So this is a few months late, but I thought I should still add some to BQ's excellent posts about the Chinese real estate situation.
Summary: I think that Chinese residential real estate is in the middle of a huge bubble. When will it pop? That's the tough question.
So while traveling in China this past summer, here were some of the things I noticed that made me scream bubble.
1. Prices have skyrocketed. From talking to people, many places have gone up 250% in the past 5 years. While that doesn't guarantee a bubble, I would say that steep of a price rise coupled with a huge price/income ratio signals bubble.
2. Construction everywhere, but where are the people? The construction frenzy continues not only in Shanghai but to a smaller town (Chinese town = only a million people) about an hour outside by train. It seems that many places are being built up on anticipated spillover demand, not actual demand.
3. Expat money. One reason the bubble has gotten so big, and may even get bigger, is that expatriot Chinese are using the construction boom to pick up a place. Many of Tina's cousins have decided to buy a place for the week or two out of the year they plan on visiting China. However, I think expats are not a great way to support real estate because as the rest of the world's economy turns around, China's real estate looks comparatively like a worst investment. I think that money can dry up quickly.
4. IPO's. The Agricultural Bank of China (ABC) had the world's largest IPO this summer. However, I read in a Chinese newspaper that when ABC's directors met with investors, one ABC executive fell asleep while another kept laughing nervously as a response to any questions. So it sure looks like an unprofessionally run bank that is just trying to cash in.
5. The feeling that this is different. Everyone I talked to recognized that prices were ridiculous, but also said that they can't collapse because first, rural Chinese are moving to the cities and second, the government can't let them collapse. I think the first argument is pretty weak since the rural Chinese aren't that wealthy, so I can't see how they play that significant of a role in the real estate demand. The second argument is downright scary. This implies that people are taking significant risks that they would not take if they thought the government wouldn't step in. Can the Chinese government prop up the real estate forever? Not a chance. Can they prop it up for a while? Sure, but at what cost? I'm sure BQ can illuminate more about the danger of a government trying to artificially inflate prices.
So what will the impact be on us? I really don't know, hopefully BQ can illuminate more with numbers, but it seems like the direct expose to Chinese real estate by US banks is minimal. There will be some indirect damage since many US banks did by into the ABC IPO and other Chinese banks. The bigger impact will be what the collapse does to the overall Chinese economy and that spillover effect.