Pundits have heralded China's stimulus programs as an effective model for other countries to emulate. However, the Chinese government has lit the fuse of its own implosion and many analysts have made the mistake of comparing Keynesian apples to bank lending oranges. As the flow of credit slows, China will not only risk an economic collapse, but a political one as well. It seems a matter of when, not if.
Instead of China's government pumping printed or borrowed money into the economy, its stimulus funds have come from bank lending. estimated that 2011 financing will hit 17.5 trillion-18 trillion yuan ($2.7 trillion-$2.8 trillion), more than a third of China's entire GDP. Financing for 2009 and 2010 equated to more than 40% of GDP.
The credit push has lead China to consume more than half of the world's cement, 47% of the world's coal and 48% of all iron ore. This, for a country whose GDP is just 10.7% of the entire global economy and hundreds of millions wallow in poverty.
Sustaining the credit expansion in an attempt to prevent a recession has built the world's largest house of cards. Estimates have put the number of vacant apartments built as high as 64 million. Entire ghost cities have been constructed and sit virtually empty. The homes are simply unaffordable. In the commercial sector, China holds the record for the world's largest shopping mall. Currently it is 98% vacant.
China's real estate bubble, one of the few remaining, is losing air at an astonishing speed. In just the past few weeks, hundreds of real estate brokerages have shuttered and thousands of workers have been laid off. The private SouFun Group in Beijing announced that the number of transactions fell by more than half in six of the 35 cities it surveyed just this month compared to last year. At least some declines were seen in 80% of the cities it surveyed.
The real estate slowdown has put pressure on copper prices around the globe, dropping more than 20% from a recent 2010 peak. Beijing is trying to curb inflation by slowing and in some instances limiting the credit available. Chinese firms have been using copper as a financing tool. Stockpiling and using copper as collateral allowed many firms to obtain credit outside officially sanctioned channels. While many saw strong demand for copper as proof of a stable economy, at least one research firm has been told by their sources that almost all of the copper imported in the past three months has been used for these financing purposes, not for building
As the demand for copper subsides, prices will invariably decrease. The copper used as collateral will no longer be enough to service or guarantee the debts of numerous firms. Inventories of the metal will have to be sold. If the price of copper tumbles quickly, an entire portion of China's economy could collapse. Even Beijing will have problems propping up the price of copper with all its other troubles.
Beijing has been forced to close off sources of easy credit to keep inflation from running rampant. The tightening brings copper to a tipping point where massive business defaults could occur, pushing prices even lower. In turn, the slowing of China's real estate market could be pushed into a freefall that makes the rest of the world's problems look miniscule. Pile all of those potential economic disasters on a poor and angry populace seeing success in fighting government for the first time in decades and the outcome will be anything but stable. In fact, China may not be the largest country on the planet for many more years. What was once called China could be dozens of smaller states fighting for the scraps left after the fall of Beijing.
Hedge fund manager Jim Chanos, who is known for profitably shorting Enron prior the company’s collapse, recently predicted an upcoming crash in the Chinese economy and a collapse in the Chinese real estate market
Chanos notes that although the central Chinese authorities in Beijing have been attempting to slow what appears to be an overheating economy down for quite some time, local government officials have stymied the cooling efforts.
According to Chanos, many local officials are continuing to sell real estate to developers, often with the use of risky leverage. These actions are currently fueling a massive property bubble in the growing economy.
Likewise, noted economist Nouriel Roubini has also predicted a “hard landing” in China. Roubini at a recent investment conference in Singapore, stated that there is a “meaningful probability” of a hard landing in China after 2013. Roubini bases his prediction on the fact that investment now makes up more than 50% of China’s GDP. According to Roubini, previous cases in which this phenomena have occurred (like South-East Asia in the mid 90s) have resulted in disaster.
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