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So Much for That China Real Estate Bubble

Well, let’s not be dismissive of the prospects of Chinese real estate bubble eventually bursting. It is impossible to do so with a country that is home to a plethora of ghost cities, consistently delivers mixed economic data and where retail investors are warming to equities over hard assets at a feverish clip.

However, the recent strength of the Guggenheim China Real Estate ETF (TAO) , which tracks publicly traded companies and real estate investment trusts that derive the majority of their revenue from properties in China and Hong Kong, is hard to ignore. With today’s 3.1% gain on more than double the average daily volume, TAO is up 16% over the past 90 days and is one of just two ETFs to have hit 52-week highs to this point in Thursday’s session. [Good News for China Real Estate ETF]

TAO’s bullishness (the ETF is up 21.6% this year) seems to contradict long-standing, widespread speculation that China’s housing and commercial real estate markets pose systemic risk to its goliath economy. Kaisa’s recent collapse has bolstered the bear case, but those headlines have not stopped TAO’s ascent.

Kaisa’s woes could turn to out to be a blessing in disguise for TAO. Noting the importance of the property market to the Chinese economy, Joep Huntjens of NN Investment Partners points out in a commentary for the Financial Times that Beijing is unlikely to let a sequel to Kaisa play out. After all, maintaining investor confidence is critical in avoiding bubble scenarios.

Monetary policy has also played a part in lifting TAO. The People’s Bank of China’s has not been shy about paring interest rates and, as Huntjens notes, mortgage rates have been relaxed and down payment requirements for second homes, usually investment properties, have been trimmed.

Strength in big-name Chinese banks is helping TAO as well. The Global X China Financials ETF (CHIX) has surged 23% this year despite dividend cuts and executive departures from some of China’s largest state-run banks. PBOC rates cuts are also helping CHIX. [China Bank ETF Surges]

The largest state-backed banks could benefit from the grater flexibility to set rates. These banks won’t have to compete for deposits since the average saver will feel these banks are safer as a government-controlled entity.

Banks could eventually extend more loans to private borrowers where they can demand higher rates. However, the large spreads between private and state-owned borrowers have persisted, suggesting banks will be slow to ditch the reliability of state-backed companies.

Guggenheim China Real Estate ETF