Which is worse, China's debt problem or ours?
The US is in bad shape with subprime debt, but China's local governments aren't doing so well either
We’re not bearish enough [on China].” – Jim ChanosSkip to next paragraph
Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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Even if the US holds itself together, there’s a good chance that either Europe or China will drag it down.
The latest reports show China’s property bubble beginning to lose air. The Wall Street Journal reports:
After years of housing prices gone wild, China’s property bubble is starting to deflate.
Residential prices are heading downward in some major cities, damping some undesired real-estate speculation but raising the prospect that the Chinese economy may slow more rapidly than anticipated with profound consequences for global growth.
Real estate is a foundation of China’s phenomenal growth record in the past two decades, and its health is crucial to China’s construction, steel and cement sectors. Real estate is also a favored investment of Chinese looking to get better returns than bank deposits pay.
And legendary short seller, Jim Chanos, says China’s local government debt is worse than America’s subprime problem. Subprime debt in the US never surpassed 10% of GDP. China’s local governments have debt (much of it bad) of more than 30% of GDP.
We went to China recently. We were unable to form a clear opinion about it. Yes, there were plenty of buildings that looked empty…but the streets were full of people.
And there is so much money in China! A friend is an antique dealer in Paris. He tells us that the hottest segment of the market is Chinese antiquities. As soon as something comes on the market, a buyer from China snaps it up. Here’s an example. In March, an antique China vase was auctioned off at Sotheby’s. The auction firm had appraised it at $800 to $1,200. Instead, it sold for $18 million.
With that kind of cash available, why worry about empty apartments? Surely, the demand will meet up with the supply, right?
Trouble is, without the discipline of the free marketplace, you never know what the demand really is. And given a lot of extra cash and credit from the feds, supply tends to overshoot, often spectacularly.
Without the light of real, free markets, buyers and sellers wander around in the dark like blind drunks. They stumble into each other. They fall down. They bloody their noses and make an awful mess.
In the heady air of post-commie central planning, China may have less than 10% of the world’s GDP, but it buys more than half its cement – and nearly as much of its iron ore, steel and coal.
What does it do with all that? It adds supply! It builds.
From first hand observation we weren’t able to draw much of a conclusion. But theory tells us that there is no way you can invest that kind of money – often with the help of local governments – without making some major mistakes.