulting large trade surpluses helped the Japanese
economy grow even faster Simultaneously savings were extremely high due to
stringent tariffs and regulation The result was that money was readily available for
investment This investment into capital resources meant that
Japanese products could even become better and cheaper To counteract this spiral of increasing Japanese
competitiveness, the Plaza Accord was established
The Japanese Case: Before the CrisisThe Plaza Accord Agreement in 1985 by consortium of the largest economy to
devalue the U.S. dollar against Japanese Yen and German Deutschmark
Took place in New York Plaza Hotel
The Japanese Case: What happened As a result of the Plaza Accord, the Japanese Yen
appreciated against the US-Dollar Exports from Japan became more expensive and
less competitive Imports to Japan became cheaper Thus the Japanese trade balance worsened…
To counteract adverse effects on GDP, the Bank of Japan followed a more expansive monetary policy
Y = C + I + G + NX
The Japanese Case: IS-LM Diagram
IS Curve
LM Curvei
Y
IS Curve‘
Y1 =Y3 Y2
LM Curve‘
i2
i1
i3
1.
2.
2.
1.1.
2.
The Japanese Case: Effect on Rates As we saw from the IS-LM diagram, the
combination of both effects leads to a decrease in interest rates
1985 1987 1990 1993 1995 19980.00 %
1.00 %
2.00 %
3.00 %
4.00 %
5.00 %
6.00 %
7.00 %
8.00 %
9.00 %
Basic Discount Rate Uncollateralized Overnight Rate
The Japanese Case: Effect on Asset Prices The extremely low interest rates meant that
market liquidity increased significantly Some of this money went into speculation in
shares and real estate
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 20040
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
0
50
100
150
200
250
300
Nikkei 225 Index Total Average Real Estate Commercial Real Estate
Nik
kei P
rices
Real Esta
te P
rices (
2000 =
100)
The Japanese Case: Effect on Rates To counteract the bubble, the Bank of Japan
started to increase interest rates This made speculation more expensive
1985 1987 1990 1993 1995 19980.00 %
1.00 %
2.00 %
3.00 %
4.00 %
5.00 %
6.00 %
7.00 %
8.00 %
9.00 %
Basic Discount Rate Uncollateralized Overnight Rate
The Japanese Case: Effect on Asset Prices Mortgage payments became more expensive New credit financed purchases of real estate
and shares suffered from higher rates, too The asset price bubble bursted..
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 20040
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
0
50
100
150
200
250
300
Nikkei 225 Index Total Average Real Estate Commercial Real Estate
Nik
kei P
rices
Real Esta
te P
rices (
2000 =
100)
The Japanese Case: Result The dropdown in asset prices had adverse
affects on the financial system Loans (banks‘ assets) defaulted leaving the
banking system with severe losses The following credit crunch was
underestimated by the Bank of Japan and slowed down growth in the following years The so-called „Lost Decade“ began
Severe asset price bubbles put the economic development of a whole economy at risk!
China‘s Economic Development
China’s GDP has increased every year in the last decade
The annual growth rate is between 5% to 15%
PBOC’s Monetary Policy Expansive Monetary Policy Money Supply increases
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
China GDP (in Trillion US$)
GDP (in Trillion US$)
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
2
4
6
8
10
12
14 China 1998-2008 GDP
Percentage Growth
GDP growth
GDP per capita growth
199819992000200120022003200420052006200720080
1
2
3
4
5
6
7
8
Interest Rates in China
Deposit interest rate (%) (FR.INR.DPST)Lending interest rate
Chinese Fiscal Policy
From 21st, July 2005, start system of managed floating exchange rate
Before July 2005: 1 RMB=0.1208USD
Now 1 RMB =0.1502USD
Growth: 24.3%
China‘s Economic Development
Chinese Trade Balance
Chinese export enjoyed a continuous growth after 1980 with the only exception in 2009
Four trillion investment plan for two years announced by China government in 2008, about 13% of GDP in 2008
China‘s Economic Development
IS-LM curve shift of China
IS 1998
LM
i
Y
IS
Y1998 Y
LM 1998
i
i1998
China‘s Economic Development
China annual disposable income per capita for urban households
China‘s Economic Development
Chinese Real Estate & Stock Market
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
1000
2000
3000
4000
5000
6000
SSE Index and Residential Prices, 1998- 2010
SSE Index Year Start Residential RMB/SqMeter
China‘s Economic Development
0
2
4
6
8
10
12
14
Lending Rates
China (95-03) Japan (80-88)
88
95
03
Is China following the path of the Japanese Crisis?
Both Japan and China followed loose monetary policy & huge fiscal stimulus
Japan GDP growth rate 3-4%, compared to Chinese GDP growth close to 10%
Japan’s bubble was driven primarily by commercial real estate market, which is not the case in China
50-60% of Japan bank Lending was in real estate market compared to 40% in China
Post-liberalization China faced huge shortage of residential property that meets new living standards.
State-controlled measures and regulations – second property restrictions, bank reserve requirements
80
Post-credit crisis, China central government dolled out 15% of its GDP
China banks loans stand at $1.4 trillion, a 30 % increase from 2008
China real estate prices continue to rise in 2009
` Is there a bubble in the Chinese Asset Market?
Is there a bubble in the Chinese Asset Market?
In Short term, China is likely to enjoy high growth 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)
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.
In Long term – yes, there is a bubble in the Real Estate market
Most of the bank lending is finding its way in over-priced real estate as the financial markets are still incomplete in China
64.5 million electricity meters registered zero consumption over a 6 month period
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
`
Thank You