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China Goes Shopping for Subprime

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Tourists come to browse through foreclosures.

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Over the last 5 years, China's appetite for American bonds has helped prop up our consumerist habits, keeping interest rates low for the federal government and home buyers alike. America was like a compulsive gambler who paid a small vig to the neighborhood loan shark - in this case, China. From SUVs to flat-screen televisions to McMansions, the Chinese essentially financed our purchases by buying our debt - over $1 trillion worth.

In the last 5 years, China has spent about one-seventh of its entire economic output purchasing foreign debt, mainly ours. And so it's darkly ironic that China's citizens are flying here to buy up the very same houses it once helped us secure. It is like the victor coming back for his spoils.

This week, the Associated Press wrote about the growing popularity of tours geared toward Chinese investors seeking to purchase affordable American houses.

More than 100 buyers from China's ever-growing upper- and middle-class have gone on these tours in the last few months, according to Chen Hang, the China-born vice president of real estate at Fortune Group. The Pittsburgh-based company shows foreclosed property to Chinese buyers.

"The Chinese are going to seize the opportunity to take advantage of some great deals," Chen told the Associated Press.

SouFun Holdings Ltd., a Beijing-based real-estate website, is one of the companies seizing on this opportunity. It's currently organizing a tour of 40 investors to New York, California, Boston and Las Vegas to visit foreclosed properties priced at $300,000 to $800,000.

"We never thought these tours would garner such interest, but we've had an overwhelming response," SouFun CEO Richard Dai told the AP. "Before, we heard of Chinese or Hong Kong movie stars buying homes in the US, and now more and more Chinese can afford to have the same."

Most of the tours have focused on well-known ethnic Chinese neighborhoods. And the trips are expensive. For the upcoming SouFun tour, one buyer paid $2,200 plus airfare, which is about the annual income for many Chinese. The trips also offer perks. The Lion's Property Development Group in New York City organizes groups to visit properties in the city, and the company woos buyers with stops at Broadway shows and famous restaurants.

The idea that the US government might actually ease restrictions and grant visas to millions of immigrants to spur our economy is quietly building support. The New York Times's Thomas Friedman discussed it in his most recent column.

Shekhar Gupta, the editor of the Indian Express newspaper, told Friedman, "All you need to do is grant visas to 2 million Indians, Chinese and Koreans. We will buy up all the subprime homes. We will work 18 hours a day to pay for them. We will immediately improve your savings rate - no Indian bank today has more than 2% nonperforming loans because not paying your mortgage is considered shameful here. And we will start new companies to create our own jobs and jobs for more Americans."

The option might be between allowing a wave of immigration or relying even more heavily on China to buy our fast-growing debt. The stimulus package must be paid for somehow, but, in recent weeks, China's government has indicated it may resist buying more Treasury bills.

Like any loan shark, China may soon come calling for its money.
No positions in stocks mentioned.

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