19
May
11

Is a Great Recession Coming to China?

With the majority of the media and analysts permanently bullish on the prospects of China (much like those of Japan’s in the late 1980’s, remember that?) you start to see some similarities as well as differences to previous economic cycles in the past Economies of Power. The expression ghost cities is starting to surface recently, referring to rural towns within the China where real estate developers have cranked up the supply of residential housing as well as commercial buildings to “prepare” for great expectations of people flocking to these newly built cities in the near future. How big are these projects? In many cases the amount of housing capacity available is ten times that of the population of the newly built city. In one case a town with a population of 30,000 boasts capacity for 1,000,000+ people.

What is wrong with this picture? With inflation fairly high in China (not to mention the actual number being much higher than what the government has reported), as well as the income levels way out of whack with the affordability to live in such areas, how can this economic growth plan be feasible? As well as how much of this over-building has contributed to China’s monsterous GDP growth of recent times? When you look at the recent problems in Dubai, they seemed to be dwarfed by the Chinese real estate conundrum of build, overbuild and then overbuild on top. The money supply in China has grown substantially since the 2008 US financial crisis at rates never seen before or perhaps have they been seen before?

When you compare past economic boom bust cycles, China’s current situation parallels that of America in the 1920’s (with China’s being to a much greater degree though). The free money credit system of the Roaring 1920’s made all Americans at that time feel like prosperity was boundless. Although poverty had reached record levels in the 1920’s but so had the number of wealthy individuals who had amassed fortunes via real estate and financial markets. Companies over-produced with high expectations for future demand. Leveraged Borrowing to invest in the real estate and capital markets had reached record highs in the 1920’s in America much like now in China and people paid premiums for luxury goods as well as high-end houses. Will the outcome for China become like that of America after the 1920’s or like Japan in the 1990’s or Dubai in recent times or much worse? How much would it’s economy fared had not it been reliant on over-production and over-consumption as well as over-building within the real estate sector? With the vacancy rate sky-rocketing in the thousands of skyscrapers built in this latest boom from Beijing to Shangai will the excessive gap between supply and demand cause a correction that will last for decades? Is the end of the Chinese economy coming?

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