wooo realestate implosion buddy! ^5

March 28, 2008 8:10 AM

The Most Important Article You Did Not Read This WeekNow, it is true that the most important article you probably didn’t read contains all the usual hair-raising things you’d expect to see about the real estate market, including “developers under siege,” “signs of weakness in key markets,” developers “slashing prices,” and the head of a major builder advising “that people wait three to four years before purchasing a new home.” But the most important article you probably didn’t read is not about real estate markets in Naples, Florida, or Sacramento, California. It is about China. [ full WSJ article here]
posted by Stynxno (43 comments total)

China's inflation rate is 7%, the highest in 12 years, due in part to food prices growing over 18%. Furthermore these rising prices are causing prices of Chinese imports to the U.S. to grow as well, signaling an end to the ear of ultra-cheap imports to US discounters like Walmart and Target.
posted by Pastabagel at 8:21 AM on March 28, 2008

I dunno, I think the U.S. attacks against the Mahdi Army in Basra, Iraq are a slightly bigger deal then some over-leveraged land speculators getting hosed in China.
posted by delmoi at 8:38 AM on March 28, 2008

too much editorialising
posted by jouke at 8:43 AM on March 28, 2008

And hype w/o analysis or context. Thanks for the supplements, Pastabagel!
posted by Alvy Ampersand at 8:45 AM on March 28, 2008

Altogether too much wooing, also.
posted by jokeefe at 8:45 AM on March 28, 2008

Could someone explain in layman's terms exactly what it is I'm not reading between the lines here...ie. WHY is this the most important news story? What is relevant? Why is it relevant? Why was it overlooked?
posted by iamkimiam at 8:46 AM on March 28, 2008

I'm on record somewhere on MetaFilter saying that I think that China is essentially a big giant bubble. Like most of my fears this is something I desperately want to be wrong about.
posted by Kattullus at 8:47 AM on March 28, 2008

If I turn to ideas and theory, I would want to know how China will handle its problem(s); but I am also interested in how the US, my country, will handle its problems. Am I to feel better cause China too has problems? I can pretty much guess what the WSJwould suggest editorialluy to fix my country: make tax cuts for the very wealthy permanent. Help out the investment banks but do not mess with defaulting home owners.
posted by Postroad at 8:51 AM on March 28, 2008

metafilter: essentially a big giant bubble.
posted by symbioid at 8:57 AM on March 28, 2008

In other words... we're fucked six ways from Sunday?
posted by BobFrapples at 8:57 AM on March 28, 2008

Check out what Global Guerrilla has to say about black swans in China:
"So, what happens when China's high performance, globally connected capitalist economy which is flying at dangerously high speeds hits the inevitable speed bump? The answer is: it will derail (hollow out and fragment). The chaos it will produce in SE Asia is the real threat we have to deal with.
A fascinating read.
posted by TorontoSandy at 8:59 AM on March 28, 2008

too much editorialising

Double-check your definition of "editorialising".

Could someone explain in layman's terms exactly what it is I'm not reading between the lines here...ie. WHY is this the most important news story?

"Most important" is a bit hyperbolic, but there is a lot to cause concern- our credit-happy, debt-laden consumer culture is propped up largely by Chinese (remember, they're the godless commies) investors buying our debt as their economy went gangbusters. Now, as their economy slows, a lot of the same potential market disasters that are sucking America down are now threatening China as well.

So, follow the money. Chinese Investor (A) buys debt from U.S. financier (B), which is used as leverage to finance another deal with another investor (C). It's much more complicated than that, but basically as the Chinese economy weakens, it makes it harder for A to repay his loans to C. Where is A going to turn to get that money? That's right, B. Question is, where the hell is the U.S. going to get the cash to repay that debt when China comes calling?
posted by mkultra at 9:00 AM on March 28, 2008 [3 favorites has favorites]

delmoi writes "I dunno, I think the U.S. attacks against the Mahdi Army in Basra, Iraq are a slightly bigger deal then some over-leveraged land speculators getting hosed in China."

