By 2010, China was beginning to have an impact on the global consciousness in a new way. Prior to the western financial crisis, it had been seen as the new but very junior kid on the block. The financial crash changed all that. Before 2008 the conventional western wisdom had been that sooner or later China would suffer a big economic meltdown. It never did.
If Martin Jacques says that then the crash is going to happen in 3…2…1
I think the CCP has a very long road down which to kick the can.
There’s so much that just looks like economic absurdity but they never seem to get the crash you’d expect.
Looking at housing in Dongguan where a small flat will set you back more than a hundred grand GBP when the average office worker is on about 8 – 10 grand a year. Yet flats keep being built and bought by the wealthy few. Often they just leave them as empty concrete shells in the belief the value will just rise forever. Sometimes they furnish them and rent them out. My 3 bedroom apartment must be worth at least half a million GBP, given the size and location, and I pay about 800 quid a month so maybe they’ll have covered the cost of the place in 50 years.
This is going on all over the country on an unimaginable scale. When it crashes it’s going to be a fucking huge disaster… and of course they’ll blame ‘hostile foreign forces’.
“I think the CCP has a very long road down which to kick the can.”
Whats your take on how long that road is?
Jim, I have no idea.
10 years ago I was saying this nonsense can’t keep up much longer…
“A small flat will set you back more than a hundred grand GBP when the average office worker is on about 8 – 10 grand a year. ”
So price to earnings ratio roughly in line with most western European cities.
I suspect sooner rather than later for a number of reasons.
1. Everyone’s realising the numbers they’re putting out are fake. Even CCP officials are admitting as much.
2. The silliness is becoming known – there are supposed to be 64 million unused apartments in China now as one example. Ghost cities as another. They used more concrete in the last three years than the US did in the whole of the 20th century. etc etc much of the supposed prosperity is fake. If I build something in the middle of nowhere that no one is ever going to use, then I have spent money, but I havent actually created any value. Nevertheless these numbers are included in China’s GDP. They’re growth is not slowing, it’s already going backwards.
3. The hold of the government on power is not as solid as it would appear from the outside. If the rush to prosperity slips even a little, there’s a good chance they’ll go down. Not because the people will rise up, their own apparatchiks will revolt.
4. Trump. Not just the trade war, although that’s the bit that everyone knows about. He’s also pushing back on IP theft etc. Ultimately, this is not about trade, it’s about forcing China to play by the same rules as everyone else in economic terms. This is something they promised to do when they joined the WTO, but have consistently failed to do. At the moment this is in a holding pattern pending the 2020 presidential elections. Once he’s re-elected (and that’s pretty much a given at this point), stay away from fans ;o)
5. Much of the craziness referred to in point 2 has been financed by western investors. They’re now starting to learn that China is not transparent, has no rule of law and most of their “investment” money is not coming back. If Trump takes steps here, boom.
6. China is running out of dollars. The huge surplus/reserve that everyone knows about/assumes is almost gone. squandered on keeping the wheels on and belt and road, which has been plagued with problems due to the fact that most of the initiatives are in kleptocracies. The money keeps disappearing.
7. Hong Kong Protests.
And so on.
China still confounds me. Since before 2005-ish, I have been wittering on that the country is in a similar position as Russia in 1913: roaring economy built on sand, it just needed “an event” to happen for the whole thing to come crashing down in bloody revolution.
But it hasn’t happened.
I suspect (hope) that the trace deals that Trump has brokered will let the air out slowly.
Jorb,
From what I’ve read and heard that’s a reasonable assessment, I’ve also witnessed some of those ghost cities when I visited a supplier in 2006/7. It wasn’t just apartments though, whole industrial areas standing idle.
I’m not sure I agree about the party, Xi Jinping has been consolidation power, possibly because he’s seen the writing on the wall.
Chinese real estate has the same problem as, say, London — prices are ridiculously inflated; some day, those prices will collapse; and when the price collapses, the apartments will still be there — only now more affordable.
