Decision time for China

June 21, 2012 9:19 PM

"Dwarfing even the $2 trillion borrowed for the Railway Ministry’s high-speed networks since 2008, and the thousands of kilometres of 4–6 lane toll roads with barely a vehicle on them, China’s building binge is the most striking example of what Prime Minister Wen Jiabao famously, but impotently, denounced in 2007 as the country’s “unbalanced, unstable, uncoordinated and unsustainable” model of economic development. Now, with house prices and sales sagging in response to government restrictions aimed at deflating history’s biggest ever property bubble, and with local governments as deep in bad debt as the developers, I asked the businessman what was to prevent the bubble actually bursting, in a spectacular financial explosion? "
posted by vidur (46 comments total)

is answer was that it wouldn’t happen. A lot of these empty apartments, he said, had been bought by Chinese families as investments, and they would patiently hang on to these speculative purchases because interest on savings was derisory. Secondly, although some developers would go to the wall, the bubble would simply not be allowed to burst for fear of public anger as well as economic chaos. China had massive reserves if need arose, he said, and would not hesitate to bundle nonperforming loans off into a state “bad bank”. Its plans to build 36 million “affordable” homes by 2015 would also help to offset faltering private sector demand. When in a hole, in other words, the Party keeps digging.

Then the businessman added: “Look, I don’t lose too much sleep over China’s economic troubles; but I do worry, tremendously, about a political explosion tearing the place apart”.
posted by KokuRyu at 9:22 PM on June 21, 2012

Looks like they learned perfectly from us!! Mazel Tov!
posted by spicynuts at 9:24 PM on June 21, 2012 [1 favorite]

KokuRyu: "A lot of these empty apartments, he said, had been bought by Chinese families as investments, and they would patiently hang on to these speculative purchases because interest on savings was derisory. "

Huh. China has a Florida.
posted by schmod at 9:47 PM on June 21, 2012 [5 favorites]

"China’s internal security budget is now bigger even than its military expenditure.. Nearly 200,000 protests against injustice and abuses of power, some large-scale and violent, are expected this year. "
posted by stbalbach at 10:00 PM on June 21, 2012

The Macroeconomics of Chinese Kleptocracy
posted by Bwithh at 10:01 PM on June 21, 2012 [4 favorites]

the bubble would simply not be allowed to burst for fear of public anger as well as economic chaos

Look, when you're dealing with a mania, you don't get this option. You do NOT. You can delay the popping of your bubble for awhile, but you can only do that by doubling down on the original bad bets, making the ultimate destruction much, much worse.

Bubbles are the equivalent of using thermonuclear weapons against an economy. The damage they do is immense, and trying to dodge that damage increases it. By the time the economy realizes that it's really messed up and is in deep trouble, the damage has already been done, and all the pain that ensues is the process of unwinding stupidity. It's the withdrawal symptoms after a prolonged drug high.

The answer to painful withdrawal symptoms is never, ever, to increase the dosage of the original drugs. But that's how governments always try to bail these things out. They just increase the addiction to debt and consumption, and make it even more difficult for savers to make any return on their capital. They can get very little for lending their wealth tokens to others, because they are competing with unlimited supplies of the exact same tokens, created for free, by the central bank.

Fundamentally, if you have to work to get something, you can never price it as cheaply as someone who can create it for free. This is why you're not making anything on your savings; your interest is being stolen and given to banks.

The Chinese economy is going to crash. It's going to be an epic wipeout, and it's going to cause a huge deflationary wave all over the world. And, in response, governments everywhere are going to start printing money like crazy.

The problem originates in the US; since about 1992, each time we've gotten into any kind of economic trouble, our answer has been to print money. And, as each crisis is averted, the printed money has caused new distortions and bubbles elsewhere in the economy, false enthusiasm caused by a drug high. Each wave of "liquidity injection" set off new waves of debt issuance, debt that the underlying economy cannot fundamentally repay, a fact that's hidden from the economy by the liquidity sloshing around. So the entire world economy has gotten itself into an incredibly unbalanced, precarious state, and it gets more unstable by the day.

So we'll see a huge attempt at deflation as debts try to go bad, as the economy tries to get healthy again, and governments will step up and stop the return to health at any cost.

