China’s asset bubble

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.

The Discussion: 91 Comments

It’s not just me – this isn’t my theory. There are too many buildings with too much space and too few people who can afford or who want to move into them. Can it go on forever? Because it has to, if China’s growth can continue at present levels. Everyone in Beijing knows there os a bubble and that the overbuilding borders on the bizarre, building just for the sake of building. And did I blame the government? As a matter of fact, I never mentioned the CCP in my post. You are reflecting your own insecurities and reflexive defense of the party. It’s always there under the surface, the fight-or-flight hormones.

Richard, I agree there is an asset bubble in China, but if this bubble burst, nobody has any proof that it will cause the economic collapse like say Japan’s asset price bubble in the 1990’s. The problem with Japan is that there is much much more money investment outside of the country than it is coming in, whereas in China alot of outside investment are coming in China than going out of the country. This property asset bubble mostly affects tier 1 cities like Shanghai and Beijing.

Besides, most of the ‘inflated’ properties are probably in the inner to middle rings of these tier 1 cities. Even if the asset bubble burst, 95%+ of the Chinese population could not afford them anyways.

December 16, 2009 @ 11:26 pm | Comment

Pug, I have never said there would be a Japan-style scenario – in fact, I never compared it to Japan at all. I don’t believe it will wipe everything out, but it will be painful. All we can really debate is the degree of the pain. And the notion that this is only affecting a sliver of the cities, between their inner and middle rings, probably isn’t correct – these increases put pressure on the outlying sectors as people leave their now-too-expensive housing. Then the outlying properties creep up in price. We see this pattern in most fast-growing cities. In Hong Kong workers have mainly been pushed out to the the New Territories, and in NY those who lived in the Lower East Side have had to move to Brooklyn. The difference there was that there was such a huge market for housing – real housing, not properties to flip and speculate on. There was always more demand than supply. In China, it’s appearing more like Dutch tulips, where everyone’s buying to get rich quick, and if the pyramid comes crashing down they’ll be stuck because there simply won’t be enough buyers. That’s what happened here in Phoenix, and it will happen in Beijing.

December 17, 2009 @ 12:07 am | Comment

“Besides, most of the ‘inflated’ properties are probably in the inner to middle rings of these tier 1 cities.”

You mean places like Xianlin outside of Nanjing, Longhua outside of Shenzhen, Yingchuan in the North East, Ordos in Inner Mongolia, and Bengbu in Anhui?

“Even if the asset bubble burst, 95%+ of the Chinese population could not afford them anyways.”

You mean people like my ex-girlfriend, a former primary school teacher from Dongbei who took out multiple mortgages (at least 20) to buy apartments using connections at the bank and then used the rents from each apartment to make the mortgage payments (which they just about did) and lived off her takings running a Ma Jiang table out of her place? It would be true to say that China 800 million farmers would be only marginally affected by a real-estate crash, but the remaining 500 million would certainly feel the effects.

“Whereas in China alot of outside investment are coming in China than going out of the country.”

Yes, because nothing has happened in the last 18 months which has changed that situation.

Look, I long ago gave up making predictions about China’s (or any other country’s) economic future – but do I have concerns? Yes, I most certainly do.

December 17, 2009 @ 12:22 am | Comment


Yes I think the Chinese government should start building more public housing (to rent) for low income people that would ultimately lower price of the housing in the tier 1 cities in the middle to inner ring areas. However, I would not agree that it would become something like Phoenix style vacancy because Phoenix is a suburb area whereas Beijing and Shanghai are urban areas.


I think Richard discussed 2 problems here, an overpriced housing market and the glut of unoccupied housing. The problem with Shanghai and Beijing is the overpriced housing market whereas the cities you described like Ordos is probably due to supply vs demand issues. Unless you have some kind of proof that there is an asset bubble (overpriced housing market) in the tier 2, 3 or 4 cities. I would like to hear it.

December 17, 2009 @ 5:01 am | Comment

I should’ve said that building government housing would ultimately lower housing prices for the region as a whole and not just the middle and inner ring areas.

