is there a bubble in the chinese asset market?

23
Is There a Bubble in the Chinese Asset Market?

Upload: neerajjain09

Post on 10-May-2015

378 views

Category:

Business


2 download

DESCRIPTION

Comparing Chinese real estate market with Japanese 80's market crash

TRANSCRIPT

Page 1: Is There a Bubble in the Chinese Asset Market?

Is There a Bubble in the Chinese Asset Market?

Page 2: Is There a Bubble in the Chinese Asset Market?

Agenda

Introduction The Japanese Case China’s Economic

Development Is there a Bubble? Conclusion

Page 3: Is There a Bubble in the Chinese Asset Market?

Introduction

Unprecedent Growth in the Chinese Economy More than a decade of

growth in the GDP Asset Prices skyrocketing

Japanese Crisis Asset prices increased

rapidly between 1985-1991 Burst of the bubble in 1991

Is China heading for a similar crisis?

Page 4: Is There a Bubble in the Chinese Asset Market?

The Japanese Case: Before the Crisis Before the crisis began, the Japanese

economy underwent decades of unusually high growth – the so-called „Japanese miracle“

-5

0

5

10

15

20

25

Japan GDP Growth 1960-2008

GDP Growth (annual %) GDP per capita growth (annual %)

Inflation Consumer Prices (annual %) Inflation GDP Deflator (annual %)

Page 5: Is There a Bubble in the Chinese Asset Market?

The Japanese Case: Before the Crisis Steady gains in productivity promoted economic

growth in the years before the crisis Japanese goods were often superior to foreign

products – both in quality and price The resulting large trade surpluses helped the Japanese

economy grow even faster Simultaneously savings were extremely high due to

stringent tariffs and regulation The result was that money was readily available for

investment This investment into capital resources meant that

Japanese products could even become better and cheaper To counteract this spiral of increasing Japanese

competitiveness, the Plaza Accord was established

Page 6: Is There a Bubble in the Chinese Asset Market?

The Japanese Case: Before the CrisisThe Plaza Accord Agreement in 1985 by consortium of the largest economy to

devalue the U.S. dollar against Japanese Yen and German Deutschmark

Took place in New York Plaza Hotel

Page 7: Is There a Bubble in the Chinese Asset Market?

The Japanese Case: What happened As a result of the Plaza Accord, the Japanese Yen

appreciated against the US-Dollar Exports from Japan became more expensive and

less competitive Imports to Japan became cheaper Thus the Japanese trade balance worsened…

To counteract adverse effects on GDP, the Bank of Japan followed a more expansive monetary policy

Y = C + I + G + NX

Page 8: Is There a Bubble in the Chinese Asset Market?

The Japanese Case: IS-LM Diagram

IS Curve

LM Curvei

Y

IS Curve‘

Y1 =Y3 Y2

LM Curve‘

i2

i1

i3

1.

2.

2.

1.1.

2.

Page 9: Is There a Bubble in the Chinese Asset Market?

The Japanese Case: Effect on Rates As we saw from the IS-LM diagram, the

combination of both effects leads to a decrease in interest rates

1985 1987 1990 1993 1995 19980.00 %

1.00 %

2.00 %

3.00 %

4.00 %

5.00 %

6.00 %

7.00 %

8.00 %

9.00 %

Basic Discount Rate Uncollateralized Overnight Rate

Page 10: Is There a Bubble in the Chinese Asset Market?

The Japanese Case: Effect on Asset Prices The extremely low interest rates meant that

market liquidity increased significantly Some of this money went into speculation in

shares and real estate

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 20040

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

0

50

100

150

200

250

300

Nikkei 225 Index Total Average Real Estate Commercial Real Estate

Nik

kei P

rices

Real Esta

te P

rices (

2000 =

100)

Page 11: Is There a Bubble in the Chinese Asset Market?

The Japanese Case: Effect on Rates To counteract the bubble, the Bank of Japan

started to increase interest rates This made speculation more expensive

1985 1987 1990 1993 1995 19980.00 %

1.00 %

2.00 %

3.00 %

4.00 %

5.00 %

6.00 %

7.00 %

8.00 %

9.00 %

Basic Discount Rate Uncollateralized Overnight Rate

Page 12: Is There a Bubble in the Chinese Asset Market?

The Japanese Case: Effect on Asset Prices Mortgage payments became more expensive New credit financed purchases of real estate

and shares suffered from higher rates, too The asset price bubble bursted..

