"There is danger from all men. The only maxim of a free government ought to be to trust no man living with
power to endanger the public liberty." - - - - John Adams

Monday, July 18, 2011

The Great Depression is coming to China

The New South China Mall, the largest mall in the world based on gross leasable area, has
been 95 per cent vacant since its opening in 2005.

The Chinese real estate bubble has just burst . . . the question is will China go into their own Great Depression and how will it impact the world?

Major cracks are beginning to surface within the Chinese real estate market as speculation about the collapse of the bubble has started to emerge.

This story was recently reported by this site in "The Federalist": China's Ghost Towns.

Well, the bubble has popped.  I suspect China will have a monster flood of home foreclosures, businesses going under and perhaps serious political unrest.  How this will impact the politics and economy of the rest of the world is a serious concern.

Standard & Poor's recently cut its outlook on Chinese developers from "stable" to "negative" in anticipation of a "sharp correction" for real estate prices. Analysts are forecasting that home prices will fall by 10% within the next year.

In a bid to insulate China's economy from the global financial crisis and weakened demand for China's exports, authorities encouraged banks to lend, particularly for real estate development and public works that create a lot of local jobs. Fixed asset investment — the construction of infrastructure and buildings — doubled between 2007 and 2010 as developers availed themselves of cheap financing.

The result: Some Chinese cities are awash in vacant commercial space and unsold apartment units. In the first half of this year, home sales dropped:
  • 20% in Beijing
  • 26% in the western boomtown of Chongqing
  • 61% in the speculative hotbed of Haikou on Hainan island
according to the China Index Academy, a property research firm.

A new city, build in seven years, still has hardly any residents, resulting in empty streets and
empty buildings in Chenggong, Yunnan province, China

At an average wage of $7,400 people are neither able to purchase the basic $100,000 apartments units nor invest into small businesses around the new developments. In cities like Hainan, residential apartment occupancy rates stand at only 30% while more industrialized cities such as Shanghai and Beijing also have substantial vacancy rates of approximately 50% and 35% respectively. Prior to deflation of the American real estate bubble, Michigan had the nation's highest rental vacancy rate of 18.4%.

Commercial real estate is displaying a similar trend where construction is outpacing demand. What was once expected to be the largest retail mall in the world, the New South China Mall in Dongguan is practically empty as over 95% of its stores remain un-leased since its construction in 2005. Although the "Great Mall of China" contains 9.6 million square feet of floor space, less than a dozen active shops remain in the mall. Also, due to the lack of customers the few active shops claim that they can go for days without making a single sale.   (China Bubble)

At the peak of the American housing bubble, the average new home price to annual disposable income ratio topped out at slightly over five, meaning that it would take five years of savings to fully purchase a home. The current corresponding metric for Shanghai is ... 57.
In early 2011 China's central bank raised banks' reserve-requirement ratio by half a percentage point, following six such increases last year.  The central bank knows what is coming and has been increasing reserves trying to avoid the bank failures that took place in the United States.  
The official numbers from Shanghai mentioned is of 6 million
square meters of unsold space this last year.

Chinese credit is starting to tighten.  "It's very tough to get loans now," said Huang Fajing, a cigarette lighter manufacturer in the southern city of Wenzhou who was recently told by his bank that his credit line was being trimmed. "I've had to scale back stockpiling raw materials."

Local government debt has also skyrocketed. The careers of many Chinese local officials depend on creating jobs and economic growth, but the central government prohibits cities from issuing their own bonds to finance public works. To sidestep that prohibition, municipalities across the country have created off-the-books entities to do the borrowing. A national audit released in June found that local governments had amassed $1.65 trillion in loans by the end of last year — a sum equal to nearly a third of China's GDP.

"China has developed a huge debt burden in the past two years due to the fiscal stimulus in the wake of the global financial crisis, on top of a post-crisis property bubble," wrote Vincent Chan, an analyst for Credit Suisse, in a report released last month.

For more on this story

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