Space is Curved in China
August 11th, 2010
The New York Times finally, plainly stated what is so evident here on the ground inside China’s property market: space is curved inside a bubble. In particular, it’s the State-owned Enterprises (SOEs) themselves and local governments that have been driving the market to dizzying heights. The Times wrote, “Land records show that 82 percent of land auctions in Beijing this year have been won by big state-owned companies outbidding private developers — up from 59 percent in 2008.”
In other words, the game has been fixed for a long time now; unfortunately, a lot of residents have been left outside the bubble or on the thin-film itself. Even national government administrators have been giving recent property buyers back-handed reassurances that property prices will not fall more than thirty percent. Yipes! What kind of investment is that?
By driving up property prices, the state-owned companies, which are ultimately controlled by the national government, are working at cross-purposes with the central government’s effort to keep China’s real estate boom from becoming a debt-driven speculative bubble — like the one that devastated Western financial markets when it burst two years ago.
I’ve always been of the mind that China’s swagger about having gotten things right during the Great Recession while the West got it wrong has been more a matter of luck than of cleverness. An estimated US$2.4 trillion in debt will have been loaned out from the beginning of 2009 through the end 2010, placed in one of three pools: infrastructure projects that will not see returns on investment for years, if ever; property speculation instead of on R&D and human resource development; and simply spirited out of the country. What makes the explosive capacity of the bubble even more disconcerting is its opacity: like the credit default swaps (CDSs) and collateralized debt obligations (CDOs).
Like physics, the fundamentals of economics will eventually come to roost in China in a revelation of the most basic law of the universe: what goes up, must come down.
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August 11th, 2010 at 11:43 pm
It would seem that this would actually benefit the SOE’s private sector competitors.
This kind of reminds me of a situation in the early 2000′s when too many SOEs were losing too much money, causing something of a financial crisis. To rectify this the government allowed some to go bankrupt, privatized some, and forced others to become more profitable. This caused a deep, but very very shortlived downturn in the economy. Fortunately today the private sector occupies a much larger portion of the economy than it did 10 years ago. Ultimately there will be another round of this SOE downsizing, it’s just a matter of time.
August 12th, 2010 at 8:10 am
Hi, Outcast;
I’m not as confident this time round the SOEs will be pruned the same way they were at the turn of this century. Then, a lot of it had to do with a lack of productivity, a lack of investment capital and over-capacity of manufactured goods. For the last three years at least, most of the remaining SOEs have actually produced surpluses (ie, profits), which they’ve been loathe to give back to the government. At most, I would see the heads of SOEs that had speculated with bank money in the most egregious fashion being replaced, never to be heard from (or seen) again. Meanwhile, the SOEs this time around are simply too big to fail: due to correlations with other parts of the economy – banking, infrastructure, property development – and employment. The private sector, on the other hand, though vibrant, really picks up the financing crumbs from the SOEs, and would not be able to absorb the workers laid off from SOEs dissolved on a wholesale basis.
Still, as you say, “it’s just a matter of time.” Though what reckoning will be anyone’s guess.
September 19th, 2010 at 2:32 pm
Hate to bump this, but it looks like that day of reckoning is coming a lot sooner than any of us thought. If this article is accurate of course.
http://blogs.forbes.com/robertlenzner/2010/08/31/chinese-real-estate-bubble-is-bursting/