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Guest Post: The Reasons For China's Imminent Bust
The global dominant narrative about China is wrong, claims Gordon Chang. Don't expect it to be the 'pocketbook of last resort' that will rescue world markets from their current malaise.
And don't expect its remarkable economic growth to continue. In fact, expect a "hard landing" for China - and soon.
Forbes.com columnist and international lawyer Gordon Chang has spent much of his time since the early 1980s working and living in China. His primary knowledge of the country and his relationships there give him a superior understanding to how its economy is actually faring than many analysts based in the West. And what he sees today doesn't inspire confidence.
We are seeing the first real signs of slowdown in China's economic growth looking at the year-over-year numbers for the past several months. Car sales have decreased nearly 5% since last year, and property values are beginning to plummet in key markets (30% in October alone in Shanghai).
Gordon sees these as the inevitable harbingers of a coming collapse in China due to excessive stimulus policies the government undertook starting in 2009. The bubbles and malinvestment created by this stimulus have not been addressed, and increasing weakness and transitions inside the political system are making it less likely they will be before market forces intervene.
On The Repercussions of Excessive Stimulus
Inefficiency eventually catches up with every economy. They have a semi-closed system so that they are not necessarily subject to the principles of economics in the same way that we are, but they can only delay the inevitable. They cannot prevent it entirely, and that is really going to be their problem. Because they have done a lot which just does not make economic sense. I mean it might make sense in terms of rapid buildup of an economy, but they have to pay a price. And they have not paid their price yet.
The one thing that people say is "These Chinese leaders are so great at economic management because they got through 2008-2009 and they had enormous double-digit growth while the rest of us were suffering." Well yes, they did that but they did that at great cost.
And so for instance in 2009, the first full year of their stimulus plan, they dumped something like $1.1 trillion into a then $4.3 trillion economy. And so did they create growth? Yes, they did, but they also created a stock market bubble, a property market bubble, and inflation. And they have yet to deal with the property market and the inflation problems. Those are dislocations that they do not have the answers to. I would rather have our economic problems than theirs any day of the week.
On Growing Political & Social Instability
Starting at the end of next year, the Communist party is going to change the officers of their Politburo Standing Committee, the apex of political power in China. We are going to have a new General Party Secretary. And then in the early part of 2013, the government officers change. And sometime after that, the all-important Central Military Commission has a revamp of membership. And so at this time of political transition, the important economic decisions are not being made. But it is even worse than that, because corruption indeed is engulfing the political system. It is causing so much friction in society. The Communist Party is not able to mediate conflict and its only answer is to increase coercion.
And that is why you have survey after survey of the rich and the super-rich, they talk about leaving China. It is not the poor who are going, which we have seen in many waves throughout the last couple hundred years, now the rich are thinking of getting out. They are getting passports, they are putting their families offshore, and this is of concern because this is a leading indicator.
If you go about 25 miles south of where I live, and go to Princeton, New Jersey, you will see a lot of beautiful homes. I mean, they are all paid for, they have got a wife there, they have kids, and they have one or two Mercedes in the driveway. It is the perfect American family, except one thing is missing, and that is Dad. Dad is a senior official in Beijing and he is stealing as much money as he can. And at maybe not the first sign of trouble, but perhaps the second sign of trouble, he is on the United flight to New York, because he is not going to stay to defend a regime that is shaking. And that is one of the reasons why I think we have to be concerned about the way the Chinese economy is going, because the Chinese rich are starting to see the signs and are beginning to bail out.
We are talking about the people who have benefited the most from this system. And they can see the problems at the top of society. We have now a weak General Party Secretary, Hu Jintao, and he is going to be followed by probably by someone who is just as weak, especially in his beginning years, Xi Jinping. This is a political system that will not be able to make the decisions and to implement them that everyone knows have to be made. And that is why, for instance, we have not seen much in the way of reform over the last five years. In fact, we have seen a reversal of reform. And most of the conditions that have given rise to China's extraordinary growth either no longer exist or are disappearing fast. And so this is an economy in trouble.
On The Popping of China's Real-Esate Bubble
There was just too much money in the economy and so people then poured money into apartments. And China has gone on a tear building ghost cities and all the rest of it. And now the progression that you talked about -- skyrocketing prices and then stable prices, selling volume, and then property price declines -- is what we are seeing in China.
In October, last month, prices in places like Shanghai declined 30%, as we saw developers start to offer these enormous discounts. And by the way, these discounts were so big that people who bought at earlier stages in these same developments, where these discounts were being offered have now taken to the streets complaining if you are giving 30% discounts to these other guys, then give it to me as well. And so we have not got a little bit of social unrest because of falling property prices.
In Wenzhou, which is in prosperous Zhejiang Province, which was perhaps the most prosperous province up to about a year ago, developers are, one developer is now offering BMWs to the first 150 buyers of apartments. And this is just a sign that property prices have not only softened, but they are starting to fall quickly.
