I'm gonna sing the Doom song now

December 15, 2011 8:06 PM

China's economy poised to join the rest of us in the toilet. I certainly hope one of you smart people can prove this article wrong.
posted by coriolisdave (84 comments total)

There's only one safe investment left! If it tanks, the end is truly nigh.
posted by The Card Cheat at 8:09 PM on December 15, 2011 [4 favorites]

My favorite part:
A fire-sale is under way in coastal cities, with Shanghai developers slashing prices 25pc in November – much to the fury of earlier buyers, who expect refunds.

You want refunds? You speculated in the property market, driving up prices by purchasing apartments that you left empty for years, and you want others to absorb your losses? What do you think China is, a communist country?

Oh. Wait.
posted by 1adam12 at 8:11 PM on December 15, 2011 [13 favorites]

I don't know whether the article is true or not, but I sure would be interested in ideas as to how a person could invest and make a buck off of it.

Would I short China?! Perhaps...
posted by markkraft at 8:13 PM on December 15, 2011

I certainly hope one of you smart people can prove this article wrong.

Ambrose Evans-Pritchard is just like everybody else reporting on China - he's projecting. One Telegraph article by a non-finance guy with a double-barreled who doesn't speak or read Mandarin does not a Doom song make.
posted by KokuRyu at 8:14 PM on December 15, 2011 [8 favorites]

"You speculated in the property market . . .and you want others to absorb your losses?What do you think China is, a communist country?"

Sounds like pure U.S. capitalism to me.
posted by markkraft at 8:17 PM on December 15, 2011 [9 favorites]

I'm torn. While I'd rather not have the entire world economy in the toilet, I'd also rather not have a hulking monster in the east breathing down our neck all the time and reminding us that the US saw its zenith a couple decades ago, and that it really is all downhill from here.
posted by crunchland at 8:26 PM on December 15, 2011 [1 favorite]

If China's economy goes south it will actually be pretty good for the us. Commodity prices will fall. Chinise imports will be more expensive, making domestic companies more profitable and carbon emmisions will go down.
posted by humanfont at 8:28 PM on December 15, 2011 [5 favorites]

you know what would be cool is if there was a point at which there was not a goddamn horrifying disaster ready to happen at every goddamn moment of the god damn day

i suppose i could live alone in isolation in the fucking mountains but really what is even the point
posted by This, of course, alludes to you at 8:32 PM on December 15, 2011 [61 favorites]

If China's economy goes south it will actually be pretty good for the us.

Repeat after me: it is never a good thing when any economy slows down. Trade goes both ways, and a Chinese slowdown could have negative implications for interest rates on US debt.
posted by downing street memo at 8:34 PM on December 15, 2011 [9 favorites]

I knew I should have sold my Vancouver real estate yesterday...
posted by mek at 8:34 PM on December 15, 2011 [1 favorite]

China has a very strictly controlled economy, with fixed exchange rates. Their inflation is low and getting lower, so they have a lot of room to lower interest rates to stimulate growth.

If that doesn't improve things the government can just print money and build cities to stimulate the economy, at no risk to them. Chinese imports will always be cheap as long as the rates are fixed.

The only real worry is relying on their numbers - who is to say that the government's figures are remotely accurate.
posted by estuardo at 8:39 PM on December 15, 2011 [1 favorite]

If China's short on cash, what happens to the US debts to China?
posted by maryr at 8:39 PM on December 15, 2011

i suppose i could live alone in isolation in the fucking mountains but really what is even the point

The pollution would still get there (and is probably there already) anyway. There is no where on Earth you can live and be really, truly isolated from anyone else.
posted by curious nu at 8:40 PM on December 15, 2011

If that doesn't improve things the government can just print money and build cities to stimulate the economy, at no risk to them.

Can you elaborate on this point a bit more?
posted by vidur at 8:43 PM on December 15, 2011

But with price to income levels reaching nosebleed levels of 18 in East coast cities, it is clear that appartments – often left empty – have themselves become a momentum trade.

Could someone explain this sentence to me? Is "momentum trade" a thing? Or are the apartment forcing a change in momentum? Assume I know just enough finance to be able to follow the average Planet Money podcast.
posted by maryr at 8:45 PM on December 15, 2011 [1 favorite]

Just making the point that money printing will not affect their export competitiveness, as the government have control over the yuan/dollar rate. You can get away with a lot more when you don't follow the usual open-market rules.
posted by estuardo at 8:47 PM on December 15, 2011

I can't say I understand all of this (like, what does "get away" mean in this context), but that's my failing entirely. I need to read more. Thanks.
posted by vidur at 8:57 PM on December 15, 2011

The renminbi has appreciated markedly in the last two months.
posted by flippant at 9:04 PM on December 15, 2011

China's current experiment with capitalism is only 40 years old or so. The government owns all the land in China, every parcel. They can take it at any time, they can order people to move from one parcel to another, and if the economy slows down or stutters, the central government can order the people to work and order them to produce whatever the country needs and can obtain materials for.

Some of the people still in charge, worked with Mao and many of the people think fondly of him and his times.

I wonder how America's view of Tienanmen square would change if they knew a good portion of those students were rallying to bring back the old days of communism?
posted by psycho-alchemy at 9:07 PM on December 15, 2011 [1 favorite]

If China's short on cash, what happens to the US debts to China?

They sell them and investors snap them up in panic. You won't be putting your money in Euros or RMB for safety. If not enough buyers show up the fed does magic to make everything better.
posted by humanfont at 9:10 PM on December 15, 2011

maryr, a momentum trade is where you buy something in the belief that the price is rising, and you can sell it later for a higher price. You're betting that people are rushing into this and the current price is lower than the future price (i.e. the momentum of the current and future buyers will drive up the price). It's speculation drives bubbles, which is the writer's point.
posted by claudius at 9:20 PM on December 15, 2011

*it's a form of speculation that drives bubbles
posted by claudius at 9:21 PM on December 15, 2011

If China's short on cash, what happens to the US debts to China?

