And speculation on what that can mean for the rest of the world economy...

http://online.wsj.com/article/SB10001424052702304906004576367121835831168.html?mod=WSJAsia_hpp_LEFTTopStories

BEIJING—After years of housing prices gone wild, China's property bubble is starting to deflate.

Residential prices are heading downward in some major cities, damping some undesired real-estate speculation but raising the prospect that the Chinese economy may slow more rapidly than anticipated with profound consequences for global growth.

Real estate is a foundation of China's phenomenal growth record in the past two decades, and its health is crucial to China's construction, steel and cement sectors. Real estate is also a favored investment of Chinese looking to get better returns than bank deposits pay. Local municipalities and provinces depend on rising prices for land sales as well to fund infrastructure projects.

World Bank economists warned at a Beijing press briefing on Wednesday that a real-estate bubble was among the biggest economic risks China faces.

Already, in nine major cities tracked by Rosealea Yao, an analyst at market-research firm Dragonomics, real-estate prices fell 4.9% in April from a year earlier. Last year, prices in those nine cities rose 21.5%; in 2009, the increase was about 10%, as China started to recover from the global economic crisis, with much steeper increases toward the end of that year.

A downturn in property and apartment prices would harm Chinese industry and investment, and crimp consumer spending. China is a "housing-led economy," says UBS economist Jonathan Anderson, who estimates that property construction alone accounted for 13% of gross domestic product in 2010, twice the share of the 1990s.

While China's anticipated growth is still well above that of other large economies, any reduction could have deep consequences. The global economy is now even more dependent on China for demand for anything from commodities to luxury goods, given the tepid recovery in the U.S. and Europe's continuing sovereign-debt problems.

If the Chinese housing market slows faster than people had expected, the impact would be felt in a number of markets that export heavily to China. Many Latin American and African economies have shifted their focus toward Chinese demand for their raw materials, and many Western firms, including U.S. retailers and fast-food chains, now bank on Chinese consumers feeling wealthier to make up for stagnating sales elsewhere. Also, plans by local Chinese governments to improve infrastructure loom large for heavy-equipment makers like Caterpillar Inc.

The red-hot demand for Chinese housing that has fed such growth plans is now ebbing. Data from Soufun, a Beijing real-estate consultant, show average property prices in China in May rose 5.1% compared with the year earlier, a slowdown from rapid rises in 2009 and 2010.

Standard Chartered Bank estimates that China's so-called tier-two cities, such as Dalian and Tianjin, may have 20 months of housing inventory by year end, putting "substantial" pressure on prices. Standard Chartered forecasts price cuts of 10% to 20% "in many cities."

A number of analysts think official data, which have continued to show a slight rise in prices, understate the slowdown as the government can affect the numbers by pressing developers to withhold or add high-value properties to the market depending on what it wants the data to show.

Ardo Hansson, lead economist at the World Bank's Beijing office, said Wednesday that China should consider boosting interest rates further to tame consumer prices and head off bubbles in housing and other assets. He didn't comment on whether the current real-estate slowdown would harm economic growth, but stressed the importance of the property sector to the Chinese economy, especially in such sectors as steel and cement.

Partly as a result of the Chinese real-estate slowdown, prices for key industrial metals used in construction have softened. Spot copper prices have lost 5% since early March, and have now fallen to around 69,000 yuan ($10,647) a ton after racking up 34% in gains between June 2010 and March this year. Major steelmakers have been consistently cutting their product prices since February.

Chinese officials, facing widespread anger from ordinary citizens who can no longer afford to buy a home, have sought to slow the rise in housing prices. The unanswered question is whether the government can manage to reduce prices gradually in a way that won't undermine economic growth.

Since January 2010, the Chinese government has introduced a number of measures to stem speculation, including boosting down-payment requirements on mortgages for second homes to 60% from 40%, barring state-owned enterprises outside the real-estate sector from investing in property and lifting the amount of cash banks must hold in reserve 11 times—essentially reducing funds banks can lend.

"In some ways, [real-estate] prices are really crazy," said Guo Shuqing, chairman of China Construction Bank, in an interview last week. He says the cost of apartments in big cities is well beyond young couples' means.

