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Posts Tagged ‘Xinjiang unrest

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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