NEWS: Real Estate Bubble in China

BEIJING - China's real estate market seemed to have got into an unrelenting price spiral in 2004 as the central government issued a series of policies to cool down the sector but housing prices continued to rise throughout the year. This surprising double-digit year-on-year growth may have delighted developers, but made experts fear a market bubble.
According to the National Bureau of Statistics, by the end of November, China's housing price rose 12.5% year-on-year, up 0.8 percentage points over the 11.7% growth in October. The growth rate is even higher in 35 major cities. So is the country's real estate market enjoying healthy development or is this just an artificial bubble? There is still no definite answer.

From December 1, 2002, the developers' own capital was stipulated to stand at 30% of their total investment, 10 percentage points higher than before. The threshold was further increased to 35% last year.

Another macro-policy was issued late October, as the central bank raised for the first time in nine years its benchmark interest rate by 27 basis points, one-year lending rate from 5.31% to 5.58%, and the one-year deposit rate from 1.98% to 2.25%. The higher lending interest rate surely puts a heavier burden on developers' financing costs and the majority of the consumers who acquire their property via banking loans.

However, the impact of these measures, aiming to cool down the overheated property market, is not as so palpable as the experts and insiders had predicted, with prices continuing to rise and market demand remaining robust. The National Bureau of Statistics recently indicated that average property prices in China's main cities rose 12.5% year-on-year in 2004. Prices for residential and commercial property averaged 2,759 yuan (US$333.10) per square meter, with the average price of residential housing rising 11.6% to 2,580 yuan per square meter between January and November.

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REPORT: PWC The Underbelly - Non-performing Loans

When it all goes bust- there is always the non-performing loan market:

The Asian non-performing loan ("NPL") market continues to flourish. Taiwan's clean-up continues and the Philippines is beginning to show signs of life. China, as always, remains a hot spot with India still waiting for the action to kick-in. Throughout all of these individual markets (and more), PricewaterhouseCoopers continues to be at the forefront of the deals being done. In this fourth issue of NPL Asia, a newsletter aimed at NPL sellers and investors, and the advisors that serve them, we again do our best to report on recent trends, transactions and market developments. In this issue we focus once again on China and Taiwan, the most active markets, and also on the issues facing India, Indonesia, Korea and the Philippines.

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REPORT: PWC China NPL Investor Survey 2004

PricewaterhouseCoopers conducted a survey recently on the China non-performing loan (NPL) foreign investment community entitled, "China NPL Investor Survey 2004". The survey explores the strategies, preferences and expectations of the China non-performing loan foreign investment community and found that well-capitalised and experienced NPL investors are eager to make multiple, sizeable investments in China's NPL market but are troubled by its lack of defined parameters, consistency and deal flow. 78% of the survey's respondents are prepared to invest between US$51 million to US$250 million each over the next 1-3 years. All of them say that China is a high, if not their top, priority in Asia and they have a common belief that opportunities should be increasing over the next few years.

The survey was sent to 40 entities, including specialised units within investment banks, distressed debt funds and other commercial entities. Seventeen of these entities completed survey forms representing an impressive 42% response rate.

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REPORT: BCG "Aim High, Act Fast: The China Sourcing Imperative"

by Jim Hemerling, Hubert Hsu
February 1, 2003
For more than a decade, "Made in China" has been a compelling sourcing option. Today, in almost every industry, it is a requirement. And companies that that are not already moving - or not moving fast enough - are in danger of becoming uncompetitive.

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REPORT: BCG "China: The Pursuit of Competitive Advantage and Profitable Growth"

by Jim Hemerling, Hubert Hsu, David C. Michael, John Wong
July 7, 2003
Whether as a source of growth or a platform for low-cost sourcing and production, China is an opportunity too important to ignore. Written by BCG's leading consultants working in the Greater China region, this report is an anthology of articles about China published over the past two years. These articles address topical business issues facing both multinational and domestic Chinese companies in a broad range of industries. They are informed by BCG's nearly 20 years' experience in working with such companies in China.