Beijing has one of the most expensive real-estate markets in the world relative to the income of its citizens. Calculations based on Soufun data show that in the opening months of 2006 an average-price new apartment in China's capital would cost around $100,000—the equivalent of 32 years' disposable income for the average resident. By 2011, the average price had more than doubled to $250,000, but relatively modest increases in income mean it would now take 57 years of saving for the average resident to cover the cost.

In Shanghai, apartment sales tumbled 37% in April, to 11,000 units, compared with 17,500 units in January, according to the Shanghai Real Estate Trading Center. With business so slack, Midland Realty, a unit of Hong Kong-based Midland Holdings Ltd., closed eight of its nine offices in Shanghai. "The government's policy on purchase restrictions had a huge impact on both selling and buying, leading to transactions drying up," said Xu Feng, senior director of Midland's development center in Shenzhen.

According to Dragonomics, sales volume in the nine cities it tracks fell by about half since the start of the year. In Beijing, that has meant rising rents, say real-estate agents. Zhang Kai, an agent at Home Link in middle-class neighborhood Tuanjiehu said the number of sales had dropped by half since February and monthly rents for small apartments jumped to about 3,000 yuan ($460) in June from 2,500 yuan ($385) a month earlier. Many apartment owners don't want to sell, he said, because they are waiting for prices to turn around.

One real-estate agent elsewhere in Beijing said regulations that required buyers to have formal Beijing residence and proof of having paid taxes for five years straight were crimping sales.

The housing slowdown comes at a time when there is evidence China's growth is slowing. Last week, two surveys of purchasing managers showed a slowing of manufacturing activity. China, the world's second-largest economy after the U.S., grew at 9.7% in the first quarter from a year earlier. In late May, Goldman Sachs lowered its estimate of Chinese second-quarter growth to 8% from its previous estimate of 8.8% as the government continues to tighten monetary policy to fight inflation and import demand from the U.S. weakens.UBS economist Tao Wang says she thinks the price decline will be short-lived as Chinese investors, with few other options, will again pour money into real estate and as local governments push up the price of land they sell to developers. Real-estate prices will rise for another three to five years, she estimates. A sharp fall then would batter investors, banks, construction firms and other sectors.

There are interesting similarities between the housing bust in the US and the current bubble in China. In the US, many financial watchers knew an end to the bubble was coming at least a year before it burst, but couldn't say when it would go bust. And few knew what havoc it would wreak.

Many in China know housing prices are crazy, but most Chinese continue to think unfinished, poorly-built apartments that virtually no one can afford to buy are "good investments". I think they're perishables, sitting rotting away. Of course they don't rot as rapidly as fruit, but with the size of the oversupply, time eats away the useful life of the structure.

Tick, tick, tick . . .

yes, just watching and waiting, beautiful value curve.

A couple of other reports also out in the WSJ today about the potential Stock Bubble here. One Hong Kong Regulator calling ti the "new dot com bubble".

http://online.wsj.com/article/SB10001424052702304778304576373991778095156.html?mod=WSJASIA_hpp_LEFTTopWhatNews

Big Funds See Red in China

By STEVE EDER, MARY PILON and MICHAEL RAPOPORT

Hedge-fund titan John Paulson is hardly alone in his wager on a Chinese company whose stock lately has swooned. Several other prominent money managers, including mutual-fund giants that invest individuals' money, made similar bets on stocks now struggling.

A Wall Street Journal review shows that some big-name investors, from Fidelity Investments to Carlyle Group, in recent years snapped up shares in Chinese companies that trade on Western exchanges.

Shares of some of the companies shot up after the financial crisis as investors looked for ways to share in China's fast economic growth. But, in recent months, shares of many of these Chinese companies have tumbled amid questions from regulators and investors about the truthfulness of these companies' finances and operations.

The Securities and Exchange Commission has said it is investigating accounting and disclosure issues at some Chinese companies that list on U.S. exchanges. Trading has been halted in more than a dozen U.S.-listed stocks of Chinese companies.

