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China property bubble?


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#1 monsta

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Posted 13 October 2011 - 07:16 PM

Did you know huge sums of money (trillions in fact) have been spent on various construction projects, roads, railways and bridges in China. Nearly all of which are under used and will never make a return. Did you know many of the longest bridges in the world now belong to China yet many of them are barely used? Most remarkable and perhaps disturbing are the ghost cities sprouting around the country:
China's ghost cities and malls

It is widely reported that there are already 64 million empty apartments littered across China with even more to be constructed. And considering vast of amounts of money are spent building these things which are all financed through sky-high land prices (property and land sells for similar values compared to American homes despite the fact the average Chinaman only earns a 1/10th of the amount). It is all very reminiscent of Dubai and we know how that turned out! And unlike Dubai, China does not have a rich oil neighbour to bail them out of this hole.

So what do you think? Bubble or no bubble?

For various detailed reasons I think this is a bubble and if you want to read the spoiler which gives a fairly detailed analysis of my take on the Chinese economy and why they can't grow their way out this mess. It is VERY long so be warned! The basic thing I want to ask is this building sustainable?

You don't have to look very far to hear how much China is booming and how quickly it is growing. I mean just recently the questions have evolved from if China will overtake America to when will China overtake America. A famous prediction was recently made by the IMF that China will overtake America by 2016 if judged by GDP PPP; a prediction of overtaking America much earlier than earlier anticipated. Even if we include other measures such as nominal GDP the predictions are not that much further away in the future with popular dates cited as 2020 or 2024. It sounds unbelievable but is this Chinese miracle growth story really true? Can China really achieve 10% growth rates for the foreseeable true? This is especially remarkable when one considers the current economic climate where most western economies are failing to register significant growth and the fact that China - like many eastern tigers - is an investment driven export (command) economy.

I know this bit maybe a bit technical but it is worth noting when making a judgement on their economy. GDP is calculated using the following factors:

GDP = Consumption + Investment + Government spending + (Export - Imports)

Now when breaking down China's economy into these relevant factors which is kinda tricky due to the opaque and I must say generally misleading and highly optimistic or down right lies that litter Chinese statistics we can make the following general comments. From what I gather from official numbers is that the Chinese trade surplus (that is exports - imports) was recorded at $261bn. As impressive as that maybe it is actually a decrease from the previous year and this primarily occurred because its level of imports had increased this year while it's total exports largely stagnated.

A stagnation in the level of exports makes sense when you consider that China's main markets are the USA, Europe and Japan where the economies are barely growing and many consumers are reining in on their spending. And besides even if this area did grow, considering the size of the Chinese economy - which is reported at $6 trillion - then the total value of trade surplus only accounts for about 5% of their total economy. So by that token we can say that this part of the equation does not play a major part in their growth numbers.

That means that the only other areas of growth would be other areas. We do know that since 1980 the level of consumption in China has consistently dropped from 50% of GDP in 1980 (which is a low figure anyway) to 34% today. What is more, this figure figure has consistently dropped throughout the 90s and 00s suggesting a transfer of wealth is occurring from its consumers to business.

This can be explained if we dive a bit deeper between the headlines reported in the news. China not only purposely weaken it's Yuan by buying US treasury bonds (and other foreign currencies) it also provides many direct subsidies to it's businesses (which it fails to report many of those to the WTO) and on top of that gives other indirect subsidies by subsiding the cost of petrol and water to businesses. All these factors means Chinese businesses can undercut the prices of international competitors and Americans should be made aware of this fact. We all hear about currency manipulation but what we hardly hear about are the huge amounts of state sponsored subsidies that I am pretty sure violates the agreements made in the WTO. It not only takes away American jobs but it takes away jobs from Bangladesh, Vietnam and other surrounding neighbours who cannot provide a cheaper wage than the Chinese despite paying lower wages. For those neighbouring countries (and America) to compete wages must be suppressed for existing jobs.

