Sunday, January 31, 2010

China Is Bubbling

It looks like real estate in China is going through a massive bubble. It is still on the upswing side.

We don’t really have a view on when it will end; [but] we do have a view that this is a bubble. Real estate is very much driven by government policy. This year we have RMB 4 trillion through the stimulus package, another RMB 6 trillion from municipal bonds, another RMB 10 trillion from bank loans. We have RMB 20 trillion in the system and it all finds its way to real estate. If the government next year decides to continue the relaxed monetary policy the market will continue like this, regardless of whether this is wasteful investment or not — people will still buy and we will still be building and selling.

These buildings are not fully occupied and people should be worried about it. I am sure the government is worried about it, but what do you do, they want the stimulus and if you want to create jobs then this is a by-product.
And how much is that worth In $US?
Not to detract from her point, but I should note that I tally the total influx of funds somewhat differently. I think she is double-counting the RMB 4 trillion government stimulus, which was funded half by bank lending and half by municipal bonds. The combined figure, as I calculate it, is more like RMB 16 trillion, or US$2.4 trillion.
So how much is that in US dollars?
BEIJING -- China's economy expanded by 6.1 percent year-on-year in the first quarter of 2009, official data showed Thursday.

The quarterly growth was the slowest in the past 10 years as the global financial crisis continued to affect the world's fastest-growing economy. It was 4.5 percentage points lower than the first quarter of 2008 and down 0.7 percentage points from the previous quarter.

Gross domestic product (GDP) reached 6.5745 trillion yuan ($939 billion) in the first quarter, Ma Jiantang, director of the National Bureau of Statistics (NBS), told a press conference.
Since the numbers are never as precise as the figures show, let us say that it is $3.8 trillion. And a $2.4 trillion stimulus represents 63% of the GDP. That is a lot. The Chinese can pay for most of it in cash. But that leaves them vulnerable to the next shock in the market place.

So how about an anecdote? Here is one from March 2009.
Today I visited Beijing’s most stunningly dysfunctional, catastrophic mall, called The Place, and all I could think about was what I wrote back in 2006. Made to look kind of like Versailles on the outside, The Place is an irrational maze of stores and eateries that seems to have been designed to turn off and turn away customers. It has stairways that lead nowhere, unmarked elevators that take you to surprising places, not to mention a generally chintzy feeling created by all the faux marble and Grecian columns; it always looked pompous, but now it’s looking seedy and run-down as well.

The Place is around the corner from my office, and this was my first trip back in about two months, I was shocked at what I saw. Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. The two good restaurants there, Ganges and Master Kong Chef’s, were still thriving. The few others that remained seemed to be just hanging on.

That same night I went by The Village, which seemed so cool when it first arrived and now seems so unnecessary aside from the Apple store and a couple of restaurants. Same thing as The Place: lonely clerks looking plaintively out the store windows, eyes begging you to come in and buy something. But no one does. There is simply too much stuff, too many stores, and no buyers. Do you have to be a rocket scientist to conclude this is unsustainable? And to top it off, they are now finishing the second Village mall down the street, across from the Poppa Bear of all disaster malls, 3.3. All I can say is, WTF??

I’m predicting The Place and many of its sister ghost malls, shunned by customers overwhelmed by so many malls to choose from, each selling the same crap that no one can afford nowadays, are going to experience a catastrophe, if they haven’t already, and will ultimately become burnt-out, boarded-up shells. In turn, this is going to throw a lot of fuel on China’s current financial crisis. Real estate will be further cheapened, and the general misery unique to times of deflation will set in. Brother, can you spare a dime?
The author has some ideas on why it got so bad.
I told them this was coming 2.5 years ago and no one listened. The day of reckoning, the moment of truth is here. Even if things pick up, these malls are hopeless. Like the Mandarin Oriental, they will need to be razed and replaced with something useful, like affordable middle class housing (wishful thinking on my part). If not, Beijing could become a city pockmarked with looming dinosaurs, huge husks of once breathtaking buildings, now vacant and decaying, like so many of the Olympic structures.

I kind of understand why this overbuilding happened, as the economy became a vicious inflationary circle. Now we are experiencing the down wave, and it’s just starting. As we crash, The Place and many other useless mega-malls like it will serve only as reminders of the excesses of good times that we fooled ourselves into believing would last forever. Their time has now come. In fact, their demise is long overdue.
The government in China is doing the same thing the government of the US is doing. Trying to reflate the bubble instead of marking down assets to their real value. It will end badly. In the US and China.

Given that the real volatility of the Chinese political system is far in excess of the volatility in the US and we in the US have the safety valve of local, State, and National elections with a range of policies to choose from (Texas or California?), I think there will be a LOT of political upheaval in China in the years to come. They will be so caught up with domestic problems that their opportunities for international mischief such as the current uproar over arms sales by the US to Taiwan will be limited. OTOH they could do what governments the world over do when domestic trouble is serious. Start foreign adventures. Will China go down (for a while) quietly? Or will they make a fuss? Stay tuned.

And another thing. When China crashes it will put a LOT of downward pressure on the price of oil. Unless they go in for oil adventurism.

Cross Posted at Classical Values

1 comment:

Pastorius said...

There's also the coming crash when their one baby per family policy depletes the next generation of taxpayers.