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REPORT: BCG "China and the New Rules for Global Business"

June 3, 2004

This is the first of four BCG/Knowledge@Wharton China Reports. Topics include how China affects the global supply chain, the risks of doing business in China, and a look at MNCs in China. "China and the New Rules for Global Business" includes articles about the opportunities and threats global firms face in China; an analysis of how sourcing production in China compares with sourcing in other countries; and a description of the challenges that big banks face in China, among other topics.

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REPORT: PWC Issues and Risks for FDI

For more than a decade, the People's Republic of China (PRC) has experienced an unprecedented influx of Foreign Direct Investment (FDI). FDI has been used by foreign companies as an important means of entering China. This has a number of attractions, including low cost manufacturing resources and facilities, and the prospect of a huge consumer market. Before 1992, loans accounted for 60% of the total value of incoming foreign capital. In recent years, FDI has dominated the capital inflow, accounting for 70% of the total value. The Chinese Ministry of Foreign Trade and Economic Co-operation (MOFTEC) revealed that total inflows of FDI in 1996 amounted to US$41 billion, making it the second largest FDI recipient after the United States. Hong Kong constitutes the single largest source of FDI for China.

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REPORT: PriceWaterhouseCoopers Survey About Doing Business in China

March 2004
While the magnitude of foreign investments in China has been increasing, foreign investors continue to encounter different challenges when doing business or investing in China. What are these challenges? Is it easy for a foreign investor to exit China? What will the trend for foreign investment in China over the next three years? In order to answer the above questions,

PricewaterhouseCoopers' Advisory Division has conducted a "Doing Business in China Survey" which aims to identify issues and problems encountered by foreign companies doing business or investing in China. The key findings of the survey are as follows:

-95% of the foreign companies believe that foreign investment in China will continue to increase over the next three years.

-Only 26% of the respondents' investments in China are currently profitable and 72% of them expect profits within the next five years.

-The top three challenges faced by foreign companies doing business or investing in China were the complex and developing legal and political environment, foreign exchange controls and lack of knowledge of the local business environment.

-82% of the foreign companies think that it would not be easy to exit their investments in China.

-Most of the survey respondents needed advice on legal framework and statutory compliance requirements (74%), tax compliance and tax planning advice (57%).
If foreign companies were to invest in China again, they would devote more efforts on initial planning (42%) and thorough risk analysis (42%) prior to investing

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Overbuilding

One of the classic symptoms of bubbles is overbuilding in key areas. For example, too many online pets supplies companies during the Internet bubble, too many disk drives companies during the PC bubble.

China is no exception. Certanily there is too much building in Shanghai real estate. Reports are that foriegn auto makers are overbuilding capacity with exaggerated expectation of consumer adoption of cars. What else ? Please provides great stories, data, info on overbuilding:

Time Bombs

Bubbles also fund businesses that never should exist. I call them Time Bombs because they tick away investor money waiting to explode when the bubble crashes. Sometimes Time Bombs are marketing shell games intended to deceive investors. Sometime they are very honest, but confused efforts to build a company that has not real product or market or business logic.

An example from China that someone told me was a company that was getting tremendous amount of money from private equity firms for selling - DANDELIONS - which apparently are readily available at every road side.

Any other great examples of Time Bombs?!

Overvaluation

Bubbles also great overvaluation of all companies, Time Bombs, Copy-cats, as well as great companies that are poised for growth. Think Cisco, Intel, Amazon, Yahoo during the Internet bubble. All great companies. All will continue to be great companies. All were overvalued.

China examples anyone??

Bad business practices

Finally, bubbles pump small companies with too much cash deteriorating sound business operations and discipline. Money gets wasted on everything from staplers, fancy offices, overbuilt and poorly designed logistics, advertising etc...

Does someone see that going on in their business in China or a business they know?