Is China Really in a Bubble?
Stocks rallied yesterday…hard. After only one session out of the previous eight in the black, we were beginning to wonder when we might see a “pop.” After all, nothing trends along an uninterrupted trajectory – neither up nor down – forever. Straight lines are for geometry classes, in other words, not stock markets.
So what now? Will 274 Dow points be enough to purify the gushing torrent of putrid economic indicators that pour forth from the world’s data machines? Can a one-day stock market bounce erase $12 trillion dollars worth of phony stimulus programs, dodgy bailouts and make-work scams? Can they unwind six decades worth of over-spending and under-producing in the old world economic powerhouses? Or, put a slightly less-dramatic way, can a 274-point rally fend off the corrections necessary to get the world economy back into tip-top working order?
Almost certainly not, we’d guess. In any case, it’s probably better not to think about it too much. The more we do, the worse the answers get…and the more our head hurts.
In the meantime, your managing editor is hanging out here in China for a while. (Fellow reckoners will recall that we are technically homeless at the moment, a situation we are in no great hurry to remedy.)
We journeyed to Beijing with Bill, Addison and Chris Mayer a couple of months back, trying to get the lay of the land. On that visit, our first to the mainland, we met with economics professors, financial publishers, professional money managers and industry insiders from all over the capital city.
The Chinese economy, most then agreed, was almost certainly in a bubble. Property prices, for example, were increasing at an unsustainable rate, prompting many leading economists to declare the residential real estate sector the mother of all bubbles. Jim Chanos even went as far as comparing it to “Dubai…times a thousand” adding later that the Middle Kingdom’s runaway economy was on a “road to hell.”
“The residential real estate market, the general consensus seems to agree, is particularly worrying,” we reported from the nation’s capital at the time. “The numbers cooled off a little last month, but some suggest that’s only because the government requested that certain high-end properties be held back from the market.”
Central planners in Beijing had already set to work attempting to relieve some of the price pressure in the real estate sector by curbing lending, demanding higher reserves be kept in bank vaults and curtailing mortgage lending for second and third homes. Despite their “cooling” efforts, the Chinese economy still managed an incredible 11.9% annual growth rate in the first quarter, it’s fastest rate of expansion since 2007. And, although the total value of property sales fell by 25% in May from the previous month, prices continue to climb, albeit at a slightly muted rate (down from 12.8% in April to 12.4% in May.)
For a growing number of those famous migrating workers, property prices in “tier-1” cities like Beijing and Shanghai are increasingly out of reach. Almost certainly, there will be a correction…perhaps even a violent one. Earlier this week, Harvard professor Ken Rogoff joined the “bubble” crowd when he told Bloomberg News that we’re already “starting to see that collapse in property and it’s going to hit the banking system.”
All this is not lost on investors, of course. The nation’s benchmark index, the Shanghai Composite, tumbled more than 6% last week. Already the worst performing major index in Asia for the year, last week’s dismal performance pushes it down over 26%, well into “official” bear market territory.
That said, bubbles and corrections are not the same as irreversible crashes and multi-generational economic heat deaths, such as those unfolding across the aging, moribund western powers of the world. Meddlers will be meddlers, after all, whether they are American, European, Chinese or otherwise. Making the same mistakes again and again is part of their political DNA. And it’s just a small part of what doesn’t separate them from the apes.
But the emerging markets of the world have a few very key ingredients that are conspicuously absent in the developed economies of the world. Perhaps primary among those advantages is that the numbers on their balance sheets are mostly written in black, not red. Most run extraordinary trade surpluses, while the west digs itself deeper and deeper into debt with each and every new welfare/warfare program dreamed up and dollar borrowed/printed to finance them. Right now, China holds the world’s largest stockpile of foreign reserves at $2.45 trillion. While a good portion – about $900 billion – is held in value-atrophying US dollars, the Chinese are wasting little time in converting additional surpluses into tangible assets.