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Stocks

China's asset bubble lifts stocks as Tobin's Q returns

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Employees of a real estate company set up model apartments for an exhibition in Hangzhou, Zhejiang Province. Chinese real estate prices are continuing to rise even as property development flags.   © Reuters

SHANGHAI -- The myth that real estate prices will never fall still lives on in China, despite signs of market stagnation and government efforts to rein in the property bubble.

And Chinese investors' unflagging faith in land has brought renewed attention to the so-called Tobin's Q ratio, derived by dividing market capitalization with the replacement cost of a company, including its stock and land holdings. As was the case in Japan during the property bubble in the 1980s, inflated real estate prices reflected in the ratio could push up stock prices in China.

"Land king" taking break

A prime property at Shanghai's Xinjiangwancheng Station, a 40-minute subway ride away from the city center, has seen development slow down. Only a few units of heavy machinery were seen operating at the 132,000-sq.-meter lot last Wednesday.

Nearly a year has passed since Shanghai-listed Cinda Real Estate bought the property through competitive bidding last fall, but the lot has yet to be readied for construction. The price per meter was 49,152 yuan ($7,254) when factoring in the area-to-floor ratio. This surpassed the highest price of previous transactions by 80% and was comparable to a luxury residential property in Tokyo's Setagaya Ward.

Local real estate companies cheered the arrival of the new "land king," or the priciest property in an area that makes other properties look cheaper and potentially helps to also raise their prices.

But development has stalled, with construction temporarily suspended in August. Industry insiders see two possible reasons. One is Cinda's fundraising difficulty as its capital ratio has fallen below 20%. The other, more plausible reason is that the company is waiting for the land price to rise.

Shanghai home prices have been rising by over 20% this year. The government has rolled out measures to rein in the property bubble, but few believe Beijing is serious about keeping such policies in place. A cooled real estate market would be a blow to local governments reliant on revenue from selling land to the private sector.

Q ratio grabs spotlight

The Q ratio drove a surge in stocks in Japan during the late 1980s. The price-to-earnings ratio had risen to 60-70 for some companies, making them obviously overpriced. So market players turned to the Q ratio, which reflects the value of a company's total assets, to keep the party going. Tokyo Gas stock surged based on its Q ratio, which even included the book prices of its gas tanks, properties that had no obvious real estate value. 

Similar stock surges have happened in China on a limited scale. Real estate companies such as Jinke Property Group and China Vanke soared between late August and September. Investors flocked to companies with huge land holdings on reports that the aggregate value of investment properties of listed companies stood at nearly 600 billion yuan.

A private-placement fund manager in Guangdong Province says a rise in value of real estate holdings is reflected in the company's theoretical stock price. So far, investors have been hyping up investment properties, but they could turn their attention to companies' headquarter buildings and factories.

In Shanghai and Beijing, condos exceeding 10 million yuan are now common, making casual investment increasingly difficult. Properties in smaller cities are affordable, but tightening regulations stand in the way. Property investors may begin shifting money from real estate to stocks of companies that hold assets.

The Shanghai Stock Exchange Composite Index has risen from months of stagnation and its floor is now as high as 3,100. Depending on which stocks draw money, the Q ratio may drive a market rally.

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