You know, every market has to go to equilibrium. There are too many apartments in China and not enough buyers and occupiers. And it was going to go to equilibrium in some fashion. What is really surprising observers is that the rapidity at which we see this move to equilibrium. Last year there were, in about I guess it was April or May, the state grid in China reported there were 64.5 million apartments that showed no electricity usage for six consecutive months. That is enough housing for 200 million people, but yet Beijing was decreeing the building of 30 to 50 million more apartment units....
But at the end of the day, there has got to be a correction. And what goes up fast comes down fast. And what we are seeing is the down phase. The only issue is whether Beijing can stop the down phase by administrative measures. But so far the Chinese leaders, Premier Wen Jiabao, last Sunday said "nope, we are going to stay with these tightening measures." And that has really created great pessimism in the Chinese property market...
And so really what we have is a government now that is really trying to bring the property market down. And of course it wants to do so gradually, you know, orderly. But as you say, it is a bubble, there is a pin and the problem is that Chinese leaders cannot manage the process of bringing the property market down to equilibrium....
When China's elite analysts start talking about prices being 50% of where they are this year that means that they are probably privately thinking that no, prices will not halve: they might go down even further than that. And that is really a problem because that mentality, once it gets embedded in people's minds in China really means that, Chinese leaders then have very few tools in which to prop up the property market.
Click the play button below to listen to Chris' interview with Gordon Chang (runtime 40m:55s):
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C3X continues its unbelievable success rate as November performance hits 84% success over 62 calls in forex markets and this comes in front of a live trading audience.
http://capital3x.com/think-tank/performance-for-november-84-success-rate...
If Gordon Chang is right, it's only because a broken clock is right twice a day. He was calling for China's collapse ten years ago and he wasn't making a long-term prediction, he was saying it was ready to crash then.
Very good interview. (Much better than 'Coming Collapse of China' book, which I read on a hard sleeper from Guangzhou a few years ago. :)
Re gold, it's actually pretty easy to buy it in China (bank branches sell it, and big cities have a branch of "China Gold" with display cases full of bullion). But it's illegal to export it, so tricky for the mega-rich to flee with. I think the middle classes may well try to switch into gold when the property market softens. (I've seen a couple of ghost cities. In the centre of some cities there are even "ghost blocks", empty blocks in developments where the early stages were bought for living in, but the later ones were bought for investment and are completely dark at night...)
As I mentioned in a response to a post a few days ago, we are not seeing the examples cited in this article in reality here in China.
The 30% decline in property price is with extremely limited properties which are just so undesirable and that no one was interested in them and had to do something to stimulate sales. But what does the 30% get you, so an overpriced apartment went from $1M USD to $700K USD, so what? Hardly a decline for a home buyer.
From what I see on the ground in China is that home prices are holding pretty steady (a few percent drop here or there), but sales have stalled. Not sellers or buyers are conceding, so the market seems stalled. I would guess this should slow the demand for new developments.
Now the 30 M new homes proposed for Beijing are not open market real estate, they subsidized housing targeted only for low income workers.
So this shows something is wrong because the free market was not addressing the need for low income housing as developers have been building and selling high-end properties.
Regarding the economy, what is observed is that the economy still seems to be booming.
Amazingly, one of the biggest issues for employers currently is a shortage of workers. This includes both day laborers and office staff. China is already aging and the young don't want to be day laborers in a factory, many now laze their days away addicted to internet games. A three month stint of working somewhere gives them enough cash to get by for the year with a little help from mom and dad. Now, the first question asked in an interview is how many days vacation do I get each month. This is even ahead of how much money!
Export orders have dropped off, but this has not changed the supply demand equation, at least not in the industries I am familiar with. Very few seem to be actually closing their doors. In the past, factories would never turn down an order, now 10 years into this experiment, factory owners are aging and getting tired. Now, they are turning down all but the best orders. With the shortage of labor, they have figured out its more productive to close 1 of 3 production lines and keep the 2 remaining at full capacity. Although top line has fallen, it appears that margin is holding or even improving. The other thing that the tight labor supply has created, is increased mechanization. My observation is that the Chinese don't invest a million dollars in robots to punch a hole, they build cheap simple machines and they get the job done. So, productivity is increasing and this is allowing them to hold margin as labor and input prices rise.
I really cannot comment on the macro policies and situation. I don't have clear optics to them from the ground. But what I can tell you is that unlike the USA, where almost no one would consider just starting a factory making plastic buttons (or whatever) in their basement, this is exactly what happens everyday in China. The reasons are many, but first, no one stops them. They don't have their neighborhood condo committee to worry about, they don't have the mountain of regulations from OSHA, DOT, EPA, CPSC, IRS, etc. They also don't see it as beneath them. I think most unemployed in the US would think it beneath them to just start making some small item and selling it for 10 cents for 1,000 and working day and night. The Chinese don't think its beneath them (except the spoiled youth). Many of these basement factories grow into much larger operations very quickly.
I fully agree that China will see its day when what has gone up will come down. I tell this to colleagues everyday as I sit on the sidelines afraid to enter the stratospheric property market. They just laugh and make another million.
