China’s economy began overheating in 2007 and signs of speculation and over-exuberance started to appear, such as a
brief stock bubble that year and a
housing bubble in 2008. The 2008 global financial crisis caused China’s
exports to plunge, forcing China’s leaders to abruptly refocus their worries from overheating to a potential domestic economic crisis and its very realistic threat to social stability. In November 2008, China launched a massive
$586 billion economic stimulus program that was primarily invested in public infrastructure projects, housing, rural development and the rebuilding of areas hit by the 2008 Sichuan earthquake. China’s stimulus plan was successful at staving off a recession and social crisis – so successful that inflation, overheating and overbuilding quickly became a concern again as the newly printed stimulus money sloshed around the economy, creating very alarming distortions and speculative activity.
Economic stimulus, in the form of literally freshly-created money, is the quickest (and dirtiest!) way to create immediate economic growth. A stimulus program’s funds are typically used to create large scale construction projects that put unemployed people back to work, generate demand for raw materials and act as a conduit for new money to enter into and reinvigorate the overall economy. The problem with stimulus programs is that the creation of new money causes existing money to be devalued, leading to inflation and, in essence, stealthily taxing savers and wage earners to fund the stimulus program. The other problem with stimulus programs is that they very often led to the undertaking of extraordinarily wasteful projects that would never been attempted if natural market forces were in control. Capital that is wasted or destroyed in stimulus-fueled investment booms is called “
malinvestment.” While stimulus programs do create some form of immediate economic growth, it is largely artificial and temporary as larger and larger injections of newly printed money are required for the growth to be sustained.
Economic bubbles and reckless credit booms go hand in hand and the China Bubble is no exception in this regard. A chart of Hong Kong banks’ exposure to Mainland Chinese debt displays the truly
parabolic nature of China’s credit bubble that started in 2009. China’s local governments have financed their ridiculously extravagant construction projects via a
$1.7 trillion “subprime” credit bubble, of which
$540 billion is likely bad debt, according to Moody’s. Fitch has also
warned about Chinese local government debt saying, “credit risk has risen from an over-extension of loans to local governments and property.” As the
IMF sounded an alarm over the Chinese banking system’s vulnerability to heavy losses, an influential Chinese finance professor said that the
Chinese banking system was “on the brink of bankruptcy” and that “every province in China is Greece.” To make matters worse, Société Générale has warned that China’s massive and largely unregulated shadow banking system
may need to be rescued, no small feat considering how pervasive this type of banking is in China. In the city of Wenzhou, an incredible
90% of families are involved in the underground banking business, which includes loan sharking and pawnshops.
While the IMF warns that China is “
vulnerable to asset bubbles,” local governments
encourage real estate speculation due to their reliance on land sales taxes to pay their mounting debts. Wild speculation has sent Chinese housing prices to unaffordably high levels, hitting a globally unprecedented
27:1 price to income ratio in Beijing. China’s overly-inflated housing prices have brought about strong social costs, as young men find themselves
unable to get married without owning an apartment for example. A young architect even resorted to building and
living in a small egg-shaped pod to escape the high cost of housing. High prices have sparked a building boom, with housing construction
rising 41% in 2010 alone, helping to create an estimated supply of a
64 million empty apartments. Most alarming is the fact that China’s residential property investment as a share of its economy has
reached the same level that the US housing bubble did at before its crash, while approaching levels hit during the epic Japanese housing bubble that resulted in a 20 year (and counting) bear market.
china case will be far worst