Property is an emotive subject in the west following crashes across a wide swathe of the developed world. Such an experience can only heighten one's sensitivity to bubble-like characteristics in other markets. When we look at China, one can find an example to support just about any hypothesis.
A number of examples include: The case of massive vacant cities that are still unoccupied in Inner Mongolia is used as an example of overbuilding on a grand scale.
Drive around the Pudong financial district of Shanghai with an informed local and you will see vacant office towers where the developer miscalculated demand and didn't have the right connections to ensure a higher occupancy. .
Mrs. Treacy pointed out a blog post to me last week where someone had attended a property road show for a new development in the Southern metropolis of Guangzhou. Property was trading at approximately $300 a square foot. More than a 1000 contracts had been signed on a single Saturday.
Reports have also been circulating that Li Kai Shing, Asia's richest man and an astute property investor, is diversifying out of China and Hong Kong.
What can we conclude from this? Increasingly high value manufacturing, a growing services sector, relaxing of the hukou residency system, less reliance on farm labour and further urbanisation all support the case for property demand. On the supply side, a great deal of building has already occurred and prices are high. As with any market, prices are unlikely to come down until interest rates increase, supply increases further or barriers are removed to allow a freer market. To date measures to cool speculation have fallen most heavily on the banking and shadow banking sectors while the effect on prices has been muted.
The Shanghai Property Index has been ranging between 2650 and 4000 since 2010, with a mild upward bias evident since early 2012. A sustained move below 3000 would be required to question medium-term scope for additional higher to lateral ranging.
Eoin Treacy's view The announcement that the currency swap
arrangement between Japan and India is to be extended to $50billion from $15
billion is a positive development and should enhance the view that India's deficits
will not get out of hand. The Dollar continues to pull back from last week's
peak near INR68 in what is looking increasingly
like a process of mean reversion.
While the currency swap arrangement is positive for the Rupee, the Dollar fell back today as the potential for a Syrian attack has become more likely and as the next FOMC meeting draws closer. This suggests that the Rupee has potential to appreciate further in the short term.
Companies such as Tata Consultancy that had rallied spectacularly on the Rupee's weakness are now susceptible to mean reversion. Meanwhile 3-month government yields have pulled back sharply suggesting the pressure that has come to bear on the banking sector is beginning to abate.