Well, except that China is a major piece of our economy. As goes China, so goes the US. If cheap imports from China are ending, that means a major shift in our economy will be coming up due to that factor alone, along with all the rest of our own problems.
posted by krinklyfig at 9:05 AM on March 28, 2008

The reason you should care is that China and the U.S. are inextricably linked. The Chinese currency is essentially pegged to the dollar. As they export goods here, we export dollars back to them. The inability of the currency to fluctuate significantly means that an appreciation of chinese currency that was supposed to happen did not, which means that their economy grew too fast. The fact that they have inflation and a soon-to-be bursting bubble in real estate is consistent with this thesis.

Furthermore, we now how slowing growth or recession in the US, coupled with Chinese import inflation due to materials costs rising (i.e. oil). So there is slowing demand here and rising prices there which will slow domestic demand, which amounts to slamming the brakes on the chinese economy. But it's a big economy, so slamming the brakes won't grind it to a halt.

But we may see some very interesting unwinding in the near future, particularly in the commodities. China is a huge consumer of oil and industrial commodities. If their largest customer (the U.S.) isn't buying, AND local demand can't pick up the slack, China is going to experience a pretty ugly recession and these commodity prices are going to fall. (Local demand not picking up the slack is a big unknown).

That means oil could fall back to the 80's or at least sit at 100 for the remainder of the year. It may also force China to decouple its currency from the US even further. This will appreciate their currency and totally sink ours, which would not be good for anyone, so I don't see the next President pushing this. That fact that Bush failed to achieve this decoupling in the 2004-2005 timeframe, btw, is a major failure of his administration. That would have slowed the bubble growth two years ago instead of letting it grow out of control for two more years before bursting.

The thing to watch is how China deals with this. Recessions are old hat here in the U.S. But China has bet a great deal on significant year over year growth. If that fails to materialize, they'll have a several hundred million pissed off workers, and a few hundred million stagnating middle class drones, who may begin to agitate for change.

So here and there, we all live in interesting times.
posted by Pastabagel at 9:06 AM on March 28, 2008 [13 favorites has favorites]

Wait, people are getting the wrong idea here.

"Chinese (remember, they're the godless commies) investors buying our debt as their economy went gangbusters. Now, as their economy slows, a lot of the same potential market disasters that are sucking America down are now threatening China as well."

If the Chinese economy falters, the Chinese are going to fall all over themselves to buy US bonds, because as long as the currencies are linked, they get a better return in Chinese money than if they bought Chinese assets.

Furthermore, if the situation there really falls apart, you will see a speculative unwinding of legendary proportion. You could see that index fall back to 1800 or 1900 easy, if things get back and people panic. The people panicking would be Americans and Europeans, and when their money comes out of China, it's going right back into the US markets, as people re-learn that the only large market with a history of reliability and transparency is the US.

Again, that's a big if. They may orchestrate their own soft landing, or sell assets to currency rich Europeans and Brits to keep the system moving. And they may alleviate their food situation by adopting western-style industrial agriculture. So there's a lot of uncertainty. what is certain is that the glory days of 2003-2006 are behind us.
posted by Pastabagel at 9:16 AM on March 28, 2008

Personally, I'm worried less about the economic impact on the US/Europe/Taiwan, and rather more about the social impact in China. For example, what happens if factories start closing -- will the workers head to their traditional home villages, or to the cities? Those workers frequently live in company dormitories, so when the company goes down, they're homeless.

...I really don't want to see another Mao-style "solution" but I could see them going that route & re-collectivizing in order to sop up the excess workers by forcing them into rural labor.
posted by aramaic at 9:16 AM on March 28, 2008

Well, except that China is a major piece of our economy.

Iraq is also a big part of our economy. My claim was that this particular story out of Iraq was bigger news then this story out of China.

As goes China, so goes the US. If cheap imports from China are ending, that means a major shift in our economy will be coming up due to that factor alone, along with all the rest of our own problems.

Sure, but if the Chinese economy contracts, that would actually reduce inflation there and therefore reduce the cost of Chinese imports to the US, not increase them.

Now clearly a reduction in U.S. demand for imports is going to cause a problem in China, which is probably what we're seeing: the Chinese economy reacting the the U.S. economy's reduction in demand.

