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i just spent a month in China to attend some family matters. my mind was not on markets/macro per se, but some random observations.

1. The extent of economy tied to real estate is just staggering. none of this should be new info, but it still blows my mind everywhere i go. 90% of billboards are new RE development projects. I stayed in newly built apartment buildings of my relatives in the suburb 15 miles from a tier 2 city, and the price/sqft is meaningfully higher than my house in a relatively expensive neighborhood in Boston, while personal income is probably at most 1/5 of Boston's level.

Aside from internet moguls, virtually every rich person in China somehow cycled their fortune back to real estate, whether it is residential or commercial. So many of the publicly listed companies are nothing more than fronts/channels for the parent group to get favorable land deals/financing from local governments/banks.

2. the headline is still ok on RE front with rising price and units sold, but i think a divergence is starting to form. A few tier 1 cities have remained strong, but cracks are appearing in tier 2-5 cities (mind you, a tier 4 city in China may still have a population well over 1m). it sorta reminds me of the narrow stock market in 1998-1999. perhaps a bigger issue is commercial real estate where there is less "hard" demand. We are witnessing doubling/tripling of shopping space in 4-5 years ending next year while online shopping is growing faster than US. A huge collison seems inevitable.

3. Stress is starting to show in banking system. These are pure anecdotes. A friend is a Sr. loan officer in one of the big 4 banks. He just came back from a huge shipbuilding project going bad (we are talking about $ billions of bad debt). He said this year started out worse than any he could remember, and when i asked whether it was restricted to certain industries, he said it was across the board, and his friends at other banks are having similar problems. With newly changed incentives that overly penalizes bad debt, he sounded like there is very motivation for loan officers to be aggressive. i wonder if there is a loan officer survery in China. would be interesting.

4. another friend's wife works in the leading local trust product company, essentially the financing arm of the local government. She works in back office, but their firm has changed policy of selling trust products this year -- it used to be sold by only sales people, now EVERYONE in the firm is encouraged to sell the products even though the rate is higher than prior years and promised higher commission. I politely said no when she tried to sell me some "no risk 10% return" products. mind you, 95% of these shadow financing products are on RE projects. Another friend works in a multi-national finance firm, and their controller had recently barred purchasing such products. Wise move, i thought.

5. The increased pride/confidence/faith in the government/country associated with the economic development is palpable, on virtually every media outlet. Citizens are demanding stronger personal rights and the governments to act tougher in foreign affairs. in other words, a status suitable for the new China. i think it would be an under-statement to say citizens would overwhelmingly support a war against Japan/Southeast Asian countries if the "right" circumstances arise. A domestic recession certainly won't hurt either.

Perhaps it is this faith in the government that is underpinning the housing bubble. virtually everyone i talk to claims the government is corrupt (though getting better), but they have full faith in the ability of government to engineer a soft landing and protect their biggest asset -- RE. For a "newly" capitalistic country, i find the average citizen (even well educated ones) has poor/zero knowledge of what a financial crisis will feel like. after all, it has been non-stop rise in 30+ years. who can blame them?

To me, the bubble is so obvious (admittedly it felt that way 3 years ago), but when i asked my friends "what if", the common answer is "the government won't allow it to happen". And every time i hear that phrase, i can't help thinking of the following quote from Michael Lewis's essay on Irish RE bubble.

real-estate bubbles never end with soft landings.

A bubble is inflated by nothing firmer than expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long-term investment real estate has become and flee the market, and the market will crash. It was in the nature of real-estate booms to end with crashe.

i have been critized of spending too much time/energy thinking how this bubble will affect US market/how I invest. maybe so. Still, I am sorta scared by all the negative repurcussions a hard landing could have -- yes i know any sane person knows there is a problem there vs. 3 years ago, so it may be priced in (in what asset class though?), but i suspect people are under-estimating how big/wide-spread the problem is. on the other hand, i am kinda excited (politically incorrect) that we could see some really exciting investment opportunities of a lifetime if things unravel the way i feel it can.
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