The alternative ploy -- that it doesn’t exist -- doesn’t get same airing that it did in the US before the subprime crash. Instead, the “it’s a bubble, but it won’t burst” case is that the bubble is too important to China’s continued growth to be allowed to burst, and -- unlike the US -- China has the wherewithal to keep it going, at least for a while. (See There will be no Minsky moment for China, March 25; China Can't Afford to Let Its Housing Bubble Pop, January 30; Templeton Braving China’s Housing Bubble, February 28; Chinese Property Sector Will Not Implode Like America's Subprime Market, March 11.)
I have deliberately refrained from this discussion, mainly because I prefer to work from data, and I prefer data that -- despite some warts -- I trust. Until recently there was no publicly available data on China’s debt levels, which is a key metric for me; fortunately that has been remedied recently by the Bank of International Settlements, and I’ll analyse that in a future post. But whatever it reveals, I also concur with the alternative ploy to some extent -- that though there is a bubble, China’s capacity and determination to contain problems is much more impressive than the US’s.
But I also wanted to see the phenomena first hand before I commented. Anecdotal and eyewitness evidence counts for something.
One colleague (who is a China ‘bear’ with numerous business visits to China beneath his belt) had insisted that not only were many apartment blocks uninhabited, they were also uninhabitable: the concrete shells existed, but nothing had been finished internally -- pipes existed but no taps; electrical wiring but no fittings; and so on. That I definitely wanted to see for myself.
So scratch that from my bucket list: Figure 1 is a typical apartment in a complex of a dozen or so 30-plus storey buildings in a fourth-tier town in Sichuan. It has been in this state for a year, and the owner of this flat -- who intends on living there ultimately -- is in no hurry. On its own that apartment isn’t so remarkable. But all the flats in the building were in the same state, as were the facilities: to catch a lift, you have to bang on the doors to let the operator know you want to be picked up.
Figure 1: Finished building, empty apartments
This is where the “uh-oh” bells began to chime: there was a clear disconnect between the speed with which this particular development had obviously gone up -- see the brickwork in Figure 2 -- and the snail’s pace at which the entire complex was now being finished.
Figure 2: A not so finished finish
This was a set of about a dozen high-rises, and yet the workforce that was doing the finishing was miniscule -- I think I captured about 20 per cent of it in Figure 3.
Figure 3: Industrious… not!
The paradox between the rapid sprouting of buildings and the snail’s pace of their completion was explained to me by an expat Australian as being a mutually beneficial ploy for both the developers and purchasers -- while prices were rising -- since the longer the project took to finish, the more it would be worth. So get them up in a hurry, but finish them as slowly as possible.
I began to imagine the frenzy that could develop if prices started to fall, since the mutual interests of developers and purchasers would then work in reverse: in a glutted market with falling prices, the first one finished is the one that sells.
That is something that can happen in Western bubbles as well, but it can be very misleading to apply Western thinking to the Chinese situation, because some things that happen in China have no parallel in the West. One such Chinese idiosyncrasy is the link between property development and industrial expansion. Much of the expansion in industrial capacity actually comes from enterprises -- primarily export-oriented -- that are established by local councils.
And where do the councils get the money to build these factories? From selling land on the periphery of the council’s domain to developers. And where do the developers get the money to buy the land? From the formal and shadow banking systems. So in this indirect way the expansion of China’s production depends on debt-financed real estate speculation.
This wouldn’t matter so much if the council-established enterprises were profitable, but the allegation was made frequently on the ground there that they’re not -- both through over-capacity in these industries already, and poor management. All is well as long as the property prices keep rising, but a downturn will mean that the councils can’t continue papering over the cracks.
So if China’s housing bubble does burst, then both the credit system and the industrial system -- or at least its incessant expansion -- will be suddenly brought to a halt. As noted, I have more faith in China’s capacity to respond to bursting property and credit bubbles than I justifiably had in the US prior to its bubble bursting. But they will quite possibly have serial industrial and council bankruptcies to cope with at the same time.
We do indeed live in interesting times.