In addition to all that the state also provides easy access to credit to its State Owned Enterprises (SOE). And where does all this money come for the subsidies and easy credit? From either the Chinese taxpayer or their savings. So unlike what the Chinese Prime Minister recently claimed, that the Chinese consumers spend less because they are responsible and more frugal than the greedy American, the real reason is because the whole system is geared against Chinese consumers and works mainly for the SOE's. This provides a good explanation on the real reason why consumption for the Chinese is going down while the amount of investment remains high. And this level of investment is the most important area of their economy indeed it is the major driver of their growth in recent years.

From the above, we can gather from a process of elimination that government spending plus investment must make up 65% of GDP. I have heard various figures for investments ranging from 50% to 70% (Jim Chanos claims it is 70%). In either case, even the lower 50% figure is really remarkable when one considers that no country has ever achieved such high investment figures (not even Japan in the 80s had figures this high). And not only that but they have sustained high levels of investment for a prolonged period of time; no country has devoted over 33% of GDP to investment for more than 9 years yet China has been doing this for 12 years and running. You would think high levels of investments are great but have you seen what the Chinese have been investing in? Huge sums of money (trillions in fact) is spent on various construction projects, roads, railways and bridges which are all under used and will never make a return. Did you know many of the longest bridges in the world now belong to China yet many of them are barely used. Most remarkable and perhaps disturbing are the ghost cities sprouting around the country:


It is widely reported that there are already 64 million empty apartments littered across China with even more to be constructed. And considering vast of amounts of money are spent building these things which are all financed through sky-high evaluations of land (property and land sells for similar values compared to American cities despite the fact the average Chinaman only earns a 1/10th of the amount). It is all very reminiscent of Dubai and we know how that turned out! And unlike Dubai, China does not have a rich oil neighbour to bail them out of this hole.

The Chinese use the four same words preceding any bubble (this time is different) but we all know that these bubbles all end in the same manner. They are making the same mistakes as the Japanese and western countries but only on a scale that is truly unprecedented; it is a bubble we have never seen before. And considering that China's recent growth is primarily driven by investment and government spending (50-70% of GDP) then a reduction in investment can only lead to a recession, not to mention A LOT of wealth destruction, mass unemployment and possible social unrest.

I know, considering the current headlines circulating around that China can only go onwards and upwards it is a big bet to go against the current trend. But I am going to stick my neck out and say that China will enter a major recession (because credit fuelled booms produce the worst recessions) in the next two years. I could be very wrong and would like to hear your opinions and counter arguments but I want to make this prediction because predictions are only good if they are correct before the event occurs.

And unlike Japan of the early 90s and the mid-90s Asian financial crisis, the world economy is not exactly booming so that could have an adverse impact on the speed of China's recovery.


#2 jorgea

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Posted 10 June 2012 - 02:24 AM

It sounds much like a bubble that is about to burst at any time

#3 Ausdoerrt

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Posted 10 June 2012 - 06:40 AM

Well on the other hand they're building up infrastructure that could save them money in the long term. Maybe with some policy changes those currently "ghost" cities could help offload the ridiculous amount of people in other big cities.

Though of course China's full various silly projects that basically waste budget, though it's rather difficult to assume seriously that it's all done with some malign intent to mislead the rest of the world about China's economic state, as the video seems to imply. All I have to say to that is, heck, if they have the money to waste it on useless stuff like that, they must be pretty booming right now rolleyes.gif

In all seriousness though, it's more likely just a by-product of various old bureaucratic mechanisms which don't quite work well with a (pseudo-) capitalist market system. In the old days, they would've had an easy time populating those "ghost" cities through political means - just like the Soviets did back in the day on similar projects. In a capitalist system, though, infrastructure alone won't attract people, and such projects won't make much of a dent in real estate prices in the rest of China. Unfortunately, I think the "sky-high" real estate prices in the rest of "developed" China are very real thanks to the equally "sky-high" demand to live in those cities.

I also think this discussion isn't very important because China has more important issues to deal with, mostly demographic, which could affect its economic state in the near future.

Finally, I don't think it's correct to call this a "property" bubble. It's more like a "government spending" bubble. And they can pretty much keep it going as long as there's money in the budget.