Also, by the way: The people advocating people wait a few years to buy a house are people who make money renting apartments. In their TV ads.
posted by delmoi at 9:18 AM on March 28, 2008

chinese steel prices are going through the roof. we are seeing 40-50% increases on fastener imports. this is going to rocket up the prices of everything still manufactured in the US, and everything manufactured elsewhere.
posted by quonsar at 9:39 AM on March 28, 2008

Mega kudos to Pastabagel for saving this post.
posted by Blazecock Pileon at 9:41 AM on March 28, 2008

quonsar: yikes, what type of fasteners were those?
posted by aramaic at 9:42 AM on March 28, 2008

what type of fasteners were those?

common stuff that's used in everything: nuts, bolts, hex caps, rivets, all kinds of screws - most of it is made in taiwan anymore, and they buy the steel from china.
posted by quonsar at 9:46 AM on March 28, 2008

Hmm. Interesting; it'd be neat to see a list of where different fastener technologies get their source materials. For example, does Henkel supply from China? I assume they do, but maybe not? And what about the ultrasonic welding guys?

...if a person had that info, you could perhaps begin to establish how product design will change in the near-term, as designers shift to different joining methods.
posted by aramaic at 9:57 AM on March 28, 2008

The sky is falling and the oceans are rising. I picked the wrong era to be a land-dwelling mammal.
posted by dances_with_sneetches at 10:29 AM on March 28, 2008 [2 favorites has favorites]

Sure, but if the Chinese economy contracts, that would actually reduce inflation there and therefore reduce the cost of Chinese imports to the US, not increase them.

Except the contraction of the economy would mean less goods supplied. If business failings and M&A activity reduces the suppliers in an industry from a dozen to a few, the remaining companies will product differentiate instead of flooding the market with identical commodity products (assuming the follow the US and European model). Net net, this results in higher prices.
posted by Pastabagel at 10:35 AM on March 28, 2008

So when they measure inflation in China, they include food, but not in America?
posted by drezdn at 10:47 AM on March 28, 2008

we are seeing 40-50% increases on fastener imports.

A little higher than the jump in food prices, but it's following the same trend. Rice prices have gone up 30%. Grains are sky rocketing too. Interesting times indeed.
posted by ryoshu at 10:50 AM on March 28, 2008

The Renminbi is not really pegged to the dollar anymore. It is not allowed to be completeley freely traded, but the last couple of years it has been allowed to appreciate against the dollar at an accelerating rate. The hope is that the increased buying power will allow China continued access to ever cheaper imports, which is one antidote to increased inflation. The exchange rate chart for the last 2 years is actually sort of beatiful, the way it is cleanly accelerating.
posted by Catfry at 10:51 AM on March 28, 2008

China and the great silent recession

China's economy shrunk by 40%, but no one noticed

"The World Bank provides the gold standard of PPP calculations, and it had reported that China's real GDP was close to US$9 trillion as of 2005. That made it the world's second biggest economy (behind only the U.S. at US$12 trillion). With its blistering growth rate, it seemed a sure bet China would leap into top spot within a few years, fundamentally shifting the world's balance of power.

The problem was, the World Bank's estimates were based on a study of Chinese prices that was 20 years old, and when Chinese authorities finally released updated figures late last year, the bank's estimates were wildly off the mark. When they re-crunched the numbers, it turned out China's economy was closer to US$5.3 trillion. On a per capita basis, that works out to just over US$4,000 per head, compared to US$41,674 in America. That one little accounting change meant there are as many as 91 million more people living in desperate poverty in China than previously believed. It also meant that China is likely decades away from surpassing the size of the U.S. economy, and generations away on a per capita basis.

The massive implications of all this were summarized in a report for members of the U.S. Congress last month. For one thing, it means China isn't quite the dream market that exporters assumed. Why don't Chinese consumers buy more Western goods? Well, now it appears they just don't have as much money to spend as previously believed."
posted by Fuzzy Monster at 11:13 AM on March 28, 2008 [7 favorites has favorites]

Thanks, Fuzzy Monster, for the article. That was even more arresting than the one about the real estate slump.
posted by Kattullus at 12:06 PM on March 28, 2008

The massive implications of all this were summarized in a report for members of the U.S. Congress last month.

Do you happen to know if that report is public, and online anywhere? Google is failing me.
posted by Pastabagel at 12:22 PM on March 28, 2008

Do you happen to know if that report is public, and online anywhere? Google is failing me.

I'm not sure if it's the same report Fuzzy talked about, but the most recent Congressional Research Service report on China - China-U.S. Relations: Current Issues and Implications for U.S. Policy, dated March 17, is available for download from OpenCRS.

