Not likely goes the argument made by Nie and many other sky is blue believers.

But yet it is happening

right now in Wenzhou. Homeowners that are upside-down are simply walking awaygiving the bank
the keys. Story here in Chinese.

Yes, but thats Wenzhou. Wenzhou is an aberration so goes the argument. Wont happen in the major
centers. And those people were all speculators anyway; they just walked away from apartments that
had been sitting vacant and undecorated for years. The tier one cities are different.or maybe
Wenzhou is a harbinger.

A story recently stated, quoting unnamed sources, that there are about 5,000 to 6,000 individuals in
Beijing that each own more than 300 apartments. Which got people talking about if it could be true.
And if so, who owns them? And subsequently talking about vacancy rates in Beijing. And why is it that
this data is not available? Vacancy rates is one of the most common factors used in most countries
when measuring the health of the real estate market. Yet in China this quite easy to calculate figure has
never been provided. I will leave it to you to decide why we cant see an official figure on this in China.

But Beijing Public Security Bureau did cause a stir when it released innocuous figures about the total
number of households in Beijing. Because its calculations show that about 30% of homes owned are
unoccupied, not rented not lived in. Story here in Chinese.

A more recent report from one of Beijings leading real estate agents suggests the vacancy rate in the
city is closer to 40%. Story here in Chinese. And as far back as 2010, it was suggested that in China
there were then 65 million vacant homes, owned but unoccupied. Story here in English.

So how much different are Chinas tier one cities than Wenzhou? Speculators control vast number of
properties, with most sitting vacant. The true demand for actual home-owner occupied property is
undetermined, but it likely has already been exceeded by supple. How far would prices need to fall
before speculators tried to get out, and if buyers aren't available, like in Wenzhou, then how long do
they sit under-water on loans before they walk away? And if China faces a real credit crisis, what will
they do? What will the banks do, start calling in loans? What will the government do? What will you do?

For Asias richest man, it appears the risk is now too high. Hong Kong tycoon, Li Ka-Shing, is cutting
and running. Li has sold many of his mainland properties in a recent flurry of transactions. Media
reports state that Li foresees drastic changes in Chinas political and economic landscape emerging,
and intends to put his money into Europe. Stories here and here in Chinese.

I have tried to present the bullish and bearish views here from some of the experts. But I will offer my
two-pennies worth as well. The argument I hear often is that the government wont let property prices
drop too far, if at all. The local governments, the banks, the powerful property developers and the
myriad government cadres and their associates who own multiple properties all have a strongly vested
interest in seeing this property game continue, and they will fight any moves that will hurt those
interests. To say nothing of the anxiety that would be felt by homeowners who live in their property if
prices were to collapse and they suffered real losses in the value of their primary asset.

I understand this rationale. This is the dilemma the central government faces as it tries to move the
country away from a real estate and infrastructure driven economic model. And it is certainly true that
Chinas real estate market can not be classified as driven by normal market mechanisms, if it were then
a significant correction would likely have occurred already, for by any standard market measure prices
have long topped. So I get that argument.

But I think it is fools gold to believe the government will not let prices drop. Were those who bought
the stock market at 6000 points compensated for their losses when it dropped below 1700? Is the
government bailing out the speculators in Wenzhou who are upside-down on their loans? Why is
property speculation any different than stocks? Why would Beijing or Shanghai speculators be treated
any differently than Wenzhou speculators? (yes they are the centers of power but the principle is the
same).

Im not an economist, but I am not blind. I can read numbers. And on a macro-level the addiction to
easy credit looks increasingly close to crossing the Rubicon (corporatei.e. SOEsand local
governments debt levels are particularly alarming). Whereby the government will not be able to stop a
credit crisis from happening or bail everyone out if or when one occurs, even if it wanted to.