Withdrawal is painful, politically terribly unpopular. Clearly, the only answer is more drugs. Getting out of the hole won't get politicians re-elected, so dammit, keep digging!
posted by Malor at 10:19 PM on June 21, 2012 [4 favorites]

This guy has been talking about real estate bubble in China for a while now. Remember, this year is leadership transition for top communist party posts. The bubble won't burst at least until Oct 2012. Apparent normalcy for be kept until then.
posted by Carius at 10:22 PM on June 21, 2012

Witnessing on a daily basis how badly the West reports on Japan (it's laughable, really), I tend to take these sorts of reports with a grain of salt. The only way to get the real story is to roll up one's sleeves and read the source material, be it government reports, scholarly documents, or vernacular media.
posted by KokuRyu at 10:37 PM on June 21, 2012 [2 favorites]

Everyone who would like to see bankers executed should look to China. It is only a matter of time.
posted by b1tr0t at 10:38 PM on June 21, 2012 [2 favorites]

Given that a lot of the Chinese property bubble seems to have spilled over to Toronto and especially Vancouver (but nobody really knows to what extent), this could be interesting.
posted by one more dead town's last parade at 10:59 PM on June 21, 2012

...and Australia, omdtlp.
posted by panaceanot at 11:11 PM on June 21, 2012

I for one am tired of seeing China just copy everything we invent in the West. The burst of the housing bubble? That was our idea!
posted by twoleftfeet at 11:39 PM on June 21, 2012 [2 favorites]

Urgh, not the inflation panic again.

Yes, inflation can be a serious problem for an economy. So can unemployment. So can lack of growth. And its those problems that are actually afflicting us.

It's all very well to be wary of the bears in the woods, but not so much when there's a lion gnawing your arm off and a tiger chewing on your foot...
posted by TheophileEscargot at 11:52 PM on June 21, 2012 [3 favorites]

they would patiently hang on to these speculative purchases

Keep the bulbs. They will bloom again one day.
posted by benzenedream at 11:54 PM on June 21, 2012 [3 favorites]

Inflation sucks if you are a retired person living off savings or a dilettante living on inherited wealth. It is substantially better than deflation if you are a working shlub with a mortgage or student debt.
Better to take the lower unemployment, improved growth and inflationary risks than sit by for fear of inflation.
All that said, current central bank policies centered around banker welfare are not working, and to my mind increase the risks Malor is talking about with no corresponding boost to the economy/employment.
posted by bystander at 1:25 AM on June 22, 2012 [4 favorites]

A lot of these empty apartments, he said, had been bought by Chinese families as investments, and they would patiently hang on to these speculative purchases because interest on savings was derisory. Secondly, although some developers would go to the wall, the bubble would simply not be allowed to burst for fear of public anger as well as economic chaos. China had massive reserves if need arose, he said, and would not hesitate to bundle nonperforming loans off into a state “bad bank”.

As a Spaniard, this sounds dreadfully familiar.
posted by Skeptic at 1:40 AM on June 22, 2012 [3 favorites]

they would patiently hang on to these speculative purchases

And when (if) the dust settles they'll return to discover that their investment has probably collapsed anyway, because cheap, poorly constructed housing will fall apart at a fast clip especially if not occupied. Ghost estates in Ireland are already disintegrating; unless China is a country magically protected from the elements it won't matter how much patience investors have.

Anyone in Ireland, Spain, or Portugal could give them all good advice on precisely how much to trust experts who claim there can be no collapse of the housing market becuase of some wondrous national element that allows their country to somehow be different.
posted by lesbiassparrow at 1:44 AM on June 22, 2012 [3 favorites]

Urgh, not the inflation panic again.

Look, the deflation scare is because of the prior inflationism. All the money printing is causing the instability and bubbles and crashes. It's not the cure, it's the disease.

You make it sound like it's an either/or proposition, but when we print money like this, we're issuing systemic debt, with the goal of encouraging private actors of taking on even MORE debt. You can't treat a debt problem with more debt, just like you can't treat a heroin addiction by ever-increasing doses of heroin.