The yield on treasuries does not depend on how short on cash the buyer is.
posted by furiousxgeorge at 9:23 PM on December 15, 2011 [1 favorite]

Thank you both on preview, all.
posted by maryr at 9:24 PM on December 15, 2011

Repeat after me: it is never a good thing when any economy slows down.

Depends on your perspective. When economies slow down, emissions decline. And we (meaning humanity), really need the latter to happen.
posted by longdaysjourney at 9:32 PM on December 15, 2011 [2 favorites]

I really should have taken an economics course.
posted by Defenestrator at 9:39 PM on December 15, 2011 [4 favorites]

Sorry, this comment just reminded me of this.

I've got nothing of value to add here.
posted by Navelgazer at 9:48 PM on December 15, 2011

Would I short China?! Perhaps...
posted by markkraft at 8:13 PM on December 15 [+] [!]

Actually, it is incredibly difficult to short anything in China. It is illegal to short stocks on the domestic exchanges, creating huge arb opportunities that simply cannot be realized. For example, the same company dual listed in Hong Kong (where shorting is allowed) may have a 30% greater capitalization on the domestic exchange. Its totally fucked up. Its a case study in wealth creation, with nowhere to actually get the money out. You see it in those crazy arbs, in their real estate, and you see some of the wealth leaking out into Vancouver etc.

If you really want to take a bet against China, I would suggest shorting anything in Australia, whose economy is hanging by a thread and is hugely levered to exporting basic materials to China. Or if thats too exotic, good old fashioned US companies like MCD and YUM (McDonalds and KFC etc) are getting premium multiples based on their ability to grow in China, which might be more difficult going forward.

Of course, if you really want to shit yourself, consider that at 6-7% gdp it seems like they are barely able to keep the population happy. People are willing to deal with the parties crap if they feel they are getting richer, but there will be a point where it does not fly anymore. When does that happen? 3% growth with inflation? 0%? If China pulled just one of these "shut down the port" things our Longshore unions pull from time to time its going to be chaos. I have a pet theory that in general the supply chain has not properly discounted the risk of China unrest.
posted by H. Roark at 9:52 PM on December 15, 2011 [7 favorites]

The real estate price drop is the result of an attempt by China's central government to take some wind out of a growing real estate bubble and inflation (they originally hoped for a 20% drop in home prices, according to analysts). As of a week or two ago, they have reversed course and are now trying to stimulate growth - part of a perpetual balancing act between inflation and growth, rather than something to immediately panic about.

The most recent policy decisions for next year are to stay the course, and GDP projections are at 7.9% growth (just below 8% target). It could all go terribly wrong, and there are (always) worrying signs along with positive ones, but I wouldn't be going all Invader Zim yet.
posted by blahblahblah at 9:58 PM on December 15, 2011 [3 favorites]

you know what would be cool is if there was a point at which there was not a goddamn horrifying disaster ready to happen at every goddamn moment of the god damn day


Unplug. Actual large events only happen every few months and your friends will tell you about them if they are important. (the events, not your friends)

To paraphrase Dave Barry, the news media has correctly predicted 27 of the last 5 major crises.
posted by Tell Me No Lies at 10:05 PM on December 15, 2011 [19 favorites]

Singapore's newspapers keep close tabs on the Chinese economy, seeing as how its just a few hours flight away etc and while I've seen double spreads on the abandoned construction in Inner Mongolia and a slight slowing in real estate sales in the big cities, they've yet to doom and gloom about this. In fact they're taking measures to slow their own real estate prices in order to prevent such speculation.
posted by infini at 10:10 PM on December 15, 2011

I'm all for a slowdown in China. I think their growth is overheated, they are gross polluters, and America could stand to lay off it's chinese manufactured crap binge. it would cool energy prices and allow for a little bit of growth here. will it happen that way? who knows.
posted by ninjew at 10:14 PM on December 15, 2011 [1 favorite]

When economies slow down, emissions decline. And we (meaning humanity), really need the latter to happen.

No kidding. In fact, from the GW perspective, this economic 'breather' is a bit of a blessing in disguise. Cutting down is what all 7 billion of we have to do. From each according to his ability.
posted by Twang at 11:11 PM on December 15, 2011

The property bubble in China cannot be underestimated. You have families with 3 generations, often 4 or more people supporting one single apartment in the city. This is a serious emotional investment. This is nothing like the property bubble in the west. This is much, much bigger.

You think the "American Dream" of a single family home and its destruction in 2007-2009 was big? Imagine if four people pooled their income for one single apartment and have never, in their lives, have taken on any debt. They have never seen a property bubble. This isn't Hong Kong in 2003 who understand what a capitalist recession means. This is mainland China. This is the first real debt property bubble crash.

When four people are supporting a house that is underwater and they cannot legally walk out of their homes, there will be incredible fear. Greed and Fear are the two drivers of the market and I'm not sure we are globally prepared for this kind of economic fear for the domestic Chinese markets.

If you think this can be resolved because they have some central controlled economy, you have far too much faith in central governments. When fear takes hold, even if they removed all economic controls on property, no one will bite and buy houses. There is zero incentives to purchase housing. Everyone that has the means to buy an apartment has already purchased one (including speculators). Market saturation is what causes bubbles to pop, and we've reached market saturation sometime this year. I don't care what kind of incentives you produce, no one will buy because of fear and market saturation, it's that simple. Of course, the earlier the bubble pops the better, but whenever it does, it's always really painful. The property boom for China started around the time the one in the USA ended, in 2008, and it should've been forced out in 2009, but it just kept blowing up due to a lack of places to park capital.