And whenever or if-ever the RMB is a fully convertible currency what will happen? How will the global
Forex and bond markets view Chinas total credit/debt levels and the health of the countrys banking
and financial system? Will we see a tidal wave of domestic money leave the country? It seems to me
this all will have a huge impact on Chinas financial system and real estate market, perhaps negatively. I
often wonder why this is not talked aboutperhaps I am completely off-base seeing a link between the
RMB becoming fully convertible and the countrys real estate marketany economists out there to
comment on this?

And if you believe that China's real estate market and the governments control and manipulations of it
are uniquely Chinese, just take a look at Las Vegas, Nevada, the US city that has seen the highest
increase in prices, and the impact of that state governments policies. Story here in English. See any
similarities there to our situation here in China?


WHAT IS THE STORY ACROSS THE BIG POND

As has been well reported, in many US cities property prices have risen rapidly in recent months, in
some cities the average exceeds 25%, and in some neighborhoods is close to 50%! I can speak with
personal knowledge of the city Atlanta where I do real estate business and prices have risen on
average 19%, and in some communities double that or more.

Do I expect it to continue at this pace? I hope not. Im not complaining about the rise, obviously I have
benefitted. But much of the price increase was not due to natural market forces, it is due in large part to
investor and hedge fund buyers and banks withholding foreclosure activity, thus reducing supply. So
hopefully what we see is a more natural healthy growth pattern in prices moving forward. And that is
what I expect, prices to keep moving up in months and years ahead but at a pace that closer represents
owner-occupied buyer interest and the rate of inflation.

However, I will not be surprised to see a dip this wintermortgage rates are rising, investor interest is
waning because rental returns are slimming as prices go up, and although the US economy is showing
some signs of firming, jobs are still lacking and those that are created are primarily part-time. These are
but some of the headwinds still on the horizon that could create reason for doubt about the
sustainability of the US real estate recover.

I am not deterred from moving forward though and neither are my partners in the US. They have been
showing me many quality homes, turn-key ready with tenants in place, for interested investors in China
to consider. And I am going over in October to meet with my team in Atlanta and scout new burgeoning
growth areas of the city to purchase and renovate properties for my portfolio of rentals. It is definitely
more difficult to find real gems at huge discounts, but if one looks in the right areas there are diamonds
to be found. So despite my apprehensions for the near term, I remain medium and long term positive on
the US market both as a source of passive rental income and appreciation growth.

Good investing!

Chris
GreetingLine

Firstly, if you are a regular reader, accept my apologies for the absence of the newsletter last month.
Secondly, if you live in Beijing then congratulations, you are first! You have the good fortune, (or maybe
its misfortune) of living in the city with the worlds most expensive real estate. Yup, based on price to
income ratios, Beijing now tops the globe in home prices! Dont despair if you live in Shanghai or
Shenzhen, you are number 2 and 3, although a distant second and third.

The term house-slave has never been more apt. For us working-class Beijingers, it now requires on
average 22.3 years of earnings, that is every single Yuan and every single Mao we make, to pay off the
mortgage. Story here in English.
For mortgage-payers, thats the tale of woe in one sad chart. Want to see what it looks like in pictures?
How much house can our hard-earned money buy here and elsewhere?

I have chosen a couple of examples using my two citiesBeijing, where I live, work and call home; and
Atlanta Georgia, where my real estate businesses are located. These two homes are available right
now, I simply took the photos and property descriptions ads directly from real estate agent listings.

For reference the US dollar figures are converted using a ratio of 1 USD = 6.157 RMB. And in China we
use Construction Area to determine property size, whereas in USA and elsewhere they use Living
Area, a handy guide is to measure living area as 85% of construction area (i.e. 100 meters total
construction area will leave you with around 85 meters of actual living area).
Learn More
For more information about the properties we have available today in Atlanta, Chicago, Memphis,
Orlando, Fort Myers, Ft Pierce, and Charlotte, just contact me by email or phone.

