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What Is Really Going On in China's Real Estate Sector?

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Quite a bit of discussion this morning about China's real estate situation after Bloomberg reported a banking regulator there last month told lenders to perform a new round of stress tests doubling the worst-case scenario from a 30 percent decline to as much as 60 percent.  "Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively," Bloomberg said, citing a "person with knowledge of the matter."

This likely refers to cities in China like Beijing, which are the focus of the State Council's concern over property speculation there. In other cities, however, while sales have fallen, but not as much. In cities such as Tianjin. Chengdu, Nanjing, prices have actually increased a bit, according to a report from Standard Chartered. The report does say land hoarding and accessing bank lending to fund land purchases remains problematic and there is significant "buying-for-investment" occurring in these smaller cities. The question is whether policies being implemented that are designed to cool the real estate speculation will have the unintended consequence of taking the down the broader economy.

Standard Chartered, which performed their research by talking to developers in China, says it appears that, nationally, land prices have stabilized after peaking at the beginning of the year. Morevoer, the price declines were concentrated in cities such as Shanghai. Beijing and Hangzhou. Their conclusion is that the bubble in real estate in those cities has been pricked without taking down smaller "tier 2 and tier 3" markets. As well, while credit conditions overall have tightened, it is not to the extent seen in 2008 and many developers appear to have cash on hand to implement at lower prices, providing an added cushion if demand slips or credit tightens further.
POSITION:  No positions in stocks mentioned.