However, because the cities and provinces are funded by property development, we will see severe bankruptcies in local governments. Local governments auction off land and use the proceeds for funding administration (as well as taking a bit off the top for themselves). When the land auction stops, they will require a bailout. While many think that the national China's economic position is strong, they have not considered the serious financial risk in the local governments using land auctions as their primary source of funding.

Of course, that isn't even getting into the political implications of millions of people suddenly going underwater on their only investment for the first time in their lives.
posted by amuseDetachment at 11:14 PM on December 15, 2011 [9 favorites]

I remember when I moved to China there was a pretty popular book called "The Coming Collaprse of China" which utterly convinced me that China would, at the very least, suffer a huge economic downturn within the next five years. This was in 2002, of course, and since then there's been no shortage of such doom-shouters.

The "China's going to take over"/"China's gonna collapse any second now" ratio usually stays around 10 to 1. Anyway, I've read so many damn China collapse articles I can't take any of them seriously. I guess some day one of them's going to be right, but it's just a ridiculously easy article to write and get published, people are always attracted to the contrarian point of view. And with such a huge country there were always be terrible problems to write about, that are legitimate.

I'm basically pretty skeptical of anything written about China not from a highly reputable and expert on that specific region, preferably from a publication like the South China Morning Post in HK or equivalent in Taiwan, Singapore, so that it's not an article about what's going on "way over there".
posted by skewed at 11:20 PM on December 15, 2011 [1 favorite]

The largest Chinese language economic news magazines (Caijing and Caixin) both understand the property bubble as the greatest threat to China's political stability and economy.

I don't even need to bother with links because they're so prevalant, you can do a google search on their website domains with searches for "property bubble" and "land auction". It's the defining topic for the Beijing intelligentsia as well as the average taxi driver in Guangdong. Go to any taxicab in China and ask about the economy. It will immediately go into a debate about property values.

This is different than 2002 (which did end up having a property collapse in Hong Kong but not really in Mainland). In 2002, China was expanding and there was a serious economic shift. You'd be really hard pressed to think that there was any real mass cultural understanding that there was a bubble in China. With this one, everyone is explicitly conscious of it in China. Of course, people have been advocating for a pop of the bubble since 2009, one understands that this is under the implication that the longer it goes in the more dramatic the fall will be. Waiting until 2011-2012 for the bubble to pop has made this a very serious matter at this point.
posted by amuseDetachment at 11:35 PM on December 15, 2011 [3 favorites]

The timing of the Torygraph's article about a Chinese menace, days after Cameron rejected the Euro treaty, sounds like a Bush "Terrorist Warning" alert whenever he had negative news in the press. Yes China is a worry so it's not wrong, but is it imminent, or an immediate distraction.
posted by stbalbach at 11:40 PM on December 15, 2011

If China pulled just one of these "shut down the port" things our Longshore unions pull from time to time its going to be chaos.

Yeah, uh, that just happened.
posted by shii at 11:43 PM on December 15, 2011 [1 favorite]

Ok, very simply, the Chinese are about to go through their first Great Depression. (as opposed to the Great Leap Forward, a very different thing.)

Why? Because that's what bubbles do. An combination of excess optimism and easy availability of money make prices go up. Liquidity chases inflation. When new money is being added to an economy, the people getting that new money usually use it to buy into sectors that are already showing profits. So the price goes up even further, which in turn gets people even more excited, and they're more willing to take on debt to increase investment. So more people buy in, some using the new money coming into the system. That sends up prices further. Each new wave of buyers drives prices even higher, and brings in a new wave of buyers. It's the Greater Fool theory; most of the smart people know prices are too high, but they just keep going up. Even though you're a fool to spend a million bucks on a tract home, eventually a Greater Fool will be along to buy it for a million five, so you'll sign the paperwork.

With a really big bubble, eventually, the least sophisticated actors in the economy will get involved. This is called the Widows and Orphans phase. The very last, most risk-averse people will finally have their barriers overcome, and they'll buy into the exciting new market. They're expecting greater fools still, but there are no greater fools; they are the most foolish of all. And then the bubble starts to pop.

All the same forces that drove prices up in the beginning, in a virtuous cycle, now combine to drive the prices down again. People want out, and are willing to accept losses to do so. That drives prices down, and scares people, so more sell out. The contracting debt positions start to cause liquidity issues, and you can get into outright liquidity crunches and chain reactions of failures, causing severe price deflation everywhere in the economy at once, even things that were only marginally affected by the original runup. There's a desperate scramble for cash, because a huge amount of the debt that was incurred is simply bad. And there is no way it can be made good, but in our modern economy, the governments sure do try.

If everything is left alone, the prices will eventually return to something resembling where they were... usually they will drop something below 'fair value', as measured by market pricing taken over a very long trend line. There will be several very bad years, and people will come out seared and frightened of debt, realizing just how dangerous a tool it is.

People incorrectly think the bust is the problem, and that it's the illness that must be medicated. This is the major fallacy of modern economics. The damage was already taken during the boom, not the bust. It was malinvestment; if the bubble was really big, it was a lot of malinvestment. If the government steps in and tries to keep the prices higher than it should be, generally through flooding the market with more liquidity, it causes all sorts of ancillary problems, up to and including new bubbles in new sectors, which starts a whole new round of malinvestment and yet more damage that must be repaired.

The way to repair the damage is to just let the economy contract. That process of contraction IS the economy getting healthy, discovering what it actually needs to function, as opposed to what it merely wants. It is a very painful process, but medicines for really severe illnesses, like bubbles, are very rarely pleasant. It's the withdrawal symptom from the drug addiction of too much easy money. It is not at all fun. Over the short term, it's extremely painful. But over the long run, it means you can return to health again, where if you stay addicted, you just keep getting sicker.

