Today, we will continue from Will a crashed Chinese property market lead to an embrace of gold? Part 1- Chinese characteristics of property market. As we discussed in that article, our question was,
What if the Chinese government succeeded (whether accidentally or deliberately) in smashing the store-of-value function of property?
There?s no guarantee that the Chinese government will be strong-willed enough to let the property bubble burst. Some China pundits reckoned (e.g. Michael Pettis) that its policies will vacillate from one extreme to another, switching between the brakes and accelerator quickly, as the reality on the streets veer from inflation to deflation and back to inflation. If this is so, the developments will become unpredictable and volatile, which is where we will expect negative Black Swans to spring surprises.
Also, there is a risk that the Chinese government may react one second too late, letting the property market fall into a tipping point whereby price deflation becomes irreversible. This can happen because according to Patrick Chanovec (an associate professor at Tsinghua University’s School of Economics and Management in Beijing), supply and demand do not drive property prices in China (see China: gigantic property bubble in the midst of exploding supply of vacant brand new homes). Instead, property serves a store-of-value function, which is a function that is supposed to be served by money (traditionally gold, but it?s fiat currency today). Once property no longer serves this function, prices will fall to reflect supply and demand.
The problem is, if the Chinese currency does not serve the function as store of value, and there are limited investment avenues (e.g. stocks are too volatile), then what else can take that function? Logically, the answer is gold. Already, according to a recent report from China?s CCTV, some Chinese investors are switching from property to gold. In a recent interview, this is what Patrick Chanovec commented regarding this new development:
It?s open knowledge that since last year, the Chinese government encouraged its people to invest in physical gold, even to the point of letting TV ads do the talking. Will the Chinese turn their attention to gold as a store of value? This is a very interesting question. We will see.
Tags: China, Gold, Patrick Chovanec
