I keep getting asked the question “Is China a Bubble?”

And I keep answering “I have no idea, that is not my area of expertise.” But I offer up Andy Xie, no stranger to these pages, as a local expert. And now, let’s add another person to defer to: GMO’s Edward Chancellor.

Barron’s Alan Abelson references Chancellor’s recent piece “China’s Red Flags.”

“Such debacles usually start, Edward has found, with a compelling growth story. Another feature is a blind faith in the competence of the authorities. The ignominious list includes: excessive capital investment; a surge in corruption; easy money; fixed- currency regimes; rampant credit growth; moral hazard; precarious financial structures; and rapidly rising property prices powered by dodgy loans.

Of these, rapid credit growth is the most important leading indicator of financial instability, followed by an asset price bubble. Low interest rates and strong money growth play a significant part, too, in creating memorably bad outcomes. China, unhappily, has its share of these dubious qualities as well as being inflicted by a huge speculative mania.”

Here are the 10 factors that Chancellor flags. They suggest China’s boom will go bust. Each item starts by referencing a specific classic bubble indicator, and follows with the specific China variant (in parens).

China Bubble?

1. Great investment debacles generally start out with a compelling growth story (The China Dream)
2. Blind faith in the competence of the authorities The Communist Party of China We Trust)
3. General increase in investment (Chinese investment Boom)
4. Corruption (rampant in China)
5. Easy money (Money supply grew by nearly 30%, interest rates maintained well below nominal growth rates).
6. Fixed currency regimes (Chinese currency, the renminbi, is pegged to the U.S. dollar)
7. Rampant credit growth (new bank lending increased by nearly RMB 10 trillion, a sum equivalent to 29% of GDP)
8. Moral hazard (China’s leading banks, among the world’s largest by market value, are seen as too big to fail)
9. Precarious financial structures (Chinese banks are particularly reluctant to report problematic loans).
10. Strong credit growth and rapidly rising property prices (a widespread belief that the property prices can only go up)

The entire GMO piece can be found here a nd is well worth some Saturday morning face time . . .

>

Sources:
China’s Red Flags
Edward Chancellor
GMO, March 2010
http://bit.ly/9g5yBN

Red Flags Over China
ALAN ABELSON
Barron’s, March 29, 2010
http://online.barrons.com/article/SB126964423756268289.html

Category: Credit, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

44 Responses to “China Bubble?”

  1. investorinpa says:

    I think the phrase “bubble” is overused. Was the US a bubble in the 20th century? By these definitions, it may have been so. There were enormous peaks and valleys throughout the century. There were periods of time with shaky banks, overdrawn credit, etc. The better question should be what will China be like in the next 100 years? Will it be like the US and have a phenomenal century but have periods of hyper growth and crash? Demographic folk like Harry Dent say that birth rates etc work against the Chinese, but productivity works for them. It’ll be interesting to say the least.

  2. Hmmmm, don’t most bubble usually get popped? It wasn’t until Greenspan/Bernanke ramped up interest rates that the market crisis hit. Are the Chinese authorities equally as ruthless?

  3. bsneath says:

    There is much evidence of a property bubble in China. For example, developers are paying $1,000 to $1,500 per sf for undeveloped land in Bejing and Shanghai. Further, as a centrally managed economy there is likely to be a significant mis-allocation of resources and corruption.

    That said, it is far easier to overcome bad economic decisions in a rapidly growing economy. Time and growth are your friends.

    Further, China’s leaders appear to be reasonably astute in managing nascent bubbles before they turn into economic catastrophes. They have raised bank reserve requirements, down payment requirements and mortgage interest rates particularly on properties acquired for investment purposes. While these actions may not forestall a bubble collapse, they will provide a cushion to protect the system in the event one occurs. It will be far easier to work out of bad property transactions when 40% of the purchase price was upfront cash, the initial mortgage term was 10 – 15 years and banks are holding $1 of capital in reserve for every $6 to $7 in loans. (Compare this to our scenario of 100%+ debt financing, 30 year mortgages, 30 to 1 reserve ratios, off balance sheet accounting mechanisms and derivative bets that can serve to magnify rather than cushion the effects of a bubble collapse.)

