Who will save China? Part 2

There's a few things I didn't cover in my last post on China, so here is part 2...

On Australian SBS show 'Dateline', there was a piece on "China's Ghost Cities"



Related to video above, Business Insider reported in late 2010:
"There Are Now Enough Vacant Properties In China To House Over Half Of America"

Recent statistics show that there are about 64 million apartments and houses that have remained empty during the past six months, according to Chinese media reports. On the assumption that each flat serves as a home to a typical Chinese family of three (parents and one child), the vacant properties could accommodate 200 million people, which account for more than 15% of the country’s 1.3 billion population. But instead, they remain empty. This is in part because many Chinese believe that a home is not a real home unless you own the flat.

And so people prefer buying to renting, and as a result, the rental yield is relatively low.

Consultancy firm McKinsey's believe this trend will continue with China expected to build 50,000 skyscrapers in the next 20 years. The figures translate to 2,500 skyscrapers each year, more than 200 every month, almost 50 a week. (The definition of a skyscraper is a build at least 80 metres tall)


Satellite Images Of The Ghost Cities Of China

"There’s city after city full of empty streets and vast government buildings, some in the most inhospitable locations. It is the modern equivalent of building pyramids. With 20 new cities being built every year, we hope to be able to expand our list going forward."

Chinese Property Charts
source: Business Insider
Outstanding real estate developer loans are up 50% in two years

Price Spike - home prices in Haikou have jumped 54% in one year

Nationwide there has been a 140% house price rise from 2007 to beginning of 2010

Price to Income

Price to Rent

A sign of systemic risk: local governments now rely on land auctions for revenue


China's State-owned enterprises (SOEs) are the leading cause of over investment in property


China's SOEs

Property Developers in bed with Government is a recipe for disaster (just ask New South Wales Labor!). In China about 50 per cent of local government revenues come from property development. In other words, in China (and to some degree in other countries like Australia), local, state and Federal Government is addicted to property development to fund Government budgets.

As John Lee states
The favouring of SOEs (and suppression of the domestic private sector through capital deprivation) is a key pillar of how the Communist Party maintains its economic dominance and relevance at grassroots levels.

To put some numbers on China's property growth,

bank lending of domestic fixed-asset investment, expanded from US$750 billion in 2008 to US$1.4 trillion in 2009 and US$1.2 trillion in 2010. The 2011 target is US$1.1 trillion. Despite weekly direcectives by Government officials, Chinese banks lent an estimated US$220 billion in January (2011) alone. Three-quarters of the capital goes to state-owned enterpises (SOEs) overseen by thousands of local bank branches.

As I've stated several times previously, all property bubbles eventually burst. China's bubble is unrepresented and makes the US sub-prime property bubble look like a grain of sand on the beach.


China's Inflationary clampdown

Inflation is becoming more prevelant worldwide as the US floods the world with paper dollars, and national governments embrace debt to uphold promoised social security systems.

In China, Neils Jensen, from London-based Absolute Return Partners, argues that China is "massaging" its numbers.

"Official figures show that inflation eased 4.6 per cent in December 2010, from November's 5.1 per cent, but anecdotal evidence suggests the actual inflation rate. particularly in the big cities, is running closer to 20 per cent.

What's more, the Chinese have also taken the extraordinary step of reducing the weight of food in the consumer price index - at a time when sharp rises in food prices mean that households are likely to be spending even more of their income on food.

"when the Chinese ultimately bite the bullet and force the economy to slow down meaningfully (and I believe it is a question of when, not if), the biggest victim is likely to be commodity prices, and none more so than base metal prices, which in recent years have been highly correlated to the fortunes of China."

source: Business Spectator

On 4 April 2011 it was reported that the Chinese government was putting direct pressure on major companies to resist passing on inflationary pressures to consumers. ie. the Chinese government is increasingly relying on administrative price controls to stop inflation (but these will never work!)

Last week, Chinese shoppers emptied supermarket shelves of items such as shampoo, soaps, and even instant noodles, after state-owned media reported that major companies - including Unilever and Procter & Gamble - were planning to lift prices by 5 and 15 per cent from the beginning of April.

Alarmed by the reaction, the National Development and Reform Commission (NDRC) – the country’s economic planning agency – contacted the companies, urging them to exercise price restraint.

Other Chinese companies including Liby, a leading detergent producer, and Tingyi, which produces half of China’s instant noodles, also agreed to delay planned price rises.

The Chinese authorities are clearly worried that rising prices – particularly for essential goods such as food – could trigger increasing social and political unrest. Food prices rose 11 per cent in the year to February, more than twice the 4.9 per cent in the overall consumer price index.

source: Business Spectator

Place your bets. China is in trouble for ignoring basic economic laws. Like gravity, they cannot be defied through government decree.

~ Scott