There are no good solutions to the fallout from bubbles. This is because the bubble itself did the damage, and that damage has to be repaired. The only good solution to a bubble is never to allow one to happen in the first place, and it is there that our central bankers have profoundly, utterly failed, probably the biggest failure of oversight in all of human history. This Chinese bubble popping is just the next phase of global monetary disorder. The root cause is with our central bank, and our original bubble in the late 90s, and into 2001.

As I have said many times, if Alan Greenspan had visited your home personally, piled half of everything you own on the lawn, and set it on fire, he would have done less damage to you than he did during his tenure at the Federal Reserve.

The world is not supposed to be this unstable. And the reason it's unstable is because the foundation is rotten -- they've been undermining the substructure of the global economy, the monetary system, for just about forty years now, and it's giving way with increasing frequency and severity. We're using the power of liquidity to try to manage the economy and keep it stable, which means it can't fix problems. So the rot in the system just keeps accumulating, as we use floods of cash to try to pretend it's not there. We don't get rid of the problems this way; we defer them, and we make them worse. To avoid losing a foot today, we promise a leg tomorrow. Then the next day, we promise a hip to avoid losing the leg. Eventually, we're going to run out of promises.

The Chinese bubble is a direct symptom of our bailout attempts from the 2008 crash here; we flooded the market with dollars, and the Chinese matched us, keeping their currency at par. They imported our inflation and our liquidity, greatly worsening their existing bubble dynamics, increasing the size of their eventual pop and wipeout. The piper has been piping a very, very long time, and he wants to be paid. Will we actually pay him, or will we promise him a third limb if he'll just keep playing?

It's interesting that each new cycle is shorter than the prior one -- our first bubble pop was in 2001, the second was in 2008, and now the Chinese are blowing up in 2011. The European crisis is also related, but it's not as tightly coupled to the issues with the dollar as are the Chinese. They're dealing with indirect fallout of overdriven economies suddenly shrinking, where the US is Ground Zero, with China being joined at the hip.
posted by Malor at 11:48 PM on December 15, 2011 [25 favorites]

I should actually amend that -- in that the Chinese should now go through their first Great Depression, but it's quite possible that the Chinese government will try to stop that from happening. How, precisely, they will react, I don't know, but it's likely to involve propping up failing companies that are politically connected.

This is why the Japanese have never really recovered from their property bubble in the late 80s -- they just never let things fail, so their economy stays moribund.
posted by Malor at 11:50 PM on December 15, 2011 [1 favorite]

fell 35pc
slumped to 12.7pc
fell 5pc
off 60pc

What's this 'pc'? Does The Telegraph not know there's such a thing as a percent sign? It's been on keyboards for 134 years.
posted by Sys Rq at 11:53 PM on December 15, 2011 [1 favorite]

they just never let things fail, so their economy stays moribund.

However, no face has been lost.
posted by telstar at 12:10 AM on December 16, 2011 [3 favorites]

Malor: This Chinese bubble popping is just the next phase of global monetary disorder. The root cause is with our central bank, and our original bubble in the late 90s, and into 2001.


I'm reading an interesting book at the moment that sees the process as starting earlier, with the Mexican and South American sovereign debt bubble in the 70s, which the book claims is linked to the Japaese real estate bubble, then the Asian crisis of the late 80s, which flows into the US dot.com bubble, and then here we are. I'm no economist and can't judge, but it makes exactly the same points as Malor does above.

Also, worth emphasising the other cause of China's problems - their sales (to Europe at least) are way way down due to the crisis here (Financial Times - requires registration, and mentioned in the original article).
posted by Infinite Jest at 12:20 AM on December 16, 2011 [1 favorite]

I was thinking about something, captive in my rolling metal box listening to Marketplace.. when you sign up for debt, like a car loan, credit card, etc, you probably understand that in order to service that debt you have to produce income by performing work. and you do that, for a while. and then you lose your job and continue to TRY to pay off the debt. eventually, you are no longer able to produce income and you are forced to default on the debt. you could try selling other things of value that you own, and sometimes you own enough to service your debts. but what if you don't have anything of value left?

see I think that if goods from China begin costing more in importing countries, Chinese imports become less attractive relative to other options. provided it is an item available from somewhere else. so they have to produce more goods at the same price to compensate. but demand is soft, so either way they lose.

writ large, there's all this debt out there. ordinarily, growth is necessary to service that debt. growth is the work the economy performs to pay for it's debt. since growth is suffering, we're seemingly CREATING money (with less value standing behind it) to service that debt. this seems to be creating more debt, in excess of our capability to service it. there simply aren't the resources available to grow to meet those obligations. so now we seem to be passing the debt football around. it's like a game of hot potato, only everyone seems to be holding on to the potato until they have burnt hands, and then passing it on.

so does the world have to declare bankruptcy? i'm not making a crack, there. and if my logic here is flawed, i'm not gonna be offended if someone points that out.

I'm so fucking tired of saying that we've hit resource limitations
posted by ninjew at 12:29 AM on December 16, 2011 [1 favorite]

If you really want to take a bet against China, I would suggest shorting anything in Australia, whose economy is hanging by a thread and is hugely levered to exporting basic materials to China.

Forgive me, but the prospect of an American saying that our economy is hanging by a thread, is pretty rich...

We are not "levered" to exporting minerals to China. There's no leverage there at all. We do make a shit tonne of money from it, and it's true a downturn in China would affect Australia negatively. However:

a) we are so, so far ahead, economically speaking, to almost every other Western country, we are well positioned indeed to deal with slowing growth.

and b) Not everyone is so concerned about China's growth, including the well-paid advisors and economists they employ.