    Does China have bubble worries? Yes. Will the collapse in the real estate bubble devastate the China’s economy? Who really knows, but at least the Chinese government recognizes the risks and is stringing up the safety nets to cushion a fall if one comes.

  4. torrie-amos says:

    fwiw, I listend to quite a bit of Jim Chanos speech in December, so I’ve been doing homework on the subject.

    alot of articles are out there I”ve probably read 30-40 of them, most of them are generalities, personal though I operate better with numberical facts, dougie kass says, you short the fundamentals and you cover on the news, well, we know chanos was banging the drum on enron, which was all there in gloriious black and white, ie, special purpose vehicles, off balance sheet stuff

    anyways, i knew chanos had facts on his side to be so public, so i kept on searching

    PIVOT CAPITOL MANAGEMENT, has an excellent piece on the facts and putting it in terms of history

    there’s also a times guy i think who covers the 9 provinces of china and how they are seperate and operate differently

    for the easy lover in you here’s my main takeaway points from all of my notes, note these dates and figures are not set in hard core stone, they are rounded for contestual purposes

    a. in 1974 china exported 380 million a year, now it does that in a DAY

    b. like all countries they have a financial crisis every ten years, last big one was 1998, followed by a small one in 2003

    c. gained international prominence in 2004 with stunning q1 5% growth numbers, which a few years later after 8 quarters became part of bric mantra

    d. flush with cash and exponential growth and the olympics coming, they went on an industrialization binge……..they have built new steel, cement, alumina plants that have capacity that exceeds the rest of the world combined, by my estimates these big projects were started in 05 and completed in 09, and our now on line……………this is a best guess on my part, yet, based on imports it would seem to me rather than shut down older plants they are rehabing them, bringing up there standards with new tech equipment

    e. the 9 provinces are very diverse culturally and geographically, they represent 80% of population, government decree’s are still out of the older internal central province, there still is in an intact cast system in high level govt from this province, this is slowly changing, yet, little influence imho

    f. an intersting difference is that a resident pays no state and local property taxes, so alot of chinese have bought 2nd and 3rd properties and leave them empty, zero carry cost, because they believe it is a good long term investment, this seems to be a cultural thing they have for property, fwiw

    g. a bubble, hmmmmm, my take-away is that they are extremely over capacizied, the only item they are a little low on per capita basis is rail, other than that everything else per pivot is off the parabolic in nature

    h. my first company in 1981 i worked for had opened up a mfg plant there in 1976, my first money manager traveled there extensively in the 90′s and reported on it regularly, my second company did a bit of construction work there in the late 90′s

    i. what imho is undiscovered is the many small and mid cap companies that are big money makers, yet, as we know and will never is truth in financial reports, they have fledging bio-tech companies as an example

    j. one sign of a bubble that is anecdotal is chl, china mobile is buying a bank??????? when i see stuff like this i always ask why why why, it is not logical off the cuff and inherent with alot of risk imho

    in summary some interesting developement over the last 3-4 months, there are now approximately 50 china etf’s available to us investors, u name a sector or industry and they now how it, on April 16th the shanghai index will allow futures trading, can u say hmmmmmmmmmmmmmmmmmmmmm, which also means shorting which was illegal will be allowed if i remember correctly

    the timing of all this

    a. chanos and available facts
    b. weakned commodities, cept for copper is still holding well
    c. and the market developements

    needless to say, i’m watching em

  5. ivanhoff says:

    By studying financial history, I came to the conclusion that the common denominator of most big bubbles is a combination of the following ingredients:
    1) Easy access to cheap money for a prolonged period of time. It stimulates risk appetite and grows money supply to a point where capital flows into investment projects will very low or negative ROI.
    2)A new industry that people don’t understand and therefore don’t know how to price adequately. It is natural for most people to assume that there is nothing to complicated in being in the real estate, but this hasn’t stopped Chinese property to reach price to annual income ratio of over 20:1 in most regions. A disproportionately large part of Chinese income goes for mortgage payments. This robs the economy from the purchasing power of many consumers, who are in housing they cannot afford.
    3) A large number of people suddenly start to feel rich and to behave as such. Labor costs rise as many believe that they could have better living standard as investors/speculators than as employees/business owners. This is the so called Dutch disease, which eventually leads to lower productivity in the country.
    4) The fear of falling behind peers becomes stronger that the fear of losing savings, which lead rational, accountable people to mimic the speculative actions of gamblers. Confirmation bias reigns as everyone tends to find only information that confirms his/her investment thesis and ignore everything else.
    5) The supply of the demanded asset increases substantially. In real estate, we notice over-building, in equity – more IPOs, in debt market – more loans that can be securitized. During a bubble prices rise fast because there are very few sellers. At some point the supply of the desired assets will overwhelm their demand and there is a rush to the exits.

