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.

gathering20storm

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.

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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

Has China ever in his history experience a bubble burst? Just curious, I have no idea.

Overdependency on construction business as engine to the economy sounds familiar to me, same problem here.

Too much money looking for profits and not enough places to invest.. that is the source of many problem, inside and outside China.

An overcapacity in money production. Hyperinflation comming everywhere soon?
Does any one know a good ETF? Or should be better to buy gold straight away?

December 15, 2009 @ 1:34 pm | Comment

assuming that 30 to 50 % of all office space is empty, assuming now that all office space is filled – hence every city would need to nearly double its residents….imagine the fallout….

December 15, 2009 @ 2:08 pm | Comment

Sounds familiar. I wrote about China’s nascent asset bubble last summer, looking at excessive government spending and government-induced lending:

“…when a big part of the new money goes to the wrong places, it is not only given to the wrong people, but it is also taken away from the right people. Growth of profitable and viable industries is being diminished in order to sponsor investment in other, less viable industries, or, even worse, in order to sponsor speculation in the stock and real estate markets. In addition, the resulting rise in stock and property prices encourages other private investors to put some of their money in, and so even more money is being channeled to the wrong places and a new bubble is being created. “

December 15, 2009 @ 2:36 pm | Comment

It’s called a vicious circle, a vortex, a gathering storm. And they all end the same way, with no exception, ever. Those in and out early are set for life; they’re at the top of the pyramid. The masses below get skinned alive, and it’s hard to sympathize. Don’t they read The Economist?

December 15, 2009 @ 2:57 pm | Comment

Richard – does this mean you are starting to realize what a mess China is in? And that all the ways out of it are painful in ways that a nervous and fragile dictatorship cannot endure?

December 15, 2009 @ 3:20 pm | Comment

@Dror
The ways China can unravel are inscrutable.

December 15, 2009 @ 3:43 pm | Comment

I tend to agree. I am not certain, but I have not had the guts to buy property in China for the last five years and I certainly do not have the guts now. Of course, had I bought, I would have made a fortune by now, so that shows how little I know. But I also sat out the entire dot.com boom and that turned out alright for me.

All I know is that every time I ask my Chinese lawyer friends how China is going to fill all the rows upon rows of empty buildings, they always point out how many people are and will continue to flood into the cities. I just wish I knew whether those people will be enough to sustain this, because without this, I just don’t think it possible.

December 15, 2009 @ 3:49 pm | Comment

@Richard

You don’t need the disclaimer, it comes across like you are pandering to tedious fenqing trolls. The argument stands well on its own.

@Everyone

The only way I can see out of the bubble would be through inflation and wage rises wiping out the debt. This seems a moe credible solution than it appears in the West given China’s possible room to grow. Does anyone know how likely this is to happen?

December 15, 2009 @ 4:33 pm | Comment

“You don’t need the disclaimer, it comes across like you are pandering to tedious fenqing trolls. The argument stands well on its own.”

I absolutely agree with this.

December 15, 2009 @ 4:53 pm | Comment

Dror, I’ve known for a long time the kind of mess China is in. I also know that they have enough cash in the bank to just pay people to pretend to work, like the ladies in the subway who pretend to be x-raying your packages. Again, common sense tells me that can’t last forever either, but it could go on for years. It’s a clusterfu*ked world, and China will go through its own misery soon enough. Will it mean a total catastrophe? Probably not, but we can argue about that forever. I’m sure that Hu, like Obama, has a master plan to save us all.

December 15, 2009 @ 4:59 pm | Comment

@ Dan

“…but I have not had the guts to buy property in China for the last five years and I certainly do not have the guts now.”

Given your legal eagle status, can I ask, if you had bought property, how confident would you be that foreign owned property in China would have the protection of the law?

I’m thinking specifically about (i) corrupt local officials laying false charges against foreigners in order to confiscate assets, or (ii) a future diplomatic row that sees foreigners deported or visas not renewed.

December 15, 2009 @ 5:14 pm | Comment

@Stuart
There is an easy solution. Just get married to a Chinese man/lady (depending on your gender of course)

Marriage has its own problems though….

December 15, 2009 @ 6:32 pm | Comment

@Si: tedious fenqing trolls

tendentious fenqing trolls is more apt.

