What if the Chinese property bubble goes nuclear?

http://www.independent.ie/life/home-garden/homes/what-if-the-chinese-property-bubble-goes-nuclear-30440285.html

by tokenadult • 12 years ago

34 77 12 years ago

dm25• 12 years ago

Aren't there a lot of people living in really bad conditions in China?

Why does the Chinese government not allow these people to move into these empty buildings? Wouldn't any rent being paid be better than the buildings sitting there earning nothing?

It could be done with a lottery or with very clever analysis of who would be best suited for these buildings. (need teachers, butchers, shop keepers/merchants, police, fire-fighters, etc., in the appropriate amounts)

The buildings just sitting there seems like the worst option, doesn't it?

I'm probably very ignorant on the economics of this type of thing but I would be very interested in learning. Does anyone know of a detailed explanation of why these buildings aren't being populated?

There are several Eiffel Tower replicas all over the world, 3 in China, 1 of them is full-scale: http://en.wikipedia.org/wiki/List_of_Eiffel_Tower_replicas

akanet• 12 years ago

A low rental price on a high-end condo would immediately devalue the condo and any surrounding units - which is worse to the property development people than no rental income at all. They live by essentially propagating high prices for development.

dm25• 12 years ago

By "property development people" do you mean the hired construction companies or the Chinese government?

Doesn't the Chinese government own these cities and buildings?

ajmurmann3• 12 years ago

I also never understand why it's seen as so important that real estate prices go up. Statements like "Chinese-based parents who are funding their children's purchases are helping the Irish property recovery." from the article always baffle me. Isn't it great if real estate is cheap? It means people can afford to live there and spend there money on other things and keep the economy going that way. I certainly prefer that over what's going on in SF. I understand that often times people will take out mortgages against there houses if the price goes up and that way money goes back into the economy. But in my opinion that's not real money and will only lead to another 2008.

dm25• 12 years ago

That's what I'm thinking, even if the property and surrounding properties are devalued now at least they would be creating an economy in the city. They could always raise the prices later. I just don't understand how empty could ever be better unless the cost of maintaining a lived in building was higher than a non-lived in building..

Then again, I see the same thing here in the US. Companies like Cisco buy huge office buildings and leave them empty for years. I suppose it's because building prices are cheap now. I always thought it was because there was a movement for workers to work from home more.

marincounty• 12 years ago

The rent in San Francisco and Marin County is going up too fast. I hate to say this on this board, but I'll be glad when the tech bubble bursts. I have some friends in San Francisco and I'm so glad they are protected by rent control. Marin County only has rent control in San Anselmo. If you live in San Anselmo and you live in a detached "Mother in-law" unit you have rent control. As to Landlords, who consistently raise rents to whatever the market bares--don't complain when your Tenants really don't give a dam about your property, or you? Your tenants know the difference between gouging, and reasonable rent increases. Being a Landlord is a little different than making money in the stock market. That person who has carved out a litte life in your community, and home--sometimes as to pass you in the Hallway in order to get to the bathroom? "But, I'm just doing what Everyone else is doing?" Sometimes--relationships are more important than maximizing capital, maybe that's how the term mother in-law unit came to fruition? "Hell, throw her out--I hear it's cheap to live in Chicago? By Mom!" I just don't get it I guess?

tomphoolery• 12 years ago

Isn't it great if real estate is cheap? It means people can afford to live there and spend there money on other things and keep the economy going that way.

Real estate prices rising means that the people are getting more wealthy. When real estate prices fall, it means that people are most likely getting less wealthy.

I understand that often times people will take out mortgages against there houses if the price goes up and that way money goes back into the economy.

What you're describing here is called "re-financing", it's a perfectly normal means of borrowing money against your house if you have enough collateral. I've never heard of people doing it so that money goes back into the economy, it's usually to re-invest money into your house like for construction or whatever, and your monthly payment just increases.

logicchains3• 12 years ago

It's seen as important that real estate prices go up because a significant proportion of the population have borrowed money to invest in houses. If real estate prices fall, the wealth of people with houses/mortgages is reduced.

One way of looking at this is that a significant proportion of the population have a 'vested interest' in increasing real estate prices. Some would also argue that continuously rising house prices are economically beneficial, as if house prices fall, then the homeowners/mortgagees who lose wealth from the fall will spend less, reducing consumer spending and hence 'harming' the economy.

