This NYT article analyzes a possible takeover of Fannie Mae and Freddie Mac by the Federal government if things get worse.

Below graph explains the role of Fannie and Freddie in housing market.

(click to enlarge; source NYT)

But Federal government won’t have to do so. All the government has to do is to talk to reassure investors the two GSEs have the government backing. With government’s assurance, the companies should have no problem raising more capital in the market. But the equity share may be more diluted. It’s not good for stock holders.

So what about moral hazard? In my view, GSEs are created semi-government institutions and they have never existed in the first place. But since they are already here, government will have to bail them out. Yes, even at Taxpayers’ expense. Imagine the Federal government let Fannie and Freddie go under, it will jack up mortgage rate and foreign investors will lose confidence in all government-issued bills or bonds. The US will fall into severe recession right away. In order to avoid future bailouts, after the crisis, plans should be devised to make GSEs completely private, cutting off government ties once and for all.

PIMCO’s Gross denied Lehman rumor and said the company is continuing to trade with Lehman. Will Lehman be another Bear Steans? I remembered days before Bear’s collapse, its CEO came out denied rumors outright. So will you rather trust Gross? But note that this time the big difference is Lehman has the Fed’s backing.

Watch Bill Gross interview on CNBC:

(click above picture to watch)

Beijing Cooldown?

After Games, Trends Point to Property Growth

By J.R. WU

BEIJING — The run-up to this summer's Olympics ignited an explosion of new commercial and residential space in the Beijing market over the past two years.

The Chinese capital has given itself an urban facelift that includes skyscrapers and sports stadiums, a new third terminal in Beijing's international airport, bigger park space and a more expansive subway system — ingredients for a modern metropolis.

However, the construction boom has been accompanied by fears that once the games end on Aug. 24, Beijing could plunge into a property slump.

That isn't likely to happen. Property agents say the market may see higher vacancy rates and lower rents and sale prices in the months immediately after the Olympics, but they expect spaces to be filled eventually because Beijing remains a key city for doing business in China.

Property prices in Beijing, like those in the rest of China, have been falling from their spectacular highs, and they may correct further. The main reason for the cooling is the government's tightening over the past two years.

Speculation that housing prices are on their way down is helping to depress prices, says Ben Christensen, head of research in Beijing at property agent Jones Lang LaSalle.

"In Beijing that's sort of compounded by uncorrelated speculation that after the Olympics, prices are going to plummet," he says. "I don't see that. Nobody in the property industry sees that happening because there is no reason for it."

Much of what is going on in the Chinese capital is telling of a broader national trend — rising incomes, urban sprawl and the growing sophistication of Chinese consumers underpinning demand for one of the world's hottest real-estate markets.

Migration of people from rural areas into cities looking for better jobs, bigger homes and higher living standards is driving urbanization across China. Foreign companies in China and domestic companies going global want high-grade buildings for their China headquarters.

But the big problem for China in recent years has been that prices rose too quickly to be sustained. "The government wants property prices to decline," says Lehman Brothers economist Mingchun Sun. "But they don't want to see a collapse of the property market because it is still one of the growth engines for the economy."

While Beijing's property market is tracking the national trend of a gradual cooling, policy makers are finding their biggest headaches in places like the southern boomtown of Shenzhen, just across the border from Hong Kong. A steep rise in prices in markets such as Shenzhen helped prompt the government to aggressively curb credit, land sales and mortgages nationwide during the past two years.

The growth in Beijing's property prices peaked in October 2007 at 15.1% and has been steadily slowing to 12.4% in May, based on data of China's 70 large and midsize cities from the National Development and Reform Commission. Shenzhen's swings have been sharper, with the rise in property prices dropping from nearly 21% in August 2007 to 2.5% in May.

Once property prices return to more affordable levels, demand from home buyers should kick in again, supported by individual income growth, which is rising 15% to 20% each year in China, Mr. Sun says.

If Beijing policy makers switch their focus from fighting inflation to shoring up weaker economic growth, the ensuing monetary easing would likely boost property prices again.

The average sales price now in Beijing's high-end residential market is estimated at 24,010 yuan ($3,500) per square meter, compared with 15,838 yuan at the end of 2006, according to Jones Lang LaSalle.

Mr. Christensen says prices in the high-end residential market should start to stabilize by year's end as investors evaluate their property investments more thoroughly. The bottom for prices in this market segment could be around 20,000 yuan per square meter, he says.

Jones Lang LaSalle says the new supply in Beijing's high-end residential and retail markets will roughly triple — or more — this year from last year. New luxury residential space will grow 30.4% this year to include 10,301 more units, compared to 11% growth in 2007. New supply in the retail market will rise 64%, or 1.4 million square meters this year, compared to 16% last year.

Obesity in China Becoming More Common

By SHIRLEY S. WANG

In a development with implications for China's work force and economic growth, a new study says more than 25% of adults in the country are overweight or obese and that the number could double over the next 20 years.

The report, based on data collected from 20,000 patients in China over the past 15 years, says obesity has increased 1.2% a year among men in that time — higher than the rate for adult men in the U.S., U.K. and Australia.

With the population at 1.3 billion, that means an additional 11 million Chinese adults are becoming overweight or obese every year. In addition, 12 million to 14 million adults are becoming at risk for diabetes and hypertension annually, says study author Barry Popkin, director of the obesity center and professor of global nutrition at the University of North Carolina at Chapel Hill.

"When you have this many people becoming diabetic and hypertensive, you think about the health-care costs and it's pretty staggering," says Dr. Popkin. The study is set to be published today in the health policy journal Health Affairs.

The study suggests that the problem may be accelerating. And the reasons for the rise in obesity isn't because of increased consumption of fast food or other Western foods in China, Dr. Popkin says. Rather, improving living standards mean that growing numbers of Chinese can now afford vegetable oil, beef and dairy-food sources that until recently had been too costly. A more sedentary lifestyle for many Chinese plays an important role as well.

Obesity-related costs are likely to lead not only to drastic increases in direct medical costs, but also to indirect costs like decreased worker productivity and absenteeism.

Health-care costs could also have implications for companies looking to invest in China. Many companies provide medical care for workers, and thus they could end up footing much of the bill for obesity-related costs, Dr. Popkin says.

Those costs could prompt companies to invest in less-costly markets, such as Vietnam, and ultimately slow the Chinese economy. "U.S. labor costs skyrocketed and people are moving away from investing here," says Dr. Popkin. "It's the same issue in China."