Pop goes the Chinese real estate bubble

Gome Drops Real Estate Joint Venture
Citing the rise in uncertainty within China's property markets, Gome said in a press release on November 29 that it would terminate its agreement with Beijing Pengze Property, Beijing Pengrun Property Holdings and Gome (Beijing). The real estate joint venture agreement was signed on September 27 and was formed with the intention to focus on property investment in second and third-tier cities across the country. The registered capital for the joint venture was 200 million yuan, of which Gome held a 45 percent stake.
I highlighted the cities: this wasn't a venture aimed at the high priced Beijing or Shanghai markets, but they still felt uncertain. This story doesn't look very important, but remember bubble economics. An unsustainable growth rate requires acceleration; easing off the gas pedal is as good as hitting the brakes. The bubble needs more money, at faster rates, to continue growing. Since the bubble is also based on psychological perception, it cannot maintain the image. It either grows or dies.

This is also a story of the bubble, in that a home appliance firm was involved in real estate speculation. Many companies in China, with no interest in real estate or little interest beyond their own floor space needs, have created real estate development divisions. As with new money, the bubble needs new participants and the continual entrance of new players kept the bubble afloat. Gome's high profile exit is a major psychological blow.

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