SoftwareMaven• 12 years ago

I have a feeling the problem is jobs. What are the industrial jobs that will form the community's foundation? No jobs means nobody wants to move there.

politician• 12 years ago

Perhaps, but I think the problem actually might be "new wealth doesn't know how to invest". In other words, people who've come into the cities, earned some money, and now are wondering what to do with it.

mimighost• 12 years ago

Those buildings are not populated for several reasons: 1.Sits in the suburb area where the public transit is very poor. 2.Lacks basic public facilities like schools and hospitals.

Basically, those ghost cities are the outcomes driven by the local government's insatiate desires to sell more lands to real estate developers, the revenue from which has become a critical part of its total income.

starky• 12 years ago

Not really a detailed explanation but when I was there a few months ago the guy I was with said that a lot of them were sitting around unfinished because they didn't have any buyers. A lot of them are so called luxury buildings where I'm sure the developers don't want people who can't afford that type of life living, they were pointing out buildings where apartments were 1.5M RMB ($250k) which given the wages in China is just a bit ridiculous.

The factory I was visiting was constantly complaining about how nobody wanted to work in the south of China anymore and that all the workers had moved up to Shanghai, yet there was all this construction and plans for huge growth in the area. I just couldn't figure out how they were justifying these plans.

crdoconnor10• 12 years ago

Why does the Chinese government not allow these people to move into these empty buildings?

For the same reason why the American government doesn't let people move into the large number of empty high end luxury apartments in downtown Manhattan.

They all belong to somebody.

est• 12 years ago

South China Mall is still empty? Should take an online street view research before bad journalism.

waps4• 12 years ago

http://www.thenanfang.com/blog/tag/south-china-mall/

TLDR: Not empty anymore, but they must be making a hell of a lot less than planned, and have taken a huge hit to their projected profitability doing this. I'm sure they reflected this in their stock price and GDP projections, right ?

geetee• 12 years ago

Vice on HBO did a good segment on this. Definitely worth checking out if you have access. A little extra bit here: https://www.youtube.com/watch?v=qPjGWcM3Awc

melvinng• 12 years ago

TL;DR: if it goes boom.. the world will just move on as usual and we just get back up.. just like the US market.. except China wasn't as hyped up and the media is still control by the government so it won't be as bad as the US.

NicoJuicy• 12 years ago

In China, you need to know people to get a loan. Once they have loans, the bank isnt following up.

People take a loan, invest 25% in a crappy building. Take 75% and the bank takes the useless property when they dont receive the money...

So yeah, a lot of bad / empty buildings in China..

hackaflocka2• 12 years ago

"With deflation raising its head in Europe many economists believe that a devaluation of the Chinese currency will hit Europe like an economic broadside – in particular the economies with the most debt (ahem) whose repayment requirements will grow substantially under continued deflation."

I'm pretty good at macro-economics, but I couldn't understand this sentence.

Perhaps it's just a mainstream media attempt to confuse the reader into thinking he/she doesn't really know economics.

But if you think you have a handle on what this sentence means, I would welcome your interpretation. Hit reply below and fire away.

danmaz74• 12 years ago

Inflation is good for debtors, because as the value of the currency shrinks, so does the value of your debt, that becomes easier to repay in real term - with inflation, salaries grow nominally, tax revenue grow nominally etc. With deflation, the opposite happens.

hackaflocka2• 12 years ago

Excellent explanation. Thanks.

popsc• 12 years ago

I concur w/ danmaz74’s statement. But what is the cause and effect relationship of “devaluation of the Chinese currency will hit Europe like an economic broadside “ . Is it less Chinese purchases of European goods?

wodenokoto• 12 years ago

Are there any good books that looks into this problem and how it came about?

narrator2• 12 years ago

China can make all the bad investments they want. Unlike any other western country, the government prints their own money debt free and can thus just bail out all the bad loans forever. The boom bust cycle is just an aspect of fractional reserve / debt as money banking. In China the banks operate like partially privatized central planning and are closely directed by the government. There is such extreme cognitive dissonance about this in the western financial press. They just don't get why China doesn't bust. Check out the history of Chinese bail outs and bad loans. It's really quite interesting. Loans and funds and banks and all that fail all the time in China and the government just prints up some money and bails them out if they're politically important. Goof ball investment schemes which are the Chinese equivalent of LTCM fail all the time and everybody loses their money and nobody bats an eye in China, but it doesn't bring the system down.

DavidSJ• 12 years ago

So, is that system a time bomb for China (and the rest of the world), when one day a financially critical entity doesn't have the right political influence and goes belly up, bringing the house of cards down? Or, is there some reason to think this can go on forever and the political system will keep bailing everyone out?

joe_the_user3• 12 years ago

I think the parent would argue that if the state chose not to support a given entity, it would simply support all the others and so financial collapse could still be averted. Edit: and the state can do that because it's a dictatorship quite willing to print its own money (though the US sadly little different today).