An SEC official said the commission plans to issue an investor bulletin as soon as Thursday detailing some of the risks surrounding companies that have listed in the U.S. through "reverse mergers"—a mechanism that helps companies avoid detailed disclosures required in initial public offerings. The bulletin is expected to mention accounting problems at some Chinese companies recently been hit with SEC trading suspensions.

Trading was halted in Beijing-based Longtop Financial Technologies Ltd. in May when its chief financial officer and external auditor resigned amid an SEC inquiry over its accounting practices. The financial-technology company, listed on the New York Stock Exchange, announced the inquiry and investigations in a news release, saying it "intends to cooperate fully" with the SEC.

Longtop shares have gone from trading around $12 after the financial crisis, to $40 in the past year, to $18.93—where they has sat since May 16.

Among Longtop's biggest investors has been Boston-based Fidelity. The mutual-fund giant held 14.5% of common shares outstanding as of March 31, according to Capital IQ, which tracks investments based on regulatory filings. Other major investors have included hedge funds Maverick Capital Ltd, with a 9.8% percent stake as of that date, and Tiger Global Management LLC, with a 4.6% stake. Other holders, according to Capital IQ, have been mutual-fund houses Putnam Investments and Janus Capital Management.

Fidelity, a shareholder since the company was listed in 2007, invested in Longtop mostly through its two funds Fidelity Advisor Global Capital Appreciation and Fidelity Advisor Mid Cap II, according to people familiar with the matter.

The Longtop holdings were small for Fidelity, making up a sliver of the large funds, according to data from Morningstar. Based on the March 31 holdings data—and provided that its stake had remained constant—Fidelity would have recorded a fall of about $100 million in the value of its investment since March 31.

A Fidelity spokesman said, "We perform rigorous analysis on all potential investments for our funds," adding that Fidelity has "decades of experience investing in the Asia region, and our funds that invest there have been successful."

Representatives for Maverick, Tiger Global and Putnam declined to comment on the holdings. A representative for Janus didn't respond to a request for comment. A spokeswoman for Longtop this week said that the company's audit committee has hired a U.S. law firm to coordinate with the SEC in launching an independent investigation.

Critics of investors who have dabbled in Chinese companies say pain they suffer may be deserved.

Gordon Chang, author of the book, "The Coming Collapse of China," called U.S.-listed Chinese companies a "classic bubble," saying investors want to believe the narrative coming from China.

"Anyone who knows the first thing about the way Chinese companies operate know there are severe problems," he said. "If you are going to invest in a company, you've got to investigate."

Others say investors betting against these companies are spreading negative sentiment that is overdone and punishing legitimate firms.

Critical reports from short sellers, who benefit when stocks' prices decline, are "akin to rumor-mongering," says Perrie Weiner, an attorney who has represented U.S.-listed Chinese companies in shareholder lawsuits and SEC investigations. The short sellers "have a built-in economic motive" to broadcast critical research about these companies, he said.

A long list of money managers like Fidelity have invested in Chinese companies that have made public filings over the past six months, alerting investors to potential accounting errors, fraud, a change in auditor or regulatory investigation.

Firms to have invested in Chinese companies that have made such filings include the Vanguard Group; hedge-fund managers Citadel LLC, AQR Capital Management and Renaissance Technologies LLC; and private-equity firms Carlyle and Oaktree Capital Management, according to Capital IQ. Wall Street firms such as Goldman Sachs Group Inc. and Morgan Stanley invested on behalf of clients, the database said, as well as the California Public Employees' Retirement System, the largest U.S. public pension fund.

For many large investors, the holdings are tiny slices of their portfolios. Also, investors may have exited their positions, so gains or losses are unclear.

For Vanguard, the shares reflect holdings in passive index funds, a spokesman said. Hedge funds like AQR and Renaissance often buy stocks based on quantitative factors rather than any belief in their fundamentals.

Besides Vanguard, managers or their spokesmen at these funds and banks declined to comment on the reported holdings.

Mr. Paulson's hedge-fund firm has owned about 14% of shares outstanding of Sino-Forest Corp., a Toronto-listed Chinese company whose stock has fallen in the wake of a highly critical report by a short seller last week.