QUOTE
You would think high levels of investments are great but have you seen what the Chinese have been investing in? Huge sums of money (trillions in fact) is spent on various construction projects, roads, railways and bridges which are all under used and will never make a return. Did you know many of the longest bridges in the world now belong to China yet many of them are barely used.


I think that falls under government spending rather than investment. It's more like those misguided government projects nobody wants to invest it. So I think actual high levels of investment in China are quite real and good - considering that you're seeing so many people willing to open some sort of operations in China, be it in natural resources acquisition or outsourcing. A lot of it may be "artificial" thanks to the exchange rate manipulation, but it still works in China's favor.

I think a lot of people going for "Oh my, China is XYZ" are looking for sensationalism and only look short-term. A lot of "bad" dynamics we see can be attributed to the gradual market transition philosophy, which means the gov't needs to support the whole baggage of the old system (incl. failing SOEs) while developing the new to smooth out the transition. People saying "that's bad for the general public" well that's true but 1) in comparative terms they are still benefiting considerably and 2) this is still a better alternative (at least politically) than, say, declaring the actual bankrupt SOEs bankrupt and putting all those people out of jobs. Anyone who's looked at the post-Soviet transitions knows that the "shock transition model" doesn't work most of the time, so China is doing it right, IMO.

QUOTE
This is especially remarkable when one considers the current economic climate where most western economies are failing to register significant growth and the fact that China - like many eastern tigers - is an investment driven export (command) economy.


Except unlike the rest of the Asian countries, China has got a huge internal market of its own it can start developing. There are also markets they haven't really tapped into in Eastern Europe/Central Asia. Ultimately though, I think it's a bit wrong to classify China simply as an "investment-driven export-geared economy"; they should be on a transition away from that model, and the Western crises only act as an incentive to speed up the change. I mean, China has been losing in outsourcing costs to some of the "cheaper" countries for a few years now, despite the monetary policy.

QUOTE
Now when breaking down China's economy into these relevant factors which is kinda tricky due to the opaque and I must say generally misleading and highly optimistic or down right lies that litter Chinese statistics we can make the following general comments. From what I gather from official numbers is that the Chinese trade surplus (that is exports - imports) was recorded at $261bn. As impressive as that maybe it is actually a decrease from the previous year and this primarily occurred because its level of imports had increased this year while it's total exports largely stagnated.


1) Eh, official Chinese data. rolleyes.gif
2) You can't judge economic growth and/or stability from trade deficit/surplus figures. It's about as wrong to say China is declining because trade surplus is down as it was to say (remember the screaming on the media a few years back?) that America is going down - just look at our huge trade deficit! Well, I'm pretty sure that US trade deficit is down compared to pre-recession figures, but I don't think the country's economy is feeling any better from it. So you say it's a bad thing, I say it's a good thing because China can't be an export economy forever - it's already stretching itself pretty thin with that monetary policy.

QUOTE
We all hear about currency manipulation but what we hardly hear about are the huge amounts of state sponsored subsidies that I am pretty sure violates the agreements made in the WTO.


Actually, I'm pretty sure just about everyone is complaining about China in the WTO, it's just not in the media so much. But, thanks to the way the WTO works, they can do ****-all about it.

P.S. I have NO idea why I just wrote a tl;dr response to a year-old necro thread. I should've been playing videogames dry.gif
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#4 wceend

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Posted 10 June 2012 - 02:06 PM

QUOTE (Ausdoerrt @ Jun 10 2012, 07:40 AM)


P.S. I have NO idea why I just wrote a tl;dr response to a year-old necro thread. I should've been playing videogames dry.gif

user posted image I jsut ran into this after reading your post..coincidence? I think not.


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#5 wedora

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Posted 10 June 2012 - 03:15 PM

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#6 Ausdoerrt

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Posted 10 June 2012 - 07:24 PM

QUOTE (wceend @ Jun 10 2012, 09:06 AM)
I jsut ran into this after reading your post..coincidence? I think not.

Hehe laugh.gif If only I still lived in a first-world country, then the meme woulda been completely perfect.
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