China’s property bubble
It should have been history’s greatest example of a successful exit from years of totalitarian rule. Instead, it might prove to be history's greatest property bubble, ahead of what could well prove to be history’s largest property crash.
This 60 Minutes report on China’s Ghost Cities tells most of the story, and demonstrates what malinvestment looks like, but gives little of the cause and foreshadows only a little of the potential fallout when the bubble bursts.
The main cause the clip ignores is the Chinese government’s role in encouraging these projects and their money printing that has blown up this inflationary bubble—giving new buyers the idea that house prices will rise, will rise, will always rise and will keep rising. It’s like the pyramid scheme in Albania that boomed and burst after the collapse of socialism there, only on a much, much larger and more destructive scale.
As Robert Wenzel explains, Chinese politicians have a tiger by the tail:
At present, the Chinese economy is a combination of free markets and bizarre central planning. These ghost cities are heavily financed by local governments and the money that investors use to buy the properties is pumped about by China's central bank, The People's Bank of China. So much money has been pumped out by the People's Bank that price inflation is starting to cause civil unrest. The People's Bank of China and the government of China are trapped, the only way they can prop up the bubble is by more money printing, but that will cause price inflation to accelerate even more. If they stop printing, the real estate market and stock market will crash. It is possible it will result in the greatest crash in economic history...
When this thing crashes, one way or another, it will be blamed on China moving "too fast" in the direction of free markets. It will be a myth…
The fallout will be huge. America is partly financed by Chinese savings, which could well disappear in the bust. Australia has endured the depression only because it has been kept rich selling to China “the most commonly available commodities known to man,” there to be transformed into property no-one lives in. Demand for those commodities will plummet in the bust.
We do live in interesting times.