Tuesday, February 20, 2007


Real Estate And The Year Of The Pig

Gung Hay Fat Choy! (Happy New Year)

The Lunar New Year dates from 2600 BC, when Emperor Huang Ti introduced the first cycle of the Chinese zodiac.

Because of cyclical lunar dating, the first day of the year can fall anywhere between late January and the middle of February. On the Chinese calendar, 2007 is Lunar Year 4704-4705. On the Western calendar, the start of the New Year falls on February 18, 2007 - The Year of the Pig.

The Year of the Pig is of particular importance for North American real estate markets, since the level of interest rates is in direct function of how China's Central Bank will direct the investment of its USD 1 trillion in foreign exchange reserves.

China's foreign exchange reserves are at twice their level of two years ago and amount to more than one-fifth of all global foreign exchange reserves in American Dollars. To put things into perspective, this humungous amount would be enough to buy all the gold sitting in the vaults of all central banks or, put differently, it would be almost enough to buy all residential property in the London Metropolitan Area. This massive hoard of foreign cash reserves is growing exponentially to the tune of some USD 20 billion per month.

China's foreign exchange reserves already far exceed the minimum level required to ensure financial stability. As a rule of thumb, a country needs enough foreign exchange to cover three months of imports. The reserves of the People's Republic are already enough to cover five times as much - 15 months worth of imports. This is the direct and proximate result of the country's large current account surplus, significant foreign investments and big inflows of speculative capital, especially over the past couple of years. In theory, strong flows of foreign capital into China should have pushed up the Yuan to astronomical levels, but Beijing has resisted this by refusing to allow its currency to float freely, thus forcing the Central Bank to buy up the surplus foreign currency.

How this stack of money is invested has big implications for the world economy, not just for China. But no place is more dependent on the decisions that the Central bank will make in the Year of the Pig than North America. This is so because approximately seventy percent of the country's foreign reserves are invested in American Dollars, mainly in US Treasury securities. This has propped up the Dollar and reduced American bond yields by as much as 1.5 percent.

China's Central Bank, however, has now signalled its intention to switch from Treasury bonds to American mortgage-backed securities and corporate bonds in an attempt to earn higher yields. What's even more important, Chinese officials are also debating the need to diversify reserves out of American Dollars in order to reduce the exposure of a big drop in the value of the Greenback, and to invest a larger slice into Euros and the emerging Asian currencies.

Clearly, a big shift out of the Dollar could therefore push up bond yields and hence mortgage rates, thus damaging further the already weakened North-American housing markets. And this is the reason why the Year of the Pig promises to be a pivotal year and of great repercussions here in North America.

Luigi Frascati


Real Estate Chronicle


Great post, as always. The year of the pig could be China's year. I was not aware of the amount of influence other countries have on the US dollar. I would bet most Americans are not aware either.
Oh, they are aware of it alright. They just do not accept it. It is difficoult to accept the fact that the highest standard of living in the entire world is dependent on the whims and fancies of China, India and the Asian emerging economies.

This is the dark side of globalization, what we refer to in Economics as the "democratization of wealth" - as poor countries get richer, rich countries get poorer. The same applies to Europe, on a smaller scale.

And this is also the reason why humanity will one day decide to fight WWIII. But I am not into predictions ... You wouldn't want to hear my views on future events to come. Nobody would.
People of earth are completely unaware of the planet. Keep up the great posts.
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1. Put fresh or silk flowers in principal rooms for a touch of color.
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4. Set the table with pretty dishes and candles.
5. Buy a fresh doormat with a clever saying.
6. Take one or two major pieces of furniture out of every room to create a sense of spaciousness.
7. … Ten Ways to Make Your Home Irresistible
Check out the school district. . . .
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