January 29, 2010

China Housing Not A Bubble

Calls for China’s crash usually happen at the start of the year and 2010 is no exception. This year’s blame China crowd includes the usual editorial boards (Financial Times, Wall Street Journal), a Nobel prize winner (Paul Krugman) and more usual suspects such as Gordon Chang (is a near 10 year old prediction still relevant?). Hedge fund manager Jim Chanos made a big splash warning to stay away from China because he said Beijing’s stimulus created a housing and property bubble. Chanos has since backed away somewhat from his comments but warnings of a China property bubble persist including from the World Bank.

The predictions however do not take into account that the indicators of a housing and property bubble as burst in the USA and EU are not the case in China. Chief among the differences is building construction in relation to demand. The housing bubble and commercial real estate bubbles in the USA and EU were not driven by demand. In the USA whole suburbs of empty houses and strip malls stand vacant. In some areas such as Victorville, California, neighborhoods are torn down and plowed under. In cities across America and Europe holes and vacant lots mark the spots of cancelled buildings.

Yes China is in a building boom. Property sales rose 75% last year alone. In 2007 China accounted for half of all new building areas on the planet. How is this not a bubble? Consider the transformation of Chinese society from rural to urban. The housing stock in China remains woefully inadequate. In the USA nearly a fifth of the housing stock was built before 1940. But China’s housing stock was devastated by continuous war until mid century and deteriorated further in the 1950s as private households neglected properties fearing state confiscation and housing was lost to industrial development. Any traveler visiting outside China’s cities can attest to the poor state of rural housing. All the new migrants to Chinese cities will need housing. And current city dwellers want better housing.

A similar comparison exists for commercial real estate. Half the commercial buildings in America were built prior to 1970. China’s building boom began with commercial buildings in the 1980s and ‘90s but still has a long way to go. Typical indicators for commercial property viability such as vacancy rates do not fit the Chinese market. It is not at all unusual to see 50% or greater vacancies at the peak of office space building cycles for example.

The primary category of residential building in China is multi-family low and high-rise. Add to that the demands for high-rise commercial buildings for offices and hotels. The materials required for such construction create huge demand for everything from steel and concrete to carpet and computers. Yet as a percentage of GDP the building construction industry in China (around 5-6%) is not much greater than in the USA (4.6%-4.1% between 2004-07).

Beijing is responding to world opinion and investor concerns. New policies introduced recently include 20% down payment requirement on property and 50% on land. But as to rumours that China will implement a property tax (currently there is none) the State Administration of Taxation said this week it was only in the “research and preparations” stage. Potential speculation in property on tropical island province Hainan alarmed the Financial Times but the report failed to mention that the governor of Hainan has suspended new land leases and development plans.

Property remains a barometer and important component of China’s economy. And many analysts continue to find property stocks attractive. The Changjia Group will IPO on Hong Kong in March and Sun Hung Kai properties is a media and investor darling. Foreign investment continues in the commercial sector too. Starwood Hotels says it will double its portfolio in China over the next two years to over 100 hotel properties.

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January 27, 2010

Chinese Skies: Southwest, British Airways Jets Financed by China

Airbus announced an agreement today with CDB Leasing, a leading leasing company in China, to cooperate in financing and leasing of Airbus jet planes worldwide. Under the agreement CDB Leasing will arrange financing solutions to airlines to buy Airbus planes. CDB Leasing is majority owned by Beijing's China Development Bank. Chinese banks are playing an increasingly important part in passenger plane financing. Already big Chinese banks including Bank of China and Commercial and Industrial Bank have financed planes operated by Southwest Airlines and British Airways. Reflect on that the next time you board....

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China Year End 2009 Data Shows Strong Stable Growth

Remember how 2009 began (much like this new year) with predictions of a crash in China because Beijing had poor experience handling a recession and China couldn't possibly decouple from the global recession? Turns out the Chinese economy grew steadily and healthfully all 2009. Here are data points for last year: GDP expanded 8.7%; retail sales grew (in real terms) 16.9%, better than 2008; fixed asset investment grew 30.1% with urban fixed asset investment at 30.5%; capital expenditure investment in secondary & manufacturing industry expanded 26.8%; RMB 9.59 trillion (Yuan) in loans were issued, a 95% increase; exports were down -16% to $1.2 trillion (US dollars) and imports dropped -11.2% to $1 trillion; with exports down Chinese industrial output grew only 11%, the slowest since the 2001 recession; Beijing's foreign exchange reserves grew to $2.4 trillion; although food prices remain inflationary, overall CPI deflated to 0.7%....

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TRADE WAR: USA Targets Chinese Drill Pipe & Electric Blankets

The United Steelworkers union's latest demand to the Obama administration calls for anti-dumping duties up to 496% on drill pipes and collars imported from China used for oil drilling. The Commerce Department dutifully launched a probe and will make a determination next month. Today Commerce decreed that woven electric blankets from China must incur anti-dumping duties ranging from 90% to almost 175%. The complaint in this instance came from New York based consumer conglomerate Jarden Corp. The spate of anti-dumping and countervailing duties on Chinese goods is picking up. It appears the Obama administration is using selective protectionism against Chinese goods in frustration over the inability to work with Beijing on currency and other issues such as 'human rights' important to Obama donors and stakeholders....

