China’s property bubble
Ever more media attention is being focused on China’s potential property bubble. As discussed several times previously, the Chinese economy is a freakish economy that is 60% dependent on construction to produce growth. It is this massive emphasis on infrastructure spending that has buoyed the industrial commodities, benefiting Canada in the process. A significant slowdown in China’s economy is still the greatest threat to the global economic recovery, a fact not lost on TD Economics who released a report last week in which they concluded that a slowing in China’s economy to between 5% and 7% from its current 10% clip would have the following impacts:
Under this scenario, world economic growth would be almost cut in half to 2% and commodity prices could fall by 30-40%. This would shave 1.0 to 1.5 percentage points from Canadian economic growth.
This is not even considering the impact that this would have on the commodity-heavy TSX which would face a smackdown if commodities fell this steeply.
Indeed, the Chinese growth miracle has even been credited with holding off the nastiest effects of the Great Recession as it insulated Canada to a much greater degree than other countries who did not have such strong export ties to the Middle Kingdom:
“All of us in the mining industry are totally, totally dependent on the Chinese economy”….”Their demand for commodities has kept prices high. The ripple effect throughout B.C. and the rest of the country has been very, very important.”
So it is of utmost importance that we ponder the following questions: Is the massive building campaign in China simply an example of fantastic foresight on the part of their central planners, or is it better described as the greatest ongoing misallocation of capital on the planet?
Dateline ran an interesting 15 minute segment on exactly this phenomenon just this past week. It is well worth watching:
Some key quotes:
Professor Zhou Xiao Sheng, Sociologist, People’s University, Beijing:
“What worries me most is polarization…Right now, China is polarised – it continues to be polarised – that is a big worry. It is clear that polarisation will cause conflicts in society – poor people may come out and start a revolution.”
Gillem Tulloch, Hong Kong-based analyst who has been investigating China’s residential and commercial real estate market:
“It’s essentially the modern equivalent of building pyramids. It doesn’t really add to the betterment of lives, but it adds to the growth of GDP…..It’s basically happening because China is a command economy and the Chinese Government can dictate where the resources are spent….If the central government a GDP target, they have to meet the target and the easiest way to do it is just to build.”
Reporter: “Isn’t all this construction a good thing? It’s creating jobs and getting the economy moving? That’s a good thing?”
Gillem Tulloch: “People forget that it is not the quantity of GDP that matters but the quality and essentially, they’re building things for where there’s no demand and so they’re creating a large problem for the future….It can’t stay this way because we’re in the upswing of a bubble, and when the bubble bursts, it will impoverish vast numbers of people….it increases the chances that you get some form of social unrest.”
The bursting of a Chinese bubble would be a potential game changer. Certainly the current level of economic activity is unsustainable given what is driving it, but how long it can be sustained at its current pace is a huge question. China’s centralized economy has managed to orchestrate economic growth at a miraculously consistent 10% clip. The big question now is can they orchestrate a soft landing without crushing their own economy and significantly damaging the global economy by extension?