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Posts Tagged ‘China inflation nightmare

Chinese Real Estate and the Civil Unrest Powder Keg

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by Justice Litle
Editor, Taipan Publishing Group 
Posted 20 July 2011

In China, a massive real estate bubble has left 64 million apartments vacant – and millions of laborers angry.

Things are getting heated in western China. Via The Wall Street Journal:

BEIJING — Chinese police “gunned down” several rioters after four people were killed in an attack on a police station in the northwestern region of Xinjiang, the state media reported, in what appeared to one of the most violent incidents in the mostly Muslim area since it was shaken by ethnic rioting in 2009.

Two security personnel and two hostages were killed, and one other security officer was injured in the attack, which began around midday Monday in Hotan, a small, remote oasis city on the edge of the Taklamakan desert, the state-run Xinhua news agency said. The agency gave no details of how many attackers were killed or injured.

It is hard to know the frequency or intensity of “civil unrest” incidents, due to media suppression and spotty regional coverage. But it is clear the necessary conditions for sparking unrest – a civil unrest brushfire if you will – are in place.

One dynamic that could touch off the inferno – empty Chinese apartments.

By some estimates, China has as many as 64 million apartments that remain unlived in. This is a function of the “ghost cities” phenomenon (more on that in a minute), in which vast metropoli are constructed with no rhyme or reason.

Why would this be a factor for unrest? Because even as these apartments go empty, gathering dust waiting for renters who never come, poor Chinese laborers are living in epically crowded conditions. For all of China’s phantom real estate, there are multiple families sharing tiny domiciles, with as many as 11 in a two-bedroom apartment.

It doesn’t make sense. With so many residences barren and empty, why is the Chinese labor class packed in like human sardines?

Because the shiny new apartments are far too expensive for the average Chinese worker to afford – orders of magnitude more than the average salary, with very strict payment terms (50% up front, 36 months for the rest).

The Chinese real estate market is booming, nonetheless, because property developers keep finding ways to finance construction – and wealthy Chinese investors keep buying. Empty buildings will often see units snapped up by out-of-town buyers, only to have “for rent” signs go up in the windows a short time later.

The vast majority of apartments remain empty. Sold by Ponzi real estate developers… bought by Ponzi investors… a self-sustaining cycle in which prices go up because the buyers are making them go up. It’s the “greater fool theory” in full effect.

Here’s a thought: Why don’t Chinese officials just order large price markdowns on these expensive, empty albatrosses, so that the crowded laboring class can move into them and have nice places to live?

There is just one big problem with that notion: A wholesale markdown on Chinese real estate, to levels anywhere near what real buyers can afford, would potentially bankrupt China’s property developers… thoroughly outrage the well-connected property investor class… and lead to a full-blown banking crisis as hundreds of billions in loans went bad.

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Why the wheels are falling off China’s boom

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by Charles Hugh Smith
from Of Two Minds
Posted originally June 15, 2011

The rot in China’s economy is deeper than inflation and malinvestment

Despite their many differences, the economies of China and the U.S. share a number of key traits: both are corrupt, rigged, crony-Capitalist, rely on phony statistics and propaganda and operate with two sets of rules: one for the Elites, and another for the masses. Given these similarities, it’s no wonder that the wheels are falling off both economies.

There are some key differences, of course, which will make the crashing of China’s boom all the harder. China’s leadership likes to do things in a big way, and so its campaign of “extend and pretend” over the past three years has been unprecedented. This isn’t just the consequence of a Command Economy overseen by a Central State; the “extend and pretend” boom was fueled by stupendous borrowing by local governments and private enterprise as well.

This flood of money has severely distorted China’s economy, yet the imbalances are now normalized. The system and players have now become dependent on this level of stimulus, so withdrawing the distortions would have negative consequences. Yet allowing the flood of investment to continue will unleash higher inflation, which is already triggering social unrest: Chinese Street Vendor Dispute Expands into Violent Melee.

Thus China’s leadership faces the same impossible conundrum as Bernanke has in the U.S.: Your Pick, Ben, But One Goes Off the Cliff (April 22, 2011).

When a system become this precarious and imbalanced, it can best be modeled by stick/slip destabilization: blaming the last grain of sand that destabilizes the entire pile for the collapse is to ignore the real cause: the entire system is unstable.

