"Market bears point to China’s “ghost cities,” instant residential developments bereft of citizens, as proof of a major misallocation of capital resulting in a housing bubble. However, Chinese policy makers have been working to reduce the excess with a range of regulations, including restrictions on multi- property ownership, rising interest rates and mortgage limitations.
Slowing Growth As a result, growth in the most speculative markets has moderated (and the deserved financial problems of the most exuberant builders serve as a deterrent to further misallocations). Today, according to CLSA analyst Andy Rothman, 89 percent of new homes are purchased by owner-occupiers making down payments that average 44 percent of purchase price; the majority of the rest are bought with cash. This looks more like prudence than a bubble.
Bears are overly focused on supply, basically disregarding the demand dynamics driving the housing market. Amid the greatest urban migration in history, the concept of “just in time” inventory management simply doesn’t apply. Five years ago, the Pudong district of Shanghai was reckoned to be the biggest urban real estate bubble of all; today, it’s fully occupied. In China, if you build it, they will come.
There has indeed been substantial misallocation of capital in the financial system. My team at Xerion estimates that up to 25 percent of Chinese bank loans may be bad, implying potential losses as high as $1 trillion. That’s a huge bailout number, but not beyond China’s capacity."