Is the China bubble about to burst?

Is the China bubble about to burst?

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Toronto, ON, Canada, — An aggressive and arrogant China is entering 2010 with a bit of uncertainty. Although there was no let-up in its exports in 2009, its internal financial position looks uncertain. China watchers are expecting a bubble that will eventually burst.

In 2009 banks in China lent internally about US$1.4 trillion to businesses, including the real estate industry, with dubious performance records. James Chanos, a successful U.S. stock market dealer, has predicted that China’s financial collapse could be far worse than Dubai’s.

China soothsayers wish to prove Chanos wrong – and they may be right. With US$2.2 trillion in foreign reserves, it would seem China could weather any storm. But the problem is that its cash reserves are uncashable. The United States and Europe are not just waiting to repatriate the money to China. So China could be left to its own devices if it faces a financial storm where markets tumble and poor people with money tied to investments see their savings vanish.

Easy credit, too much money in the economy, excessive foreign direct investment, a completely undervalued currency and rising real estate prices have definitely created a bubble. This bubble could burst with any minor international event. That is the price China would have to pay for designing policies that serve Western consumer markets.

But there is a silver lining. All the foreign direct investment of the last 25 years, amounting to about US$900 billion, which has gone into building the economy, will serve China well. Factories will continue to produce and Western consumers will continue to buy consumer goods. So China will recover.

But there still remain a few economic aspects that will be debated for years. These include US$2 trillion spent in the last 30 years to improve and rebuild infrastructure. This is too much for a yet underdeveloped economy that is exclusively dependent on exports. Although this has given China a neat and clean look, the huge expense without an internal consumer economy is dubious economics.

Take for example the investments in larger-than-needed mega-infrastructure projects like the high-speed rail network or the hugely expensive Olympic projects and other prestigious airports and road projects.

Consider this: real estate values increased by 70 percent in Chinese cities in 2009, far beyond the average household’s affordable level. The stock market has skyrocketed by 80 percent beating even the best predictions for 2009. As the average Chinese have major investments in both these sectors, there will be turmoil if both sectors crash in 2010. If so, the U.S. recession of 2008-2009 would pale in contrast and China’s economic crisis could rival the U.S. depression of 1930.

Why are so many economists and brokers forecasting China’s internal implosion? Simply because they are reading about China’s US$580 billion stimulus package, the US$1.4 trillion lent by banks to the rich and powerful in China and the US$80 billion in foreign direct investment received in 2009. These are huge amounts of money that cannot be ignored.

This river of money has ended up in China’s real estate and stock markets. Everybody in the West knows what happens when markets shoot up too fast. They drop as rapidly as they rise, sinking tons of money. In the event of a stock market crash, all this money will evaporate and ruin the financial health of the country for a long time to come.

It is difficult to pinpoint when China will implode, but it seems certain that the laws of economics will take their due course. In this scenario, opportunists from the West, backed by Western money, will come into China’s financial markets and buy healthy Chinese companies on fire sale. Chinese investors will cry foul but to no avail. This will not be an end of the Chinese economy but rather a sobering reminder.

This scenario is very much on China’s mind. On Jan. 20, world stock markets reacted sharply to the announcement by the chairman of China’s Banking Regulatory Commission that China will slow its massive lending spree in 2010, which is an indication that behind all the fat claims of China being the second-largest economy or the largest exporter, lies a sobering realization that all is not well in the economy.

Elsewhere in the world, the United States, Canada, Europe and Japan are not doing as well as anticipated. The precarious banking position of 2009 has been stabilized in Europe and the United States. But the economy will continue in the doldrums for a while.

The 7 million Americans left unemployed due to the U.S. banking crisis are not about to be employed. They will have to wait. In Europe the position is slightly better. The Japanese economy is not yet on a recovery path but may soon be.

The Indian economy, mostly consumer driven, stayed unaffected by the 2008-2009 global recession barring the immediate impact on a few sectors at the onset of the U.S. banking woes. It will grow as much as the Chinese economy is likely to in 2010, if one believes Chinese statistics.

The Indian economy for the past 50 years has remained isolated and so has largely been immune to the pulls and pressures of the Western world. Also, large amounts of cash flowing in as foreign direct investment, remittances from Indians living abroad, and institutional investments from abroad in the stock and bonds market have helped the economy.

India does not have much to show off in exports, manufacturing or new infrastructure. But what it has, alone with its immunity to Western pressure and its general stability, is worth laurels.

Therefore, putting together the negative and positive ramifications for the Chinese economy, it is easy to conclude that China’s financial and real estate troubles are real. The manufacturing economy, although linked to consumers in the West, will chug it along. This is the best that the Chinese can hope for.

Unexpectedly, the United States may see an opportunity to press China to revise its currency, which has stayed largely undervalued. This is not a pretty picture for China.

Additional concerns arise when one notes that in an average good year prior to 2009, 20 percent of China’s bank loans went sour. In contrast, average bad bank loans elsewhere in the world were 2 percent. With huge bank disbursements in 2009, mostly to unsavory but well-connected people, China’s bad loan position may jump to 30-40 percent. So no matter how one looks at it, China’s financial markets are headed for trouble.

China’s manufacturing economy will soon face problems of its own. It was in 1979 that Chinese leader Deng Xiaoping instituted a one-child policy that won accolades in the West. Since then, the population base is growing old. The manufacturing sector will have trouble replacing old retiring workers with young ones.

Also, smartly educated youngsters may not opt for factory jobs, preferring office jobs or high-end technical jobs. There is no dearth of labor in China to run assembly lines or work on simple construction projects. But a major production disruption is possible if nobody wants to work on these jobs.

Big troubles are forecast for the Chinese economy in the near term and it is all because it is trying to outdo the West. If trouble strikes, it is the West that will gain.

(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)

Posted via web from Toronto Real Estate News | Blog


About Tariq Sultan
Dear Readers, I am a dedicated Toronto, Ontario based real estate professional who has been successfully meeting and exceeding the needs of his clients for past several years. I am actively involved in the insurance, financing, and mortgage industry. Real estate is not only my career – it is my passion. I strive to continuously provide my clients with exceptional service to ensure they are fully satisfied when it comes to their real estate needs. For any real estate related inquires contact me today, I will be happy to assist you. Best wishes, Tariq Sultan

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