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Property Bubble in China

My dad just came back from China, board meetings and a bit of sightseeing in the Yellow mountains. It my dad's 10th trip to China over the past decade, me I've only been twice. Anyway, again he was amazed by the vitality of the city, its energy, its growth, its continual building process. apparently the Bund is currently undergoing massive upgrading in preparation for the 2010 World Expo in Shanghai.

Various commentators have been commenting on the growth of China, which this year exceeded 8%, and my dad concurs from the ground, but many more are worried about the Chinese credit expansion, among them mis Michael Petttis a Shanghai based professor and blogger. Over the past few months he has been discussing the credit expansion in China that has found its way, in greater and greater propertion in the the real estate sector. This morning an FT article discusses the Shanghai property market as having some level of over capacity; in fact it compares New York which is perceived to be in real trouble with regards to property values with a 10-15% vacancy rate to Shanghai where the vacancy rate is around 50%, yes nearly half of Shanghai's available commercial real estate stands empty (I have seen reports of other Chinese city were multiple 70+ story buildings stand empty), but in Shanghai this is somewhat unexpected.

The issue is that the owners view the properties as investments and not as asssets to be deployed. The cost of holding these buildings empty is negligible (most of these empty buildings are owned by State Owned Enterprises "SOE" that borrow at subsidized rate), their books show these properties not at book value but at market value which is rising at 3-4% per month -- easy money, until the pied piper shows up!

Imagine any North American mega city with a 50% vacancy rate -- how valuable would these assets be?


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