Tag Archives: ChinaBubble

Christian Science Monitor weights in on China bubble

Gordon Chang, author of “The Coming Collapse of China“, published in 2001. The book predicted the China would collapse by around 2005, or perhaps as late as 2010. He predicts that widespread unemployment, government corruption, inefficient state owned enterprises, and a lack of leadership would lead to the undoing. Publishers Weekly comments:

His invocations of the “power of the Chinese people,” or of an imaginary individual who will one day “end the Chinese state as it now exists,” read more like political soap opera than judicious analyses.

One of the Amazon commenters summarized Mr Chang’s POV as:

“The Coming Collapse of China” is an angry book written by the son of a man who “left China before the end of the Second World War and [the son] grew up hearing him say that Mao Zedong’s regime would have to fall.” The son returned to China to work as a lawyer in Shanghai. When he wrote this book – his first – it was a polemic in which he pounded away at the evils of Communism and predicted that Jiang Zemin’s regime would have to fall.

The Christian Science Monitor published Mr Chang’s “China: the world’s next great economic crash” article in the Opinion section this week. The truth is probably somewhere in between the current China Euphoria (rise of China is story of decade) and Mr. Chang’s China Collapse POV. For the record, I’m optimistic that China will be in a very strong position by 2050, with living standards in the largest cities (Beijing, Shanghai, Guangzhou) at parity with Taipei and Hong Kong. However there is a massive asset bubble in China that is hurting all but the wealthiest 0.5% (85% of families can’t afford basic housing). 40% of local gov’t revenues come from land sales (Professor Chovanec) and current GDP growth is fueled by real estate development.

The following is an [objective?] look at the current China situation:

Beijing, ignoring advice from Washington and other capitals, did not in the boom times try to restructure its economy to favor consumption. Instead, the Chinese government sought to take maximum advantage of then-surging foreign demand. The role of consumption, therefore declined – falling from a historical average of 60 percent of the economy to about 30 percent last year. No country has a lower rate.

To make up for slumping demand abroad and sluggish consumer spending at home, the State Council, the central government’s cabinet, announced a stimulus plan in November 2008. Beijing originally said it would spend $586 billion through 2010. In the first full year of the program however, it has directly and through state banks disbursed about $1.1 trillion in stimulus funds.

The plan, not surprisingly, is creating gross domestic product, but growth is an artificial “sugar high.” For one thing, Beijing’s stimulus spending last year was around a quarter of the total economy. Now, perhaps as much as 95 percent of China’s growth is attributable to state investment, as a Chinese analyst noted recently.

Despite the massive state spending, the country’s economy is not particularly robust. Power consumption statistics, a crucial indicator of economic activity, show the economy expanding at only two-thirds the announced rate.

Moreover, essentially flat consumer prices last year belie official reports of roaring retail sales. So does the full-year 11.2 percent decline in imports, another sign of sluggish domestic demand. And if the economy is really growing by double digits, why is Beijing insisting on continuing its stimulus?

New York Times columnist Thomas Friedman, however, thinks none of this will be a problem. Arguing that China is not the next Enron, he gives this advice to Mr. Chanos: “Never short a country with $2 trillion in foreign currency reserves.”

Yet Beijing’s record-setting reserves – now $2.4 trillion – are essentially unusable for this purpose. Why? China’s leaders need local currency, the renminbi, to deal with domestic needs. If they convert reserves into renminbi, they will cause the currency to zoom up in value and choke off the critical export sector. Foreign reserves have only limited uses in domestic crises.

Second, the state’s stimulus plan is taking the nation in the wrong direction. It is favoring large state enterprises over small and medium-sized private firms, and state financial institutions are diverting credit to state-sponsored infrastructure. Over the past three decades, China’s economy has expanded at an average annual rate of 9.9 percent because of the private sector, but now Beijing is renationalizing the economy with state cash.

Third, Beijing’s flooding of state enterprises with government cash will undermine their competitiveness, as a similar tide of money severely damaged Japan’s corporations during the bubble years.

Japanese managers discovered they could make more money managing cash than from anything else, and they therefore neglected their underlying businesses. Essentially the same thing is happening in China.

China Bubble? Jim Rogers “No”. Jim Chanos “Yes”.

The mainstream financial press has recently started picking up on the idea of weather or not “China” is a bubble. Longtime China bull Jim Rogers is quoted as saying: “I find it interesting that people who couldn’t spell China 10 years ago are now experts on China… China is not in a bubble.”

Rogers’ partner George Soros got famous shorting sterling. Meanwhile, Jim Chanos got famous shorting Enron. Chanos noticed that Enron had a very low return on Capital Investment (only 6-7%/year) and is seeing the same low return on invested capital here in China.

