I think there is one fundamental point people should understand when pondering macro issues: for a closed system the amount of savings is equal to the amount of debt. Every dollar of debt is a dollar of savings for the debt holder and vice versa (the first part is always true; for the second part to be true we can either take a narrower view of what savings are or we can view "debt" a little more expansively to mean all financial assets -- the key is that claims are always matched by obligations). So China having a lot of debts is equivalent to Chinese having a lot of savings since most of the debts are held domestically. With that in mind maybe people can get a better perspective on the "what if" the credit boom stops.
"A lot of the extra liquidity is being sopped up directly into real estate"
It doesn't really work that way. People who buy lose liquidity but people who sell gain liquidity. Cash just changes hands. The question is what are the side effects of these transactions. In this case lots of apartments get built. Many of them empty. You may not regard that as the real economy. But is digging up gold to put in a vault or mining bitcoin any more real?
No, they aren't. It isn't doing anything useful, just acting as a speculative asset. It isn't developing the economy so that production is increased later on. Gold and bitcoin mining similar don't create value either (for gold's usage as a speculative asset).
With their real estate boom people will eventually live in larger and more modern housing units. The process to get there may be more wasteful than necessary but it can be eventually productive even from a very utilitarian perspective.
During the dotcom boom much more fiber capacity than needed were built but they were eventually absorbed. It was a misallocation of capital at the time and companies went bankrupt for that. But it was eventually not all waste.
Ha! The last time I looked at apartments in Beijing (late 2015) was depressing. Rents for 10k RMB/month, sells for $1 million USD, has one bathroom with a crappy wet floor shower (rental, the for sale places were completely unrenovated of course). Those buildings are also not meant to last more than 20 years without extensive maintenance (Chinese overbuild on concrete to take adavantsge of unskilled migrant labor, this leads to serious maintenance problems, but the CCP sees it as a feature rather than a problem), they start looking depilated after 5.
My wife owns a villa in a tier 88. It is a nice place, but the standards are so different, the lack of indoor heating makes me wonder how it could ever be livable.
Also, China lacks a property tax, so housing is seen as a speculative asset. It is really just like gold or bitcoin. Lots of house aren't even lived in (e.g. See ghost cities that have completely sold out but no one wants to actually live there).
Right. And keep in mind that Chinese GDP per capita is about one fifth of the U.S. If everything in China were up to US standards Chinese GDP would be 3 times that of US.
Wait, we are talking about a $1 million apartment here, even in SF that would get you something ok, but in Beijing, you would hardly get anything at all, it is just insane.
China already has developed world real estate prices even in tier 3s, while the quality is still developing world. it is definitely in a huge bubble that will pop eventually.
How much of the $1 million apartment is the price of the land? How much of the land price can be accounted for by things like very large investments in infrastructure such as the subways and preferred access to top universities that are still relatively low cost?
Anyway yes if they overbuild then one day they will have to build less. Remember the labor supply that are willing to do construction jobs will also be decreasing rather quickly. Right now they still have a generation of construction workers who are relatively skilled and who are still cheap to hire. Overbuilding now is not super stupid considering the demographics.
These are all tall apartment blocks, so land is involved, but is amatorized ofer many units.
Construction workers are unskilled by design (farmers from the country side, not even high school educations, construction is basically a jobs program for them). The techniques they use to compensate will result in higher maintnence costs later on down the line. It isn't stupid considering what they have, but the resulting buildings become dipilated rather quickly, why pay $1 million for that? And if I can rent that place for a cheap 10k rmb/month anyways, why would I bother buying?
I agree it is not a good investment based on the cap rate, unless the rent will be rising quickly to much higher levels. But as Keynes has pointed out long ago, investment for most people is like the beauty pageant. "It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees." (Keynes, General Theory of Employment, Interest and Money, 1936).
What I found interesting is that many bubbles have some rational elements otherwise they would not have formed in the first place. Take Beijing real estate: do apartments with convenient access to subways sell for a lot more? do apartments in districts with better ranked schools sell for a lot more? If yes you see people are still pricing utilities and the market is functioning at the micro level. It is just hard to pin down why the overall price level is so high:
- for most people who live in their own apartments, the price is quite irrelevant (they don't want to sell as they need a place to live);
- people who hold empty apartments probably subscribe to the "beauty contest" theory of investments (they may rationally think the price high but they couldn't think of a better way of investing);
- as far as the government is concerned the wealth redistribution caused by the high real estate price is in the right direction esp. when compared to a stock market bubble: high land auction price means more money to build infrastructure; high ownership ratio means older people who are less educated with lower income benefit more and while the young suffer they are more educated and can expect their income to rise rather quickly.
Despite the high real estate price Beijing population had been increasing rapidly (would have been even higher growth if not for government control in place). If China on a whole eventually stalls out at Taiwan's level (where Taipei suffers from similar real estate phenomenon) China would have succeeded beyond what most people expect.
Except that here it's kind of frightening to see the quality standards that are being followed (or rather: not followed) when putting up all of this housing, especially in non tier one areas. Housing gets build. Stays empty. After a few years look likes it's ready to be bulldozed and reconstructed from scratch again. In most cases, this is indeed exactly what happens, but it's hard to see any long term benefit from this sort of approach once the economy slows down.
If one sees a shanty town in the developing world one may wonder who would want to live there. What one does not see is what the conditions were before people moved into the shanty town. China actually completed rural electrification (and road coverage, cellular coverage etc) but still just having running water and indoor plumbing is a positive change for many.
Right that is the process of money creation. However it does not change the accounting identity that asset and liability are the flip sides of each other.
Except that means that if the debtor defaults, then the creditor loses all their savings. And the problem here is that what you have in large nations is a gigantic, interlocked network where every creditor is a debtor to many other lenders.
The result is that a limited number of debtor defaults can start a chain-reaction that freezes the whole system. Then you have a financial crash, and history shows these usually take a decade or more to get out of. Or is it your view that there is something special about the Chinese such that that couldn't possible happen there.
I wouldn't say that it is impossible. The tendency is though to double or triple count negative things. Chinese economy has lots of inefficiencies. Very true. That is reflected in the low per capita income. People could live a higher standard of living given the amount of effort they put in if the system were more efficient. People's lives are a lot less free. Capital control for example. Bitcoin was okay and then it is not. Inefficiencies in the economy can brake contagions though. What is negative in one aspect can be a saving grace in another. Check out how coal price behaved. The party wanted to shut down capacity and they did. Even as coal demand dropped the price shot back up. Difference between coal and oil? Coal is much more local while oil is international.
