China's property bubble is real, if you're offshore: Gadfly editorial

[SHENZHEN] International investors who bought Chinese property-related stocks and bonds a year ago, when default fears sent them into a tailspin, have cause for celebration. Their bravery has paid off, handsomely. Real estate prices in Shenzhen have increased 74 per cent in 12 months.

Don't try the same now, though. Most developers with shares and debt accessible to investors outside of China are primarily exposed to the nation's biggest cities, where price increases have been the steepest and where cooling measures are looming.

New-home prices gained in 47 cities in February compared with 38 in January, the National Bureau of Statistics said Friday. They dropped in 15 and were unchanged in eight.

That trend has been buoying both equities and notes, with the dollar bonds of 46 Chinese real estate companies tracked by a Bank of America Merrill Lynch index increasing an average 7 per cent over the past six months, better than any other industry.

Evergrande Real Estate Group, whose shares have risen 29 per cent in Hong Kong over that period, said in its semi-annual report that almost two-thirds of its projects are in first and second-tier cities. Among them is Shenzhen, where average prices soared 74 per cent in the year through February.

Local officials have begun to complain about home affordability. The last time that happened, a host of cooling measures followed. Authorities have already started to crack down on borrowing for mortgage down payments. In Shanghai, where average prices are up 24 per cent, there's been discussion on how to cap the appreciation.

The same issues that worried international investors in the past are also still present. Developers have more debt, even if a greater share of it is onshore. Little wonder that of the 23 negative rating actions taken by Standard & Poor's on Chinese companies this year, 10 were directed at real estate firms.

Capital expenditure for the sector also continues to increase as developers buy more land. Again, the biggest buying sprees have been among those companies in large cities with access to offshore capital markets.

To be sure, China has an incentive to keep the property market chugging along and, as tycoon Li Ka-shing noted last week, overall, prices are reasonable.

International investors, however, are exposed to precisely those cities that look the most frothy. Calling a bubble nationwide would ignore the vast differences in the various geographies. But for money managers from New York to London and Singapore who only play in the top tier, it may not be so far from the truth.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

BLOOMBERG