December 17, 2009 @ 5:09 am | Comment

Phoenix is a suburb area whereas Beijing and Shanghai are urban areas.

Sorry Pug, Phoenix is the 5th largest city in the entire USA. Unlike New York or Beijing it’s not a “vertical” city – it’s more spread out like Los Angeles and Las Vegas. But to refer to Phoenix as a suburb is simply inaccurate.

December 17, 2009 @ 6:06 am | Comment

Whatever Richard, compared to Shanghai and Beijing, Phoenix is more rural because the population density is much much lower.

December 17, 2009 @ 7:06 am | Comment

Pug, exact same thing with LA. So I guess it’s real smart to say LA is more rural than Beijing. Strange, I never thought of it that way, but perhaps you’re right. Now, if you said more densely populated than Phoenix or LA I’d be with you. Speaking of dense….

December 17, 2009 @ 7:57 am | Comment

“Unless you have some kind of proof that there is an asset bubble (overpriced housing market) in the tier 2, 3 or 4 cities. I would like to hear it.”

Exactly the same kind of thing is happening in the cities I mentioned above as is happening in Shanghai/Beijing, there’s just fewer people looking at the situation there. Shenzhen’s problems are well-known and long-running. Ordos is probably the most extreme case – housing for almost a million people almost all of which has already sold been sold as investment housing, but which locals cannot afford to rent. Nanjing is also incredibly over-priced compared to what local people can afford to pay and prices continue to increase ahead of economic growth. Bengbu is another weird case – a sleepy Anhui town where prices are above 8,000 for a sqM, about six month’s wage for the average Bengbu-ite. The people who buy these properties do so without reference to whether there is any actual demand for it, and many take out multiple mortgages to buy them on the expectation that they will be able to rent the property to someone else and that the value will continue to increase so they will not be left in negative equity. And building has not stopped in any of these places. At some point investors are going to be left holding property which nobody wants to rent paid for with loans that they cannot afford to repay, whilst at the same time developers are left holding real-estate that they cannot sell and a construction workforce that they cannot afford to employ.

December 17, 2009 @ 8:54 am | Comment

FOARP, if what you say is true it’s incredibly ominous. Same thing happened with pu’er tea. And with tulips. Fascinating, how history repeats itself.

December 17, 2009 @ 9:21 am | Comment

(might not be a “crippling” as some are predicting, but will nonetheless be painful for many people).

Some speculators will lose money but that’s life. It might even be a good thing for young people and migrant workers.

December 17, 2009 @ 11:04 am | Comment

and I’m still curious as to how many foreigners will be left holding the bag.

December 17, 2009 @ 11:10 am | Comment

@Merp – If foreigners become a major factor in real estate prices rising above and beyond the influence of the domestic population(are they now?), that to me would scream ‘sell’,simply because it would mean that people with only a minimum of knowledge of the local market were buying for the purposes of speculation.

December 17, 2009 @ 12:52 pm | Comment

Digging into my increasingly dusty urban development educational background here, I have a fact that might surprise you all: the metro Los Angeles area actually has the highest population density in the United States. Yup, even more than great New York. Sprawl can be pretty tightly packed!

December 17, 2009 @ 10:40 pm | Comment


I don’t know about that. According to wikipedia, LA has 8,205 people/sq mi while NYC has 27,440 people/sq mi.

December 18, 2009 @ 4:42 am | Comment


I said the metro Los Angeles area, not just the legal city itself. I meant to write greatER New York, not just New York as legally defined. Check it out (stats are from 2000 US census):

It’s a popular myth that Los Angeles is a low-density sprawl- it’s a very high-density sprawl.

December 18, 2009 @ 7:00 am | Comment

I felt the need to share with you the story of Jason Bromby, a 28-year-old British diplomat who has gone missing in China. This is very scary. Read more about it:

Spread the word, something needs to be done.

December 18, 2009 @ 8:41 am | Comment

That website that Brea just mentioned is a work of fiction.