To see the new properties we have available in Houston, Dallas, Indianapolis, St. Louis and Kansas
City, click here. In the access code line write: ChrisTeed.
How We Can Help Make It Happen

We provide a one-stop way to purchase and manage income-generating properties. Great
efforts have been made to ensure you can do this without needing to leave China! Our goal
is to make this super easy for you and to give investors great properties that earn real
returns today and in the future.

Provide you with an inventory of properties in great neighborhoods with excellent
appreciation potential.
Place quality tenants. Our properties are already RENTED NOW.
Manage your property. As part of your purchase we provide property management for FREE
for one year.
Provide you with on-the-ground personnel resources and support team.
Help set up your bank accounts in US and obtain your needed US tax IDs.
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Provide legal and accounting service in Chinese or English language.
Provide assistance when you want to sell your property.
To hear more about all the properties we have available, and how we can help you purchase one or
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mobile at 13681247085.

If you have friends, family or colleagues that might be interested in owning income property feel free to
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address will be deleted from the database.
From the end of 2008 until the end of 2013,
Chinese banking sector assets will have
increased about $14 trillion. As Fitch
notes, that's the size of the entire US
commercial banking sector. So in a span of five
years China will have replicated the whole US
banking system!

What we're seeing in China is one of the largest
monetary stimuli on record. People are focused on
QE in the US, but given the scale of credit growth
in China Fitch believes that any cutback could be
just as significant as US tapering, if not more.
Goldman Sachs adds that China stands to lose
up to a stunning 18.6 trillion RMB should this
bubble pop.
Via Goldman Sachs,
The speed of credit expansion exceeds
that seen prior to other credit crises in
history, this expansion has not been
matched by economic growth, and, of
course, the more "shadowy" sources of
much of the credit growth raise doubts
about its soundness.

When you look at crises elsewhere, a
lot of the same precursors are present
in China. ...in terms of a large run-up in
credit that is not matched in GDP growth.
Others include a very aggressive
expansion of shadow credit, massive
investment in property leading to a bubble
in some locations, weak risk management
at banks, and heavily state-directed
financial and corporate sectors.

Another very important issue in China that
isn't cited often enough is moral
hazard. There is tremendous
confidence in the ability and the
willingness of the central government
to bail everyone out. But as the system
gets bigger and bigger, there are more
questions about how feasible that is.

On top of all of these financial system
issues, China's growth model is peaking
out. A few years ago nominal GDP growth
in China was in the mid-teens. In that type
of environment, problems can easily get
papered over. It's only when growth slows
that the challenges really start to surface.
WHERE TO GO FROM HERE?

Astonishing really. A Beijing villa costs 3X what a mansion costs elsewhere. Yet if you were to rent it
out, you would generate just 25% more income each month. One graph and two groups of pictures,
summarizes the story of real estate realities today in different localities better than a thousand words
could.

But now what? Where will prices go? Having an opinion on the future of real estate prices in China is a
lot like having a belly-button, everyone has one, and no one belly-button is much better than another.
Generally though opinions fall in one of two campseither youre a bull or a bear, or as I call it, the sky
is always blue team and the sky is always grey team.

One of the loudest voices on the sky is blue team is famous blogger and real estate developer Ren
Zhiqiang, who accurately predicted in 2009 that Beijing would see property priced at 50,000 RMB/
meter within 5 years, a prescient call that came about ahead of schedule. Perhaps the most commonly
heard voice representing the sky is grey team is Xie Guozhong (Andy Xie). Xie was roundly acclaimed
as being one of the first to predict a crash in Chinas stock market back in 2006/07, and has since been
roundly mocked for his persistent call that Chinas real estate will see a 50% drop in prices within 5
years. Story link here (in Chinese)

Recently Ren upped the ante considerably, stating that within 5 years most property inside the
fourth ring road will cost 100,000 RMB/meter or more. As if on cue, Xie wrote an article stating that if
the government unleashes another round of stimulus aimed at the real estate market it will likely trigger
a financial crisis. Stories here in Chinese and here in English.

