Aside from a post on canings in Singapore, the most linked-to and visited post I ever wrote was about the inevitable collapse of China’s luxury malls. Some will do fine, like the Village in Sanlitun (the stores on the street level and the restaurants, at least). Others, like Solana and Gemdale and The Place and 3.3, well, I don’t think they stand a chance. Overbuilt is overbuilt.
Taking a much more thorough, well-researched and intelligent approach to the always controversial issue of China’s bubbling economy than I did, one of my favorite reporters in Beijing warns of a property bubble that could cripple China for many years to come. Please indulge a healthy clip:
As fast as China is growing and urbanizing, its cities are churning out more office towers and luxury malls than can be leased for years to come. Tianjin, a gritty metropolis not far from Beijing, will soon have more prime office space than will be filled in a quarter-century at the current absorption rate. Shunyi County, in the capital’s suburbs, sold a residential plot last month for $400 per square foot, a new national record. The bidders were mostly state-owned companies and the winner none other than a developer owned by Shunyi County. Where the developer came up with the money for the purchase is unclear, but the county will nevertheless book $740 million as revenue from the sale.
China’s mercantilist trade policy is another contributor to its asset bubble. By artificially depressing the value of its currency and making it difficult for locals to invest abroad, China has forced an artificially large amount of capital to chase after domestic investments, inflating property and stock prices. It’s the same scenario China pursued in late 2007, before its stock market lost two-thirds of its value, but that era was characterized by monetary restraint compared with today.
“It’s a pure debt game,” says Andy Xie, an economist who advises private investors and sees the current bubble as “much worse than previous ones.”
In late November China’s ruling Politburo declared that the nation’s monetary and fiscal promiscuity will continue into 2010. The markets, predictably, were overjoyed. Economists who see parallels to the Russian and Brazilian financial crises a dozen years ago are less sanguine.
“The more debt that’s on the balance sheets, whether you see it or not, the more vulnerable borrowing entities become to shocks,” warns Michael Pettis, a finance professor at Peking University and expert on China’s economy and sovereign debt.
China naysayers have been wrong before. Gordon Chang, author of the 2001 book The Coming Collapse of China, has warned–wrongly, so far–that doom lies around the corner. Cushioning China’s economy is its high growth rate, an estimated $260 billion (but declining) annual current account surplus and, at $2.3 trillion, the world’s biggest foreign exchange reserve.
Bubbles, it bears noting, tend to surprise many observers with their longevity. (A FORBES cover story warned six years too early that the U.S. housing bubble threatened to tank the economy.) But when bubbles do eventually blow, it’s usually with a bang.
Friends have been telling me about the deranged property prices in Beijing, and once again, as with the malls, it just strikes me as common sense that this is not sustainable. And you have to consider all the ripple effects a housing bust would foment – all those migrant workers on construction sites, all the construction machiney makers, the cement and lumber providers, all the ancillary businesses, door-knob makers and house painters….
What Epstein is describing mirrors to the letter what we saw in the US in five years ago, and is even more reckless: flipping properties and creating massive pools of debt and the same insane mass hypnosis: “Property values can only increase!” We all know how that goes.
I do not want to see this happen and hope Epstein is totally wrong. But again, my common sense tells me there’s no way he can be wrong. Any student of bubbles, from tulips to dot-coms, can see the gathering storm. I wouldn’t want to be owning any property in China when it meets land.
Update: Damn, forgot the obligatory disclaimer: The US started this mess and has been just as speculative and as consumed by the property orgy as China. This is not unique to China. But in China, the crash could be more painful considering the massive dependency on construction. But no one deserves more criticism than the US, and I have said this many times.
Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.