Babes of Beijing

From: Derek Hillen
Sent: Monday, November 14, 2011 11:25 AM

Subject: Babes of Beijing

China is a big country, inhabited by many Chinese.” – Charles de Gaulle

While Europe continued its convulsions, I went to China last week to see companies in Kunming, Shanghai and Beijing. From the outside, the place is humming but talking to the locals reveals a deep dissatisfaction with the current state of affairs. Revolution is not in the air but I was told on several occasions real inflation is two to three times higher than the reported figures we follow. Wages are growing but when you have to eat, drive and pay rent, you are seeing prices for those items now double or triple levels of just a few years ago. University graduates in Beijing starting out at a foreign company are paid R 3,000 a month, (less than US$500) and that means you live with your parents and far away. Those with overseas degrees who return are paid on average R 7,000 a month. I asked a Jones Lang LaSalle real estate consultant who is from Beijing how these people could buy an apartment in Beijing, her response: “No way.” That is permanently out of reach. One way around this is to have the parents, or other family members pay the down payment and the “child” takes over the mortgage. She confirmed more and more people are getting foreign passports than ever before. However, people stay in China for now as it is easier to make money there. Easier there than in Europe, I imagine.

One of our drivers told us that in China you get R 120 a year in medical subsidies. He has to pay over R 1,500 a year for basic medical insurance and he told us bluntly, “If you get sick in China and don’t have the cash or insurance, you die.” That may be a pretty shocking statement but in reality such is how it always has been in China. He and his wife both work 6 – 7 days a week and they have one child, a 17-year old son, whom they fret about because, “He isn’t diligent enough at school and spends all his time playing games on the computer!” When asked if they ever wanted another child, he shot back, “No! There is no way normal people can afford to have more than one child. Prices for everything are crazy.” Then he asked me which country the US was going to invade next, whereupon I politely changed the subject.

Everyone I talked to believe the residential property market in China will remain painted with a giant red bullseye with Beijing’s high powered rifle and endless magazine pointed firmly at it. Developers are moving away from mass residential toward building commercial property as a result, which should lead to a surplus there as well. Yields on residential property in Beijing and Shanghai are around 2%, the same as Hong Kong. Cap rates on commercial properties in Beijing have finally converged with those in Shanghai and now both cities are at a ridiculous 4.5-5%, the same levels as Hong Kong. In Shanghai, we were told that Chinese SOEs were taking up a lot of Grade A office space right downtown. They see this as an obvious migration. I see it as a near top of the market signal when companies such as BaoSteel, or a chemicals trader take up the most expensive real estate. The cost of capital is just too low.

Here in Hong Kong in our daily today, Keith Yeung writes, HK developers are giving record commissions to estate agents to shift properties. Chinachem is offering 5% comms and Sun Hung Kai (16 HK) is offering 4%. This is a big jump compared to historical averages of 1-2% commissions. Keith believes this will put more pressure on the secondary residential market and more price cuts are ahead. Sell any rally in this sector.

On our last night in Beijing, we heard the Berlin Philharmonic conducted by Simon “Shake, Rattle and Roll, were playing at the stunning National Center for the Performing Arts and we got tickets. It turns out IMF Managing Director (and former member of France’s national synchronized swimming team) Christine Lagarde was in town and had the same idea. As she whisked past us at the entrance, towering above her hosts in attractive red high heels, one of our party asked, “What the hell is she doing here? Doesn’t she know Europe is falling apart?” The concert was great but at intermission I had another brush with Ms. Lagarde who was conversing earnestly with a high ranking Chinese official in the hallway. As I passed by her glaring security guards (one with a lovely scar arcing down from his ear to the corner of his mouth) I could have sworn I heard her say, “We don’t need a lot of money. But what we need, we need NOW!” Ah, well.


You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA

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