1. 1 THE CHINESE REAL ESTATE BUBBLE: IS IT AN OPPORTUNITY FOR SHORTS? Michael Wong and Peter Treadway

2. 2 Reading Questions Is China undergoing a massive bubble in real estate similar to that of the US? How are the specifics of the China bubble different or similar to that of the US? Does the Minsky/Kindleberger debt deflation model apply to China? Has the stock market already anticipated the bursting of the bubble? Does the stock market have further declines ahead due to problems in Chinese real estate?

3. 3 The Case-Shiller index US house prices began their upward March in 1998 peaked in 2006.

4. 4 The Bubble in China Rate of real estate price increase accelerated into 2008 and then fell off dramatically Global financial crisis in 2008 interrupted Chinese real estate price acceleration In 2009, real estate price acceleration resumed

5. 5 The Bubble in China

6. 6 The Minsky/Kindleberger Debt Deflation Model Massive increase in real estate prices financed by bank debt Something (government action?) pops bubble Real estate prices decline, borrowers in distress, banks face loan problems and insolvency

7. Minsky/Kindleberger in China? Statistics on bank real estate lending hard to come by Bank loans increased by 31% in 2009 Major lending to local government entities which probably went into real estate Major acceleration in real estate prices 7

8. 8 Minsky/Kindleberger in China? (cont) Where is China on the Minsky/Kindleberger models timeline? Have the authorities restrictive actions come in time? Or are they the straw that is breaking the bubbles back?

9. 9 The Stock Market Prices for bank and real estate stocks have been declining since November 2009 Price action on the Shanghai and Shenzhen markets for banks and real estate companies since November 2009 CSI 300 Banks Index (down 28%) CSI Real Estate Index (down 42%) Similar declines for Chinese bank and real estate stocks on Hong Kong exchange.

10. Is It Too Late to Short Chinese Banks and Property Stocks? Probably not. Problem is more serious than markets have anticipated Expectations for Chinese banks need for more capital, rising non-performers and possible government bailout reasonable. 10

11. 11 Conclusion Real estate price acceleration and surge in bank lending in 2009 suggest bubble has formed in Chinese real estate. Minsky/Kindleberger debt deflation model relevant to China. Ultimate cause of bubble negative real interest rates, excessively expansive monetary policy and failure to revalue renminbi against dollar in 2009 First down leg of declines in Chinese property and bank stock prices is over Odds favor a second downleg. Still opportunity for shorts