Real Estate Bust in China?

Every time I turn on CNBC and forget to hit the mute button, I hear about how China's a bubble and how you need to know how to play it. Now, some parts of the Chinese market seem a little frothy, but I've seen bubbles in Asia firsthand, and I just don't buy it here.

I lived in Shanghai for four years starting in 2001 and in Singapore for five years before that. While I lived there, I had the opportunity to see the growth and stumbles of these Asian markets and countries.

I moved to Singapore in February 1996, which meant I caught the tail end of the Southeast Asian boom that began in the early '90s. I remember being amazed at the price of real estate. While my husband's company paid for our rent (thankfully!), can you imagine our shock when we discovered our apartment rent was S$11,500 per month (at the time, about US$9,000)? In the following year and a half we watched as the rent on similar apartments in our building moved up to more than S$15,000 per month -- over 35% in less than 18 months. (And you thought we had a housing bubble here?!)

That was the summer of 1997, the beginning of the "Asian crisis." Thailand revalued the baht in early July 1997 and sent Asia into a tailspin. At the time, most of these currencies were pegged to the U.S. dollar, or at least were set to trade in a band. This revaluing sent most of the currencies outside their bands and caused their stock markets to plunge, and the economies followed suit.

By early August, Indonesia revalued its currency (the rupiah). Malaysia, not to be outdone, sometime around Labor Day decided it too would revalue, but it would "peg" the price of the revaluation; there would be no wild swings for them. This caused yet another round of dislocation in the markets. If you were involved in the U.S. markets back then, you might recall the severe plunge we had into late October 1997 -- the S&P lost about 12% in about two weeks, helped along by this Asian currency crisis. We made a low in October 1997; the Asian markets, however, continued to slide for about another year.

Here is a chart of the Singapore Straits Times Index from July 1997 through the end of 1998. With the exception of that oversold rally in early 1998, the index did not make a low until what folks in the U.S. refer to as the Long Term Capital Management crisis in the fall of 1998. I know most folks believe the Asian crisis was in 1998, but the root of the problems and the slide started in the summer of 1997 -- autumn 1998 was just the culmination.

[img]http://images.thestreet.com/rmoney/technicalanalysis/55817.bmp[/img]

In the fall of 1998, I traveled to Shanghai for the first time. We stood in amazement at the number of cranes dotted throughout the city, mostly because they were all idle. Remember, Asia had been in a financial crisis for over a year at this point, so idle cranes had become the norm. Nonetheless, we fell in love with the city, and when my husband was offered a transfer there in late 2000 we jumped at the chance.

To show you how different it was to arrive as expatriates early in a boom (as compared to our arrival in Singapore late in the boom), we rented an apartment which was about 1,000 square feet larger than what we had in Singapore for a "mere" $5,000 (U.S.) per month.

We arrived in Shanghai in February 2001 just as it was recovering from the Asian crisis. China was on its way toward becoming the factory floor of the world. It was quite early in the boom; just a few short months after our arrival, Beijing was picked for the 2008 Olympics and things really ramped up economically, but that burst wasn't necessarily reflected in the market. In fact, note on the chart below that the decision for China to host the Olympics coincided with a peak in the stock market (should Brazil worry?):

The country kept booming along, but the stock market was not so hot. The SSEC almost halved from the time we arrived in early 2001 until late winter 2003. In late winter 2003, SARS became an issue in China. People stopped going to restaurants, theaters, shopping, everywhere. For a city of 20 million, the place was eerily quiet.

The chart above shows that SARS was a problem for the Chinese market, but it wasn't terribly high to start with -- all the decline in late 2003 did was bring about a retest of the lows. Then in late December 2003 the SSEC took off and zoomed ahead. But a long-term chart of the Shanghai Composite suggests that all while China's economy was booming, the stock market was not. China's stock market did not take off and go on a tear until 2005; it then went straight up until 2007 -- up 500% in two years.

By the time the Olympics came around it had halved from the high.

I have noticed all these hot small-cap Chinese stocks jumping up lately, and I find it curious that the SSEC isn't higher now. In fact, the SSEC made its high last summer and has not been able to surpass that high.

Overnight into Thursday, the Shanghai Composite was down 2% on some "tightening" moves by the government there. My first observation is that if China is the new growth engine of the world (as I keep hearing and reading), then why hasn't the SSEC made a higher high since last summer? And why can't it beat out the high of a few months ago?

Perhaps a shakeout down to the 3100-ish area would give the SSEC a much needed shakeout toward support and may even provide it with the right shoulder of a head-and-shoulders bottom.