Why You Should Be Looking at Chinese House Prices

Reddit

China’s official purchasing manager’s index expanded in February. It read 50.1, according to the China Federation of Logistics and Planning, and anything over 50 indicates an expansion. It’s also a fact that the February reading was lower than the January reading. Cue the nerves about the strength of China’s expansion.

It’s not a fact that the China PMI is at all useful for investors. It’s a survey. And there’s no telling if the survey of China’s purchasing managers produces accurate information about what’s going on in the Chinese economy. And anyway, in causal terms, the PMI survey is secondary. In the world we live, the first cause of all growth is credit expansion.

Australian investors worried about China’s PMI should pay more attention to Chinese house prices. Some of those prices are rising ‘excessively fast,’ according to China’s State Council. The Council warned banks to raise interest rates and down payments, especially for second homes and investment properties. It’s worried that a property bubble is bad for social harmony.

This is always the issue with excessive credit growth. The money has to go somewhere. The banks that take advantage of low central bank interest rates tend to put the money to its quickest use: inflating property prices. This happens at the commercial and residential level.

China would prefer to have a more orderly flow of credit into fixed assets and public infrastructure. But you can’t always get what you want, even in a command economy. And for Aussie investors hoping that China’s credit growth flows directly into industries that demand commodities, there’s no guarantee that resources will rebound.

By the way, we know that both Alex Cowie and Greg Canavan have staked out their respective positions on this China issue. They have different positions, which is what happens when thinking people disagree. But it’s a mistake to say you’re either a China bull or a China bear. That’s simplistic.

The issue here is whether Chinese credit growth can be channelled into productive investment. If it can’t – because there’s too much credit growth – it’s a bubble. If it can, well then it can. But this isn’t about being a bull or a bear. It’s about the real rates of return on investment in China and whether the investment boom is driven by investors or speculators.

You can’t blame Chinese speculators for buying extra houses, though. You have to beat inflation somehow. And what’s happening in China is happening the world over: investors are pouring money into asset classes that can help them beat inflation or at least own something of value.

Regards,
Dan Denning
for The Daily Reckoning Australia

Join me on Google Plus

From the Archives…

Why China’s Economy is Flashing Red
1-03-13 – Greg Canavan

Heroes and History
28-02-13 – Bill Bonner

Bitcoin: Get Rich or Die Mining
27-02-13 – Joel Bowman

Why Italy’s Gold Hoard Tells You the Precious Metal is Ridiculously Cheap
26-02-13 – Greg Canavan

Stock Prices Are Not What You Think They Are
25-02-13 – Greg Canavan

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
Reddit

Leave a Reply

Be the First to Comment!

Notify of
avatar
wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au