December 15, 2009 @ 8:57 pm | Comment

Don’t be a Mr. Doom and Gloom, Richard. Boy people here blaming on the government on overbuilding when private developers are responsible for this overbuilding. How can an asset bubble could cripple China’s economy? It is not like Dubai where their only economy is solely dependent on real estate. Hong Kong faced a similiar real estate bubble in 1997 where real estate prices dropped 50% within a matter of months yet it didn’t cripple its economy for years. China’s economy is more resilient and does not dependent on real estate as you say.

December 15, 2009 @ 11:33 pm | Comment

Having last been to China a few years ago (when it was already way, way past the point of no return in terms of overbuilding), I have trouble imagining what is even left to demolish and rebuild at this point. Are they tearing down post-2000 construction already? I’m honestly baffled.

Here is a good report I came across a little while ago that looks at it from a financial perspective (PDF):

http://www.pivotcapital.com/reports/Chinas_Investment_Boom_the_Great_Leap_into_the_Unknown.pdf

It addresses two of the major myths that drive the rationale that China can build forever: 1) ever-growing expectations for higher living standards (as in growth in living space) and 2) a bottomless well of migrants to drive urbanization.

This report points out that 1) average living space in China is already quite sizable in the East Asian context and 2) China is already a lot more urbanized that statistics let on (with lots of “rural” areas being that in administrative designation only).

December 15, 2009 @ 11:35 pm | Comment

Rather than arguing that the property bubble will cripple China (which I don’t believe) I would personally argue it is simply another example of the massive misallocation of resources that is going on in that country. China may see itself as different from the rest of the planet, but this enormous misallocation is exactly the same mistake as Japan, the US and UK have made.

December 15, 2009 @ 11:52 pm | Comment

What will happen when the populaiton piramid gets inverted in 30 years or so?

http://en.wikipedia.org/wiki/File:China_population_pyramid_2005.png

December 16, 2009 @ 12:11 am | Comment

within next 30 years I mean.

December 16, 2009 @ 12:22 am | Comment

I agree there’s a large danger of the asset bubble bursting, as real estate prices in Beijing and Shanghai are unrealistic, inflated. As a typical Chinese immigrant living in the US (suburbs, not new york or some expensive area), and if you bought a house in the US for like $150,000, and sell it for $200,000 today, and say you worked in the US for 8 years as a regular engineering, earning $80,000 a year. So after you sell your house, and cash out your 401k, and add to your savings, you would have roughly $400,000. In RMB, this is about 2.7 million. Now, if you get old, and want to retire in China, then 2.7 million is barely enough to buy you an entry level apartment in Shanghai, not even in a good location, not even that big. With 2.7 million gone, how can you retire comfortably in China? Not to mention Chinese RMB will only rise in a few years. So the prospect of working in the US (not just washing dishes, but white collar, middle class job) and retiring comfortably in China is not good.

December 16, 2009 @ 1:10 am | Comment

Si, it depends on how you define “cripple.” I don’t mean it will tear China down, but it could be like a torn Achilles tendon.

Pug: Don’t be a Mr. Doom and Gloom, Richard. Boy people here blaming on the government on overbuilding when private developers are responsible for this overbuilding.

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.

Stuart, I doubt a corrupt official would try to seize the assets of a foreigner only because it could become an embarrassing international incident. Then again, I doubt that it’s without precedent – plenty of foreigners have been been cheated, if not losing their homes then their bank accounts.

December 16, 2009 @ 1:12 am | Comment

@anti
“So the prospect of working in the US (not just washing dishes, but white collar, middle class job) and retiring comfortably in China is not good.”

What about retirement in Florida?

December 16, 2009 @ 1:22 am | Comment

I, and most of my friends, have been talking about this for years. I remember back in 2003, when prices climbed above 3000 Yuan/SqM in the Nanjing ‘burbs and people started saying that it was too high. I remember in 2004 being told that most building in the Pudong area had 30%~ occupancy. I remember having a meeting in the Jinmao tower in 2007 where I was able, at least for that building, to confirm that this was not unaccurate. However, despite all my doubts, real estate prices have continued to climb. Now, either I have been continually wrong (which is seeming more and more likely), or, the crisis is mounting like water behind a somewhat cracked dam.

December 16, 2009 @ 1:53 am | Comment

FOARP, if the Forbes article is right, 2012 is the year. I called the US housing bubble in late 2005 and had to wait two years to be proven right. Once you have ordinary people getting into it, flipping properties, you know it’s time to get out. Just like when everybody thinks they have to own gold, you know it’s time to sell. You may miss some of the fun as the bubble continues to grow, maybe even for a few years. But it’s much better to be safe than sorry. This is the time when the insiders are getting ready to cash in their chips. The mere mortals on the ground who couldn’t resist the buzz of fast, easy cash will have their savings wiped out.