The real estate bubble in China is coinciding with a stock market bubble as well, along with some of the cheap manufacturing moving away from China and into SE Asia due to the rising prices and the yuan gaining in value. Personally, I'm a bit apprehensive about the potential social fallout in China from a weakening economy. The growth economy has given the PRC leadership some breathing room, but domestic dissent due to an economic slowdown has to be a major concern.

Given the news earlier today on the under-estimated numbers of missiles facing Taiwan, there are some analysts that are getting increasingly worried about what China will do to divert the attention of the populace away from the economy. Not that I subscribe to that doomsday scenario (particularly given the Ma Ying-jeou victory in last weekends Taiwan election), but it's certainly something I wish that the American public and policy makers in D.C. were paying more attention to.
posted by gemmy at 1:30 PM on March 28, 2008

Rice prices have gone up 30%.

Important point here for those not following the story - they went up 30% in one day.
posted by IndigoJones at 2:33 PM on March 28, 2008

“ ‘The reason you should care is that China and the U.S. are inextricably linked... very interesting unwinding in the near future... several hundred million pissed off workers...there's a lot of uncertainty...’ ‘...chinese steel prices are going through the roof’ ... ‘Grains are sky rocketing too’ ..”

Oh, great. So now I care.
Odds on a war with China?
posted by Smedleyman at 2:54 PM on March 28, 2008

Odds on a war with China?

Hopefully significantly less than a snowflakes chance in hell.
posted by Burhanistan at 3:07 PM on March 28, 2008

Okay dammit. Is the world coming to an end or not!?? I feel like a goldfish kept alive in a blender!
posted by ZachsMind at 3:14 PM on March 28, 2008

China Celebrates Its Status As World’s Number One Air Polluter
posted by homunculus at 3:21 PM on March 28, 2008

The Chinese currency is essentially pegged to the dollar.

Or not: "The renminbi, which western governments have long alleged is undervalued, thus giving Chinese exporters an unfair advantage, has appreciated 6.7 per cent against the US dollar in the past six months. Economists expect it to rise 10-15 per cent against the dollar in 2008 and it is expected to rise a further 10 per cent in value this year, according to Qing Wang, economist at Morgan Stanley China. He warned that pace could quicken to more than 15 per cent should inflation in China, already running at a high level, continue to climb."
posted by effbot at 3:47 PM on March 28, 2008

Another good reason that this isn't the most important article I didn't read this week is because we're not all Americans.

Real estate is doing fine here cheers.
posted by wilful at 9:08 PM on March 28, 2008

"He warned that pace could quicken to more than 15 per cent should inflation in China, already running at a high level, continue to climb.""

Doesn't inflation mean more money, which then makes that money worth less?
posted by Iax at 1:01 AM on March 29, 2008

Real estate is doing fine here cheers.

No, it isn't. And you're nuts if you think that what's happening in China -- one of Australia's biggest destinations for raw material exports -- isn't just as important to Australians as it is to Americans, or to me, living in Korea.
posted by stavrosthewonderchicken at 6:18 AM on March 29, 2008

I don't see how Chinese real estate prices are really all that important. If anything Falling Chinese real estate helps from the perspective of the U.S. First it helps slow down Chinese growth which slows inflation. Second less construction lowers Chinese demand for raw resources lowering commodity prices. Third, less migrant workers working in construction means more working in export industries, lower wages for chinese workers and lower prices in the U.S.

Of course everything is more complicated than this, but the real estate market in China is much less important than it is in the states. They still actually have factories that make stuff over there.
posted by afu at 9:32 AM on March 29, 2008

w. t. h. wilful? Not only is the real estate situation in oz looking like it's going to track the US, just behind a year or so, but your future is inextricably tied to southeast asia's, as stavros points out above!

(semi-related, PM kevin rudd speaks excellent chinese! )
posted by thedaniel at 11:32 PM on March 29, 2008

There are cycles in every market. It goes up and down all the time. The best bit of advice I can offer is real estate never goes back to zero. Your stock might crumble out underneath you and be worth nothing, but real estate will always have some value. There's a saying, "If you hold on to a piece of property long enough, anyone's a real estate genius."
posted by Brent Mitchell at 9:27 PM on April 17, 2008