Well, okay. You CAN treat both problems that way. But you won't get the outcome you probably want. We do avoid today's withdrawal symptoms, but we worsen the addiction, and the eventual withdrawal down the line. The bailouts and money printing increase the deflationary pressure over the longer term, while temporarily decreasing it in the present. We avoid dealing with the problem now, but the problem only gets bigger.
posted by Malor at 2:30 AM on June 22, 2012

Malor seems to be in particularly Austrian form today. Which is awesome.
posted by valkyryn at 5:46 AM on June 22, 2012 [1 favorite]

Debating growth in China

Now, it seems, the expected returns to investment are so low that even cheap capital and socialized credit risk is not enough to tempt privileged borrowers into borrowing and investing. This fact alone should worry those of us who are still not yet convinced that China has a serious investment problem. Over at The Economist there is a long section on the Chinese economy in the current issue, which is well worth reading because it puts the bull case very intelligently, but it does so in part by making a distinction between "over-investment" and "mal-investment" which I think is irrelevant. The problem is the sustainability of debt and the cost of servicing it relative to the economic wealth generated by investment, and this occurs whether China overinvests or mal-invests...

I suspect that Beijing has a few arrows left in its quiver. I think that current loan demand may indeed be low, but if Beijing were simply to force local governments (or allow them, since they anyway love to invest bank money wantonly) to engage in another round of infrastructure investment, bad as that may be for China's eventual rebalancing, I think it would cause another spurt of growth in the short term...

I wanted to mention a very interesting study... "State-owned enterprises (SOEs) monopolize key industries and markets in the upstream, whereas the downstream industries are largely open to private competition... We show how the upstream SOEs extract rents from the liberalized downstream sectors in the process of industrialization and globalization. It implies that the unusual prosperity of SOEs in China can be merely a growth-undermining symptom of the incompleteness of market-oriented reforms rather than a proof of their efficiency dominance over non-SOEs."

...this explains why their profitability over the past decade has been increasing rather than decreasing, as one would expect. Monopoly pricing, of course, means that profitability does not arise from greater efficiency but rather from the implicit ability to tax households, and unfortunately rebalancing requires that among other things we undermine the ability of SOEs to remain profitable.

Why is this important? It may be important in part because it means that characteristics of the Chinese economy that force up the savings rate by transferring wealth from the household sector to the state sector are so deeply embedded in the economy that those of us who continue to be very pessimistic about the ease with which China can transition to a consumption-led economy may very well be right.

viz. A discussion about China with James Fallows of The Atlantic and author of "China Airborne" & China's Continuing Challenges (also btw Mongolia's Geographic Challenge, cf. Mongolia (China) fact of the day)
posted by kliuless at 5:55 AM on June 22, 2012 [2 favorites]

The Chinese economy is going to crash. It's going to be an epic wipeout, and it's going to cause a huge deflationary wave all over the world. And, in response, governments everywhere are going to start printing money like crazy.

serious economics is a bit harder than that. what's your forecast for the timing of this epic crash? the specific sequence of cause-and-effect that will lead to it?
posted by moorooka at 5:55 AM on June 22, 2012

It's all very well to be wary of the bears in the woods, but not so much when there's a lion gnawing your arm off and a tiger chewing on your foot...

Sometimes you just gotta amputate.
posted by valkyryn at 6:05 AM on June 22, 2012

serious economics is a bit harder than that.

But fringe economics is so much more fun!
posted by one more dead town's last parade at 6:37 AM on June 22, 2012 [2 favorites]

So the powerful and handsome hand of a dynastic princeling had uncovered a poisoning plot by the princeling's wife and was forced flee his guard or be arrested?

The Chinese government might have thought they could get away with this shit from George R.R. Martin, but HBO comes down hard on this kind of piracy.
posted by justkevin at 6:39 AM on June 22, 2012 [1 favorite]

Malor, you completely ignore the social factors in China (and lots of other places) that lead people to dump savings into housing rather than other forms of saving. I'm presently looking at three high rise buildings built mainly so that people who could otherwise have cash in the bank would have someplace else to stash their retirement money. Too many people got burned in a big bank fraud before big bank frauds were the popular thing, so that's where they put their money.

I'm not in China, BTW.