December 16, 2009 @ 1:58 am | Comment

To the troll – Yes, the US has deadmalls – you can find handy lists of them for each state over here.

Here’s the distinction. These are dead malls. No one is investing in them, no one is staffing them to the hilt and operating them as if they were not dead at all. Most are completely closed, maybe keeping a few profitable shops going.

Now let’s take China. Beijing and Shanghai are covered with high-end shopping malls, many of which are empty and unprofitable. Some say the retailers don’t care, that they see this as a “branding” opportunity, but they have to make money somehow (and thus we have several storefronts at the Place, for example, closing down). You’ll see similar concentrations of shopping malls outside of mainland China in Hong Kong, New York, Paris, Beverly Hills, etc. There are no dead malls in these places – a dead mall being not a mall that has closed, but rather a mall that is open, fully staffed, incurring huge real estate and utilities costs, and pretending to be a real, live functioning mall. When they are in trouble, they downsize or eventually close.

In China, however, we have an anomaly. The mall remains intact, fully staffed and stocked. And not only that. Everyone knows the mall is dead, yet literally around the corner there’s a flotilla of cranes dotting the skyline, building yet another mall. In the US and Paris, if a store or even an entire mall goes under it closes and cuts its losses. There are several here in Phoenix. There is nothing, absolutely nothing any where else that can compare to the phenomenon of China’s vast labrynthine malls full of service people and next to zero customers, aside from the window shoppers. Some malls in the US may look like that now because of the recession, but they will sink or swim. The developers certainly won’t open yet another mall down the street.

So you see, Wayne (Mongol Warrior, Batman, Leon, Skywalker, etc.), it’s not about who has the most ghost malls. It is about who is keeping these ghost malls going at impossible expense while building yet more ghost malls next door, similar to the Tianjin office buildings Gady Epstein alludes to in his article. It is virtually impossible that they can achieve occupancy, yet they keep building, more office towers, more malls. Just like China keeps buying more and more dollars. You get stuck in a vicious circle, and winding down becomes nearly impossible. This is what we call a house of cards. There has to be a day of reckoning. Not a collapse of all systems, but certainly a dramatic and painful correction and possibly the worst employment crisis the country has ever faced (as we’re seeing in America). Construction is the lifeblood of the rising China. How will its heart beat without it? We’ll all know, sooner or later.

December 16, 2009 @ 2:22 am | Comment

Folks from Beijing are flying to 2nd tier cities to speculate on properties. ’nuff said

December 16, 2009 @ 3:29 am | Comment

This isn’t a bad article. Sounds plausible enough.

IMO he is taking too much the perspective that China is just Shanghai and Beijing- as if the whole country is just the relatively wealthier East Coast alone. If there is indeed a bubble, moving say 100 million more people from rural areas to work in the cities will at least keep the value of properties up. China is simply too poor to have a country-wide bubble though.

America could do the same, just give a few tens of millions of Indians H1Bs. Charge them $5-10,000 per. Course that won’t happen but it could work in theory.

December 16, 2009 @ 5:42 am | Comment

To the troll – Yes, the US has deadmalls – you can find handy lists of them for each state over here.

Here’s the distinction. These are dead malls. No one is investing in them, no one is staffing them to the hilt and operating them as if they were not dead at all. Most are completely closed, maybe keeping a few profitable shops going.

The thing is, commercial loans haven’t even collapsed in America yet, Richard. As for staffing the malls, I guess it translates loosely into some kind of welfare policy- only instead of standing in lines, they stand at storefronts. It “looks” better, I guess.

In China, however, we have an anomaly. The mall remains intact, fully staffed and stocked. And not only that. Everyone knows the mall is dead, yet literally around the corner there’s a flotilla of cranes dotting the skyline, building yet another mall. In the US and Paris, if a store or even an entire mall goes under it closes and cuts its losses. There are several here in Phoenix. There is nothing, absolutely nothing any where else that can compare to the phenomenon of China’s vast labrynthine malls full of service people and next to zero customers, aside from the window shoppers. Some malls in the US may look like that now because of the recession, but they will sink or swim. The developers certainly won’t open yet another mall down the street.