The first day I ever came to Shanghai, it was for a lunch invitation with Rogers. I fell in love with the place, and though it took a few months to get here, I plan to stay in Shanghai. Bubble or not. That first day in Shanghai, standing with Rogers on top of the Ritz Carlton, he explained to me the madness of the Shanghai real-estate bubble, and moreover, the world wide real-estate bubble. So there you go: “Rogers, China real-estate Bubble: Yes”.

Listen, Rogers is saying that “There is no commodities bubble”. Rogers has a huge amount invested in this, and if central banks keep printing money, they keep proving Rogers right. When China’s real-estate bubble pops, some commodities will take a short term hit, but the macro trend is that the USD is being devalued.

Chanos isn’t saying that he doesn’t think that China has a bright future, he is said the GDP numbers are “massively inflated by under-depreciating a very, very, very shaky capital asset base.” Chanos’ critics say that China’s different because there’s no leverage here, but that’s not true. The market is leverage by multiple layers of ownership each using existing property as collateral. Not unlike the structured leverage in Dubai, but completely different from the leveraging the the US property market.

Most interesting is that many in the US are vehemently opposed to government involvement in the economy, yet those same people are bullish on the China market because the Chinese Technocrats can “fine tune” the economy at their will. These are the same all powerful technocrats that drop dead regularly bingeing with the hostesses at KTV.

Here’s the relevant China situation, as it stands today, summed up quickly: 1. Everybody in China was dirt poor from 1949-1977 because the gov’t prevented private enterprise (basically the same as North Korea today) 2. In 1977, Deng Xiaoping created the first Special Economic Zone in Shenzhen, beginning the growth of China. 3. In the late 90s, Clinton arranged for China to enter the WTO, speeding up foreign direct investment 4. More investment more, higher efficiency factories and foreign exchange reserves soared 5. The gov’t invested (25%?) these foreign exchange reserves into infrastructure, creating hopes of a modern, industrialized, first world China at some point in the future. 6. The owners of the factories, the beneficiaries of the infrastructure projects earned private profits, and had to invest these profits – due to lack of investment options, most chose to invest in luxury real-estate, pushing up prices to current levels. 7. In ’07, the Global Economic Crisis came and China still had enough foreign reserves to weather the crisis, not only offsetting the drop in exports, but preserving the lucky “8%” GDP “growth”. 8. Throughout ’08/’09, Due to high real-estate prices and weakened global trade and investment options, even more money has been poured into Chinese Real-Estate

Things to remember. The Technocrat “Central Planners” have never had a good track record. We’re all aware of the disasters of Communist Central Planning of Russia, Cuba and the Closed China. In the 80s though, American’s talked about the magic of the METI (Ministry of Economy, Trade and Industry) explaining how America couldn’t compete with Japan’s centrally planned capitalism. That infatuation ended around when American’s bought Rockefeller Center back from Japanese investors for half the price.

Personally, I’m very long on the Chinese entrepreneurs and the Chinese people. In the next 50 years, I hope that most of them are able to join us Americans, and our allies in Japan and Europe in first world living standards – they’ve already done so in Hong Kong and Taiwan and it seems to be a great thing for all of us. Meanwhile, I’m very bearish on bureaucrats everywhere, and nowhere more so than where the bureaucrats are living in a giant bubble – and feeding the bubble for their own benefit.

Even the Police Dept is Building Houses!

Cash Rich SOEs Pushing Real Estate Bubble Ever Higher

The National Audit Office data shows that 25 central ministries are involved in real estate violations, worth billions of yuan. Among them, unlisted assets of 51.6917 million yuan from the Ministry of Foreign Affairs have gone into purchasing real estate. The Ministry of Agriculture has developed commercial housing, acting beyond its authority, and has submitted false reports on housing subsidies. In 2008, a real estate rental service center under the Ministry of Finance took in rental income of 5.3193 million yuan. The Ministry of Public Security has approved construction projects worth 422 million yuan, utterly exceeding its authority. Other data show that among 136 central enterprises under the State-owned Assets Supervision Administration Commission, about 70% of the companies are involved in real estate, among which 16 firms are primarily based in the property industry, including Poly, Sino-Ocean, and China Resources, while more than 80 outside firms have business in real estate. Among the top ten highest priced land purchases in major cities in the first half of this year, 60% were gobbled up by SOEs.

Yes, that is 25 central ministries that have been caught speculating in the real-estate market.

  • What is the Ministry of Agriculture doing building houses?
  • And the Police Department (called “Public Security” here) is in the construction business too?

The government here is just as “asleep at the wheel” as the OFHEO was when regulating Fannie-May and Freedie-Mac.

