The China Bubble

When it comes to China everyone who is even slighly familiar with their financial problems is waiting for the first shoe to drop.

Imagine that your local city and county controlled all land rights, and the only ownership a private builder or developer could secure was a long-term lease. Now imagine that 40% of the city and county's revenues come from the lease fees paid by developers. Next, imagine a giant real estate bubble has priced most residents out of the market, and that the local governments are reaping huge gains as the development rights and leases they sell are skyrocketing.

Can you say conflict of interest?

That's the Chinese real estate dynamic in a nutshell. Local governments have every incentive to push lease prices higher, further fueling China's real estate bubble, and zero incentive to build low-cost housing for the average citizen

Our problems in America stem from the opposite impulse. Getting low income people into houses. But the fundamental impulse is the same: government can distort markets in ways that will benefit the country. No it can't.

Here is another parallel to the current economic problems in the US.

"With access to almost unlimited no-cost credit from the state-controlled banking system," he wrote, "these behemoths have abused their financial clout and plunged headlong into the real estate market, snapping up high-priced land and investing in high-end residential housing units that now sit empty across the country."

Once you understand this dynamic, it's not difficult to see why China's housing bubble will end badly. Local governments are so heavily dependent on development fees and taxes for their revenues that any fallback in new development will spell catastrophe for city and regional government budgets.

Who will lose when the bubble inevitably deflates?

Residents will suffer because government services will have to be slashed as revenues from development fees collapse.

The Chinese investors who overpaid for grossly inflated luxury condos will suffer massive losses, developers dependent on a fast-rising bubble market will go bust, and somebody will end up covering the losses as bankrupt developers renege on their loans.

Since most of the loans came from government-owned banks, then that "somebody" will be the Chinese taxpayer. Sound familiar?

Yes it does. Here in the US we can name names. Fannie Mae. Freddie Mac. Barney Frank. Chris Dodd. And don't forget Senator ∅bama.

And then there is this effort by China to meet energy saving targets.

BEIJING (AP) - Chinese steel mills and mobile phone factories are being idled and thousands of homes in one area are doing without electricity as local governments order power cuts to meet energy-saving targets set by Beijing.

Rolling blackouts and enforced power cuts are affecting key industrial areas. The prosperous eastern city of Taizhou turned off street lights and ordered hotels and shopping malls to cut power use. In Anping County southwest of Beijing, an area known as China's wire-manufacturing capital, thousands of factories and homes have endured daylong blackouts over the past two weeks.

"We can't meet deadlines for some orders and will have to pay penalties," said Han Hongmai, general manager of Anping's Jintai Metal Wire Co. "At home we can't use the toilet" on blackout days due to lack of power for water pumps, he said.

While the U.S. and Europe struggle with flagging economies, the power outages are symptomatic of China's torrid growth and officials' capricious use of their powers to meet the authoritarian government's goals.

China's economic expansion, which hit 10.3 percent in the latest quarter, blew holes in government efforts to curb surging energy demand, pollution and emissions of climate-changing greenhouse gases. Beijing told local leaders to clamp down and stepped up pressure by sending inspectors to see the order was carried out.

Curbing the production of plant food (AKA greenhouse gases) is an economy killer. Fortunately we live in a free country where Present ∅bama has promised to make the price of electrical energy skyrocket. Different method. Same result.

When the US has problems similar to the problems of a country run by Communist Dictators you know we are in a world of hurt. For the same reason. Central planning is an economy killer. We do have an advantage though. We can vote the bums out.

See you in November.

Cross Posted at Classical Values