“That is why my next story, which I am writing with the deviously genius David Bartram, will take shape and form online. We are publishing a simple story about a young British diplomat named Jason Bromby who sees the world and wants to change it. But change comes at a cost and in the end he pays a heavy price.”

He’s spamming all these English-language blogs to promote his webnovel. Don’t be fooled.

December 18, 2009 @ 1:18 pm | Comment

I’m not sure this bubble thing is being read properly. Let me see if I can articulate my thoughts. First, Chinese buy real estate and hang on. Forever. Hence this bubble might simply peter out in permanently high property prices, rather than go ka-boom. I mean, the houses aren’t being sold on 99% credit, I would bet money that most of the mortgages are with substantial amounts up front. Owners will rent and if they can’t rent, they will sit on it. Second, what is the break even point for developers? In Taiwan one need only sell half of a typical development to break even. Developers can keep putting up buildings with 50% occupancy and make money, in that case — I would bet given China’s low costs and massive corruption, the actual break-even point is even lower.

Hence, it’s not a bubble of speculative money driven by easy credit, but an outlet for savings — money that actually exists, not money that exists in some unspecified future. People thus will not be in debt when it “pops” but will rather have manageable mortgages out of current incomes because they paid much up front, with an actual asset to show for their expenditure. Hence what we will see is not KA-BOOM but rather, going out with a whimper of permanent high property prices in large cities, because no one will sell at low prices.

Is this just another case of viewing eastern practices in western terms? It sure feels like it to me, looking at the fact that Taiwanese have cheerfully been scammed by KMT-connected construction firms for 50 years now with nary a complaint. At some point “high prices” will become the norm and part of the lived environment, as they are here, and no one will notice except puzzled westerners who keep waiting for the price collapse that never comes. You are just experiencing the transition right now and calling it a “bubble”. Perhaps, “price orogeny” might be a better term.

But this is just speculation. The real losers will be the future working-class hordes who will not be able to live in the cities.

Michael Turton

December 18, 2009 @ 4:53 pm | Comment

That sounds plausible. There is a similar problem here.

Lots of buildings have been constructed, there is an oversupply, but prices are not crashing down.

Investors (mostly banks and construction companies) just sit on their assets, don’t reflect any lost value, and just wait for better times. May wait forever.

In the meantime, people looking for homes, specially young couples, have a very difficult situation. Before they could count on the raise of value of their homes.
Now prices are high, but stable, no increase of value. And difficult to sell in time of need.

And the rental market is not an option as it is now. Neither for tenants nor for owners.

Many are forced to buy homes 30 to 60 km/h away from the city. What is spared on home’s price is wasted in transportation ( cost and time)

December 18, 2009 @ 6:15 pm | Comment

Michael, I do see it differently, more like the frequently irrational speculation in the Shanghai stock exchange, or the US exchanges during the dot-com years. Many of these purchases are pure speculation, with the owner absolutely sure they can flip them very soon and take big profits. And that can go on for years; it did in the US. It can’t go on forever because the prices are totally out of whack with reality, similar to the pu’er tea craze of just a year ago, a tragedy that never got a lot of publicity:

Over the past decade, as the nation went wild for the region’s brand of tea, known as Pu’er, farmers bought minivans, manufacturers became millionaires and Chinese citizens plowed their savings into black bricks of compacted Pu’er.

But that was before the collapse of the tea market turned thousands of farmers and dealers into paupers and provided the nation with a very pungent lesson about gullibility, greed and the perils of the speculative bubble. “Most of us are ruined,” said Fu Wei, 43, one of the few tea traders to survive the implosion of the Pu’er market. “A lot of people behaved like idiots.”

….For tens of thousands of wholesalers, farmers and other Chinese citizens who poured their money into compressed disks of tea leaves, the crash of the Pu’er market has been nothing short of disastrous. Many investors were led to believe that Pu’er prices could only go up.

“The saying around here was ‘It’s better to save Pu’er than to save money,’ ” said Wang Ruoyu, a longtime dealer in Xishuangbanna, the lush, tea-growing region of Yunnan Province that abuts the Burmese border. “Everyone thought they were going to get rich.”

