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Chinese Switch from Real Estate to Stocks

Real estate prices are falling in China and stocks have soared. This is happening despite a marked slowdown of Chinese industry and Chinese economic growth. The key is a Chinese switch from real estate to stocks. The New York Times offers insight into the connected plunge of real estate values and stock market highs on Chinese exchanges.

China has been grappling with a slowing economy, falling property prices and increasingly tight financing conditions. But the country’s stock markets have been surging, thanks in large part to regular investors.

Ordinary Chinese have been piling into the market at a pace not seen since 2007, before the financial crisis, in some cases pulling money from savings deposits or cashing out of property investments as they try to win big. Investors in Shanghai and Shenzhen opened nearly 900,000 new stock trading accounts in the week that ended Dec. 12 alone-, the most in seven years.

This is happening as Chinese industrial production levels off and Chinese comes to grips with the fact that the glory days of ten percent per year economic growth are gone. The key to this is the real estate bubble in China. Chinese investors have plowed money into real estate for years and are now bailing out. They need to put their money somewhere and the stock market has benefited. The plain fact of the matter is that there is a lot of money chasing a limited number of stocks which drives prices up as Chinese switch from real estate to stocks.

Invest in or Sell Chinese Stocks?

If you believe the scenario that there is a lot of money freed up from real estate that is chasing Chinese stocks then you know that eventually the flood of new stock buyers will level off and stop. At that time fundamentals will drive the value of individual Chinese stocks. And, many of those fundamentals are not strong as the Chinese economy cools off. How soon will this happen? Bloomberg reports that after the biggest monthly advance in seven years China’s stocks fall in a significant correction.

China’s stocks fell, paring the benchmark index’s biggest monthly advance since April 2007, as technology shares slumped and a gauge of utilities dropped after surging to five-year highs.

The Shanghai Composite Index (SHCOMP) fell from a five-year high, losing 0.1 percent to 3,165.81 at the close. The index, which earlier gained as much as 0.7 percent, has rallied 18 percent this month, the most among major global benchmark gauges. Trading volumes were 9.5 percent below the 30-day average for this time of day. Tomorrow is the last trading day of the year.

To the extent that there is still money flowing out of the real estate market and into stocks the current rally may gain steam again. However, there is likely to be more downward pressure on property values as more and more investors bail out of real estate even at a loss which will reduce the capital available to drive the stock market. Anyone who wants to invest in Chinese stocks needs to take a serious look at the fundamentals of individual stocks and only purchase those that are likely to continue making money even if the Chinese market tanks!

Where Will Chinese Money Go Next?

There are a lot of wealthy people in China as a result of a spectacular decade’s long economic boom. But things are looking less secure at the current time. Where are wealthy Chinese putting their money? An interesting answer to this question comes from the real estate section of Chicago Magazine, Why Chinese Millionaires Are Investing in Chicago Real Estate.

When Chicago real estate broker Susan Tjarksen attended a local industry event in the summer of 2013, she wasn’t surprised to be asked her thoughts on buying property in this city. Her questioner was a broker who had traveled, alone, from Hong Kong.

Over the next 18 months, says Tjarksen, that Hong Kong broker facilitated $30 million of local residential deals for her clients, nearly all of whom were from China, a place that, until recently, had invested little in Chicago properties. The foreign investment has helped drive demand for the $1 million–plus units in River North and the Gold Coast that languished in the down market, vaulting the price per square foot back to prerecession levels (to $1,000 at 340 on the Park, for example).

Perhaps the place to invest as Chinese switch from real estate to stocks is in the US real estate market.

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