Here are a few factors which are widely misunderstood or discounted by the mainstream financial media

1. Over-reliance on property speculation for profits. What if 60% of IBM’s annual profits were earned from real estate speculation? Would this strike you as a sound company and economy? Yet that is the case for Lenovo in China: The Boom And Bust Of China’s Rise (Zero Hedge):
Recently Liu Chuanzhi, the Chairman of Lenovo and the iconic figure of Chinese manufacturing, faced a serious dilemma while asked why of Lenovo Group’s profit in 2009 60% came from asset investment and only 40% came from manufacturing. He said “when the typhoons come, even a pig can fly in the sky. Everybody is profiteering from this. Why can’t we?” The typhoons refers to the property frenzy and the easy ways to make money.

2. Over-reliance on investment for GDP growth fuels malinvestment and systemic risk. “Meaningful probability” of a China hard landing: Roubini: Roubini said investment was already 50 percent of gross domestic product. Sixty years of data had shown that over- investment led to hard landings, he said, citing the Soviet Union in the 1960s and 70s, and East Asia before the 1997 financial crisis. Add one part unlimited ability to borrow to one part crony capitalism and one part command economy and you have a toxic cocktail of incentives to build things which make little sense financially or functionally.

China’s second and third-tier cities are littered with sprawling (and empty) sports facilities, municipal complexes, university campuses, etc. which have been built for two reasons, and two reasons only: so local governments can meet their “growth targets” and local officials and their cronies can reap gargantuan profits. The photos of empty cities are only the tip of the iceberg in terms of housing:
A Taxonomy of China Housing Market Bad Guys:

In the absence of official statistics, Caijing cites and estimate that an astonishing 50-70% of new apartments sold between 2007-2010 have been purchased by speculators and are now standing empty. Two factors further distort the West’s understanding of Chinese real estate. The markets in Beijing and Shanghai are different from those in second and third tier cities; talking about Beijing real estate is like talking about Manhattan property: extrapolations based on thin slices of Elite real estate are bound to be wrong.

Many know-nothing Western pundits repeat the tropism that China’s rural population will soon fill up all those empty towers and cities. What they don’t understand is that perhaps 10% of China’s population can afford to buy a home, even in third-tier cities nobody in the West has even heard of. Most workers in China make $200 a month or less. Buying a condo for $100,000 is out of the question.

3. The Central Government is a domestic paper tiger. The West marvels at the seemingly powerful grip of the Communist Party and the central government’s functionaries on the nation, but this control is akin to a radioactive substance: it decays very quickly with time and distance from Beijing. When it comes to social compliance issues such as ordering people to wear masks in public and closing down cities threatened with epidemics, the central government’s authority functions well. But when it comes to actually controlling local government, Beijing’s level of control is near-zero. This can only be understood by having sources within local government; talking to Chinese yuppies in fancy hotel bars and Beijing officials will never get you close to the way things actually work in China: the real action is all at the local government level.

4. Local governments have an impossible dual mandate: growth at any cost, to maintain employment and social stability, but rein in the financial sources (debt) that fund the quick-and-easy “growth”: real estate development and grandiose infrustructure projects. There is no way out of this double-bind. The Central Government recently took $400 billion of bad debt off local government books, but this is simply more “extend and pretend”: the local governments have no other way to meet aggressive growth targets except more malinvestment funded by borrowed money.
China’s debt problem not solved
China Lending-Binge Hangover Looms in 2013
China Local-Government Debt Risk Needs ‘Attention,’ Bank of China Says

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China: That urban empty feeling

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from The Daily Bell
Posted originally December 16, 2010

And Now Presenting: Amazing Satellite Images Of The Ghost Cities Of China … The hottest market in the hottest economy in the world is Chinese real estate. The big question is how vulnerable is this market to a crash. One red flag is the vast number of vacant homes spread through China, by some estimates up to 64 million vacant homes. We’ve tracked down satellite photos of these unnerving places, based on a report from Forensic Asia Limited. They call it a clear sign of a bubble. – BusinessInsider

Dominant Social Theme:
Nothing to see here. Just investments.

