Real Estate And The Year Of The Pig

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 Chinas Central Bank will direct the investment of its USD 1 trillion in foreign exchange reserves.

Chinas 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 edges or, put differently, it would be almost enough to buy all residential character in the London Metropolitan Area. This enormous hoard of foreign cash reserves is growing exponentially to the tune of some USD 20 billion per month.

Chinas foreign exchange reserves already far go beyond 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 Peoples Republic are already enough to cover five times as much – 15 months worth of imports. This is the direct and proximate consequence of the countrys large current account surplus, meaningful foreign investments and big inflows of speculative capital, especially over the past associate 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 money to float freely, consequently forcing the central bank to buy up the surplus foreign money.

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 countrys 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.

Chinas 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. Whats already 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 consequently push up bond yields and hence mortgage rates, consequently 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