I'm fairly convinced that the property bubble in the US is (now) much less of a bubble than people make it out to be, simply because we as a society refuse to let housing be subject to purely market forces. Through zoning and other regulation we artificially restrict the supply of housing in desirable markets, thus propping up prices. That's not really a bubble in my book, since it's a rational reaction to restricted supply.

Also, in most metro areas in the US, there's not that much overbuilding left at this point. Increased population and a lack of building since the bust has pretty much eliminated that. Predictions of further doom in the US housing market are based on not much other than the softening we'll inevitably see when interest rates finally rise, although if you look at Japan it could be a couple of decades, especially if the Eurozone fails to work out its structural issues.

Being unable to read Chinese, I can't make reasonable predictions and won't pretend to be able to do so. I will say that the saving impulse is strong elsewhere and can in and of itself prop up property prices for a long, long time despite what some doom and gloomers may say.
posted by wierdo at 6:52 AM on June 22, 2012

serious economics is a bit harder than that. what's your forecast for the timing of this epic crash? the specific sequence of cause-and-effect that will lead to it?

You don't need astrodynamics to know that what goes up must come down.
posted by gd779 at 7:06 AM on June 22, 2012

If it can't prevent things like this, what the fuck is Chinese authoritarianism good for?
posted by ocschwar at 7:35 AM on June 22, 2012

> The answer to painful withdrawal symptoms is never, ever, to increase the dosage
> of the original drugs. But that's how governments always try to bail these things out.

viz., pretty much any recent Krugman column. He should run for something, he's a natural.


> You don't need astrodynamics to know that what goes up must come down.

I miss astrozombiedynamics.
posted by jfuller at 7:35 AM on June 22, 2012

We've been in a cyclical deflation since 2007 or so and it's been working to write down debt built up over the past 40 years or so. The amount of money being printed by the fed pales in comparison to the big picture.
posted by stbalbach at 7:53 AM on June 22, 2012 [2 favorites]

If it can't prevent things like this, what the fuck is Chinese authoritarianism good for?

Not what, who.

The answer to that question drives all the others. And not just in China.
posted by Kadin2048 at 9:50 AM on June 22, 2012 [2 favorites]

gd779, if you ignore the possibility of orbiting bodies or don't really care when it comes down. For those of us here in the real world, those are important considerations. Markets can remain irrational for longer than even the largest investors can remain solvent, after all.

It's pretty irrational that many smart people think it's better to lose money on Treasuries rather than invest productively, yet interest rates on federal borrowing are below any rational inflation expectations, much less the irrational inflation expectations of the gold bugs who don't seem to get the idea of certain financial instruments effectively acting as money. (the evaporation of value of which is driving half the deflationary pressure we've been facing, the rest mainly being the demand gap)
posted by wierdo at 9:51 AM on June 22, 2012

All the money printing is causing the instability and bubbles and crashes. It's not the cure, it's the disease.

Verdammt Österreicher.
posted by Talez at 10:04 AM on June 22, 2012 [1 favorite]

It's pretty irrational that many smart people think it's better to lose money on Treasuries rather than invest productively

That's easy to say when you have less than $250,000 in liquid assets.
posted by Talez at 10:08 AM on June 22, 2012

KokuRyu: "[the businessman in China said] the bubble would simply not be allowed to burst for fear of public anger as well as economic chaos."

And they're also going to tie the sun in place with a long rope, to keep winter away.

Then the businessman added: “Look, I don’t lose too much sleep over China’s economic troubles; but I do worry, tremendously, about a political explosion tearing the place apart”.

Well, at least we agree on that. (shudder)
posted by IAmBroom at 10:59 AM on June 22, 2012

TheophileEscargot: Urgh, not the inflation panic again.

I wouldn't call worries about China creating housing at five times the current demand "inflation panic". I'd call it a housing bubble. Or are you referring to a part I didn't see?
posted by IAmBroom at 11:01 AM on June 22, 2012

Carius: This guy has been talking about real estate bubble in China for a while now. Remember, this year is leadership transition for top communist party posts. The bubble won't burst at least until Oct 2012. Apparent normalcy for be kept until then.