About those “ghost cities” — are they really equivalent to the “New Towns” built in the UK after WWII? Now China is moving people from the countryside; then the UK was moving people from bombed-out insanitary cities. Before either of them could move the people, they had to build the roads, water systems, homes, factory sites. There was probably a point at which the UK “New Towns” looked like “ghost cities”.
There is the real economy and the financial economy. The financial economy of paper shuffling is destined for big problems around the world. When the financial economy goes south, China will still have the real economy assets of factories and modern infrastructure and a much better educational system than many Western countries.
There are hard times ahead for everybody. It is debatable whether China is in a worse or better position than many other countries. Time will tell !
If something is too good to be true, then the solid bet is that it’s not as good as it looks. No other country could expand like that without cracks appearing.
You don’t need to know about China — just what happens when autocracies lose control of the economy. It’ll be a prolonged economic crisis minimum, if not collapse.
I just wouldn’t bet on when.
@jorb
+1 Good summary, problem is lack of transparency. When China goes tits-up, sub-prime crash will be a ripple
Big question is will it be confined to China, or will West be hit too?
iirc HSBC have been reducing their China exposure for some time
@Gavin Longmuir
imo the China ghost-cities are similar to the ghost-airports in Spain
Gavin,
In the new towns there were ghost streets, but not for long. They were filled up pretty much immediately. Those that moved there were tenants in London and so did not have to worry about selling. A large proportion of new town houses were council properties.
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Otto — the analogy between the old UK New Towns and China’s Ghost Cities is of course only an approximation. Different countries, different times, different circumstances — but it remains self-evident that it has to be built before they can come. What triggered the analogy in my mind was reading some reports that several former Chinese Ghost Cities were becoming decidedly unGhostly: a major manufacturer moves into the pre-built factory; workers move into the pre-built housing; retail and more people follow.
My intuition is that when things go pear-shaped — as they will at some point, around the world — a country with a comprehensive industrial infrastructure that allows them to make almost everything is going to be in a better position to ride out the storm than a country which relies on imports for vital products. But I could be wrong.
When I moved to Hong Kong in 2013 I thought I knew a lot about China as a ‘sophisticated western investor’. Turned out I was around 5 years out of date. Now when I go back to London or the US, the consensus view is the same as I had back then, i.e more than 10 years out of date. In the west nothing changes very much in a decade, but in China everything does. Prior to the financial crisis they were basically still running a consumer repression economy – low interest rates, low exchange rates and low wages. Classic EM stuff, gathering $ earnings through exports to reinvest back in China. Unlike most EMs however they didn’t borrow in $ from US banks and they didn’t allow western multi-nationals to carve up their economy. They did however piggy back off the western banking system for their transactions so that when that blew up they had to quickly fix their sclerotic banking system and launch a capital markets structure. That has been the story of the last decade.
It’s not about exports and consumer represssion any more and the misallocation of capital that followed the post crisis stimulus has worked through the system. There aren’t any ghost towns any more, however much the ‘US capitalism good, Chinese communism bad’ propaganda machine keeps trying to insist. By the time I got to Hong Kong we were at the back end of the Investment led boom and moving toward the consumer. Wages have been rising steadily, taxes are being reformed and consumer disposable income is powering a consumer economy. Indeed, the last four quarter, more than 80% of GDP growth in China has come from the Consumer, FOr comparison, while the US has a population one quarter the size of China it has mortgage debt four times the size. Meanwhile in China, the so called debt bubble is actually almost all State Owned enterprises and local government debt, much of which went to build income generating infrastructure. It’s not like $ denominated consumer loans in your classic boom bust Washington Consensus led emerging market.
China is the size of Europe and the regions are best thought of as being like European countries, As such you can find stories to suit your boom or bust thesis. China certainly has its problems, but they aren’t the ones that the politicians and the short sellers keep telling you exist.
@Mark
Interesting & informative