    With that mind, catching a bubble inflection point is the hardest thing in the world. A bubble can become bigger and continue longer than most people expect. History shows that many smart and experienced money managers lost their shirts while trying to short a bubble – they were eventually right, but early and overleveraged.

  6. SINGER says:

    Good commets, guys….

    If you think about it — human civilization since its inception is a BUBBLE…

  7. torrie-amos says:

    lol, singer funny perspective, i always say one word description PROGRESS

  8. ironman says:

    Fortunately, there are now more concrete analytical methods to detect the presence of bubbles – or rather, to distinguish when growth in asset prices is no longer supported by fundamentals. Here is that method applied to the Chinese housing market, which is not as clear cut as you might think.

    (To help decide whether to click through or not, we find evidence of a bubble beginning in 2003, but not in housing – rather we suspect it was in the larger Chinese economy and housing went along for the ride. We’re inclined to think that the massive economic stimulus efforts undertaken by the Chinese government in 2008-09 created a new bubble, which now extends to that nation’s housing market.)

  9. Blurtman says:

    Does the Treasury Secretary in China have a recent history of egregious financial fraud, e.g. selling massive amounts of fradulent securities to the domestic and international market? Has he close ties to a Chinese investment bank whose interests he places above that of China?

    If yes, they may indeed be in trouble.

  10. jac says:

    Great points everyone. I am happy to be part of BR’s online family with rest of you.

    Isn’t it in the best interests of US to pop China’s bubble? If it happens after China becomes the largest economy, it will impact everyone and their unborn children.

    We (actually the whole world) can also buy time on energy independence and harvesting it from sustainable sources instead of depleted the best resources.

    Regarding human civilization is a bubble or not – we would have to agree if we have what it takes to survive no matter what. I think as a species we will continue much after the sun dies (don’t ask me how, it is not our problem to solve :).

  11. ZedLoch says:

    Having a billion people, the majority of which are still peasants, makes China a unique case I think.

    From purely anecdotal evidence coming from a Chinese colleague: yes, housing prices are incredibly high, but so is demand. Everyone wants to move to the cities, but not all can afford (or are licensed) to do so.

    In the US there was a glut of construction, the result of which is a lot of empty office space and homes. I’m not sure if China has that problem yet…

  12. VennData says:

    I don’t get the MTM talking heads who keep saying “China will float it’s currency when American stops demanding it.” So, they’re saying that the Chinese their leadership is so pig-headed and so concerned about appearances that they can’t do what’s in their own best interest because someone’s telling them too?

    If true, that sounds more like petulant teenagers than competent economy managers. If it’s not true, than where on earth do these MTM talking heads like John Auters, Stephen Roach et al get their information than from other MTM talking heads parroting back the same nonsense?

  13. wunsacon says:

    >> In the US there was a glut of construction, the result of which is a lot of empty office space and homes. I’m not sure if China has that problem yet…

    If I read torrie-amos’ post (and other articles) correctly, it seems China indeed has that problem. (See torrie’s bullet “f”.) The problem in China — as in the US — is that housing prices are too high for many people to afford. So, homes stay empty. (Or home-owers essentially “squat” in them.)

  14. bram says:

    I’ve been living in China since 2000. Is there a RE bubble in China? Undeniably yes. One of the key drivers that people seem to miss is this interesting phenomenon. Children born under the one-child policy are coming of age now. They are graduating college and looking to get married.

