The situation in China is dire.
Jim Chanos explains this here.
To summarize:
1. China has overbuilt production capacity in steel, cement, and other areas, far more than they need internally or can export, via bubble lending.
2. China cannot grow any more (and its growth rate is likely phony “official” statistics) via marshaling resources and throwing money at the economy, productivity has to rise (as Krugman noted in 1994 predicting the fall of the Asian Tigers). Without rising productivity China will stay poor. There is no rising productivity.
3. China has overbuilt commercial real-estate, Dubai standards “plus” : there is a five foot by five foot square cubicle space for every Chinese person already built.
4. China has overbuilt residential real estate. It now costs about 50% of income to live in Beijing and Shanghai, a bit less in Central China.
5. Middle Class Chinese have spent their life savings buying investment apartments because there is no real formal savings industry that is trusted — the unrest from the middle class in the event of a collapse of the residential real estate market is a massive threat to the Chinese regime.
6. Dubai-style indicators: “World’s tallest village” outside Beijin, “new cities” being built (but empty) besides old ones in Western China, resorts in Tianjin built to resemble the continents, indoor ski slopes, etc. abound.
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Timing is of course an issue, but clearly this bubble cannot go on forever and will not go on forever.
China thus faces huge disadavantages in unwinding the bubble:
A. It is now a net deficit nation, running about $200 billion a year in the hole.
B. It will find import restrictions in the US and EU and Japan over things like tires, or food, or various other aspects.
C. China produces “low value” goods that can be produced pretty much anywhere a factory is set up. China is known for poor quality and cheap, not high quality stuff.
D. China faces severe pressure to keep investment apartments at current valuations, while the renters/lease-holders want cheaper living.
E. Because China produces masses of cheap stuff, instead of manageable smaller quantities of high-quality stuff, it is extremely vulnerable to return to protectionism to protect local jobs in Japan, the US, EU, and elsewhere. Germany can ship a few thousand Leicas and Mercedes to say, Japan, and not disturb the local job nexus and STILL earn considerable export income. Not the same for China shipping millions of cheap cars and digital cameras.
F. Income remains very low in China, because productivity has not increased for decades. Capital investment in advanced, robotics driven factories that make each worker far more productive and valuable have not happened — instead masses of cheap semi-serf labor produce predictably shoddy goods.
G. A collapse in the Chinese bubble driven boom is likely to destroy export-driven resource economies and companies. Cement exporters, lumber exporters, and so on will be hit hard. Some countries and companies can have as much of 80% of their resources (Chile and Copper, for example) devoted to the Chinese building bubble.
H. China’s government driven command economy is likely to make things worse unwinding the bubble by protecting political insiders even more than elsewhere, reacting too slowly at first and over-steering later, likely causing a collapse of living standards very rapidly. China’s corrupt and inefficient banking system could wipe out the current cash economy, causing huge disruptions as all available cash is directed to propping up insider holdings.
I. Of course, when the Chinese are really pressed, they will sell off US securities, and various holdings in Europe, for whatever cash they can get, further depressing the market value of those securities (bonds, stocks) together. This will be the effect of going to the pawn shop to sell the family jewelry to keep the business afloat. The money achieved by selling current holdings is unlikely to plug the leaks or achieve social peace. But selling them is likely to cause plunging values for US debt and require huge tax increases to make up the difference, or an inflationary, near-worthless dollar.