Like the author of the article, hopefully if I wait long enough, I will be the one laughing when the property market finally collapses... or will I?
Thanks for that great first-hand report!
The Chinese are natural capitalists and traders and will eventually outgrow the communist experiment that was imposed on them by Europeans through Mao.
"But what does the 30% get you, so an overpriced apartment went from $1M USD to $700K USD, so what? Hardly a decline for a home buyer."
And a huge loss for an investor (who might already has a couple of apartments standing empty...)
Stalling sales are usually the first sign of stalling property markets until sellers start to believe in the lower prices. A friend of mine in Beijing tells me the idea that property prices might fall is entering the popular consciousness - despite a media blackout.
Which city are you in meatbag? (I was in Changsha.)
For those of us old enough to remember, this is Japan 101. The same scenario 20 years ago, with predictable results.
Chris Martenson on Zero Hedge equals a pair of Aces. -- Michael C. Ruppert
http://www.collapsenet.com/154.html
i would't doubt, if in a month or so, you'll actually see alot of high corporate executives in real estate and gov't agencies heads, get corraled, and rounded up by the thousands in every province in china for crimes against the state,... this is their way of keeping greed and malfeasance under control - with no exceptions [?]
jmo
Chang may ultimately prove to be right, but I can't take his comments seriously. His book, predicting China's collapse, was written in 2001! He's been dead wrong for several years.
What most people neglect to understand, the US will NOT allow China to fail.
I had heard somewhere (actually a BBC special on China real estate) that the Chinese gov't didn't care so much about real estate crashing in that most of the money put in was done so by the local crooked politicians and a crashing real estate market was one way to clean them out. Doubt it would be done by design but thought that was a creative way of cleaning up some corruption.
The role of delusional US consumers has been critical to net exporters around the world for the last few decades, and US consumers went flat broke a few years back... China, being a large part of US consumption supply chain, has a troubled future ahead and that is unavoidable.
(30% in October alone in Shanghai).
What kind of Journalism is that? Forbes are a joke. My friend in Shanghai sees stable prices and nothing near 30%?!?!? decline in one month. That doesn't even make sense.
China is so far ahead of the curve that's its absolutely breath taking,unlike some countries (i.e. the United States,Ireland,Spain) the Chinese government deliberately popped the property bubble. Incidently income growth in China was not driven by the acquisition of debt,unlike the US, but real economic growth.
However that pales in comparison to their true accomplishment's they've literally bought US Thorium Reactor technology that will allow them to create vast amounts of energy,technology that was developed in the United States incidently:
http://www.youtube.com/watch?v=AkC8kItzdZI
More importantly China has corned the renewable energy market and the rare earth markets:
http://www.financialsense.com/financial-sense-newshour/in-depth/2011/11/10/stephen-leeb-phd/red-alert
When oil production begins to go into decline China will have a huge advantage over every country on earth in much the same way the Spaniards were able to gain a huge advantage over the Aztecs. Chinese dominion in the 21st century could be on par or even greater than American dominion in the 20th century.
"China is so far ahead of the curve that's its absolutely breath taking"
This is more credit than I would give them. However, I totally agree that they are deliberately trying to pop the real estate bubble as it is seen as a risk. However, the fact that it is not popping shows that the central gov does not have as much control over market forces as many think.
I have done a little research on China's GDP over the centuries. Looking back, China was either the worlds largest or top 2 economies globally for much of recorded history. Things did not diverge until the industrial revolution when the west soared ahead of China still trapped in its dynastic history.
China's Confucius culture prevented it from using its early edge in technology and mathematics. Elites were trained in poetry and politics, rather then practical engineering. This worked for thousands of years when political skills trumped technology. However, no amount of charisma could defeat the steam engine. So China has faltered for the last 150 years.
Its pretty clear will regain its place in history as a top world economy sometime soon, this should not really be a surprise. The question is will it retain is largely non-interventionist approach to politics.
It seems to me that China has over the century's not been an imperialist nation. Yes. they have pushed their borders outward over the centuries, but this hardly compares to the imperialist history of the Roman's, British, and even the US. I would say that they are more interested in having geographical buffers around them as opposed to wanting to reach across the oceans and colonize Cuba. Taiwan is a country of war time enemies, so is it surprising that the mainland would eventually like to see this old enemy capitulate?
The question of energy dependence is very interesting. Historically, this was a non-issue for China. Therefore, it could create actions that have no historic president. I think it is naive to think that China has cornered the renewable energy market. China is going to be very energy hungry in the next few hundred years and I don't think they can do with-out oil. If anything coal is their likely fall-back. I don't see renewable energy making much progress in China outside of maybe Hydro power. I can't speak to their nuke energy program, but I know that they are actively pursuing it.
So, while I agree that China's influence and economy will compare with the world's leaders in the 21st century, I don't agree that China will be "dominating" other continents as the Spaniards did to the Aztecs, except perhaps economically.