The CCP well knows how high the stakes are - much higher than any western country - and I must say I feel that a lot of reporting and commentary on China - including here - is undercut with a form of racism that refuses to believe those tyrannical orientals could possibly know what they're doing. A kind of racism that pretty much regards anything from the 'far east' as - inherently - irrational, fumbling, crazy, unsubtle. A caricature, in other words.

Loath as I am to defend the CCP in any respect; this government is as smart as any other, with a degree of central control (in regards to banking and economics, in any respect) almost incomprehensible. This is not to minimise their challenges, but they have a unique arsenal to deal with those challenges, a legion of sharp economic minds, and a potent incentive.
posted by smoke at 1:09 AM on December 16, 2011 [9 favorites]

@ninjew The old debt-based societies had jubilees for precisely this reason: otherwise the burden of debt became overwhelming and dragged everyone into the mire. See David Graeber passim on metafilter.

On way of viewing what has happened in the west over the last decade is precisely that the level of debt has reached the point where the economy is no longer capable of carrying the burden. In the past a jubilee would write off the debt & things would pick up again, but now the holders of the debt have almost total political control & are attempting to enforce austerity on the rest of the economy in order to channel any remaining value into debt repayments. Eventually the economic logic of austerity will eliminate all the remaining surplus value left & the bankers will go under too, but only after they've gutted first the consumer (pretty much already happened) and then the corporate sector (as their customers dry up).

@smoke How much of that wealth is notional property values? It's exactly that kind of thinking that convinced mainstream thinkers that the US economy was in fine shape in 2007.
posted by pharm at 1:55 AM on December 16, 2011 [1 favorite]

Ah great post, but one thing I'd like to point out, following up on KoKuRyu's comment regarding Ambrose Evans-Pritchard's reporting on China. When I was running Credit Risk consulting at one of the ratings agencies I had responsibility for Asia. After a few lessons we learned the hard way - the only way to get clean data on China was to put people on the ground in China. Data is very rough otherwise so you've got to take care making predictions about China (or in general, mind you), whether you're calling boom or bust unless you've got hands on access to data your conclusions are clearly suspect.

In any case, this is something we've been predicting for about 18 months, so no surprise here. I've presented on this topic to several banks and afterwards have a Q&A. Many of my clients were also very suspicious in general about what was going on in China. I can share a public version of the presentation here (subset of what I discuss with clients) that I'm pretty sure I've posted to MeFi before ( I'm pretty busy with Uni these days so don't have time to loop back into prior comments ).

One of the first things you'll notice is its largely based on papers by Chinese academics that I know (Wu & Deng, a few others) so fairly decent data.

Key points from the presentation:

• Property in many cities has been clearly overvalued for at least two years - I first presented this paper in July 2010, so this was building for a while
 
• Ratio of house prices to rent has been surging, 65% from Q1 2007 to Q1 2010 in one city studied
 
• Overall housing was becoming less affordable even as supply sharply increased
 
• The People's Bank of China (PBC, their Central Bank) was trying to reign in the new lending via a mix of rate hikes and increases in reserve requirements over a roughly twenty four month period, and looking at their bios they are a fairly well skilled bunch, some are Western educated, many have worked in banking so these are not just party apparatchiks - they got bona fides but are dealing with an enormous problem
 
• As recently as Q1 2010 (last period of the study) at least new 70M flats were unoccupied, with a further 50M more due to be completed by Q4 2010
 
• The Chinese economy has been wobbly since Q2 2010, we've seen budge deficits from time to time and repeated spikes in SHIBOR (Shanghai Interbank Offer Rate, what banks are willing to lend at to other banks for short term, unsecured loans - LIBOR for the Chinese market)
 

So lots of signs this property collapse was imminent. I think I've given this particular presentation about two dozen times, always many Chinese in attendance and not one contradicted the claim of overvaluation, or a bubble .

Also PBC knew this and was repeatedly intervening, increasing both interest rates and reserve requirements. As recently as June they were increasing reserve requirements and now now they have just started cutting, lowering reserves from 21.5% to 20% (compare to much lower US reserve requirements) .

Oh yeh something else folks should have been looking at: stock markets in all four of those BRIC nations have been getting pounded on this year. The Shanghai composite is off about 24% but Russia is the big loser, down a whopping 38%.

Unfortunately, action in China is gonna put stress on the single largest bubble we've ever seen, US Treasuries.

These forces are clearly deflationary, and I know I've posted this link to MeFi before, Fisher's Theory of Debt Deflation.

In general one has to be very careful with predictions; there were lots of cries of "hyperinflation" when the US started Quantitative Easing, but we haven't seen it and are unlikely to given the excessive deflationary forces we're witnessing. This is a very strange market, I mean bonds have outperformed shares and even gold is getting pounded on.

Markets are predicting deflation, not inflation in other words.
posted by Mutant at 1:57 AM on December 16, 2011 [36 favorites]

Fairy stories about China's 'economic crisis'

...attempts are being made to convince businesses that China faces an 'economic crisis' on the same scale as that hitting the European Union (EU) and the US. This view is factually nonsense, as any comparison of economic data shows. In the four years to the latest data the US economy grew by 0.5 per cent, the EU's shrank by 0.3 per cent, and China's economy grew by 42.2 per cent. Given such comparisons claims that China is suffering from 'crisis' is rather like saying the US has cholera, the EU has typhoid, and China has a cold and therefore they are basically in the same situation as 'all are ill'. Such claims destroy rational scales of comparison and are therefore wholly misleading in predicting what will happen.

