Today’s investor faces a host of global concerns. Despite a deal brokered in Greece for harsh austerity measures and a steep “haircut” to bondholders, it remains unclear whether the eurozone nation ultimately will avoid default. In the U.S., unemployment remains persistently high, running at over 8% for three years — the longest stretch for jobless rates above that mark since the Great Depression.
But investors shouldn’t take their eyes off of Asia. The problems in China have equally large implications for the global economy. And unlike the European debt crisis and American joblessness, the headlines have been anything but encouraging lately.
China helped power the world through the financial crisis with breakneck growth around 10%. And with forecasts of an 8% increase in GDP for 2012, it’s hardly the end of the world in China.
However, the fact remains that Western companies — and investors — are banking big on China. And as we all know, on Wall Street it’s not necessarily a lack of growth that kills companies, but a failure to live up to expectations.
Here are five reasons China’s Year of the Dragon in 2012 will wind up being the Year of the Draggin’ instead, and how that could wind up hurting unsuspecting investors.
The talk of an overheated housing sector in China are hardly new, so I’ll just share a few of the most recent and dramatic figures:
- The value of land sales across 130 Chinese cities fell 13% in 2011, according to the China Real Estate Index System.
- GMO Insights estimates that as much as 14% of China’s GDP growth is a result of “direct” investment in housing. The global investment manager says industry-to-GDP ratio is disturbingly high, approaching the 17% share that technology held of American GDP during the 2000 tech bubble.
- China’s investment in real estate development rose 28% to almost $1 trillion in 2011 — $200 billion more than U.S. residential real estate investment in 2005, at our housing market peak.
Some folks will say this cooling off is actually due to moves taken by the government to hold back an overheating real estate sector. Beijing recently ordered cities to better manage the supply of land, raise tax rates on the sale of apartments or houses held for less than five years and set price control goals for new homes.
But whether this is a “soft landing” for China housing or indeed a bubble bursting, the bottom line is that the slowing of the real estate industry will naturally weigh on the broader economy there.