Finally, Proof There's No Chinese Real Estate Bubble

If you want to believe economists from Standard Chartered, then now is the time to buy shares of Chinese tier 2 real-estate developers China Housing & Land (Nasdaq: CHLN  ) and Xinyuan Real Estate (NYSE: XIN  ) . That's because the stocks are dirt-cheap relative to Standard Chartered's recent conclusion, "The Tier 2 and Tier 3 cities have not seen much of a correction in land or apartment prices. Moreover, developers sentiment about sales volumes seems pretty good, and they do not appear to be postponing construction."

That's great news for buyers of these companies if it's true and sustainable, so it's worth asking how the economists from Standard Chartered arrived at their conclusion. In order to get totally unbiased information they, of course, polled 30 of China's real-estate developers.

That's right, they polled the developers
Think about that for a second. Who has the most to lose from a deteriorating Chinese real-estate market? The developers would be at or near the top of that list. And who has the most to gain from propping up market sentiment? Again, the developers. Given those facts, would one truly expect those developers to give you an honest look at the state of their business? And remember that this is China, where people loathe talking about how they're doing if they're doing poorly. That concept is called "saving face," and it's fairly prevalent over there.

In other words, while I'm sympathetic to the view that there are differences across Chinese real estate markets (and called out Jim Chanos on this topic in the past), the fact is that this does not seem like a reliable indicator of the fundamental health of China's real-estate market. That's particularly true given that Chinese banks have reportedly now been asked to stress-test their balance sheets for a 50% to 60% decline in housing prices (talk about dissonance!).

While there is a lot to like about China for the long term, I'd still steer clear today of China real-estate companies like those mentioned above, indexes such as the Xinhua 25 (NYSE: FXI  ) that are weighted toward China's financial sector, companies such as China Fire & Security (Nasdaq: CFSG  ) that rely on continued fixed-asset investment for business, and even a company like China Security & Surveillance (NYSE: CSR  ) that relies on a healthy banking sector in China for capital given its lengthy DSOs.

There is simply no clarity into the health of China's real-estate sector -- and therefore into its banking sector -- at present, which makes it imperative that investors be careful.