Christ knows if he's right, but the figures are something in themselves and his blog presents a less panicked perspective.
posted by Abiezer at 2:13 AM on December 16, 2011 [1 favorite]

markkraft: I don't know whether the article is true or not, but I sure would be interested in ideas as to how a person could invest and make a buck off of it.

ETFs are an option, but due to path dependency (and regardless of performance), they lose value when held for longer periods of time. Here's a 3x bear as an example. I've always felt a better play is to short ETFs that are long, rather than buy the short ETF itself. That way you're betting in the direction you wanna go and since they're losing value intrinsically (as mentioned), it's win-win, so to speak.

Another way would be to short Chinese stocks listed on US exchanges. Thing is, real estate firms like XIN have already lost most of their value... and they pay a dividend to boot, which means you'd be on the hook for that.

You could also short companies in the US that benefit from Chinese demand - Rio Tinto or some large oil company, for example.
posted by gman at 3:23 AM on December 16, 2011

Short ETFs are generally only designed to be held for a few days at most. Because they rebalance every day (usually) their returns over longer periods will differ markedly from what you might naively expect.
posted by pharm at 3:35 AM on December 16, 2011

smoke: consider that China and India are your first and third biggest export markets, and both are reportedly heading for a crash. Consider that, while Australia has some of the highest rated banks in the world, those banks are dependent on raising funds in the international markets, which are basically closed. When your banks need to refinance debt they will be doing so at higher rates; at the same time, they'll have less money to lend because of higher capital requirements. Which implies a credit tightening in the real economy, which will affect company spending and employment.

(I'm not gloating here, I'm a Kiwi and any downturn in Aus would affect us, but I really think there's a good chance of things turning bad for you: in a global downturn, I can't see why one country would be immune).
posted by Infinite Jest at 3:40 AM on December 16, 2011

Personally I'm rebalancing away from mining, oil and heavy equipment manufacturers. Cash looks pretty good.
posted by humanfont at 3:45 AM on December 16, 2011

I have a pet theory that in general the supply chain has not properly discounted the risk of China unrest.

As a labor historian, I agree.
posted by vincele at 3:54 AM on December 16, 2011

THE SKY IS FALLING! THE SKY IS FALLING! it simply has to be falling for all of you because its fallen for us already and we're not going to stand for it if we're the only ones its falling on THE SKY IS FALLING ETC
posted by infini at 4:05 AM on December 16, 2011

Do people not realize that it's physically impossible consume more stuff then we produce?

The timing of the Torygraph's article about a Chinese menace, days after Cameron rejected the Euro treaty, sounds like a Bush "Terrorist Warning" alert whenever he had negative news in the press. Yes China is a worry so it's not wrong, but is it imminent, or an immediate distraction.

The Euro treaty was a really bad idea. Why should the UK sacrifice because of mistakes made in the Eurozone, which they're not even a part of?

and b) Not everyone is so concerned about China's growth, including the well-paid advisors and economists they employ.

Hahahah. This has to be one of the funniest sentences typed in a while. Well paid advisors aren't worried? Neither are their economists you say!? Well, certainly well paid people and economists are hardly ever catastrophically wrong.

Australia isn't having a lot of economic problems, I don't know why people would say it is. But still, the fact that people are complacent isn't really a guarantee of anything.

Loath as I am to defend the CCP in any respect; this government is as smart as any other, with a degree of central control (in regards to banking and economics, in any respect) almost incomprehensible.

The problem is lots of 'smart' governments have been making huge mistakes. The most 'technocratic' government out there is probably the EU, and they've been fucking up left and right. It's likely that mistakes being made by the ECB could blow up the entire euro currency zone. The question is whether or not people -- in the Eurozone or China or wherever are going to be able to admit they were wrong and change course. It's a difficult thing for people to do, regardless of how smart they are overall.

The failure is human nature, not economic modeling. If the models say "Do X" and they don't want to do X, they'll convince themselves the models are wrong and do something else instead.

The interesting thing is that unlike western leaders the Chinese government actually seems aware that there is a bubble and is actively trying to slow things down. That's very much unlike the response to the housing bubble here in the U.S, for example. But who knows if they'll really be able to do it.

The big thing is that a lot of the houses people are buying aren't nearly as leveraged as in the U.S. If the prices go down, the owners get screwed, but they isn't going to be nearly as much follow on effect as people try to unwind debt. If you look at the tech crash at the end of the 1990s, it didn't have this massive collapse go along with it because they stocks weren't really that leveraged.
posted by delmoi at 5:07 AM on December 16, 2011 [1 favorite]

Personally I'm rebalancing away from mining, oil and heavy equipment manufacturers. Cash looks pretty good.

Cash?
Are you being sarcastic?
posted by DonnyMac at 5:17 AM on December 16, 2011

Why should the UK sacrifice because of mistakes made in the Eurozone, which they're not even a part of?

Nobody has yet explained what the UK was supposed to sacrifice in the proposed treaty. The budgetary constraints were placed only on the Eurozone members.

stbalbach has a point: the British press, in particular those segments close to the Tories, is full of stories about how everybody else's economy is doomed. As opposed, of course, to the British economy, where everything must be hunky-dory at the moment. It's starting to look like a diversionary maneuver, and the governor of the Bank of France had something to say on that subject just yesterday (unsurprisingly sparking a counterbarrage from the patriotic British media).

Not to say that the Chinese bubble and generally opaque accounting aren't generally scary, mind you.
posted by Skeptic at 5:25 AM on December 16, 2011

It's tough to make predictions, especially about the future.
Yogi Berra
posted by bukvich at 6:29 AM on December 16, 2011

Depends on your perspective. When economies slow down, emissions decline. And we (meaning humanity), really need the latter to happen.

