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

1. Is There a Bubble in the Chinese Asset Market?

2. Agenda Introduction The Japanese Case China’s Economic Development Is there a Bubble? Conclusion

4. More than a decade of growth in the GDP

5. Asset Prices skyrocketing

6. Japanese Crisis

7. Asset prices increased rapidly between 1985-1991

8. Burst of the bubble in 1991

10. The Japanese Case: BeforetheCrisis Steadygains in productivitypromotedeconomicgrowth in theyearsbeforethecrisis Japanesegoodswereoftensuperiortoforeignproducts – both in qualityandprice The resulting large tradesurpluseshelpedtheJapaneseeconomygrowevenfaster Simultaneouslysavingswereextremelyhigh due to stringent tariffsandregulation The result was thatmoney was readilyavailableforinvestment ThisinvestmentintocapitalresourcesmeantthatJapaneseproductscouldevenbecomebetterandcheaper Tocounteractthis spiral ofincreasingJapanesecompetitiveness, thePlazaAccordwas established

11. The Japanese Case: BeforetheCrisis The PlazaAccord Agreement in 1985 byconsortiumofthelargesteconomytodevaluethe U.S. dollaragainstJapanese Yen and German Deutschmark Tookplace in New York Plaza Hotel

12. The Japanese Case: Whathappened As a resultofthePlazaAccord, theJapanese Yen appreciatedagainstthe US-Dollar Exports from Japan becamemore expensive andlesscompetitive Imports to Japan becamecheaper ThustheJapanesetradebalanceworsened… Tocounteractadverseeffects on GDP, the Bank of Japan followed a more expansive monetarypolicy Y = C + I + G + NX

13. The Japanese Case: IS-LM Diagram i 2. LM Curve LM Curve‘ i1 1. i2 2. i3 1. 1. IS Curve IS Curve‘ 2. Y Y1 =Y3 Y2

14. The Japanese Case: Effect on Rates As wesawfromthe IS-LM diagram, thecombinationofbotheffectsleadsto a decrease in interestrates

15. The Japanese Case: Effect on Asset Prices The extremelylowinterestratesmeantthatmarketliquidityincreasedsignificantly Someofthismoneywentintospeculation in sharesand real estate

16. The Japanese Case: Effect on Rates Tocounteractthebubble, the Bank of Japan startedtoincreaseinterestrates Thismadespeculationmore expensive

17. The Japanese Case: Effect on Asset Prices Mortgagepaymentsbecamemore expensive New creditfinancedpurchasesof real estateandsharessufferedfromhigherrates, too The assetpricebubblebursted..

18. The Japanese Case: Result The dropdown in assetpriceshadadverseaffects on thefinancialsystem Loans (banks‘ assets) defaultedleavingthebankingsystemwithseverelosses The followingcreditcrunch was underestimatedbythe Bank of Japan andslowed down growth in thefollowingyears The so-called „Lost Decade“ began Severeassetpricebubblesputtheeconomicdevelopmentof a wholeeconomyatrisk!

20. The annual growth rate is between 5% to 15%

21. PBOC’s Monetary Policy

22. ExpansiveMonetary Policy

24. China‘s Economic Development Chinese Trade BalanceChinese export enjoyed a continuous growth after 1980 with the only exception in 2009Four trillion investment plan for two years announced by China government in 2008, about 13% of GDP in 2008

25. China‘s Economic Development IS-LM curve shift of China

26. China‘s Economic Development China annual disposable income per capita for urban households

27. Chinese Real Estate & Stock Market China‘s Economic Development

28. 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

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

32. 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)

33. 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.

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

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

36. 64.5 million electricity meters registered zero consumption over a 6 month period