The rich in China are starting to realize something that its stock market has known for years: China’s in an unprecedented bubble with high growth and low profits. Government over-investment is driving the economy more than consumers. Investors and speculators are driving its real-estate market more than real buyers are.
I’ve said this for years and I’ll say it again:
China has a B.S. economy, and the evidence just continues to bear that out.
When I try to anticipate major tops in stocks or any financial market, I look for evidence that the smart money – the top 1% of traders and institutional investors – are starting to exit while the dumb money keeps pouring in.
Well listen to this…
Two major surveys, one from Hunan and the Bank of China and the other from Bain and Company, respectively show that 50% to 60% of China’s millionaires are looking at leaving the country.
Are more than 50% of the top 1%, or even 10% for that matter, looking to leave the U.S… or Germany… or Japan… or the U.K…. or Brazil… or India… or any major country you know of?
No. That makes the numbers coming out of China astounding.
Those willing to explain why they’re rushing for the exits say they’re doing it to protect their wealth, health and family. They know – and more importantly admit – that the country has a significant real-estate bubble.
They worry that if China’s bubble bursts and/or its economy slows down dramatically the government will put even greater restrictions on capital outflows and may even try to confiscate more of its citizens’ wealth.
So guess who’s buying a lot of the upscale real estate in places like Irvine in southern California. You got it. Chinese.
Chinese nationals bought $8 billion worth of international real estate over the last year. That’s 50% more than what they bought during the previous year.
These guys are the biggest factor driving the high property prices in Vancouver, and they’re helping to drive prices higher in Singapore, London, Sydney, Melbourne, New York and San Francisco.
In fact, it looks like Singapore could surpass Switzerland as the money-stashing haven of the world.
All of which proves that China’s 1% are desperate for a place to park their money outside of their country.
China has an exchange restriction of $50,000 a year, meaning its citizens can only transfer that much oversees per person per year. But the very rich Chinese are good at getting around this. Of households worth $16 million or more, 50% have investments overseas already.
Multimillionaires and billionaires are paying ridiculous sums of money for condos in New York. Zhang Xin, a major Chinese developer, just bought a condo in Manhattan for $26 million.
And it gets worse than that. The Chinese were a major factor in driving art auctions to record highs in the last year. A case of 1978 Romanee Conti just sold in Hong Kong for $478,000. That’s about $40,000 a bottle and it’s not even a 1961 or 1945!
If the richest Chinese are starting to look more overseas to park money and speculate rather than invest or stay in China, that is a clear sign of the beginning of the end for the country and its real-estate bubble because the top 10% of Chinese control over 85% of the real-estate values.
The bigger threat is the slowdown in the economy as more of these people actually leave the country because they control 60% of the income and at least 50% of consumer spending.
This is a clear leading indicator. One I suggest you pay attention to.
I keep beating on the China-bubble-bursting drum because when it happens it will have substantial reverberations globally. More so, in fact, than the euro crisis or the U.S. subprime crisis did in the past five years.
So why then are so few economists and analysts warning about this economic threat? Why are the voices limited to me and men like Jim Chanos and Henry Blodget?
Because most are trying to paint a prettier picture… to put lipstick on the several gorillas in the room.
Don’t be fooled. A gorilla with lipstick is still a gorilla and when it’s feels the hurt heading its way, it’s going to lash out and share the pain.
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Ahead of the Curve
U.S. investors have typically shown a penchant for putting their wealth in stocks. At the height of the dot.com boom, U.S. households held upwards of 30% of their financial assets in stocks.