Besides currency evaluation, there is another issue constantly on people’s minds regarding China, which is its rapidly growing real estate prices, a phrase quick to bring a stomach twist to any American, like trying to eat hotpot again after your last outing leaving you incapacitated for two days.

There is a disturbing similarity to the current state of China’s real estate market and that of the USA five years ago. Two examples have clarified this for me. The first is the example of a Chinese friend who bought a home five years ago, for one million yuan, who now gets frequent calls from real estate agents offering 4-5 million. He refuses to sell, even with the opportunity of pocketing the difference as profit. The second is a particularly telling account: two western friends who live in a fairly high-end apartment, who pay approaching western prices in rent. Recently, without any warning, they were told to move, as “someone had bought the apartment.” This without any visits by the new owners, which is very unusual for a country in which one is loathe to buy even an extension cord without testing it first, with multiple devices.

This leads to two, equally disturbing possibilities: the first, that someone bought this apartment without looking at it, as a purely speculative decision. If lots of investors are being this willing to foolishly ‘buy high,’ once the market turns (and it will turn) they will all run screaming for the doors at once, leading to a crisis the government might not be able to stop. Despite all of its power, the central authorities could not force tens of thousands of people purchase homes at prices FAR over their market value, which would be necessary if the market experienced a decline like America’s.

The second disturbing possibility is that the owners of the building decided to kick my friends out of their apartment for the express goal of realizing appreciation gains due to the real estate bubble. When a country starts to decide that the value of something on the books is worth more than cash flow, it is setting itself up for a crash. It is similar to purchasers of AAA-rated bonds underpinned by subprime loans: the value of the bonds was something only on paper, without any actual cashflow to back it up. The people who made the initial sub-prime loans are just like the owners of this Chinese building: so eager to have something valuable in their balance sheets that they will ignore or even actually discard their sources of real revenue.