In China the other anomaly is the 600-700 million or so people that may eventually consider moving out of the country side (there are hundreds of millions more, but I’m presuming they’ll stay). Right now there is some lag, and if you were a real estate speculator you’re gonna have to wait a long-ass time for profits, but that’s about it.

Right now the capital is being wasted on “overdeveloped” areas, I think the money would be better used in the interior and West of China. But I highly doubt China is going to see a Japan-style bubble. A new scenario for any asset bubble will have to arise, as China’s development path is completely different.

December 16, 2009 @ 5:53 am | Comment

How many of those hundreds of millions you refer to who may move from the countryside to the cities are going to be purchasing luxury condos and prime office space? How many will be shopping in the luxury malls I refer to?

Americans had better get a grip and start seeing China as it really is. Sure, there’s a lot of wealth there. Are they ready to fill expensive apartment complexes and order bon bons and Gruyere from Fauchon? Some are, but not enough to keep those luxury malls profitable. Not enough to fill all the fancy buildings going up.

And I want to echo what Fallows says in the article I linked:

For readers in China, let me be 100% explicit and clear that the point is not to put down China’s people or its system for the things the country has not yet achieved and the gaps not yet closed. Those achievements are phenomenal. But some people outside China have evidently developed a wholly unrealistic, fantasy-world concept of a China that has no remaining problems and is surging effortlessly ahead. A more realistic view — of a country that is advancing dramatically, but from a very low level of average wealth — is better for all concerned.

December 16, 2009 @ 6:05 am | Comment

How many of those hundreds of millions you refer to who may move from the countryside to the cities are going to be purchasing luxury condos and prime office space? How many will be shopping in the luxury malls I refer to?

Obviously, none. Maybe one or two. But they will spend their wages, and their presence will naturally raise property prices.

Are they ready to fill expensive apartment complexes and order bon bons and Gruyere from Fauchon? Some are, but not enough to keep those luxury malls profitable. Not enough to fill all the fancy buildings going up.

If you’re speaking of luxury malls, I hope they never will. I hope all of these malls collapse. Of course, this will happen at great expense to European name brands who have quite a large stake in this.

That begs the question, just who is holding the bag here?

For readers in China, let me be 100% explicit and clear that the point is not to put down China’s people or its system for the things the country has not yet achieved and the gaps not yet closed. Those achievements are phenomenal. But some people outside China have evidently developed a wholly unrealistic, fantasy-world concept of a China that has no remaining problems and is surging effortlessly ahead. A more realistic view — of a country that is advancing dramatically, but from a very low level of average wealth — is better for all concerned.

That’s the problem, Richard. No body fears smiling subsistence farmers. They might even sympathize with a rural worker struggling to provide for his or her family. How can an innocent child of Henanese farmers be the same monstrous Han oppressor who eats Tibetan children for lunch and rapes Uighur women at night?

Can hard working migrant workers really be the same subhuman, faceless menace that is trying with every fiber of their being to steal American jobs, swindle Holy American Workers, and poison your dog? YOUR Fido?

Clearly, many interested parties (mass media, unions, racists, fear-mongers, anti-Communists) do not want to show certain sides of China.

So who is to blame for this delusion, the Communist party? The same CCP who stated that their GDP would be half that of Japan’s next year?

Sorry Richard, the CCP may be bad, and they do a lot of “awful things”, but they aren’t responsible for these “China Myths”.

December 16, 2009 @ 6:23 am | Comment

Do a plot with wolfram alpha gdp/population for china, you can see that it raises exponentially.

Plot at the same time for US or EU and you will see how much there is still to go for the country.

Similar for average income.

December 16, 2009 @ 6:28 am | Comment

You can figure that out by a quick glance at China’s GDP/cap, avoiding the hysteria in the first place.

December 16, 2009 @ 6:30 am | Comment

You cannot move whole rural population in a snap to cities. What are they going to live from?
You can not live from the land in city.

December 16, 2009 @ 6:32 am | Comment

But some people outside China have evidently developed a wholly unrealistic, fantasy-world concept of a China that has no remaining problems and is surging effortlessly ahead. A more realistic view — of a country that is advancing dramatically, but from a very low level of average wealth — is better for all concerned.

Indeed.

December 16, 2009 @ 6:45 am | Comment

How can an innocent child of Henanese farmers be the same monstrous Han oppressor who eats Tibetan children for lunch and rapes Uighur women at night?