    First of all, the degrees they are earning are pretty close to worthless. (This may seem surprising to some people – especially my fellow Americans, who seem really psyched out by the Chinese right now. But the fact is that many of the assumptions I’ve read in the US news are drawn from the assumption that things in China operate similarly to the US and that is as wrong as can be.) The high male population of the one-child policy generation creates a competitive situation for brides; men need to have a house to attract a wife to get married. But in many cases these guys don’t even have jobs (and the prospects are grim), so the parents and grandparents gather up their savings and buy a house for junior. And we’re just taking about the occupied dwellings with price-to-income ratios exceeding 20.

    Sustainable? Not a chance. When will it pop? That’s a tough one.

  15. VangelV says:

    Xie has been singing the same song for quite some time and has been wrong. His record is not very good.

    But even being ‘right’ can be a problem for the doubters. Even though it is likely that there is massive overcapacity in some sectors it is just as likely that the overcapacity will go away as inefficient companies are closed down and domestic growth in demand takes care of the rest. This is what has been the norm for the past two decades. I remember staying in one of those ‘empty towns’ in Yunnan province twelve years ago. It did not stay empty for very long, even though its location was not all that special and it had no particular advantage over compteting towns.

    I suspect that Chancellor is right about some things and that the doubters who point to the idiocy of government have a point. And Chanos may well turn out to be right as certain portions of the commercial real estate sector take a beating. But that does not man that the China story is over or that one cannot make money by investing in companies that supply China what it will continue to need. There are still too many questions about petroleum supply and the viability of fiat currencies that investors need to consider before they reject the China story and run to alternatives like USTs or the USD.

  16. cognos says:

    Singer – This is a brilliant, subtle point. Its all “a bubble” if you dont believe the future will be like the past. In the “natural state of man” technology research and financial analytical work are worth zero. Riding the bubble… they are worth billions.

    Good post from Torrie. I have been watching Chanos and following the China story, the bubble question quite a bit. My key differentiator — that I think all the bubble progonticators miss — they dont talk about PRICE.

    The fact is — the PRICE of real estate is not that high in China. Its 2-3x basic raw construction cost. Compare this with South Florida… where it peaked at 5-10x construction cost. (With zero economic growth potential!).

    What we’re looking for when we say “bubble” is not about over building or emptiness or even something that might mildly dissappoint when over the next 3-5 years. We mean something that has significant downward price momentum. Then you have to show me it has a HIGH PRICE. I have not seen Chanos or Abelson/GMO… they have not touched this point.

    Just last week I had a conversation with a retired, older, real-estate developer I know. He spends 1/2 the year in asia, owns properties across the region. He said prices on AAA condos in major developing asian cities are still 1/3 to 1/4 those of New York.

    Without HIGH PRICES… there is no big bubble.

  17. bram says:

    cognos — you don’t seem to be considering income when you say that “…the PRICE of real estate is not that high in China.”

  18. changja says:

    @cognos

    What are you talking about? I have plenty of working age friends/colleagues in Beijing. The housing prices are skyrocketing astronomically. One of them bought a condo 2 years ago and its up 300% in that timeframe. They are comparable to NY and overly so comparing the much lower cost of construction labor.

  19. perra says:

    A lot of observers seem to be taking the ‘Greenspan approach’ to China. When asked on Bloomberg if he thought there was a ‘China Bubble’ (without further definition of course…) he said “I think so.” Then he ended by saying something like “it’s hard to tell because we don’t have any data on China.”

    I’m too lazy to provide you with a comprehensive argument (backed by data) for why the long-term China growth story is intact. Came up with the following points though:

    10 factors….

    1. Great investment debacles generally start out with a compelling growth story (The China Dream)
    - I find that even people with some exposure to China fail to appreciate the potential for growth. I feel that the potential for growth is underestimated by most US observers, not the other way around. Do you own research…urbanization is key.

    2. Blind faith in the competence of the authorities The Communist Party of China We Trust)
    - Political risk is by far the major threat to the Chinese economy in the long run. A major political event / civil unrest is the main risk to the long term growth story. But this is not because the political situation is very fragile, but because the economic growth story remains intact.