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January 20, 2010


After just 4 years in China Google wants to take its ball and go home. The snap decision is a surprise for a company famous for not losing its cool. Co-founder Sergey Brin is behind the decision to pull the plug on Google China. Brin, born in the Soviet Union, wants to embody Google’s pompous corporate motto “do no evil.” Yet his company had no problem appeasing Beijing’s Internet regulations while it tried to build its business and brand in China. And Brin himself admits that Google blocks material in the USA, France, and Germany - just to name a few instances. A simple warrant is all Google requires to hand over to US feds data on its users going back 180 days.

Last week Google’s chief Legal Officer flamed China’s central government (and by association Chinese people) on the official Google blog with a cryptic ultimatum that it may “shut down Google.cn, and potentially our offices in China” over a hacker attack. But could Google’s knee-jerk reaction become one of the biggest corporate blunders in American history?

Google first tried to enter China the Yahoo! way by buying a Chinese Internet company. But Google went small taking only a 2% stake in Baidu the leading Chinese search engine portal. Google set up its China business in January 2006 choosing the Chinese name “Gu Ge” meaning “harvesting song.” A few months later Google partnered with China Mobile and invested $50 million for a venture to develop mobile services. Not long after that Google sold its stake in Baidu after Baidu went public on NASDAQ and pocketed a nice return of approximately $63 million. Google chose Taiwan born Kai-fu Lee to head up the Beijing office and said it was in it for the long haul, a must for any foreign business in China.

But Google couldn’t bring it. Kai-fu Lee quit Google China last year to head a Beijing venture capital firm to nurture Chinese Internet startups that will compete directly with Google. Four years on Google is no match for Baidu which consistently claims over 60% of the Chinese search market. Google’s share is flat and falling. According to marketing research company comScore Google’s share of the Chinese search market sank to just 14% last November. And search is just one failure of Google in China.

Google’s main focus in China is mobile phones and related services. Investments in Chinese companies such as Xunlei (a video download service) all seemed to fizzle and somehow end up in Baidu or another company’s favor. China Mobile, with more subscribers than any other telecom, now plans to open its own apps store and develop its own services. Google had plans to launch smart phones in China based on its Android operating system. That was cancelled this week.

The loss of what will most likely be the world’s largest market for smart phones and the apps and mobile advertising that come with them means Google’s showdown has serious implications for its future. Sure most Americans think Google is number 1 everywhere in everything but need Google be reminded that at its peak in 2000 Yahoo! shares also cost three digits and its market capitalization of $120 billion was not far off Google’s worth today?

Google dropped its bomb on China in a blog post with links to reports of the overtly anti-China US-China Economic and Security Review Commission. Within hours Secretary of State Hillary Clinton announced she had been “briefed” by Google and helped spin a media cycle in which Google purchased ads in print media and online to imply its business entanglements are a human rights issue.

Fact is Google is embedded in the Obama White House. Google was the number 3 contributor to the Obama campaign. CEO Eric Schmidt (sitting next to Obama in the photo) sits on the President's Council of Science and Technology Advisers. Three other Google executives are in White House positions including Sonal Shah of Google global development and Andrew McLaughlin head of Global Public Policy and Government Affairs for Google who is the White House's Deputy Technology "czar".

On his first official visit to China Obama told a group of Shanghai youths that the USA considered unfettered Internet access a universal human right and tut-tutted over censorship. Last week Secretary Clinton enshrined the view in her lengthy “Internet Freedom” speech. Billed as a major policy initiative the speech mentioned China throughout and contained a direct ultimatum to Beijing to “conduct a thorough review of the cyber intrusions that led Google to make its announcement.” Afterwards Hillary took questions from an audience filled with plants from front groups and organizations affiliated with the NED (National Endowment for Democracy).

The scold on Internet Freedom is odd considering Hillary believed the Internet needed “gatekeepers” back in 1998. And how relevant is Internet Freedom for the world? Fully a quarter of Americans do not even have the Internet in their homes and broadband access in the USA is one of the lowest in the so-called “developed” world. But to Obama’s crowd America equals the Internet and the Internet equals Google.


Google was not alone in the hacker attack. Over 30 multinationals were affected by what was apparently called “Operation Aurora.” But there is no evidence the Chinese government was behind it. American Internet security firms Verisign, Adobe, and McAfee pointed fingers and Microsoft admitted that an unrevealed flaw in Internet Explorer was used by the culprits. Google even suspected its own employees. Headlines in the mainstream media declared “Evidence Found for Chinese Attack” (to quote the New York Times’s lead) when a malware sleuth found a circumstantial link but no direct evidence of Chinese involvement. The attack could just as likely have been a psyop from a rival company or government intent on framing Beijing.

Google now says it wants to stay in China and is working behind the scenes with Beijing regulators. And Google’s co-founders will sell enough stock to reduce their control down to 48% indicating the company may yet be run on business pragmatism over emotion. But the message that China attacked Google is sticking and the incident shows clearly who guides China policy in the Obama White House.

(c) copyright, Ben Calmes 2010
(Disclaimer: the author owns shares of Google via a mutual fund)

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