This site has never depicted the Han people in any way even close to your obscene characterization, Ferin. Never. And you look at where I use the phrase “done awful things,” it’s nearly always in reference to the US as I try to make the point that China isn’t the only place that has problems, corruption, unfairness, etc. You know this, Ferin. This site has always been sympathetic to the migrant workers, and to everyone in China except those who commit crimes or go insane with nationalism at the expense of their critical thinking.

Again, I cut you a lot of slack because I know you’re smart and you sometimes actually engage. But I won’t tolerate nonsense like this.

The China Myths were not propagated solely by the US media. The fuel for these myths are reports from China’s government showing double-digit growth at every turn, glowing accounts of industrial output and trade surpluses. Combine that with some wide-eyed journalists who have neither the brains nor the experience of James Fallows and you soon have myths sprouting up. And it’s not like China ever tried to correct the record. Far from it.

December 16, 2009 @ 6:52 am | Comment

@anti
“So the prospect of working in the US (not just washing dishes, but white collar, middle class job) and retiring comfortably in China is not good.”

What about retirement in Florida?

Most Chinese here (not including immigrants from Taiwan/Mainland from the 80′s or earlier) do not plan to retire in the US. Because a lack of cultural root, lack of close friends, relatives, family. Most will eventually go back. In Chinese it’s called “叶落归根“ (A leaf falls to the ground, and eventually returns to its root). Chinese people are unique in this strong sense of root, of home. It’s a very sad thing to die in a foreign land, lonely, away from family and friends.

I definitely do not want to end up like this Chinese woman:

University of Utah police say identifying a woman who died after falling out of a bus wasn’t a problem. But the effort to find a family member or even a close friend who knew her, has resulted in all dead ends.

“She lived by herself. She had no close friends, no business associates,” said U. Police Chief Scott Folsom.

Xie was originally from Harban, China. Officials believe she had been in the U.S. since at least 1988 and had lived in Pennsylvania, Virginia and Missouri in addition to Utah.

In Salt Lake, she had lived in the 100 South block of 1300 East and the 1200 East block of Alameda Avenue (50 South). But Folsom said after going through “exhaustive efforts,” his detectives could not find any family members, friends or even neighbors who really knew her.

“She lived a very reclusive lifestyle,” he said.

Xie’s cell phone, house phone and documents inside her apartment were checked, but investigators still couldn’t find anyone who knew much about her.

Sigh…

December 16, 2009 @ 6:54 am | Comment

The CCP itself made a target of 8% growth for th 2005-2011 five-year plan.

Bhutan has a GDP growth of 22%. It’s not the CCP’s fault that these “journalists” have no credentials save making coffee runs for their superiors.

Note that I didn’t accuse you of making those generalizations- rather, the American media and people like Not a Sinophile, Stuart, Kevin, Nanhe, etc make those claims.

December 16, 2009 @ 6:55 am | Comment

Excuse me, 2006-2010

December 16, 2009 @ 6:56 am | Comment

That sure takes us off-topic.

It’s a sad story, but raises many questions. What stands out is that this was an extremely unusual circumstance – not a single friend, not a single relative, no one who even knew anything about her. That is not the typical experience of migrating abroad.

Folsom said his office had contacted the Chinese Embassy in an attempt to find the woman’s family. During his 33 years in law enforcement, he can recall only one other time when police could not find relatives for a deceased person who was not the victim of a homicide.

I hope you aren’t trying to make an argument that this is the typical experience for Chinese who move to America. It’s not.

December 16, 2009 @ 7:04 am | Comment

Many of them stick to their own like most recent immigrants do.

December 16, 2009 @ 7:09 am | Comment

No doubt this is an extreme case, and not representative. But this story evoked a lot of response from the immigrant Chinese community, with many expressing the feelings along the lines of “I don’t want to end up like this”, or “this is why we need to retire in China”, etc ,etc. So clearly people identified with her in some way.

Generally speaking, the Chinese immigrant experience in the US is “middle or upper middle class material living standard” but “very unsatisfying spiritual living standard”. By spiritual, I don’t mean religious, I mean in terms of blending into mainstream American society, finding friends outside of Chinese community, having diverse social activity, etc. That’s why for most Chinese, despite the improved living standard in the US (which today is not always a given, especially for those who came from Beijing/Shanghai/etc), crave for many aspects of their lives back home, the friends, the food, the familiarity, the feeling of being the dominant and mainstream member of a society and not a guest/visitor.

