Bubble in China means Canada at risk; The economic headwinds in pictures

Bubblicious in China

I’ve said before that there are really only two global property bubbles that eclipse ours:  The Australian bubble and the Chinese bubble.  In a strange way, our economy and that of Australia are directly dependent on the continuation of the Chinese economic miracle.

Yet there is increasing reason to question the sustainability of the bubble in China and if you’re a Canadian, you owe it to yourself to get educated on this matter.

While discussion of a Chinese bubble is not new, the recent commentary by respected money managers Jim Chanos and Vitaliy Katsenelson adds a new level of insight into the discussion  (hat tip to The Unconventional Economist for pointing these out).

Chanos vs. China

Shadow over Asia

These articles are as insightful as their implications are shocking.  It is very difficult to argue that the manufactured GDP growth rate is anything but unsustainable.  Some estimates have pegged construction at 60% of GDP, which is shockingly high!  Entire new cities are being built and are sitting completely unoccupied.  This is not hyperbole; It is not anecdote.  You can see them for yourself.

Here are some more shocking stats about the Chinese building boom:

There are enough vacant residential homes to house half the US population

Since 2009, 2.6 billion square metres of office space has been built, much of it sitting empty.  That’s roughly a five foot by five foot cubicle for every man, woman, and child in the country.

Is this sustainable?  Definitely not!

But what effect will the inevitable slowdown in construction have on us here in Canada.  I see two major fallouts:

1)  Demand for commodities like copper falls precipitously, leaving our commodity-laden stock market vulnerable to correction.

2)  The pool of millionaires in China quickly shrinks as any cessation in credit expansion would very likely cause a significant correction in property values.  And with that, we slash the number of investor immigrants coming to Canada.

If you live in Vancouver and embraced the fallacious notion that rich Asians will keep home prices at an astronomically high plateau, I’ve got news for you.  The impact of these rich Asians entering our country is not what you think it is as they account for significantly less than 10% of total sales volume for Greater Vancouver.  But even if they were the golden goose, look at the big picture.


Economic headwinds in pictures

Some nice visuals from a CIBC economics report released today:

As stimulus is set to wind up, with Flaherty adamant that there will be no extensions, it will be interesting to see just how ready the economy is to stand on its own two feet.  Ending stimulus measures is expected to produce a significant drag on economic growth.

The current state of our largest trade partner.

Increased savings + shrinking outstanding credit = deflationary pressures, particularly on real estate which is extensively financed via credit.

Coming to a neighbourhood near you just as soon as people realize that they’re actually poorer than they think…..see next pic!

Pretty much self-explanatory!

As often said before, the bounce in GDP growth coming out of the recession was almost entirely due to 3 things:  Inventory restocking, housing, and government spending.

With housing starts now falling and the government realizing that austerity will either be embraced or enforced, it’s safe to say that neither construction or the public sector will be significant generators of jobs going forward.



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5 Responses to Bubble in China means Canada at risk; The economic headwinds in pictures

  1. Great analysis and interesting insight into China.
    Thanks !

  2. mac says:

    Well, you’ve got to look on the bright side. You’ve convinced an insurance agent you’re correct.

  3. John in Ottawa says:

    Mish over at globaleconomicanalysis.blogspot.com has this to say today in his must read “China’s Economic Treadmill to Hell; Shadow Over Asia; What [will] happen WHEN China Slows?”.

    Australia and Canada Will Suffer

    As noted above, the US would likely benefit from a normal slowdown in China (or a crash not caused by collapsing global trade). However, Australia and Canada with their housing bubbles already poised to implode would suffer mightily if commodity prices tumble.

    Given that the US and Europe are far more important globally, A slowdown in China might be a net benefit for the world “in general”, yet a total disaster for countries overly dependent on continuous strong growth in China.

    Australia and Canada would be especially hard hit, right at the worst possible time.

    We have oil to help mitigate the swings in the commodities markets. You can see it in the Forex market. Australia’s dollar, like ours, is directly linked to commodities, but ours is a little less volatile due to oil. Emphasis on “little.”

    Mish is correct in his analysis. When China slows, commodities, including oil, are going to take a hit. That will be the end of the free ride for Canada and Australia. Just look at the commodities futures today, as a result of temporary margin tightening in China, and the hit our respective dollars took. Mish’s article could not have been better timed to illustrate our vulnerability.

  4. John in Ottawa says:

    As Ben points out, Flaherty has said emphatically there will be no more stimulus. In fact, there will be austerity.

    Have a really good look at the chart above, “Worst US Job Losses Since Great Depression.” You can see the much better chart on which this one was based here.

    Recessions are getting “sticky” and have been getting progressively more sticky since WW II.

    Keynes said that when a recession strikes, governments must make up for the belt tightening by the private sector. Governments are big enough to take up the slack, either from savings or debt. He was absolutely correct, at the time, and his advice helped mitigate the Great Depression and many recessions since.

    He also cautioned governments to save (pay back the debt) during good times. This caveat has been forgotten by some governments.

    Canada (and the rest of the world) followed his advice when this recession started. Harper announced major stimulus packages. It was the right move. The expectation was that the government could “bridge the gap” in GDP until the recession ended.

    Here is the problem and most of the world has recognized it. Recessions are getting longer and longer. The gap is too wide for governments to bridge. The Keynesian medicine is killing us.

    The recession, according to the US NBER, officially ended in June, 2009. Tell that to the unemployed! Normally, after a recession GDP grows by 5 to 7%. This time around it is crawling along at less than 2%. That simply isn’t sufficient to grow employment.

    You may ask, “Why are recessions getting longer and deeper?” This is a subject that will be the source of many books and heated name calling by academics over the years.

    But, here is a simplistic answer. It isn’t 1933 any more! In 1933 the US was a young country with a strong workforce and vast untapped resources. Today, the workforce is weakened and discouraged and the resources have all been exploited. The medicine that worked in 1933 doesn’t work as well today. Remember, this is the book jacket explanation.

    What does this mean for future recessions? They will be worse, longer and more frequent. They may meld together into the next Great Depression. Governments may still try stimulus at the outset, but there will be less time to recover between recessions and stimulus will be less and less effective.

    This is why you are suddenly, and for the first time, hearing governments around the world reject Keynesian-ism and call for the harsh medicine of austerity. At least it won’t kill us. I hope.

  5. Pingback: Toronto condo data; China about to hit a wall?; Fiscal austerity to weigh on public sector jobs; The Age of Deleveraging; Another video primer | Financial Insights

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