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 20040

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

0

50

100

150

200

250

300

Nikkei 225 Index Total Average Real Estate Commercial Real Estate

Nik

kei P

rices

Real Esta

te P

rices (

2000 =

100)

Page 13: Is There a Bubble in the Chinese Asset Market?

The Japanese Case: Result The dropdown in asset prices had adverse

affects on the financial system Loans (banks‘ assets) defaulted leaving the

banking system with severe losses The following credit crunch was

underestimated by the Bank of Japan and slowed down growth in the following years The so-called „Lost Decade“ began

Severe asset price bubbles put the economic development of a whole economy at risk!

Page 14: Is There a Bubble in the Chinese Asset Market?

China‘s Economic Development

China’s GDP has increased every year in the last decade

The annual growth rate is between 5% to 15%

PBOC’s Monetary Policy Expansive Monetary Policy Money Supply increases

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

China GDP (in Trillion US$)

GDP (in Trillion US$)

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0

2

4

6

8

10

12

14 China 1998-2008 GDP

Percentage Growth

GDP growth

GDP per capita growth

199819992000200120022003200420052006200720080

1

2

3

4

5

6

7

8

Interest Rates in China

Deposit interest rate (%) (FR.INR.DPST)Lending interest rate

Page 15: Is There a Bubble in the Chinese Asset Market?

Chinese Fiscal Policy

From 21st, July 2005, start system of managed floating exchange rate

Before July 2005: 1 RMB=0.1208USD

Now 1 RMB =0.1502USD

Growth: 24.3%

China‘s Economic Development

Page 16: Is There a Bubble in the Chinese Asset Market?

Chinese Trade Balance

Chinese export enjoyed a continuous growth after 1980 with the only exception in 2009

Four trillion investment plan for two years announced by China government in 2008, about 13% of GDP in 2008

China‘s Economic Development

Page 17: Is There a Bubble in the Chinese Asset Market?

IS-LM curve shift of China

IS 1998

LM

i

Y

IS

Y1998 Y

LM 1998

i

i1998

China‘s Economic Development

Page 18: Is There a Bubble in the Chinese Asset Market?

China annual disposable income per capita for urban households

China‘s Economic Development

Page 19: Is There a Bubble in the Chinese Asset Market?

Chinese Real Estate & Stock Market

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

1000

2000

3000

4000

5000

6000

SSE Index and Residential Prices, 1998- 2010

SSE Index Year Start Residential RMB/SqMeter

China‘s Economic Development

Page 20: Is There a Bubble in the Chinese Asset Market?

0

2

4

6

8

10

12

14

Lending Rates

China (95-03) Japan (80-88)

88

95

03

Is China following the path of the Japanese Crisis?

Both Japan and China followed loose monetary policy & huge fiscal stimulus

Japan GDP growth rate 3-4%, compared to Chinese GDP growth close to 10%

Japan’s bubble was driven primarily by commercial real estate market, which is not the case in China

50-60% of Japan bank Lending was in real estate market compared to 40% in China

Post-liberalization China faced huge shortage of residential property that meets new living standards.

State-controlled measures and regulations – second property restrictions, bank reserve requirements

80

Page 21: Is There a Bubble in the Chinese Asset Market?

Post-credit crisis, China central government dolled out 15% of its GDP

China banks loans stand at $1.4 trillion, a 30 % increase from 2008

China real estate prices continue to rise in 2009

` Is there a bubble in the Chinese Asset Market?

Page 22: Is There a Bubble in the Chinese Asset Market?

Is there a bubble in the Chinese Asset Market?

In Short term, China is likely to enjoy high growth China GDP growth over the past 10 years is close to 10% p.a. Which

partially explains the price trends over the past five to six years within a tolerable range (2-3 fold increase)

We see little risk in the foreseeable future that increases in loans to the real estate sector will pose a threat to the financial system but a rapid increase in lending could lead to a rise in bad debt in the future and might curb the Chinese financial system.

In Long term – yes, there is a bubble in the Real Estate market

Most of the bank lending is finding its way in over-priced real estate as the financial markets are still incomplete in China

64.5 million electricity meters registered zero consumption over a 6 month period

Real estate development at present is directed mainly toward luxury properties, with mass-market housing accounting for only around 10% of total residential sales – growth in real estates not catering to domestic demand

`

Page 23: Is There a Bubble in the Chinese Asset Market?

Thank You