After a post earnings spike last week, we began a position on the Monday swoon in E-House (China) Holdings (EJ). It's sitting right above support and we could be stopped out of a portion of the position but I do believe I'll keep this in the longer term core portfolio. [Aug 12, 2009: E-House Holdings Benefiting from China Housing Bubble] [Aug 13, 2009: WSJ - In China, Land Prices Fan Bubble Fears] It's a tricky position because we know China is doing some not unfamiliar to America things to stoke their real estate market, but it's a pretty impressive niche company. Much like many American companies nowadays you are buying free handouts from the government, and trying to ride the wave while understanding the implications of these handouts... but needing to ignore them. Until the music stops. Which might be happening today - or in 6 months or 18. Further, if the Shanghai market continues down I don't expect US listed Chinese stocks to be able to continue to pretend as if its not happening (as we are today) - so we'll have to monitor this closely.

id=BLOGGER_PHOTO_ID_5371737347836547042Much of the story in China is actually the inverse of what is trying to be attempted in the U.S. - they have had a reliance on exports and are trying to get the massive internal savings rate down, and turn more into a self reliant internal consumption economy. [Chinese Car Sales Jump 47% Year over Year on Subsidies] In theory America is trying to do the opposite (although not in practice as it still wants its citizens to shop via incentive after incentive). We spent a lot of time on what China needs to do at the turn of the year in pieces such as [Jan 8, 2009: NYT - As Trade Slows, China Rethinks Its Growth Strategy] and [Dec 7, 2008: NYT - China's Economy, In Need of Jump Start, Waits for Citizens to Loosen Fists] Since the social safety net is weak in China, the savings rate is high as people are much more self reliant. Further there is no such thing as filing bankruptcy and getting off clear and free as some Western countries have. There is an interesting piece on the damage credit card growth is creating which I'll try to get out later in the week.

But either way we have a huge global trade imbalance - on one side is the US consumer and on the other side is the rest of the world. What is ironic is every recovery theme in almost every major economy now is based on exporting their way back to prosperity. The problem is, if you can't count on the American consumer - who is going to be doing all the importing of those exports? A conundrum. Let's see what China is up to; much like the US almost all the prosperity of late has been via government as trade has wallowed... via Reuters

  • The Chinese government is attempting to pass the baton of growth from state-funded infrastructure investment to the private housing sector, a risky but necessary move to sustain the economic recovery.
  • Construction cranes sprouting in big cities, busy furniture shops and soaring property sales all show that the transition is going smoothly so far, though officials are wary that house prices may rise too high, too quickly.
  • China's biggest listed property developer, Vanke, lifted its housing starts target for this year by 45 percent, while its rival Poly Real Estate said sales in January-July rose 143 percent from a year earlier. (staggering figures) On the ground, construction firms, big and small, are trying to meet the demand, last years' downturn now a distant memory.
  • The economic importance of the property sector in China is hard to overstate. Investment in residential housing accounted for about 10 percent of gross domestic product before a property boom turned to bust in 2008, roughly the same as the contribution from the country's vaunted export factories.
  • The government's first steps last year to revive the stalling Chinese economy were to offer tax cuts to encourage home purchases, followed by rules to ease access to mortgages.

Sounds great so far - something for the GOP (tax cuts) and Dems! (easier access to mortgages)

  • But Beijing must strike a fine balance in its bid to kick-start the housing market. On the one hand, it wants rising prices to persuade house hunters to stop putting off purchases and to get developers to invest in new projects. On the other hand, it is wary of prices rising too quickly, luring speculators into the market and turning it into an asset bubble, not an economic driver.
  • Because it is closely linked to so many industries, volatility in the real estate market will inevitably lead to macroeconomic volatility, the government-run China Economic Times warned on Monday.
  • The housing market rebound in Beijing, Shenzhen, Guangzhou and other big cities means that prices are already back to their 2007 peak, the report noted.
  • While prices are high, a surge in sales has depleted housing inventories and developers need to break ground to catch up, Ken Peng, an economist at Citigroup in Beijing, said.

But China is a big country ... different strokes for different regions.

  • The government can take heart in how most of the real estate money has been spent to date. Investment in property construction was up a fifth in western China -- the part of the country with the biggest need for new housing -- in June compared with a year earlier. Wealthier coastal areas in the east, which are already heavily built up, saw a 4.4 percent rise.

So with loan growth in July 25% of June, and the stock market dropping 20% - any similar signs in real estate? Obviously much harder to read and much more anecdotal...

  • Several real estate agents said the market seemed to have cooled over the past few weeks.
  • Shanghai Xinyi, a real estate agency in China's financial center, said transactions in August fell by half from July.
  • We could feel the effect of the government's tightening-up of loans for second homes.

And this is the issue with investing in China in the short run - everything is so tied to the government. When they want loans flowing (Jan-Jun), a tsunami ensued. When they don't - firefighters arrive to fight the water. Without inner access to these discussions it is hard to gauge what is coming in 30, 60, or 90 days.

Long E-House Holdings in fund; no personal position