Those left holding vast amounts of tea that they equated with gold were wiped out. Similar to my neighbor right here on my block who bought their tiny home for $425,000 in 2006 and now can’t sell it for less than $300,000. (There are four for-sale homes on my block.)

For those who are speculating in China, the property bubble could lead to calamity. If they have lots of cash stored away elsewhere, then there’s no problem. They can, as you say, sit on the property, but may never break even, like my neighbors. If, on the other hand, they are borrowing or using their life savings to pay for the property, they’re playing with dynamite, like buying on margin during a stock bubble. It can literally destroy their life.

If this had been a slow, steady rise as opposed to a stampede, I’d be more optimistic. Pigs get slaughtered, and that applies to greedy homebuyers in the US and China and everywhere else.

December 18, 2009 @ 11:39 pm | Comment

Richard, are you still bullish on gold? haven’t seen you post about it lately.

December 19, 2009 @ 8:07 am | Comment

Gold, take a look at my comment on the US economy and, passingly, gold, from an earlier thread today:

There’s this bizarre wave of optimism following the latest jobs report and retail sales report, but look behind the numbers and you see things are worse, not better. Right now I’d have all my money on the sidelines; the dollar is rallying and that could go on into the first few weeks of 2010. And then I predict another crash as people realize where we really stand, indebted, jobless and printing money like there’s no tomorrow. That’s when “stuff” (commodities, metals) will become the new investment darling. Fasten seatbelts.

So right now, I would stay far away from gold. If you follow me on Twitter or Facebook, you may know that I advised friends to cash in on gold on Thursday, December 3. I put every cent into money markets, and the next day gold melted down. That was partly luck, and partly good advice that I got from a friend who actually does all the stochastic analysis and moving averages that I could never do.

Right now the dollar is rallying, all markets are choppy because of end-of-year selling and people are mesmerized by the latest feel-good statistics. They can, if they really wanted to, look closer and see how home and bank foreclosures are getting worse, with commercial real estate about to get hit hard. The debt is becoming unmanageable and the only way to ever pay that debt is to keep hammering the dollar down. And when the dollar goes down, commodities and metals and even equities go up. So long-term I am short the dollar and long on gold, but right now I recommend waiting until several weeks into 2010 and then buy incrementally on the big dips. I think the price may drop as low as 980 or so before shooting back. But I know absolutely nothing and don’t pretend to have any credentials in regard to economics, China, politics or anything else, so invest at your own risk. And nothing is riskier than gold – not for the faint of heart.

December 19, 2009 @ 8:23 am | Comment

Hmmm…I think the problem here with this asset bubble is that it’s in stupid assets that nobody needs. The infrastructure investments, on the other hand, I think are a fine idea. Even if/when the Chinese economy tanks, they will have built things that are very useful for the country and its people.

December 19, 2009 @ 10:39 am | Comment

Fortunately China is not over-infrastructured like Japan. There us much to do yet.

There may be some overdevelopment in some local areas though.

I have some misgivings in the chosen model. Too much similar to the Americana model, but they do not have such a good piece of real state like the US, nor a smilar ratio population density-useful land-resorces.

If the developmen model is not well chosen the strain can be too much.

December 19, 2009 @ 12:14 pm | Comment

OECD Economist uses regression over 145 countries’ currencies, determines that China’s currency is not really very undervalued.

December 19, 2009 @ 5:50 pm | Comment

Totally agree, Lisa. Infrastructure is one thing, and I’m all for spending (rationally) to improve it. Luxury housing and commercial real estate in cities where so many of the office buildings stand empty is another.

Michael, that’s an interesting take on a subject where there seems to be universal consensus. Most economists argue the opposite, but the topic is a little too complex for me to add any deep insights.

December 20, 2009 @ 1:49 am | Comment

But infrastructure building doesn’t allow so much financial gaming as real state.

December 20, 2009 @ 1:57 am | Comment

Correct. That’s why I’m more positive on infrastructure building/improvement – at least you’re getting something for the money, provided it’s not a bridge to nowhere.