December 16, 2009 @ 7:13 am | Comment

Ferin, I was in Beijing in 2006-9. I saw how far they went to make themselves look like the most developed country, often to the point of absurdity. I don’t fault them for this; China has a right to be proud of how far it’s come in so little time. But the notion that China was becoming a thriving modernized country did not arise in a vacuum, and the Olympics was all about encouraging that perception. And I know, I was there, and watched as overnight the government installed wheelchair ramps and garbage bins divided in recyclable categories and held classes to teach taxi drivers rudimentary English – all noble things, but the goal was never in doubt: they were determined to show a China with a new face, fueling the myth of a highly developed country as much as anyone did.

December 16, 2009 @ 7:17 am | Comment

Former Anti, I think, with all due respect, that you are a propagandist and a mythologizer. Oh, those poor Chinese people who are so sad about not being integrated into the US community. Well yeah, there are people like that. And there are millions who are fantastic contributors to their communities, leading humanitarian causes and being loved by their communities. Millions. And I hate to break it to you, but there are plenty of native-born Americans who are sad and lonely and unintegrated with their communities. Let me introduce you to the lady across the street with four dogs.

I could make a similar argument about kids who leave America to work in China as English teachers, but I would be intellectually dishonest if I did, knowing that the article is not your typical English teacher experience, just as your link is not your average Chinese in America story. (And do check that story out.)

Ferin: Many of them stick to their own like most recent immigrants do.

Exactly. I knew you had it in you to be serious.

Asset bubbles. What can China do to stem the tide?

December 16, 2009 @ 7:24 am | Comment

“rather, the American media and people like Not a Sinophile, Stuart, Kevin, Nanhe, etc make those claims.”

I do no such thing, old sport.

“Folks from Beijing are flying to 2nd tier cities to speculate on properties. ’nuff said”

Yes, this is the tell-tale symptom of a greedy middle class. There will be some mighty screams if it all goes pear shaped.

December 16, 2009 @ 7:40 am | Comment

When, not if.

December 16, 2009 @ 8:10 am | Comment

@Richard
Great discussion, just wanted to quickly voice my agreement that your disclaimer is unnecessary in this case. While you can blame the current financial crisis on the US, this real estate (stock market as well) bubble is a home grown phenomena that China will have to own when the inevitable re-balancing occurs (might not be a “crippling” as some are predicting, but will nonetheless be painful for many people). Wish I could write more, but I am busily enjoying Taiwan at the moment. This is a great topic!

December 16, 2009 @ 9:41 am | Comment

Taiwan? I am so jealous. Even if it’s kind of dank there in December, Taiwan is always paradise. I want to know how they did it.

I feel I have to include the disclaimer because I know how fast some readers are to scream, “anti-China!”

December 16, 2009 @ 10:17 am | Comment

“Folks from Beijing are flying to 2nd tier cities to speculate on properties. ’nuff said”

I’m afraid it’s worse than that – people who troll this blog are investing in Chinese real estate . . . .

December 16, 2009 @ 3:28 pm | Comment

“people who troll this blog are investing in Chinese real estate . . . .”

Maybe they are all real state developers or with strong real state positions and want to get rid of their assets before the bubble burst.

That may explain their trollish behavior with anything that shows the darker sides of China. It may scare possible investors before the can be… separated from their money ;-)

December 16, 2009 @ 4:12 pm | Comment

By the way there is an interesting new google service for real state.

http://tinyurl.com/yea4esb

Hope is not eventually blocked by the net nanny.

December 16, 2009 @ 7:37 pm | Comment

As if on cue:
http://www.chinasmack.com/pictures/high-real-estate-prices-young-chinese-men/

8000 per SQM for a small city in the north east?

December 16, 2009 @ 11:10 pm | Comment

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

Richard,

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.

FOARP,

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

PB,

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

Pug_ster,

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):

http://www.demographia.com/db-ua2000r.htm

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:

http://www.maolovesyou.com

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.

http://74.125.155.132/search?q=cache:Y-xTMcX53pwJ:adamcoughlin.blogspot.com/+%22jason+bromby%22+china&cd=5&hl=en&ct=clnk&gl=us

“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

@Michael
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.

http://www.voxeu.org/index.php?q=node/4397

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

http://tinyurl.com/ylzwxhp

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

ecodelta,

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

http://tinyurl.com/kuf76w

enough said.

December 21, 2009 @ 1:22 am | Comment

@neil

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

December 21, 2009 @ 1:34 am | Comment

@resident

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

http://video.pbs.org/video/1218530801/program/1154485580

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

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