Another Sign of China's Collapse
Posted by Doug Rice on Sun, Mar 28, 2010 @ 09:56 PM
Often times I hope I am wrong.
The FT reported that forest land that is to be preserved has been used as collateral in bank loans to build infrastructure by local governments. So if the loans go bad, they will have to sell the land to pay off the debt.
Since they are unlikely to be willing to part with large tracks of forest and other natural wonders, a bank bailout would be the natural option.
But why would the loans go bad?
Because no one is using the buildings that were built by their funds.
The FT reported that Chenggong is a new town near Kunming, one of the main cities in the south-west of China.
Construction started in 2003 and the results are now apparent in 13 immaculate local government buildings, each clad in marble tiles.
A high school boasts an impressive indoor swimming pool and several of the region's main universities have built large campuses.
Pristine high-rise apartment blocks stand in rows, their new windows glinting in the subtropical sun.
The one drawback: at the moment, Chenggong is almost completely empty. Its wide streets are all but bereft of traffic, a bank branch has no customers and leaves collect in the foyers of the municipal offices.
What's worse is that haven't stopped building or borrowing to do so. While China's GDP has grown substantially, the debt to GDP ratio has barely budged. The explanation of this is that the growth was from spending by state-owned financial institutions, not directly from the government. Loans last year more than doubled to nearly a third of GDP.
Can you say unsustainable?
To put that in perspective it would be as if Bank of America Wells Fargo, etc. were state owned and they loaned out 33% of GDP, which would be almost $5,000,000,000,000.00 (trillion) if it were happening here.
Investment that was once 25% of the Chinese economy is now more like 50%.That means that for every dollar (yuan) spent in China, 50 cents of it is by the government. Again in perspective, that would be $7,000,000,000,000.00 (trillion) in government spending if it were happening here.
China is trying to increase domestic consumption, reduce foreign demand, and reduce government spending, but it's a long and difficult process. One that we hope will go smoothly, but as I often say, hope is not an investment strategy.
Here's why it matters to you
When the highly likely burst of the China property bubble occurs, the repercussions won't stay inside their borders. It would easily drag the rest of the world into a double dip recession.
And we are pretty much out of economic bullets to shoot at another recession, so the next one will likely be worse than the last one.
Worse yet, China could be forced to quickly appreciate their currency which they have pegged to the dollar and is keeping our imported purchases of their goods at low prices, or they might dump the US government debt which they own plenty of. Either would send the dollar plummeting and the prices of imported goods skyrocketing.
And if that happened with no economic bullets left in our gun, well...let's just not go there before we have to.
In conclusion, with no one living in an entire new city, it's hard to think that everything will be fine and this will all work itself out, but I sure hope I am wrong.