No bubble in tier 2 China?
If you've read this blog before, then you know I am sympathetic to the idea that China is not a monolith and that it is important to draw distinctions between tier 1 and tier 2, 3, and so on cities in China. I even went so far as to draw this distinction related to Chinese real estate in an article last April titled Why Chanos is Wrong About China. The gist of that article is that while real estate prices are out of control in tier 1 cities such as Beijing and Shanghai, prices were much more reasonable in tier 2 cities such as Xian. So, I'm sympathetic to that viewpoint (though not by any means a bull on Chinese real estate).
Given that, you might think I enjoyed a recent study by Standard Chartered that concluded (via WSJ's ChinaRealTimeReport) that prices in tier 2 and 3 cities had held up reasonably well despite government efforts to cool off the market and that the outlook for construction activity in these places was good.
But how did they come to this conclusion? By asking 30 Chinese real estate developers!
I've got to say that this strikes me as a flawed methodology. What do you expect the people with the most to lose here if they're doing badly to say when asked if they are doing badly? Of course they're going to say they're doing well. Plus, it's China...the country where people are loathe to admit any kind of weakness. I mean, c'mon, there might be some other things Standard Chartered might look at to gauge the health of the construction industry...like the fact that China is stress-testing for a 60% decline in real estate prices.
But sure, if 24 out of 30 developers say things are fine and that they will continue to bring capacity online, that sure is proof positive that everything is AOK...or perhaps not.