Is The China Bubble About To Burst?

Discussion in 'Economy' started by boedicca, Dec 6, 2010.

  1. boedicca
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    boedicca Uppity Water Nymph Supporting Member

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    Excellent read on the brewing credit and inflation crisis in China, with an interesting note about the benefits of cheap rural labor running down.

    Albert Edwards from Societe General said the OECD’s leading indicators are signalling a "downturn" for Asia’s big five (Japan, Korea, China, India, and Indonesia). The China indicator composed by Beijing’s National Bureau of Statistics has fallen almost as far as it did at the onset of the 2008 crash.

    "I remain convinced we are witnessing a bubble of epic proportions which will burst – catching investors as unawares as the bursting of the Asian bubbles of the mid-1990s. Ignore these indicators at your peril," he said

    In a sense, inflation is a crude way of curbing China’s export surpluses and therefore of resolving a key trade imbalance that lay behind the global credit crisis.

    If China continues to stoke inflation – and blaming the US Federal Reserve for its own errors help – there will no longer be any need for a yuan revaluation against the dollar, and the US Congress can shelve its sanctions law.

    On a recent visit to a chemical plant in Suzhou, I was told by the English manager that wage bonuses for staff will average nine months pay this year. This is what it costs to keep skilled workers. His own contract is fixed in sterling, which has crashed against the yuan over the last two years. "It is a sobering experience," he said.

    China may have hit the "Lewis turning point", named after the Nobel economist Arthur Lewis from St Lucia. It is the moment for each catch-up economy when the supply of cheap labour from the countryside dries up, leading to a surge in industrial wages. That reserve army of 120m Chinese migrants everybody was so worried about four years ago has already dwindled to 25m. ..


    China's credit bubble on borrowed time as inflation bites - Telegraph



    The article also notes that private credit in China is 148% of GDP - over three times that of other emerging markets; and the real estate market in major metros has run amok with prices at 18 to 22 times disposable income (the U.S. at the peak of the subprime bubble was at 6.4 times disposable income).

    It's going to be an ugly mess when it bursts.
     
  2. william the wie
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    william the wie Gold Member

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    Expected but still it is going to hurt.
     
  3. Toro
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    Toro Diamond Member

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    There are enormous imbalances in the Chinese economy, and one day, there is going to be a tremendous crash, particularly in real estate. However whether it is imminent is debatable. Chinese stocks appear to be firming.

    Albert Edwards is a mega-perma bear. I think he's been predicting The End of the World for a decade.
     
  4. loosecannon
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    loosecannon Senior Member

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    I read that China's "RE bubble" is limited to a tiny share of the nation, mostly the posh sectors of a dozen cities. They do have vacancy issues. But they have a swelling population too, with a lot of upwardly mobile types.

    IOW 98% of the RE is unaffected.

    Most of the imbalances in China appear to be the giant class divides. Part of the nation is still herding goats and harvesting veggies while another part is more modern and advanced than the US.
     
  5. ekrem
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    ekrem VIP Member

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    In USA it is 270
    Domestic credit provided by banking sector (% of GDP) | Data | Table

    Once real-estate prices in a Chinese town somewhere in the West or in the middle of the country increase dramatically there can be talk of a bubble.
    In case of China it is class-advancement from the population. There is demand to immigrate to the industrial metropolitan regions. For 1.X billion people, the dream is to live in a shiny city like Shanghai or Beijing.
    If the city does not expand and invest in infrastructure, the city can only accommodate a certain amount of people. At that point, demand for existing real-estate will sky-rocket.
     
  6. william the wie
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    william the wie Gold Member

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    Chanos thinks it is going to be soon too. I don't know how soon but China has been in bubble territory since prior to Tianamin Square. In fact one of the roots of the protest was fear of inflationary bubbles.
     
  7. Toro
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    Toro Diamond Member

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    Your observation is correct about the class divide, and your observation that most of the real estate problem is in a handful of cities is also correct. The problem is that both of those statements are related. Because most of the wealth is concentrated, most of the housing wealth is concentrated in a handful of cities, which is why it is a problem nationally, since those cities represent a disproportionate amount of wealth.

    And it is a bubble that is far bigger than America's was. In Shanghai, prices to income is 15x. No city in America ever got that high. Generally, 8x-9x is considered extreme. There are several cities in China with that ratio in the mid-teens.
     
  8. loosecannon
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    loosecannon Senior Member

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    How high was the ratio in Japan in the late 80's?
     
  9. loosecannon
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    loosecannon Senior Member

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    Japanese asset price bubble - Wikipedia, the free encyclopedia

    I think the China RE bubble is vastly overblown, and the contraction of credit seems to be working well so far.
     
  10. william the wie
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    william the wie Gold Member

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    LC, even scaled down China is out of control. Coal miner deaths would be more than one per day in the US if they died at the Chinese rate. Likewise deaths from pollution and that is from sanitized government figures. You are thinking in the wrong terms the key turning point in the US RE bust was probably fallout from Katrina and China is extremely prone to Katrina style catastrophes that get people thinking about staying alive instead of getting rich. (And yes Toro, I know that teasing out the data on the loss of life and utility in the most important food transshipment port in the world is a pain but the correlation does seem to hold in terms of loss of momentum.)
     
    Last edited: Dec 6, 2010

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