December 20, 2009 @ 2:16 am | Comment

Yes. But what I wanted to say is that there might be vested interests that can hinder or prevent it altogether from happening.

December 20, 2009 @ 3:35 am | Comment

Interesting read

December 20, 2009 @ 4:22 pm | Comment

Forgot to write article’s title

“China Acts to Calm Its Overheated Real Estate Sector – and Misdiagnoses the Problem”

December 20, 2009 @ 4:30 pm | Comment

This may be a crazy idea.

If one of the reasons of financial resources mis-allocation in China is the lack of alternative investment options within the country, and the no possibility of investing abroad, then…. why not to do the following.

Allow china nationals foreign investments using local Chinese Investment companies. Already established or newly created. Through investments funds and/or ETFs, whatever… created by these companies.

It will have following advantages

* Develop local financial companies. No need to use foreign ones.
* The government still can control where and how investment is directed.
* Diversification away from dollar based assets.
* Acquisition of influence in companies with access to natural and technological resources of interest for China
* Stimulating foreign economies and its market to continue absorbing Chinese products. It will ease overcapacity problem in China and even reduce pressure on RMB appreciation.
* Provide alternative, but still govt controlled, investment options, and reduce imbalances within the country due to much money but little investment options.
* Create must needed jobs and demand for office space.

Maybe a crazy idea after all.

December 20, 2009 @ 5:31 pm | Comment


While intriguing,the idea of real estate as a major hold of value has some real weak points.

1) The building quality of much new build in China is pretty terrible- the assets age horribly.

2) With so much real estate construction, the turnover in terms of high quality and desirable space is extremely high. What is “hot” one month is junk five months later.

I suspect the real estate mania in China has a lot more to do with developers and the web of corruption they inhabit.

December 20, 2009 @ 6:38 pm | Comment

The article´s author is also critic to the idea of real state has a hold value, he doesn’t support it.

It is only used as a explanation for the behavior of real state investors in the mainland.

If you follow the links, you will find this funny piece about using something to “hold value” beyond its real usefulness

“There’s an old story reported by an American journalist in Shanghai after the end of World War II. Ravaged by hyperinflation, locals had turned to using tins of sardines as an alternative currency. One recent arrival opened his “proceeds” from a sale only to find the sardines inside were spoiled. He complained to the other trader, who cried, “You opened them? My God, man! Those sardines aren’t for eating, they’re for buying and selling.” Apartments in China aren’t for living in, they’re for investing. That is the real source of demand.”

December 20, 2009 @ 8:33 pm | Comment

enough said.

December 21, 2009 @ 1:22 am | Comment


About the foundations cannot say, but rest of building seems to be pretty solid.

December 21, 2009 @ 1:34 am | Comment


That is an old known issue. If I were in a similar situation I would be doing the same. Not very similar from what Japan, Korea and even the US did on its time, or do still in some way.

The problem with China is the SIZE of these effect.

On the other hand, for many companies the promises of the Chinese market turn out to be just a mirage… sometimes a nightmare. Specially for small ones. (Mittelstand German companies had had some rough experiences)

About the joint ventures. It reminds me of the royal concubines or young courtesans from noble families that were paired with foreign important persons. Nice, attentive and loyal lovers and/or wifes, but they had another mission too. To turn the will of their beloved to the advantage of China, or at least provide important information to the heavenly throne.

Not that I mind such kind of treatment, but one should look beyond the beautiful facade…

If you as a company go to China for business, keep your company most valuable jewels safe. And be prepared to eventually find stiff competition with the rest.

December 22, 2009 @ 3:38 pm | Comment

PBS doc on the largest shopping mall in the world. In Guangzhou. In a remote village. You get the picture.

December 23, 2009 @ 7:41 am | Comment

Phil, thanks so much – that is amazing. It redefines the concept of the”ghost mall,” totally empty and yet still open. Everyone has to see this video. This is as “only in China” as you can possibly get.

I’m closing this thread – please put comments regarding the asset bubble in the thread above this.

December 23, 2009 @ 10:10 am | Comment

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.