Yes, because we've made a ton of progress on getting a long-term, sustainable solution to the emissions problem in place during the current recession.
posted by downing street memo at 6:32 AM on December 16, 2011

At this point I have no idea how to protect my IRA.
posted by mecran01 at 6:42 AM on December 16, 2011

The interesting thing is going to be watching all of the ripple effects; companies that people might think are wholly unrelated will find themselves in significant trouble as consequences start to slosh around the market.

For example, I'm glad I'm not holding a lot in Sandvik.

Elevator equipment suppliers are going to be interesting as well.
posted by aramaic at 6:44 AM on December 16, 2011

Here is an excellent and relatively impartial summary of the UK/EU position.
posted by cromagnon at 6:59 AM on December 16, 2011

Cash? Are you being sarcastic?

Cash makes sense in a deflationary environment.
posted by exogenous at 7:31 AM on December 16, 2011

At this point I have no idea how to protect my IRA.

Any strategy to reduce risk will often involve diversification and research. There are many funds out there that will let you be exposed to any number of markets and you should look into the performance of each of them individually. Spread money out between equities, bonds, debt instruments, real estate and plain old CDs/Treasuries.
posted by Talez at 8:05 AM on December 16, 2011

My understanding was that the Chinese "Economy" was based upon numbers that largely existed in the collective imaginations of the Politburo (or whatever they call the central body in China) and that serious economists not in the pocket of said imaginations inside China had been sounding the alarms for ages.


I mean really, Ghost cities? It was only a matter of time.
posted by NiteMayr at 8:08 AM on December 16, 2011 [1 favorite]

you see some of the wealth leaking out into Vancouver

That's part of the reason that housing costs for a detached bungalow are at 91% of typical household income (PDF—see page 4), which is so clearly in bubble territory it's no longer even something to chuckle about. Especially when you see this insanity seeping into Toronto (where the average house price went up 2.1% in the past month), and you would like to be able to afford a place to live before you turn 50 (sigh).

I feel especially sorry for native Vancouverites who can't afford to live in the city where they grew up.
posted by one more dead town's last parade at 8:34 AM on December 16, 2011 [2 favorites]

...attempts are being made to convince businesses that China faces an 'economic crisis' on the same scale as that hitting the European Union (EU) and the US. This view is factually nonsense, as any comparison of economic data shows. In the four years to the latest data the US economy grew by 0.5 per cent, the EU's shrank by 0.3 per cent, and China's economy grew by 42.2 per cent.

Um, how does this disprove the theory that China is in a major housing bubble that's about to pop?
posted by msalt at 10:01 AM on December 16, 2011

Do people not realize that it's physically impossible consume more stuff then we produce?

pfft. i been doing it for years.
posted by quonsar II: smock fishpants and the temple of foon at 10:03 AM on December 16, 2011 [1 favorite]

Do people not realize that it's physically impossible consume more stuff then we produce?

This seems like a rather naive statement... most of the stuff we produce and consume is not physical and thereby not limited in this way. It's trivially true if you're willing to look at trillions of dollars in transactions in financial instruments and say "well nothing is physically being produced or consumed, so this doesn't really matter" but at that point the premises you're working with would seem to be unable to analyze the issues being discussed in this thread.
posted by XMLicious at 11:13 AM on December 16, 2011

Cash makes sense in a deflationary environment.
Well, I'm no economist, but perhaps it makes sense to stay invested in some heavy machinery - say, a rotary intaglio printing press?
posted by DonnyMac at 12:48 PM on December 16, 2011 [1 favorite]

and I must say I feel that a lot of reporting and commentary on China - including here - is undercut with a form of racism that refuses to believe those tyrannical orientals could possibly know what they're doing.

So, spotting a bubble is now racist? Shit, why didn't Bernanke think of that?
posted by telstar at 1:04 PM on December 16, 2011

form of racism that refuses to believe those tyrannical orientals could possibly know what they're doing.

I don't think it's racism to say "Hey, those guys over there are going to fuck things up exactly the same way we did here!"

Kind of the opposite of racism really. More of a "we all share the human bond of being dipshits" thing.
posted by Tell Me No Lies at 2:48 PM on December 16, 2011 [5 favorites]

I feel especially sorry for native Vancouverites who can't afford to live in the city where they grew up.

That would be me, and everyone I know. The real question now is what effect would a domestic housing market collapse in China have on Chinese money in the Vancouver market? Would we have to wait for it to hit bottom before it becomes attractive enough to sell one condo over here to buy ten over there, or will the instability make the apparent safety of parking money in the Canadian market all the more desirable into the further future? The quantity of excess capacity in China is so mind boggling I could imagine scenarios in which their property markets never substantially recover, and I can't imagine the effect of that being anything other than more of the same for property prices over here. The unaffordability of housing in Vancouver is so monstrously out of proportion with wages that there's no way the situation can be tenable, and yet, though one day the bubble must burst, I can't foresee when or how that is ever going to happen.
posted by kaspen at 4:53 PM on December 16, 2011 [1 favorite]

If you really want to take a bet against China, I would suggest shorting anything in Australia, whose economy is hanging by a thread and is hugely levered to exporting basic materials to China.

If Chinese economic problems hit the Australian economy, could it perhaps be a good thing for Australia? The Australian economy has been pumped up by the mining boom, and consequently, Australia is in the throes of Dutch disease; mining money has pushed prices and costs of living up, making any industry not related to mining, or essential for supporting a mining economy, economically impractical. As the dollar comes down, Australia would once again become an affordable place for other industries.