Is 100,000 RMB/meter soon to be the new normal for Beijing then? There have already been isolated
examples. In March of this year a listing in Wudaokou for a tiny 37 meter flat priced at 3,500,000 RMB
caused quite stir amongst Beijing netizens. Story here in English.

But that was just a small tempest compared to netizens reactions of disbelief, rage or joy (depending on
whether they own property or not I suppose) to the analysis offered early this month by the Director of
Real Estate Research Center at Beijing Normal University who said that based on the past 10 years of
growth Beijings property prices could easily exceed 800,000 RMB/meter in 25 years. Story here in
Chinese.
In the same story, Ren Zhiqiang chimes in with this
rationalizationBeijings property today is not over-priced at
all. That the standard metric of using city residents earnings
as a ratio to measure price levels doesnt apply in Beijing
because it is not a city of residents, it is an entire nations city.
So he says to measure price to earnings we need to consider
not the average, common residents of Beijing, we need to
calculate based on the earnings of those who want to
purchase Beijing propertythat is the wealthy people from all
over China. Using their earnings as a measure of price, then
Beijing property is not at all expensive, it is in fact cheap.
I will leave it to you to decide if you agree with him or not.

If one believes the sky is blue team, its an easy decision then. Its wise to buy now, buy more than one;
buy as many as possible to take advantage of the low prices, and wait for the appreciation that will
surely follow. Then sell and retire rich, rich, rich.

I dont know if they will be proven correct or not. But I do know thisif Beijing property will cost 800,000
RMB/meter then a coffee and donut at Starbucks will cost 1,000 RMB. And a 100 Yuan bill will not be
worth the paper it is printed on, such will be the hyper-inflation in China.

CLOUDS FORMING OVERHEAD

Hu Bao Sen, another charter member of the sky is blue team, in a recent interview defended Chinas
property prices as reasonable overall and that we do not have a bubble. But in making his argument Hu
touched on one of the elements that has the sky is grey team so concerned. Hu says the reason prices
are going higher is because there is too much money in circulation, as an example he pointed to
Chinas monetary supple and capital currency accounts saying M2 in 2002 was 20 trillion Yuan, in 2012
it reached 96 trillion, and as an aggregate of GDP the M2 is now almost double. Story here in Chinese.

It is Chinas monetary supple and the associated credit and asset leveraging that the sky is grey team
focuses most on when they express their strong doubts that property prices can continue upward,
rather they will likely decline or even crash. It is hard to read these charts and not see why the sky is
grey team is worried. Story extract follows below, the full story and graphs can be found here in English.
Another noted sky is grey economist, Michael Pettis, expresses it this way: It is, to me, astonishing that
China in just five years is replicating the entire US commercial banking sector, and yet so many
analysts are expressing delight with Chinas return to growth. Of course you can generate growth if
you force such a tremendous expansion in credit, but this is simply unsustainable. Read his full
comments here in English.

Famed economist Rudiger Dornbush once said: The crisis takes a much longer time coming than you
think, and then it happens much faster than you would have thought. It takes forever and then it takes a
night.

But China blogger Nie Qingping offers this often heard claim: that if China has a bubble then it is
different; a bubble with Chinese characteristics. In his post here he makes three common arguments:

Those that bought early have done so well that even if prices collapse they are still ahead
Demand still outstrips supply so how can a crash occur
Down payment requirements in China are much higher than they were in the US, for example, during
its property bubble so some fluctuations in price wont lead to a crash

The comments section of his blog offer some interesting reactions to his opinion, but I will add a few
from other sources.
A look at household liabilities across Asia
would suggest that in fact Chinese citizens
mortgage payments represent an
uncomfortably high percentage. Undoubtedly
due to the high price of purchase.

How far would prices need to fall before
homeowners down payment equity was
squeezed?

Is it possible that we might see upside-down
loan values happen in China like happened
in the US?