Saturday, January 1, 2011

Shanghai Daily: It's only a matter of time before China's housing bubble bursts

Excellent post today regarding China on the Australian blog, The Unconventional Economist. It articulates the issue succinctly.

China has, on a per captia basis, pumped more money into their economy than the Americans.

While most are viewing the results as the growth of an emerging economic superpower, the reality is that China's economy has become over-dependent on fixed asset investment - i.e. the building of infrastructure, real estate and manufacturing plants.

This over-investment in fixed assets, which now comprises a whopping 60% of China's annual GDP, has caused China to build far too many things (apartments, factories, etc) that are not needed, resulting in significant over-capacity.

We have seen this time and time again in bubbles everywhere.

One only has to view footage of China's empty cities on youtube to understand the extent of this malinvestment.

Jim Chanos, founder and president of New York investment company Kynikos Associates, famously described China's fixed asset malinvestment and manufactured growth earlier this year as "a treadmill to hell".

China has a massive over dependence on real estate construction. They have built entire cities that are now sitting empty. Yet, despite this over building, construction is continuing, with 12 million to 15 million residential units this year.

These units, which are priced similar to those for US residents, are intended for Chinese workers who earn about $3,500 annually and are in the bottom 20% of wage earners. To make matters worse, many of the Chinese who have moved to cities from the country are construction workers. So when the construction slows, many will likely move back to the country-side, leaving a construction ghost town and one massive financial black hole.

  • “Construction is 60-plus percent of GDP, compared to exports of 5 percent... The problem is that consumption as a percentage of Chinese economy has declined in the last 10 years, from 40 to 35 percent. It’s all real estate...When construction is 60 percent of your economy, and you are building lots of things that people don’t need, the state may let this get out of control... It’s hard to manage this type of bubble".

Now Business Insider has provided proof of China's over-building and malinvestment with alarming satellite photos of entire cities laying vacant. From their article:

  • "The hottest market in the hottest economy in the world is Chinese real estate. The big question is how vulnerable is this market to a crash.

    One red flag is the vast number of vacant homes spread through China, by some estimates up to 64 million vacant homes.

    We've tracked down satellite photos of these unnerving places, based on a report from Forensic Asia Limited. They call it a clear sign of a bubble: 'There’s city after city full of empty streets and vast government buildings, some in the most inhospitable locations. It is the modern equivalent of building pyramids. With 20 new cities being built every year, we hope to be able to expand our list going forward.'"

Last week Yu Yongding - a prominent economist from within the Chinese establishment - published a scathing attack on China's economic model in the state-run China Daily. This article supported the concerns voiced by external commentators over the Chinese economy.

Now the Shanghai Daily has published an explosive article entitled: It's only a matter of time before China's housing bubble bursts.

The Unconventional Economist notes that China's housing bubble is approaching Japanese proportions. Back in the 1980s, Japan's residential housing values reached a stratospheric 3.8 times GDP at the peak of its bubble. As of February 2010, China's housing values were 3.5 times GDP.

In the heyday of Japanese prosperity, the land value of Tokyo alone exceeded that of the entire United State. This 'wealth effect' had Japanese tycoons considering buying up America.

What happened to Japan is well known history.

Will China follow a similar pattern?

The Unconventional Economist speculates on how a collapse in China could devastate Australia.

The ramifications are no different for the Village on the Edge of the Rainforest.



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  1. good post and Australia is already in trouble from what I have read.

    true depression level unemployment

  2. The full ramifications of a major slowdown in China are staggering to contemplate. Imagine the effect on commodity prices alone.

  3. China's construction boom cannot be classified as a 'Bubble' in the conventional sense of the word. No one is buying or speculating in these properties, they are a non-productive way of using up a nation's resources, and serve much the same purpose as war does in most cases. Bombs are built and consume the wealth of a nation and give nothing in return. Whether they explode or not, a nation's wealth is burnt up without benefiting the citizenry. This is much the same that has gone on in China, the nation's resources have been unproductively used up, leaving little for the masses. Had this capital been used to build up cottage industries for the locals that would provide long term employment, China truly could have become a first world or at least second world nation. Now the probability of the developed coastal areas of China slipping back to 3rd world conditions are far greater than the rest of rural China advancing to second world status. It's a tragedy for sure for it could have benefited the whole world but now the whole world will suffer as a result of the policies of the number 1 and 2 economies in the world.