Banks and Real-Estate (yes, again).

A couple of news articles on the topic of China caught our attention last week.  In an article titled Cooling Property Market Tests Beijing’s Nerves, the Financial Times reported on the sudden, marked slowdown in apartment sales within mainland China and the potential government response to this phenomenon.  What stood out amongst all the anecdotal information is that apartment prices in Tongzhou (a suburb of Beijing) are currently hovering around USD $3,500 per sq. meter (or USD $325 per sq. ft.), perhaps more if you consider the CNY (Chinese Yuan or Renmindi) is undervalued to the USD.  We admit that we’ve never visited China, so we don’t have firsthand knowledge of real estate market trends in Tongzhou (it could be the Greenwich of Beijing for all we know, and in fact, it looks like a pretty nice place from space).  We also readily admit that we aren’t experts when it comes to navigating the complexities of the Hukou system of permits.  Perhaps Tongzhou is the recipient of pent-up demand from people who cannot buy apartments within Beijing proper.  Still, we think $325 per square foot is a bit high, especially when you consider the real estate market in suburban New York (the wealthiest city in the wealthiest nation in the world).   We conducted a quick (completely unscientific) analysis of the property market by looking for new developments in the NYC suburbs (accepting at face value sq. ft. area claims made by the developer).  We end up with asking prices in the range of $250-400 per sq. ft. (across the river in Jersey), $400-600 per sq. ft. (in Brooklyn and Queens) and $250-400 (Westchester).  Median household income in New York City (2008) was $56,000.  Beijing’s statistical bureau doesn’t publish median household income, but they do say that in 2009, disposable income per capita was CNY 26, 700 (USD $4,000).   By our estimate, that puts median household income around USD $12,000-15,000, or 20-25% of that in New York.  Yet prices are roughly comparable.   In our view, these levels are unsustainable and highlight the growing disparity between real estate prices and what Chinese citizens can reasonably be expected to pay for these properties.

Last week also saw the IPO of the Agricultural Bank of China (ABC), the last of China’s major state-owned banks to go public.  Like all the other state-owned banks, ABC spun-off a package of bad loans prior to going public.  What we’re wondering is whether they’ve also spun-off all the employees who made those bad loans (over 10% of ABC’s USD 828 Bn balance sheet at end 2007).  We’re also wondering it is possible to make USD $110 billion in bad loans in an economy that is growing at a 10% clip.  Fitch Ratings has some ideas.