Thursday, February 25, 2010

UBS Investment Research Emerging Economic Comment

What it means
China and Dubai – head to head
Last month well-known investor Jim Chanos posited in a public forum that China’s property sector is “Dubai
times one thousand”, a phrase that has since been a mainstay in the financial press, echoing the extremely
bearish sentiment of other pundits that the mainland real estate market is headed for collapse, with an
explosion of bad debt and overcapacity in the process.1

UBS China economics head Tao Wang already responded to many of these concerns in detail from a domestic
mainland perspective in How To Look At China’s Investment Boom and Risks (Asian Economic Perspectives,
30 November 2009; see also our summary in The Coming Non-Collapse of China, EM Focus, 16 December

However, from our EM-wide perch we thought it would be both interesting and useful to do a “head-to-head”
comparison of China and Dubai. So we put together a set of charts summarizing everything we could find at
the macro level on property and construction in the two economies.

The conclusion is very straightforward: China looks nothing like Dubai. So while we remain concerned about
significant near-term overheating in the mainland real estate sector, these charts support our earlier finding that
there are far fewer structural concerns on the property and construction front.

Spot the housing bubble

How do we get there? Well, in How To Spot a Housing Bubble (EM Focus, 2 February 2010) we looked at
EM-wide indicators and highlighted three that characterize a bubble: prices, volumes and leverage.
The first major conclusion from the report was that of these three, price data are actually the least useful – and
sure enough, that’s true in this case as well.

We know from the ex-post outcome in Dubai that the real estate boom was both extreme and unsustainable, but
this was difficult to see in price statistics. Dubai doesn’t publish a formal historical property price series, but
we took some rough value and volume data in the building sector and for land transactions to back out a
picture of price movements; these are shown in Chart 2 above.

On the one hand, property prices clearly rose a lot in Dubai over the past few years, and by much more than in
China. On the other hand, however, when we deflate property prices by incomes it turns out that – by some
definitions at least – the implied price/income ratios fell outright in both Dubai and China since 2003 (Chart
3).2 So once again, looking at price measures alone it’s difficult to make strong conclusions.
Leverage indicators

What should we watch instead? The answer from the Bubble report is simple: watch leverage and volumes.
And here we see very big differences indeed between the situation in Dubai and that in China.
Starting with Chart 4 on overall loan growth in the banking system (and here we only have figures for the
entire UAE rather than just Dubai), there is simply no comparison. UAE lending grew at a 40% y/y pace
between 2005 and 2008, far above the emerging average for the same period, while China was actually
delevering for most of the past half-decade, with aggregate credit growth below the rate of nominal GDP
growth. It wasn’t until the past 12 months that Chinese loan growth shot up above the EM trend line.

UBS Investment Research Emerging Economic C omment Chart of the Day: Dubai Times One Thousand?

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