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Wednesday, December 21, 2011

The China Bubble: A Burst Coming Near You in 2012


While we watch Europe go through its throws of economic reshuffling, money printing, and reorganizing of alliances, China reports great numbers on GDP growth and low debt (under 20% of GDP) and now, the world's foremost manufacturer (passing the United States). But the silver lining to the world economy is a sham; and collapse is inevitable, as reported by SBS Dateline reported in "China's Ghost Cities."


At the root is the world's largest infrastructure project - the building of enormous malls, roads, bridges, and lastly, apartments and condos by the billion yuan. 64 million empty apartments that are overpriced ($70-100K) for an average worker (or family) in China making only $6K per year. These workers are then expected to pay up to 50% of the cost before they are either built (or occupied) with the remaining balance paid in 3 years. Going occupancy: around 25-30%. (Makes that 850 credit score you get stateside seem like an easy task.)

As local analyst Gillem Tulloch projects, this bubble will be larger than the United States housing crisis, but it is still moving up to the boom-bust apex. Cities like Ordos, Zhengzhou (new district) or Erenhot, Xilin Gol, (Inner Mongolia) are being created out of the blue, in just a matter of years, but are not teeming with people, the main ingredient to the functioning part of a city, or an economy. Instead, they are like parking lots between sports contests - vacant - and eerily devoid of human life. Or, as suggested by Gillem, "pyramids built for no one." Neglect, slipshod workmanship, graft and corruption must be thrown into the mix of this molotov cocktail of a command economy destined to explode with severe global implications. Tulloch adds, "It's alarming...It's interesting. I don't think there are many places in the world like this."

"Interesting," is not a good word to use in economics.

Paul Krugman, a pretty good economist, suggests this too in a December 18, 2011 blog:

I hope that I’m being needlessly alarmist here. But it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.

Alarmist and alarming.  Seems pretty darn scary to me.

No one can predict when the day of reckoning will come. That's conjecture. It may just take a financial news scandal, or a bank implosion in the neighborhood of $600 Billion (the size of Lehman when it went belly up), to trigger the full force of a Chinese massive hurricane that will have waves of civil unrest to fuel the storm for years to come. Revolution, as a sociologist interviewed for the report, will be due to growing polarization. This adding characteristic will swell due to the widening disparity in incomes, the cultural and ethnic divides, the inner China agriculturally poor versus the more affluent (remember: China) members in Shanghai and other coastal dwellings that are doing the heavy trading of the yuan to the world. Meanwhile, Beijing is hardly in control, as local and party pols blow smoke and construction dust up the upper-level folks' behinds. (But hit those GDP targets anyway they can.)


Great Depression II is not adverted, yet. Just delayed. With Europe having 3-4 nations at the cusp of default, China's boom to bust cycle about to happen, Japan's National debt at 220% of GDP, and the United States functionally illiterate about their own affairs, we got Australia and Africa left to lean on.

Oh well, time to put some financial shrimp on the barbie, eh mate?

Also time for a cracking good time watching Globalization tear itself apart.

Humanity will weather it. We hope.


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