    3. General increase in investment (Chinese investment Boom)
    - Investment is the main driver of GDP growth given the stage of China’s development. This is not an issue at the aggregate level but has resulted in overcapacity in certain industries.
    - Expect FAI growth rates to slow significantly in 2010

    4. Corruption (rampant in China)
    - A real political risk. But, having lived in China for 15 years, I have made what I think is an interesting observation: people speaking out against corruption normally just want the specific incident to be corrected or addressed; they don’t seem to feel the need to question the legitimacy of the party as a whole.

    5. Easy money (Money supply grew by nearly 30%, interest rates maintained well below nominal growth rates).
    - Medium-term risk comes mainly from M2-CPI transmission.
    - While political risk is the main long term threat to the Chinese economy, stronger than expected inflation (say 6-7% yoy in 2010 instead of gov’t forecast of 4-5%) is what could ruin markets in the short term (this year). Food prices are the main focus.

    6. Fixed currency regimes (Chinese currency, the renminbi, is pegged to the U.S. dollar)
    - Not for long: expect 3-5% RMB appreciation against the US dollar within a year. Longer term its harder to estimate, but 50% within 10 years is likely.
    - This is not likely to result in a meaningful loss of Chinese competitiveness, since China has higher total factor productivity growth rates than the US (about 5ppts higher in 1994-2004)

    7. Rampant credit growth (new bank lending increased by nearly RMB 10 trillion, a sum equivalent to 29% of GDP)
    - The gov’t/PBOC have been tightening since Dec. (after not doing anything since Aug 2009). Expect more tightening in the months to come, both “Western style” tightening and “Chinese style” window guidance tightening.

    8. Moral hazard (China’s leading banks, among the world’s largest by market value, are seen as too big to fail)
    9. Precarious financial structures (Chinese banks are particularly reluctant to report problematic loans).
    - I would not be overly concerned about Chinese banks. The Chinese financial system largely escaped the financial crisis. For example, the whole Chinese banking sector’s exposure to Lehman bonds was only $758 mio. The large Chinese banks have loan loss coverage ratios of well over 100+%, enough to weather any future NPL risk.
    - Of course, the reasons for the low exposure includes a very simple commercial lending model and closed capital markets…but the low exposure level is still a fact.

    10. Strong credit growth and rapidly rising property prices (a widespread belief that the property prices can only go up)
    - Mainly an issue with high-end, commercial real estate in the large, First Tier cities. I agree that this is a downside risk to watch in 2010, but I actually think we will see a not unjustified jump in most HK/China real estate stocks once high-end market prices have dropped and the government shows it is satisfied with the price level. The metric to watch here is property transactions: if they remain flat over last year we will be ok, if they fall by over 15-20% there may indeed be a correction.

    When it comes to Chinese and HK stocks in 2010: Apart from the risks of stronger than expected inflation (driven by food prices) or a stronger than expected market correction in property prices, the main risk is of course a US double dip.

    I think the China inflation and real estate issues are overblown and that they won’t cause any major correction.

  20. perra says:

    @ Cognos + changja:

    When talking property prices you are both right. You have to segment the market though. You can buy a 100 sq.m. apartment in the hinterland for the price of 1 sq.m. in certain Beijing and Shanghai apartments.

  21. Greg0658 says:

    torrie-amos wonders why CHL china mobile is buying a bank .. maybe they are considering that PayPal meet Net10 concept .. think I read it here at TBP .. not those brands tho

    a neighbor friend in water pumps and fountains mentioned counterfeiting is getting to be a problem over there unlike years past

  22. cognos says:

    bram + changja –

    both of you completely glossed over exactly my point. neither talked about where price actually IS today… and why that is super high.

    in terms of income… I would say major international cities rapidly converge in income levels (ex-pats get paid similar amounts regardless of location). also… chinese income levels are growing fast and that 10% growth is really concentrated in the urban professionals (so these are probably experiencing 30% annual income grow).

    so I would not compare broad “per capita” income levels with the prices of select urban condos and developments.

    someone else pointed out that prices are “up 300% in 2 years”. again… no mention of the CURRENT price level. no justification that it is HIGH by objective standard. again, south florida was $1000-2000/sq ft at the bubble peak. Prime urban China is LESS than that today…

  23. scharfy says:

    One thing about China that doesn’t get enough play is the lack of income. The poverty. People look at all the building and assume wealth, in the western sense.