The point here isn't that collapse is inevitable but that if you postpone collapse forever, you'll pay a worse price in price distortion than you'd pay if you let the system collapse.

Perhaps the people in the slums will riot because they're tired of watching the empty ghost cities rot. But given the imbalance here, that possibility might be present universally.

lingben3• 12 years ago

"China can make all the bad investments they want. Unlike any other western country, the government prints their own money debt free and can thus just bail out all the bad loans forever."

wow, it has been a very long time since I read anything remotely as economically ignorant and facile as this statement.

for one, the implication that the Chinese hold US debt and that they in turn are not borrowers is categorically false.

second, the Chinese hold less than 7% of the US debt but if you listen to the general media and commentators it sounds like it is more like 70%. The fact is that the vast majority of the US debt is held by the Federal Reserve.

Credit bubbles, like every other economic bubble is disastrous because it is a gross mis-allocation of resources. The piper shall not be denied. He is a hellish collector that will break every bone in your body if you don't pay. But the thing is, he's a bit unpredictable because you never know exactly when he'll knock on your door to collect. But knock he will.

May I respectfully suggest that before you attempt to comment on something as complex as macroeconomics you take at least a single course in the discipline?

joe_the_user3• 12 years ago

Hmm,

I reread the parent and I still couldn't find a single reference to US debt, which is all you discuss in your post.

I have a degree in economics, the parent's argument seems fine - it might contradict your dogma but it's a fine rendition of current reality.

Also, I'm sure no influential economist would say "In the long run, we're all dead," right?

dang• 12 years ago

May I respectfully suggest that before you attempt to comment on something as complex as macroeconomics you take at least a single course in the discipline?

That's not being respectful. Please stick to the substance.

tiatia• 12 years ago

"May I respectfully suggest that before you attempt to comment on something as complex as macroeconomics you take at least a single course in the discipline?"

Did you?

"Central banks can issue currency, a noninterest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.

That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit. To be sure, if a central bank produces too many, inflation will inexorably rise as will interest rates, and economic activity will inevitably be constrained by the misallocation of resources induced by inflation. If it produces too few, the economy’s expansion also will presumably be constrained by a shortage of the necessary lubricant for transactions. Authorities must struggle continuously to find the proper balance."

Alan Greenspan

joe_the_user3• 12 years ago

Unlike any other western country, the government prints their own money debt free ...

Don't you mean " Like Europe and the US, the government prints their own money debt free ..."

I mean, some players fell in 2008 but most of the debt in the US from the housing crisis was covered by Federal loans to banks that were judged "too big to fail".

And the government is now considerably more insulated from popular pressure than in 2008 so the printing can be done with fuller impunity.

The (apparently) infinitely expanding economy keep catastrophic crisis at bay but distorts the economy and constantly increases the concentration of wealth.

Capitalism's periodic financial crises have been a way to solve perhaps fundamental imbalances. The end of these crises may result, longer term, in more problematic results than otherwise.

crdoconnor10• 12 years ago

Capitalism's periodic financial crises have been a way to solve perhaps fundamental imbalances.

In theory (if you just leave the crisis to play out) that's what should happen, but in practice it rarely does. Not without the correct political response.

The too-big-to-fails in the US could have been allowed to go bankrupt, but it would have caused a catastrophic economic bottleneck because they have so many counterparties. Following regular insolvency procedures for a small enterprise is complicated enough and can take years as the creditors fight it out among themselves over how to divvy up the remainders of liquidation. Imagine how much of a clusterfuck it would be if half the country was either a creditor or a debtor in some respect. Worse, you wouldn't know if half of the rest of the country was bankrupt or not until you resolved the clusterfuck.

What could have happened was for a temporary nationalization so that the banks could have continued operating in a limited form so as to avoid the bottleneck and give time to tie up the loose ends. This is what Sweden did in the 90s. Their fundamental balance was resolved and they returned swiftly to growth.

When the too-big-to-fails are too politically powerful, however, they just tell the government to make them solvent again and the government promptly does it. Spectacularly bad lending decisions then resume and the power of the heads of those banks increases even more as the cancerous organization grows even larger. The fundamental imbalance has worsened.

crdoconnor10• 12 years ago

While mostly true, I'd add some qualifiers:

* A disturbing amount of that debt is unofficial (as well as uncounted), so won't be getting bailed out.

