Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

Roach Lite (Andy Xie) Says Pigs Flying in Shanghai
http://www.morganstanley.com/GEFdata/digests/20040407-wed.html

“In a typhoon,” one Hong Kong tycoon remarked, “pigs fly.” It was the summer of 1997, and billionaires appeared to be popping up everywhere in Hong Kong. The stars were property developers.While hard data suggest a massive property bubble in cities like Shanghai and that a major price correction is inevitable, property developers disagree. The amazing thing is that property developers use the same argument in every bubble. What I heard in Shanghai last week was the same as what I heard in Jakarta, Bangkok, or Hong Kong in 1997.

In China, entertaining government officials is a key element of property developers’ activities, leaving them with plenty of spare time to theorize on the current market strength. Usually, they tell a story to justify what is happening. When one questions how Chinese people can pay so much for a property, developers reply that people have money that you cannot see. I heard exactly the same argument in Jakarta in 1997. Chinese people just don’t have money hidden away, in my opinion. With violent robberies rising in major cities, it is foolhardy to keep cash at home. Only corrupt government officials have hidden money, but that is placed overseas. And they are likely to buy properties in the United States with these funds.

When one questions whether China is overbuilding with so much construction under way, many property developers point to Manhattan and suggest that Chinese cities could accommodate many more buildings. While the comparison is colorful, it is very irrelevant, in my view. Property is a form of wealth accumulation. It must follow but not lead the accumulation of productive wealth that derives from competitive provision of goods and services. Manhattan’s skyline rose over time, with the companies or individuals based there using profits earned elsewhere.

Shanghai actually does poorly in creating productive wealth. Automobiles and semiconductors ─ the two pillar industries in the city — make profits as a result of trade protection and have higher costs than their international competitors. They may eventually become competitive, but should destroy rather than create wealth in the meantime. Compared with Hong Kong or Taiwan, Shanghai depends on capital inflows and doesn’t generate much profit.