    600 million live in households with under 1000$ a year in income
    400 million live in households with under 2000$ a year in income

    Only 60 million households earn over $20,000 a year.

    It is closer demographically to sub-saharan Africa and must be viewed through that lens.

    Anyone who wants to look at some AMAZING AND FRIGHTENING photos of industrialization in China check out this link. Think 1975 Cleveland times a thousand….

    Chinahush.com

    Be ready to be visually shocked…

  24. perra says:

    @cognos

    Chinese urban and rural disposable income have been growing at similar levels for the past few years.

  25. cognos says:

    According to this March 5th, 2010 article in the NYTime which focused on the “bubble” and quotes Xie…

    “Prices here have risen more than 150 percent since 2003, pushing the price of a typical 1,100-square-foot apartment up to $200,000″

    I’m sorry… but for $200k one can get a tiny 200-300 sq ft apartment in Manhattan. So shanghai is 10% the price level of Manhattan. Sure maybe it might suffer a downturn… deliver mediocre returns from here. But prices just are just not that high… so there is little potential for downside pain.

    Link -

    http://www.nytimes.com/2010/03/05/business/global/05yuan.html

  26. perra says:

    @Cognos

    The major ‘bubble’ concern of people following the China real estate market is over commercial real estate, not residential.

    Also, you need to look at transaction volume, not only at price. While I don’t see a serious bubble in residential real estate, the situation is not as rosy as (I think) you are suggesting. An example from Shanghai:

    http://www.china.org.cn/business/2010-03/11/content_19583634.htm

  27. DC says:

    Footnote: Google and some of their brethren are leaving China, ostensibly because of censorship.

    It’s also possible they suspect that now may be precisely the wrong time to sink billions into an overheated environment.

    Probably not at the core of Google’s decision, but that’s a helluva market to walk away from on principle alone.

  28. SINGER says:

    @ Scharfy,

    That was fucked up dude… thanks… that should be on the MSM… when is that guy going to be on Charlie Rose or Larry King… the fact that this is happening on Earth and is hidden to the extent possible is a disgrace…

  29. Scott says:

    It’s all a very interesting debate, but it seems like there is lack of good analysis.

    Tony Boeckh is a former editor at BCA and has posted the following report publicly. Conclusion: There will be a bust, but it is probably beyond the time horizon of most investors.

    http://www.boeckhinvestmentletter.com/newsletters/Volume%202.3%20China%20Collapse%20Mar%2011%202010.pdf

  30. seneca says:

    Last week, Barron’s forecast the yuan would rise. This week, China’s economy will implode. Here’s my forecast: whichever happens, Barron’s will ballyhoo the right forecast and bury the wrong one.

    Scharfy’s link to pictures in China of industrial waste and pollution on a vast scale brings to mind that famous quote: “I love the smell of capitalism in the morning!”

  31. perra says:

    @ Scott

    Thanks for posting the link to the Tony Boeckh newsletter. OK analysis, apart from the fact that he regurgitates the old misconception that China has an “excessive dependence on exports” for growth. China is simply not an export led economy. And just because you’ve heard this said 100 times and bought Made in China products at Walmart doesn’t make it one. China’s growth is driven by private investment and consumption. Net exports even has a smaller contribution to China’s nominal GDP than government spending (including in 2007, before the crisis and the stimulus spending). This information is available to anyone who cares to look for it. If you want to see what an export led economy looks like, look up similar information for countries like Singapore, Taiwan or Malaysia.

    The guy also has no clue about NPL.

    I love the comment: “There will be a bust, but its probably beyond the time horizon of most investors.” I wish he could be more specific about his powerful forecasting models. Oh, that’s right, he doesn’t have any. He’s just hedging his bets based on the same level of information he used to brand China an export led economy.

  32. gary b says:

    check out this link….. images tell much….

    http://www.time.com/time/photogallery/0,29307,1975397,00.html

  33. scharfy says:

    @gary b

    Great link…

    This time its different? No way man.