* This does mean that they've overstated their GDP, possibly by quite a wide margin (by however much unrecognized losses there are on that debt).

Yes, the Chinese government can (maybe) stabilize in the after effects of any property bubble not built on foreign debt, but it's still wasted investment.

narrator2• 12 years ago

Let's take a look at a single bank in China which had a 22.49% bad loan rate in 2002. The government just bought the loans with some electronically printed money and everything just kept chugging along.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=apBRO...

"Bank of China said it had loans and overdrafts of 1.74 trillion yuan ($210.3 billion) at the end of 2002. The bank's bad loan ratio stood at 22.49 percent or 409 billion yuan at the end of last year. The Beijing-based lender in 1999 transferred 352 billion yuan of bad loans to China Orient Asset Management, one of four companies set up by the government to dispose of banks' bad assets, and has disposed of 63.7 billion yuan of those."

Now in the U.S for that bailout to take place the government would have to borrow that money from the Fed and the taxpayer would have to pay it back eventually. In China, nobody borrows it and nobody pays it back.

jhonovich• 12 years ago

Do you think China has invented a financial perpetual money machine? "Prints their own money debt free and can thus just bail out all the bad loans forever."

fourstar• 12 years ago

VICE did it. Better. http://www.youtube.com/watch?v=qPjGWcM3Awc

DominikR3• 12 years ago

My guess would be that nothing serious would happen, because China has a government that can effectively implement whatever policy they want without caring too much about public opinion and they still have all the production facilities and cheap workforce, which wont suddenly go away because of a housing bubble.

What destroyed the US industries (apart from high tech) wasn't the housing bubble or the oil prices. It was the high price for labor.

Also, the reason why the housing bubble in the US caused so much trouble is that the US imports more than it exports.

We have the exact opposite situation in China, where far more products are exported than imported, so destruction of wealth in China isn't going to hit their economy nearly as much as it did hurt the US/EU.

Labor prices might even go down as a result, which will make them even more competitive.

crdoconnor10• 12 years ago

What destroyed the US industries (apart from high tech) wasn't the housing bubble or the oil prices. It was the high price for labor.

No, it was the high price of the dollar.

DominikR3• 12 years ago

You do realize that it doesn't matter for an importer of US goods if the high prices for US products are a result of high labor price or high dollar price.

The importer just sees that the same product produced in the US is far more expensive than somewhere else.

tokenadult• 12 years ago

I am amazed that so few of the comments even mention that the source of the submitted article is a newspaper in Ireland, where all the same arguments about

1) governments always being able to bail themselves out

and

2) excessive investment in buildings that no one can afford to occupy being a good idea

are a recent and painful memory. Ireland is still a long way from recovering from its real estate bubble, as are Spain and many parts of the United States. Commentary that suggests that China is somehow different and special and exempt from general economic principles should refer to more real-world historical examples.

crdoconnor10• 12 years ago

Ireland was prevented from enacting any kind of stimulus by the ECB. In fact, it was told in no uncertain terms to do the complete opposite - bail out the banks and enact austerity at the exact time when she had plunging demand. This caused spiraling GDP contraction.

Ireland dutifully obeyed, because the ECB controls her money supply and so holds a metaphorical loaded gun to her head.

The ECB cannot order China to implement self destructive austerity, however. China is still sovereign in her own currency.

In principle Ireland could bail herself out too, but it would involve leaving the Euro, defaulting and a spectacular political showdown that she really doesn't have the heart for.

waps4• 12 years ago

You know, I doubt that's the case. Greece and Cyprus have crossed the EU, lied to them, and committed acts that should have meant getting kicked out of the EU. Nothing happened. If anything the EU keeps giving them more money.

So now everybody knows : clearly the EU is more interested in expanding their membership and maintaining power than it is interested in financial sense and applying treaties.

So while Ireland certainly seems to think the EU has a gun to their heads, this is only true if Ireland's parliament cooperates. Ireland's parliament could simply order it's banks to print Euros, lie to the ECB (they're already doing that, after all. That's what the Euro crisis was about). Ireland's parliament could simply vote to do that, and while they're at it, vote a law that this does not violate the European treaty. Then it'd be up to Brussels to kick them out, and they've already shown that they won't do that, no matter what. They're sovereign, there's a million ways they could do this.

So in short : you're right, in theory. In practice, the law is simply what parliament votes to be law, and they could shortcut your reasoning at any point. Given what's already happened in the PIGS, I think they will at some point in the not-too-distant future show us that theory and practice are very different indeed.

What if the Chinese property bubble goes nuclear?

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