Not just Patrick Chovanec (and it's fascinating that he's "a professor at Tsinghua University's School of Economics and Management in Beijing, China" - how does he get away with this sort of talk there?).

Hugh Hendry of Eclectica Asset Management:

"It has long seemed to us to be the case that this economic crisis would start in the US and make its way to Europe. That has happened. However, we also think it will end in Asia."

I've read similar ideas from others, and frankly, I buy into the dark idea. China is overbuilding, and they have an ecological hellhole blooming all over the nation (Beijing is regularly under breathing alerts from dust storms that begin hundreds of miles away). Their economy looks to me like a giant, overstretched balloon hovering over a field of thorns.

Also, their young men greatly outnumber the available young women. If I were writing a novel about a pre-war pot about to boil over, I'd only add border disputes with another nation to the mix. Fortunately, China doesn't have any of... oh.
posted by IAmBroom at 11:17 AM on June 22, 2012 [6 favorites]

Talez, that's easy to say when you lack a broader perspective. Or even a fairly limited perspective. Folks I know are snapping up property like mad because it's so cheap, not wasting it on a guaranteed money loser. It's not like all these folks out of homes suddenly don't need a place to live, after all. (unless there have been some incredibly large mass suicides I missed)

Whatever. If folks want to run around like chickens with their heads cut off, they're allowed to panic. Too bad it screws with the rest of us when they do.

Things are different in China. Luckily, the Chinese can do basically whatever the fuck they want. They don't need your approval, my approval, or even the market's approval. They have over a billion people they can pay to do useless shit (or better yet, useful shit) if they need to. They have no compunctions about expropriating property for the greater good. Sucks to be Chinese (or invested in China) when that happens, but ignoring the fact that they hold a large amount of real wealth and a large amount of human capital is just silly.

I guess if I were Australian, I would be more worried. As it is, the Chinese don't buy a lot from the US, so it's not really my problem if they screw themselves over unless they decide to make it my problem. I'd like to think they have more sense than that.
posted by wierdo at 12:05 PM on June 22, 2012

Bubbles are the equivalent of using thermonuclear weapons against an economy. The damage they do is immense, and trying to dodge that damage increases it. By the time the economy realizes that it's really messed up and is in deep trouble, the damage has already been done, and all the pain that ensues is the process of unwinding stupidity. It's the withdrawal symptoms after a prolonged drug high.

This mixed metaphor somehow manages to get the details of both thermonuclear weapon strikes and recreational drug highs (and coming down?/withdrawal? bit of conflation there too?) wrong, even besides the indirect analogy between the one and the other.
posted by Bwithh at 1:53 PM on June 22, 2012

Through zoning and other regulation we artificially restrict the supply of housing in desirable markets, thus propping up prices.

So that's why housing prices have fallen by as much as 60% in some places? Particularly where they went up a whole lot?

Also, in most metro areas in the US, there's not that much overbuilding left at this point. Increased population and a lack of building since the bust has pretty much eliminated that.

Umm... not convinced this is at all true. You got any numbers?
posted by valkyryn at 3:21 PM on June 22, 2012

valkyryn, you may note that the places where housing prices fell so much were not the desirable places, but the places people moved to because they could not afford to live in the desirable places. Few people want to commute from the central valley to LA proper for work every day, for example. Somehow, beachfront property and property convenient to the jobs are still terribly expensive. Go figure.

That's not to say there wasn't a bubble, but by and large the really desirable places haven't lost much value compared to the horror stories you see like new exurban subdivisions on the ragged edge of what is possible to commute 5 days a week.

Regarding inventories, you are equally capable of reading the newspaper as I am. While Las Vegas may still be fucked, it has always been a mirage in the desert. Don't presume the most obvious aspect of the story is the whole story. FWIW, my SO's mother happens to be a realtor in south Florida. It seems the adjustment is largely over now that banks are lending (for reasonably valued properties, IOW, 2003-2004 levels) the market is much better. Of course, there was little trouble in the well-located neighborhoods in the first place, aside from most banks refusing to lend anywhere in Florida no matter the LTV for a period of a couple of years.