The Office of Federal Housing Enterprise Oversight (OFHEO) was an agency within the Department of Housing and Urban Development. It was charged with ensuring the capital adequacy and financial safety and soundness of two government sponsored enterprises — the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

SOEs: Buy High. Sell Higher?

Ignoring the Dubai Crisis and Bubble Concerns, Chinese SOEs Continue Playing “Land King”

Another 19 real estate companies also showed interest in the land bought by Sino Ocean, among them Gemdale Group, a private real estate company. It didn’t bother to bid, though, as prices were too high and a huge challenge for a private company. In the current environment, SOEs are able to take significantly greater risks than private enterprises.

My closest friend in Shanghai is also a land developer (房地产开发商) and I’ve heard the exact same story from him. Every time they try to bid on a project, some SOE backed business comes in at a higher price. No matter how much you are willing to offer, the SOE backed group raise the bid until they get the property.

Do SOE’s have a secret for generating better ROI than experienced, well managed, privately held developers? If they do, they should start a training academy teaching their “post-market economics efficiency”. Most likely this will be a lesson in buying high and selling low.

Zhang Shuguang, chairman of Unirule Institute of Economics, says, “Real estate policy next year is a choice among contradictions and big changes may not take place. Tightening policies will cause the real estate bubble to burst, resulting in economic problems, while excessive stimulus will bring a bigger bubble and greater risks.”

You’ve got a bubble on your hands. Choices I’m aware of are a) soft landing or b) hard landing. Sounds like the Chinese plan is to “manage the bubble”. Good luck with that.

The dilemma is more obvious for local governments. Zhang Shuguang says that half of local government income is real estate-related, and local real estate policies will not see big changes. Preferential policies may be fine-tuned instead of cancelled.

In case you want to know “why” the bureaucrats what to “manage the bubble” instead of fixing the economy? Because the bubble is putting money in their budgets. The bigger the budget, the bigger the kickback.

Can we bring Zhu Rongji back the way Deng Xiaoping was brought back? He’s ceased to exist as a public figure since 2003 – just about the time the economy started going way off track.

Zhu tackled the problems of an excessive money supply, rising prices, and a chaotic financial market stemming, in large measure, from runaway investments in fixed assets. After four years of successful macro-economic controls with curbing inflation as the primary task, an overheated Chinese economy cooled down to a “soft landing”.

Unfortunately, he’s not likely to be restored because:

Zhu has a reputation for being a strong, strict administrator, intolerant of flunkeyism, nepotism, and a dilatory style of work. For his hard work ethic and general truthful and transparent attitude, he is generally considered one of the most popular Communist officials in mainland China.

Bloomberg Picks up on China Real Estate Bubble

Bloomberg published: “China Property Bubble May Lead to U.S.-Style Real Estate Slump

Although parallels with other bubble markets, the China bubble is not quite so easy to understand. In some places, demand for upper middle class housing is so hot it can’t be satisfied. In others, speculators keep driving up prices for land, luxury apartments, and villas even though local rents are actually dropping because tenants are scarce. What’s clear is that the bubble is inflating at the rich end, while little low- cost housing gets built for middle and low-income Chinese.

Koyo Ozeki, an analyst at U.S. investment manager Pimco, estimates that only 10 percent of residential sales in China are for the mass market. Developers find the margins in high-end housing much fatter than returns from building ordinary homes.

The central government now faces two dangers. One is the anger of ordinary Chinese. In a recent survey by the People’s Bank of China, two-thirds of respondents said real estate prices were too high.

The second danger is that Beijing will try, and fail, to let the air out of the bubble. Pulling off a soft landing means slowly calming the markets, stabilizing prices, and building more affordable housing.

One difficulty in handicapping the likelihood of a nasty pullback is the opacity of the data. As long as property prices stay high, the balance sheets of the developers look strong.

The China Bubble: Beijing Luxury Hotels

The 234-room Pangu Plaza, which opened in December, charges as much as $17,750 a night for a suite. The sushi bar, where the cheapest lunch special is $265, cooks its rice in mineral water flown in from Japan.

Confidence, however, is belied by the cavernous, empty lobby where the only sound is the tapping of the high heels of the crisply attired staff. No paying customers were evident during a weekday afternoon visit, although Seng said that occupancy has reached “up to 30%.”

This is an extreme example, but this sort of scene is EVERYWHERE in China. Weather you’re in the showcase cities of Shanghai and Beijing, in the 2nd tier provincial capitals, or any of the smaller cities. EVERYWHERE you go there is construction and everywhere you go the buildings are UNUSED.

Glad to see the western media is finally opening their eyes to this one. Nice job to the LA Times for this article “Global financial crisis hits Beijing luxury hotels hard“.