Sunday, November 3, 2013

Will The Chinese Credit Bubble Burst Soon, Toppling The Evil Chinese Regime?

Incredible article on the Forbes website: "In China There's Not One City Without Terrifying Stretches Of Empty Houses".

"Over the last two years of traveling constantly in China, I can say that I have not seen a single city, town, or hamlet without massive empty housing stock. A colleague, on two trips crossing about 1,500 kilometers overland, said that he was not out of sight of empty buildings even once."
This is a must read article. She says there are cities of a million people with 200,000 units of housing for sale. Also,
"In general, the smaller the city, the higher the proportion of multiple-unit ownership. Home ownership rates in one mid-size city in Hebei Province, according to a local developer, is 200%. A developer in Jinzhou, Liaoning said that at least half the city’s population owned two or more units. In many cities, white-collar employees, especially in banking and finance or property, routinely have four or five units."
I am not sure whether to believe this. If it is true, it means that a country 3x the size of the United States has a far bigger real estate bubble than the U.S. did in 2006. That would mean it is only a matter of time before the inevitable devastating crash.

This construction bubble would explain why commodities prices have been bid up so much. That would mean that Grantham and the inflationists are wrong; that we are at the end of a commodity upcycle not the beginning of one. It would mean that you wouldn't be able to give copper or iron ore away. You'd see true commodity price collapses as in the Great Depression. The effects would spread around the world: Chile and Australia with their mineral exports.

A Credit Bubble Stocks correspondent writes in,
"We recognized this misallocation several years ago. Chinese political leaders skilled at climbing to the top of piles of other peoples' bodies, but without technical, scientific, or true economic imagination used political access to credit to build useless, but easy-to-understand objects."
Another correspondent writes,
"I am Australian. I was over there for a conference in October of 2011. I had already been monitoring the Chinese housing bubble for a year at that stage and was shocked to see how much construction had taken place. I still follow it closely and also supply articles on the Australian and global markets to an expert who writes an annual report on housing affordability. You might also find this useful. It shows what China's demand for Australian resources has done to the price."
This correspondent provided photos:




Can anyone else share observations on China?

5 comments:

Taylor Conant said...

I can't wait to do some econodisaster tourism in Sydney and Santiago!!

Stagflationary Mark said...

This construction bubble would explain why commodities prices have been bid up so much. That would mean that Grantham and the inflationists are wrong; that we are at the end of a commodity upcycle not the beginning of one.

For what it is worth, I started buying EE Savings Bonds a few years ago. Guaranteed to double if held to their 20 year maturity. Works out to 3.53% per year, which is a relative value compared to their 20-year treasury counterpart. Should interest rate spike higher one can cash them out after a year with no loss in principal. Won't get a good return if that's done (roughly 0.15% counting the penalty) but would definitely be better than the capital loss the 20-year treasury holder would experience.

This coming from a guy with Stagflationary in his name. Go figure. The naming concept dates back to 2004 though. Although stagflationary investments have done well since then (oil, gold, silver, TIPS, and I-Bonds), I would have preferred Stagnationary. Nominal treasuries have done well too clearly.

Anonymous said...

Mr. TIPS,

Yikes: http://illusionofprosperity.blogspot.com/2013/10/help-wanted-low-pay-high-risk.html

Wow: http://4.bp.blogspot.com/-nxdQn0Pf4uw/UmoNDGW02hI/AAAAAAAAMtw/EnQAMcGAbkg/s1600/Real+Religious+Construction+Spending.jpg

CP

Stagflationary Mark said...

CP,

I think the next bull market will be in yikes and wows. D'oh!

Anonymous said...

" If it is true, it means that a country 3x the size of the United States has a far bigger real estate bubble than the U.S. did in 2006. "

Agree... Large complex systems like this do not operate on simple cause and effect scenarios like that. Similar to the theme that large Fed balance sheet expansion automatically = home run gold trade.

Notably, the US crash had as much to do, if not more, w/overall leverage that was built up in the real estate asset class, and up stream. I have not yet seen anything suggesting that the chinese homeowner is similarly leveraged, or approaching a range to be comparably leveraged. Weakly, i'll add a qualifier that i'm not expertly knowledgeable on the china situation outside of what i get from the buy/sell side.


M_K