In my part of the country, there was no real crash in valuations, only a pause in their rise thanks to some foreclosures. Now that they've largely worked their way through the market, there is little trouble, barring another national credit freeze.
posted by wierdo at 4:03 PM on June 22, 2012

Talez, that's easy to say when you lack a broader perspective. Or even a fairly limited perspective. Folks I know are snapping up property like mad because it's so cheap, not wasting it on a guaranteed money loser. It's not like all these folks out of homes suddenly don't need a place to live, after all. (unless there have been some incredibly large mass suicides I missed)

Except then you get into the inherent risks, costs and obligations that come with being a landlord. You can't exactly walk into your real estate agent's office and say "I'd like a property that's positively geared, will appreciate by 6% per year guaranteed and if you could hold off on the bad tenants I'd really appreciate it".

What if the property has defects the seller was unaware of? What if the school districts rezone and you're stuck with a property that's now in the worst district in the county? What if you get rezoned into a flood plain? What if you buy the property in an area that was cosmopolitan but the area decays further and the point where it becomes unfashionable and the property fails to appreciate? All these are risks that have to be accounted for and you either need to spend time or money or both making sure you're not just plowing money into "cheap housing" that ends up bankrupting you.

Treasuries are a hedge against uncertainty and sometimes you just want the devil you know and the lesser of all evils. Putting $100,000,000 in treasuries basically guarantees that I'll have $99,800,000,000 in real money next year. You know what you're getting and you know bar some economic apocalypse you'll get it back. And if you don't get it back you're probably going to have more urgent and immediate problems than losing $100m USD.
posted by Talez at 4:06 PM on June 22, 2012 [2 favorites]

Oh and by the way, before anyone draws up a strawman, I'm not saying treasuries are any better or worse than property.

The bedrock of my point is that to seemingly equate treasuries and property in terms of cost, risk and return is wrong. To claim that people are stupid for missing out on the proverbial free money seems foolhardy at best.
posted by Talez at 4:15 PM on June 22, 2012

> You don't need astrodynamics to know that what goes up must come down.

I miss astrozombiedynamics.

My prediction: The People's government of China will bundle nonperforming loans off into a state “bad bank”. It will buy up some zombie banks from Europe, the US, and Japan, and some Spanish sovereign debt for good measure, and launch them all into space. They'll make a zombie bank colony on the moon, thinking that's a safe place. But they fail to understand the dangers of astrozombiedynamics. The banks get hungry. Then they get angry. They use their undead financial resources to build cannons that throw rocks at the earth, starting world war three. This will come to pass at approximately midnight, the 21st of December 2012. It should destroy enough houses to give new life to the real estate markets of the world.
posted by sfenders at 4:26 PM on June 22, 2012 [1 favorite]

Talez, if you have $100 billion and you spread it around on tax sale properties in decent markets, you're going to get more than you paid because you paid for less than the value of the land. The house itself is irrelevant. If you're a dope and you put all your eggs in one basket you wouldn't have the money to spend in the first place.

Also, I'm not at all saying that treasuries aren't a good place to park some money. We are living in interesting times, with all the attendant risks. The key word there being some. Property as a sector is terribly undervalued in many parts of the country, although less so than a year or two ago. That doesn't mean I'd put all my $100 billion in property, either.
posted by wierdo at 4:44 PM on June 22, 2012

Germanys railway company Deutsche Bahn at least is is making profits, auto-translate from here:

The German railway has in the past year increased profit and revenue significantly. The group's goals were missed but company sources said close mainly because of the weakening freight transport.

The operating profit of Europe's largest transport group rose compared to 2010 by almost a quarter to 2.3 billion euros, said the news agency Reuters on Tuesday. Revenues increased by ten percent to 37.9 billion euros. Thus, the goal of 38.4 billion euros in turnover and profit before interest and taxes (EBIT) missed by almost 2.4 billion euros however. A company spokeswoman would not comment on the disclosures.
The railway had recently, especially in rail freight transport problems. The Company is reviewing all transport company sources said on their profitability. It also wants to push through price increases. Costs were also caused by high expenses for maintenance and testing of axles of wagons.

posted by ts;dr at 9:49 AM on July 10, 2012

ah shit, wrong thread, sorry!
posted by ts;dr at 9:50 AM on July 10, 2012