Sino-Forest has strenuously denied the report; it has appointed a committee of independent board members to investigate and answer the allegations. Meanwhile, it has been posting documents it says dispute the report's conclusions.

On Wednesday, the Ontario Securities Commission, Canada's largest provincial securities regulator, said it is investigating the controversy. Paulson & Co. last week sent a letter to its investors, saying it is "aware of, and is investigating, claims" made by the short seller. Paulson said its position in the stock represented about 2% of its Advantage hedge fund, but wasn't in other funds managed by the firm.

Some observers say the broader controversy won't necessarily take a big toll on investors.

"The market will punish those who invested in" these firms, said Mercer Bullard, a professor at the University of Mississippi School of Law, who said some mutual-fund managers don't do forensic accounting of investments on their own but rely on the company auditors. "Those who were diversified within China or weren't heavily exposed at all are going to be okay," he said. "It's more of a blow to China as an investment than to fund managers."

And the second article about the stock bubble...

http://online.wsj.com/article/SB10001424052702304259304576372943261984356.html?mod=WSJAsia_hpp_LEFTTopStories

'China Is the New Dot-Com,' Says Outgoing Securities Chief

HONG KONG—The outgoing head of Hong Kong's securities regulator warned investors against rushing headlong to buy shares in Chinese companies, calling China "the new dot-com" of the investment world.


"Everybody wants a piece of China," Martin Wheatley said in an interview on his final day as chief executive officer of the Securities and Futures Commission. "Therefore, there has been a rush to Chinese companies" without investors asking the normal questions about their fundamentals, he said, comparing the run-up to the Internet stock boom of the late 1990s in the U.S.

The comments by Mr. Wheatley come amid scrutiny of accounting practices and allegations of fraud at some overseas-listed Chinese businesses. The Securities and Exchange Commission has set up a group to investigate problems with a number of Chinese companies that trade on U.S. exchanges. Trading in several stocks of U.S.-listed Chinese companies has been suspended amid allegations of accounting irregularities and other improprieties.

Shares of Sino-Forest Corp., a Hong Kong-based tree-plantation company listed in Toronto, have plummeted in recent days after a short seller published research alleging problems with the company's accounting. The company, which has its assets in mainland China, has called the research inaccurate and says it is investigating the allegations.

This year, trading in shares of Hong Kong-listed China Forestry Holdings Ltd. were suspended after its auditors found irregularities in its books.

Questions about accounting and corporate governance at Chinese-listed companies are important in Hong Kong, where China-related securities account for more than 70% of the trading volume on the Hong Kong exchange.

Analysts said the temptation among some U.S. investors may be to conclude that all Chinese-listed companies are now suspect, and that the spate of alleged frauds reflect deep-rooted ethical problems in a country notorious for product-safety scandals and fake goods.
Read More

Most of the companies accused of impropriety are privately run, not state-owned enterprises. State-run companies were once thought to pose the biggest investment risk because of politicized management, their lack of accountability to shareholders, and the fact that their profits rely on favorable government regulation in protected markets.

So far, the performance of many of the listed Chinese banks, natural-resources companies and other big firms under state control has been stellar over time. Still, analysts said it is too early to make generalizations about the state versus the private sectors. For example, some analysts believe that state banks face big problems of bad loans as a result of expanded lending over the past several years.

Mr. Wheatley, a Briton who spent 18 years at the London Stock Exchange before taking the Hong Kong post in 2005, said the problems with Chinese companies listing outside their home jurisdiction, including those that list in Hong Kong, were exacerbated by the fact that regulators seeking more information about a company rely on third-party investigators.

He said, though, that the Hong Kong commission's relations with its Chinese counterparts have been positive, noting that it has received information on Chinese-based companies from regulators there as needed.

The commission said Wednesday that it appointed Deputy Chief Executive Alexa Lam as acting CEO.

Mr. Wheatley emphasized the need for investment banks and brokerages that underwrite share listings in Hong Kong to take greater responsibility for keeping substandard companies at bay. One way the regulator hopes to enforce that is by holding the underwriters liable for the accuracy and completeness of listing prospectuses, Mr. Wheatley said.