    If it looks like a bubble, walks like a bubble. Its a bubble.

  34. Thor says:

    Remember that Japan was in a bubble for many many years. If China is a bubble, it may take several more years for it to burst, they do have a very large population – I’m sure China has much more to grow, think of the country side, and how they’re building high speed rail links to them.

    Longer term, China faces many of the same demographic problems that Japan was beginning to face in the early 90′s. The difference though, is that when Japan’s demographic nightmare came home to roust, they had a far more developed economy. Although I think that China has more room to grow, I don’t think they will be able to match the double digit growth of prior decades. China will not be able to grow their internal economy fast enough to be ready for the demographic mess headed it’s way.

    In short, China may very well be a bubble, but I’ll be that it will take far longer to play out than many people think.

  35. Thor says:

    Perra – based on your comments, I would hazard a guess that you are either heavily invested in China or currently living there.

  36. bman says:

    Here’s the real nightmare scenario: When their bubble bursts are they going to just stop buying US Treasuries, or demand repayment?

  37. I’m sorry… but for $200k one can get a tiny 200-300 sq ft apartment in Manhattan. So shanghai is 10% the price level of Manhattan. Sure maybe it might suffer a downturn… deliver mediocre returns from here. But prices just are just not that high… so there is little potential for downside pain.

    And I suppose incomes in Shanghai are 10% of those in Manhatten?

  38. perra says:

    @ Thor

    I live in China. I work in and am invested in China focused private equity funds, but am not heavily invested in Chinese stocks. I’m not sure how this is relevant to my comments though.

  39. Cynic_FA says:

    IMF Article “Is China’s Export Oriented growth Sustainable”
    http://www.imf.org/external/pubs/cat/longres.cfm?sk=23177.0

    Two key points:
    1. Investment is over 40% of China GDP. When they no longer need to build new factories and office buildings, think of all those unemployed construction workers.
    2. Growth is big in three industries: Shipbuilding, Steel, Machinery. This paper shows that a continued PROFITABLE increase in China exports in these three areas is not feasible based on worldwide industry growth and projected price declines required to reach clearing levels.

    This paper gives you a lot to think about regarding sustainability of China growth and survivability of the rest of the world players in any industry China wants to dominate. Excess supply is coming along with price declines.

  40. [...] and to expand upon the previous post I have included an excerpt from a report referenced on The Big Picture . China [...]

  41. perra says:

    @ Cynic_FA

    The Chinese economy has a lot of challenges. My two point are:

    #1. A fact: It’s a big mistake to think that China is an export-led economy. China’s GDP would grow at high single digits even with a negative net export contribution to GDP. Investment will continue to make up a large share of China’s GDP. The investment is not primarily going into “factories and office buildings”. It is going to China’s ongoing urbanization. Growth in urbanization will drive China’s growth for several decades. For example, 90 mio people are expected to move from rural areas into cities between 2010-2015. And that will only bring China’s urbanization rate to 52% (in 2015) compared to the current 80+% urbanization rate of North America. So I wouldn’t underestimate the need for investment.

    Over time, consumption will continue to increase. The fact that domestic consumption grew by over 15% yoy should convince most skeptics.

    #2. An opinion: I see no ‘bubbles’ that will stop the Chinese economy from overtaking the US economy by 2020. The only thing that could stop this is a major geopolitical event. I know this is hard to accept for some people, hence all the China bashing and the belief that China’s growth cannot be for real. But it will happen all the same. You might as well profit from it…

    Reg. China’s exports, I would advice doubters to follow the quarterly export data on an ongoing basis.

  42. [...] Is China a Bubble? (Barry Ritholtz @ The Big Picture) [...]

  43. GCD says:

    A factor that doesn’t seem to get much light is the poor construction in China. With tradesmen that last year were planting corn and loose building codes and bribe prone enforcement the buildings in China are estimated to have about half the half life of a western building. This would not matter if it was a single family dwelling where the land was also appreciating but in high rise condos (the bulk of large city mortgages) it seems worth considering. And just a thought on natural disasters. In a seismic country there should be some thought of risk. There will be 80%+ building failure in any large city and they are there isn’t enough tea in China to fund the insurance pool.