Previous posts this year, “The China Bubble,” and “National Debt and Rates of Return,” have already emphasized that China’s real estate market is grossly overvalued. Today on the respected economics blog GlobalEconomicAnalysis.com, Mike Shedlock has offered new insights on the coming correction in China which he, too, has seen coming for a long time. In his post “China Hikes Rates, Ponders Capital Controls to Halt Currency Inflows,” Shedlock lists eight reasons China faces a hard landing:
- Hot money inflows
- Huge property bubble
- Massive increases in money supply, much of it property speculation and building of unneeded capacity
- Currency manipulation charges from the US and potential trade wars
- Unsterilized trade imbalances fuel inflation
- Slowing Europe
- Dearth of Jobs for new graduates
- Potential social unrest
Shedlock also provides a link to a story posted December 18th, 2010 on the U.K. Daily Mail’s website entitled “The ghost towns of China” that shows amazing satellite images of deserted cities that are meant to be home to millions. And today in the Wall Street Journal, a column by Hugo Restall entitled “China’s Real-Estate Frenzy” has this to say about a property bubble in China, “Housing prices in the U.S. peaked at 6.4 times average annual earnings this decade. In Beijing, the figure is 22 times.”
You don’t have to be an economist to understand that the combination of millions of empty, excess housing and commercial units, combined with prices for these units that have appreciated at a rate 22 times earnings growth in a single decade is a problem. Combined with the other reasons Shedlock so aptly summarizes, including surplus labor and a slowing market for exports, one may reasonably conclude China’s economy is in serious trouble.
There is an interesting story from Reason Magazine, written over a year ago by Anthony Randazzo, Michael Flynn and Adam Summers entitled “Turning Japanese,” that offers one of the best summaries of how the debt bubble caused economic stagnation in Japan and now threatens the United States. As they put it, “A long real estate bubble that had expanded extra rapidly for the previous five years suddenly burst, and asset prices came crashing back down to earth. Banks and financial institutions were left holding piles of worthless paper, and the economy soon headed south.” This article is perhaps even more applicable to China, where the banking system is so opaque it is hard to assess how much they depend on margin lending.
Shedlock makes a very good point in his recent post on China when he states “It is not ‘consumer price inflation’ that is the big problem. Asset inflation, especially property speculation is rampant.” This underscores a serious problem with conventional economic indicators which do not adequately emphasize both aggregate debt in a nation as well as asset inflation.
The United States, which confronts a total debt (all debt, commercial, consumer and government) to GDP ratio of 3.7 to 1.0, is none-the-less in a stronger position than China or the Eurozone. For one thing, we actually know what the debt to GDP ratio is in the U.S. In China the actual numbers are virtually impossible to determine, and in the sixteen nations comprising the Eurozone the numbers, while somewhat more transparent than China’s, are fragmented and also nearly impossible to compile. But these balance sheet considerations – the total debt, total assets, and the volatility of asset values, define a nation’s economic vitality at least as much as the leading indicators so favored by conventional economists. And by those balance sheet measures, China is headed for a day of reckoning.
Equally important in the relative assessment of the U.S., the Eurozone, and China’s economic prospects are factors where the U.S. is clearly advantaged: the U.S. has a diverse economy that is three times larger than China’s, technological and scientific leadership, military supremacy, a robust and reasonably transparent democracy, relative civil calm, and the youngest demographic age distribution of any developed nation. Because of these advantages, the United States, despite alarming levels of debt, may still manage to avoid a deflationary collapse. China has none of these factors working in her favor and is challenged accordingly.