China’s First Recession

       Economics states that China will contract. In every free market it is normal to have boom and bust cycles often. After Deng Xiaoping allowed China to institute capitalistic economy around 1979, the PRC has been growing at a miraculous rate. Boom and bust sequence. It is natural after a 30 year boom that there will be a relatively small bust compared to the overall growth. The housing bubble collapse in China is nothing less than a bust of a 30 year boom in China. It will be the world’s greatest bust because china has been the economic miracle of the century. 

        Boom and bust sequence principally goes up in the long term. The only thing interesting about China is that most countries in the past have had a bust along the way. China is long overdue for a bust, like an earthquake that is long overdue and the quake becomes quite large because pressure is not relieved. This is an excellent opportunity for foreign investors to short China’s real estate at the right time because, the Chinese people literally do not know that the economy can punish them with unemployment. Foreign investors are much different in that they are familiar with market collapses every few years. The Chinese real estate will not drop to 1979 levels, but it will drop significantly when compared to the top of the bubble. This bust is healthy and will be a short-term sickness for China. Booms with no busts are probably unhealthy.

How to Fix China's Housing Bubble

Everybody knows that China has one of the world’s largest real estate bubbles, but it may be possible to fix this bubble from popping. I believe that China’s real estate bubble can be possibly prevented if a certain policy is enacted. My theory assumes that retirement funds and pension funds drive up stock market prices over time. 

       This is what makes some stock markets go up in the long run and other stock markets stagnant. China’s stock market has been quite bipolar or stagnant over time and is not trusted. The stock market in China is not like America’s where only professional analysts rate stocks. China’s stock market does not increase in value over time because pension and retirement funds are not allowed to participate in the stock market. Retail investors are pretty much the only investors in China. Chinese pension funds have been limited to speculating/investing in real estate. These pension funds having been limited to investing in only private companies and real estate. Private companies and real estate may not super attractive returns. 

        These limits in capital allocation has led to an unhealthy, overinvested, bubble-like real estate sector. Pension funds suffer because they are not offered a wide variety of investment choices. Thus, people invest on their own and often regular people invest in real estate because it is easier to understand than the stock market. The U.S. pension industry is massive! And over a long period of time more people in China will embrace pension plans if the returns are decent and if pension companies can invest in the public markets. If pension funds can invest in the Chinese stock market then the stock market will become more stable and real estate may steadily become a less appealing investment. 

       Hence the real estate bubble will not immediately pop, but it will be stagnant or have more realistic growth. Real estate will still be a great investment with pension funds, but pension funds will balance out its asset allocation with stocks and real estate to a more reasonable level. This transition from interest in real estate switching to pension funds will take years. This will ensure a bright future for both real estate and the Chinese stock market in China. A slow transition like this which may take 10 or 20 years, and it will have little immediate effect on the stock market or real estate. That means no crashing real estate bubbles popping which wipes out trillions of dollars in wealth. But the long term effect is substantial in that the overinvestment in real estate will become more balanced. This being said, pension funds having access to the public market may have long term effects as opposed to short term effects. And this will “slow down” the real estate frenzy that is currently going wildly up in value. 

      A countering view is that pension funds having access to public markets will actually POP the real estate bubble. This is not my view. I think pension plans having access to the stock market, will make the entire asset allocation in China safer.

How To Prevent A Chinese Housing Collapse

Of course, I believe that the Chinese Housing Bubble is real and it will happen. But there may be evidence that the housing bubble is sustainable. Sustainability is only possible if buyers can consistently buy houses and the price continues to increase in price. Many Chinese over the last decade have participated a speculative buying of houses in which they hope that it will increase in price. Housing has turned into a investment and it is possible that housing is the traditional Chinese investment. Just as the the stock market has been America's main investment in the last century, China may view real estate in the same way. China may view real estate as such a traditional investment because they have not always had a stock market. The stock market in China is relatively new and was founded in 1990. Normal civilians may still be adjusting to this new "stock market" idea. Many companies on the stock exchanges in mainland China are nationalized. A regular Chinese person cannot be expected to invest in private companies for their retirement. And such an unstable and unproven Chinese stock market may not be convincing to the Chinese people. Real estate is the answer, where it is easy to buy, familiar, popular, and many Chinese families buy their beloved child a home. In China it is normal for parents to buy their child a home and for that home to remain empty. The property value is expected to go up. Of course building the house may be cheap but location will always sustain a decent value in a small Chinese city of 15 million people. If real estate is China's traditional investment then real estate may continue to provide the best returns. Trust in markets are small and real estate is something you can see. Time will tell whether the Chinese Housing Bubble will pop. Of course, I continue to believe that this bubble will pop--but it is important to understand WHY this bubble is building and what may cause housing prices to be sustainable.

Of course a decreasing population will increase the supply of homes, and if people stop migrating to cities--there may be an epic collapse.