Free-Market Analysis:
Even at the height of the mortgage boom in America, US builders were not erecting empty cities, were they? Did we miss something? In China, apparently they are. In our quest to present what’s going on, we’ve documented some uncanny occurrences over the past two years, including the vacant city of Ordos in Mongolia. But what Business Insider has provided us, courtesy of Forensic Asia Limited is a series of satellite images that prove that Ordos is not a unique event.

China is actually littered with what Business Insider calls ghost cities, and the satellite pictures provided would seem to prove it. It’s a pretty amazing presentation, showing how the power of the Internet, when married to space technology, can come up with important results. Photo captions from the article include:
• Here’s China’s biggest ghost city: Zhengzhou New District. Like Ordos, Zhengzhou New District has glamorous public buildings EMPTY
• See that orange area to the north-east of the Xinyang? It’s a giant new development, which doesn’t even have a name yet.
• The ghost city of Dantu has been mostly empty for over a decade. There are no cars, no signs of life

• The mostly empty city of Bayannao’er, which boasts a beautiful town hall and World Bank sponsored water reclamation building
• Now here’s Kangbashi, a new city with capacity for 300,000 –that houses 30,000
• Finally, here’s a giant new campus for Yunnan University, which was built to accommodate 2.3 million students. It has 11,000 enrolled.

The crazy photos march past, each one more surprising than the next. Whole swaths or empty developments, unrolling for what appears to be miles. Desolate city centers. Empty modern art museums. The largest mall in the world has now sat empty for nearly a decade now. Ordos has been vacant for years as well. Other “ghost cities” with little or no habitation. The argument is that these developments will fill up.

Chinese speculators are buying apartments – perhaps sight unseen – that exist in empty cities, are unfurnished and perhaps not even hooked to utilities; and we would think this sort of news would be on the cover of every business magazine in existence. It’s a darn important story. Here are some headlines we can think of: China Bust Will Topple Western Economies Into Even Deeper Depression; What Happens to the Wretched World When China Founders?

OK, let’s try to make our point a different way. Here’s a fictional conversation between a reporter at a major, mainstream publication and his editor:

Reporter: I’ve been trolling through the Internet. I’ve noticed there are nearly 65 million unoccupied homes in China.
Editor: 65 million houses. Whoa! That would house nearly one-fifth of the Chinese population.
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China is waking up to an inflation nightmare

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by Justice Litle
Taipan Publishing Group
Originally posted December 21st, 2010

AMONG CIVIL UNREST FEARS, fragile exporters and a speculative property boom, China has a very bumpy ride ahead… The inflation situation in China is getting out of control. Consider this from Bloomberg:

Chinese consumers are more concerned about rising prices than at any time in the past decade, underscoring the pressure on policy makers to step up efforts to counter inflation running at a two-year high… Authorities have held off on adding to October’s interest-rate increase, instead ratcheting up banks’ reserve requirements and using tools such as sales of food reserves to tackle inflation. The Commerce Ministry said [last week] it will “closely monitor” prices over the next quarter, especially during holiday periods, and keep releasing stores of pork and sugar…

The Chinese economy has gotten itself into a real jam. As we have detailed in the past in these pages, there are no easy solutions for China now. When inflation gets so bad that food and energy costs spiral out of control, civil unrest becomes a risk. The authorities in China have always put civil unrest fears at the top of the list, given the rigid nature of the authoritarian political system.

Western democracies are more flexible – when people get upset, they can “throw the bums out” even as the political institutions endure. In China, though, the party leaders are the institution. What’s more, in the face of rapid economic growth, the longevity of an authoritarian political structure such as China’s is an open question. (As China grows more prosperous, Chinese citizens will hunger for more rights and freedoms.)

So China is now in a place where inflation must be tackled, if only to head off the risk of civil unrest. But raising interest rates –  normally the obvious and clear step – is problematic as an inflation-fighting method because of China’s mercantilist export system. As we have mentioned before, many of China’s exporters operate on razor-thin profit margins. This is a function of Beijing supporting the export industry as aggressively as it can, in order to create jobs and underwrite economic output. The trouble here, though, is that razor-thin profit margins mean things like a hike in interest rates or a rise in the value of China’s currency can be fatal. Some exporters have said even a 1% rise in the value of the yuan could wipe them out.

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