OTOH, were the Australian governments more long-sighted, they'd have invested some of the mining largesse in a Norwegian-style national trust fund, or at least used it to build up infrastructure for the future; improve the educational system, invest more in research, not to mention hedging against high future oil prices with developments such as solar power plants and high-speed rail links. But it's Australia, the Lucky Country, the home of "no worries" and "she'll be right mate", so long-term planning is not part of the lexicon.
posted by acb at 6:41 PM on December 16, 2011

The return of Mutant! Yay!
posted by Slithy_Tove at 7:41 PM on December 16, 2011 [2 favorites]

Yes cash. I'm not being sarcastic. I've hedged against a rapid rise in inflation; but generally I expect deflation. Cash is king in that kind of scenario.
posted by humanfont at 8:11 PM on December 16, 2011

Do people not realize that it's physically impossible consume more stuff then we produce?

This seems like a rather naive statement... most of the stuff we produce and consume is not physical and thereby not limited in this way.

How does that refute what I said? If people are consuming things that can be produced in infinite amounts, then those things cannot be consumed in amounts that can't be produced.

So like I said, it's impossible to consume more stuff then we produce, obviously. There are things like resource exhaustion, but so far that's not having much to do with the current economic problems. We haven't (yet) run out of oil Global warming isn't (yet) having that big of an impact.

It's trivially true if you're willing to look at trillions of dollars in transactions in financial instruments and say "well nothing is physically being produced or consumed, so this doesn't really matter" but at that point the premises you're working with would seem to be unable to analyze the issues being discussed in this thread.

I'm convinced quite a bit of the 'discussion' in this thread is pure nonsense.

All this crap about how we, as a planet are 'living beyond or means'. Obviously Ecological issues are a problem but none of that is being calculated into these debt numbers. So how does it even make sense to say that the entire planet is 'living beyond it's means'? How can the entire planet live beyond it's means financially? It's not even logical possible. Everything you consume had to be produced somewhere, by someone.

If you think the premises are wrong, then what are the actual premises you're working off?

This isn't to say China isn't in a bubble. It probably is. But there's a lot less leverage there as well. People aren't buying all these condos don't need to rent them out to pay off mortgages, so the fact they sit empty doesn't matter as much as they would in the U.S.
posted by delmoi at 9:54 PM on December 16, 2011

For example, in my conception a work of intellectual property is produced once but consumed more than once. Or something like borrowing against future earnings would seem to me like an act of consumption not balanced by an act of production.

If you're saying that any non-material thing of value is something that can be consumed an infinite number of times, then your statement is true in that any one of those things being produced once is more than can ever be consumed, but that again seems like a trivial statement.

But in any case, yeah, lots of nonsense going on in this thread. On the other hand, I too am glad to have a visit from Mutant.
posted by XMLicious at 10:28 PM on December 16, 2011

acb: Aussie government set up a Sovereign Wealth Fund (which is what you're talking about, I think) in 2004. A lot smaller than the Norwegian one, but at least it exists.
posted by Infinite Jest at 3:11 AM on December 17, 2011

in my conception a work of intellectual property is produced once but consumed more than once.

Yes. Which only reinforces my point. If it hasn't been produced, you can't consume it. If the 'production cost' of something like IP is zero (or close to zero) then you can consume an unlimited amount of it without increasing the amount of 'production' that needs to happen.

but that again seems like a trivial statement.

Yes, it's obvious but some people in this thread seem to think that it's not true, that we're "living beyond our means" or some other nonsense. But we're not consuming things that haven't been produced.

Or something like borrowing against future earnings would seem to me like an act of consumption not balanced by an act of production.

Uh no, borrowing is not consumption. It's consumption when you actually spend the money you borrowed. You can only spend it on things that other people are producing. If you just stick the money under your mattress, then you're not consuming.
posted by delmoi at 9:24 AM on December 17, 2011

So, as I was saying above, this means that the creation of any single one of these infinitely-consumable items in your framework, like the screenplay for a Michael Bay movie, results in the production of more than can ever be consumed in all of human history. Like I said, that's a trivially true statement, but I don't think it's of use in analyzing any of these economic issues.

If spending money is an act of consumption, what produced things are being consumed when you spend it on a financial instrument composed of sub-prime mortgages, or a stock share of a company that is in the red i.e. has more debts than assets, or when you go to a casino and gamble it?

Anyways, I'm not finding any instance of "living beyond our means" in the thread above before you mention it but I would expect that anyone using it is referring to consumption of something at an unsustainable rate rather than the consumption of non-existent or non-produced things. That's what it usually means when you're talking about a person or a family living beyond their means.
posted by XMLicious at 3:56 PM on December 17, 2011

delmoi: Everything you consume had to be produced somewhere, by someone.

Um yeah, I'll second the notion that there's a whole lot of nonsense in this thread, so I may as well contribute to it and point out that I recently ate a fish. It was produced in a nearby lake, by some other fish. In warmer seasons there's actually a fair amount of food around here that wasn't produced by any human hand, all you have to do is reach down and pick it. Practically nothing you consume doesn't have some component that didn't come from the outside of this economic system. You don't really have to "live alone in isolation in the fucking mountains" to be sufficiently isolated from the global economy that you don't really have to care if they have a real estate bubble in China, but I can't imagine how isolated you have to be to forget that we collectively consume a whole lot more than we produce.

Mutant: Unfortunately, action in China is gonna put stress on the single largest bubble we've ever seen, US Treasuries.

Yeah, now the end of *that* one will be interesting. Hope they give me a few more years to get ready.
posted by sfenders at 5:51 PM on December 17, 2011

The End of the Chinese Dream: As China's economy continues to trend downward, Beijing's elites are sparking a new, palpable frustration in the general population.
posted by homunculus at 1:39 PM on December 23, 2011

Also known as "Welcome to the new system, same as the old system."
posted by Tell Me No Lies at 8:26 PM on December 23, 2011