Mr. Wheatley also cautioned that trading in products based on China's currency, the yuan, likely will develop at a much slower pace than many would expect. Mr. Wheatley said the hitch is a lack of liquidity for the currency outside of China.

"I think it will happen, but I'm thinking in three to five years is when we really see that market develop," he said.

During his time in Hong Kong, Mr. Wheatley, 52 years old, earned a reputation as a proactive enforcer, combating insider trading and other market misconduct, as well as boosting the commission's standing in Hong Kong and abroad.

After a brief hiatus, Mr. Wheatley will take a temporary position as a managing director of the U.K.'s Financial Services Authority. He eventually will run a new consumer-protection group, to be spun out of the FSA, called the Financial Conduct Authority.

Guy that published the report on sino forest used to post here for a long time.
Top notch bloke!

rickettyrabbit wrote:There are interesting similarities between the housing bust in the US and the current bubble in China. In the US, many financial watchers knew an end to the bubble was coming at least a year before it burst, but couldn't say when it would go bust. And few knew what havoc it would wreak.

Seldom is an argument strengthened by introducing another topic. why bring up america's housing bubble at all? why not argue china's imminent housing bust based on china's merits?

/ sorry, couldn't resist.

bleepingbleeper wrote:

rickettyrabbit wrote:There are interesting similarities between the housing bust in the US and the current bubble in China. In the US, many financial watchers knew an end to the bubble was coming at least a year before it burst, but couldn't say when it would go bust. And few knew what havoc it would wreak.

Seldom is an argument strengthened by introducing another topic. why bring up america's housing bubble at all? why not argue china's imminent housing bust based on china's merits?

/ sorry, couldn't resist.

I see a bubble of articles, which talk about housing bubbles.

That Muddy Waters agency is a complete bs.

First they short the stock. Then they write the negative research. Before publishing it, they sell it/or advice to big players on the market that "sh1t is going to hit the fan soon". Then "market movers" start short selling the stock as well, which would move the price down. Muddy waters enjoys the profit.

2-3weeks later, They publish/release this negative research report, and enjoy profit from public selling the stock as well.

minyanville wrote:That Muddy Waters agency is a complete bs.

First they short the stock. Then they write the negative research. Before publishing it, they sell it/or advice to big players on the market that "sh1t is going to hit the fan soon". Then "market movers" start short selling the stock as well, which would move the price down. Muddy waters enjoys the profit.

2-3weeks later, They publish/release this negative research report, and enjoy profit from public selling the stock as well.

That's Goldman Sachs.

minyanville wrote:That Muddy Waters agency is a complete bs.

First they short the stock. Then they write the negative research. Before publishing it, they sell it/or advice to big players on the market that "sh1t is going to hit the fan soon". Then "market movers" start short selling the stock as well, which would move the price down. Muddy waters enjoys the profit.

2-3weeks later, They publish/release this negative research report, and enjoy profit from public selling the stock as well.

Are you claiming they are gaming the system? Perhaps they are Chinese....

Regardless, I'd be quite happy if they wrote reports on every Chinese stock. The Chinese shouldn't be allowed to list on foreign exchanges at all since they are not responsible to the regulatory officials responsible for those markets.

beenaroundworld wrote:

minyanville wrote:That Muddy Waters agency is a complete bs.

First they short the stock. Then they write the negative research. Before publishing it, they sell it/or advice to big players on the market that "sh1t is going to hit the fan soon". Then "market movers" start short selling the stock as well, which would move the price down. Muddy waters enjoys the profit.

2-3weeks later, They publish/release this negative research report, and enjoy profit from public selling the stock as well.

That's Goldman Sachs.

bleepingbleeper wrote:

rickettyrabbit wrote:There are interesting similarities between the housing bust in the US and the current bubble in China. In the US, many financial watchers knew an end to the bubble was coming at least a year before it burst, but couldn't say when it would go bust. And few knew what havoc it would wreak.

Seldom is an argument strengthened by introducing another topic. why bring up america's housing bubble at all? why not argue china's imminent housing bust based on china's merits?

/ sorry, couldn't resist.

Seldom is an argument strengthened by taking to a different topic in another thread.