China Blows its Own Real Estate Bubble

China is currently seen as the main hope and bright spot for the global economy. Chinese leaders and government representatives have clout backed up by cash, and they are not afraid to use it on the world stage. But what if the Chinese economy is largely based upon more "bubble psychology" -- the kind of bubble psychology that struck down many western economies?

How did this bubble get going? Low interest rates, official encouragement of bank lending, and then Beijing’s half-trillion- dollar stimulus plan all made funds readily available. City and provincial governments have been gladly cooperating with developers: Economists estimate that half of all local government revenue comes from selling state-owned land.

Chinese consumers, fearing inflation will return and outstrip the tiny interest they earn on their savings, have pursued property ever more aggressively. Companies in the chemical, steel, textile, and shoe industries have started up property divisions too: The chance of a quick return is much higher than in their primary business.

Built on Sand

“When you sit down with a table of businessmen, the story is usually how they got lucky from a piece of land,” says Andy Xie, an independent economist who once worked in Hong Kong as Morgan Stanley’s top Asia analyst. “No one talks about their factories making money these days.”Newly wealthy towns are playing the game with a vengeance. Ordos is a city of 1.3 million in China’s Inner Mongolia region. It has gotten rich from the discovery of a big coal seam nearby.

An emerging generation of tycoons, developers, and local officials will go to any length to invent a modern Ordos. So 16 miles from the old town, a new civic center is emerging from the desert that could easily pass for the capital of a midsize country. An enormous complex houses City Hall and the local Communist Party headquarters, each 11 stories tall with sweeping circular driveways.

Nearby loom a fortress-like opera house and a slate-gray, modernist public library. Thousands of villas and apartment towers stretch into the distance, all built by local developers in the hope that Ordos’s recently prosperous will buy the places to be near the new center of power.

Serial Drama

Workers get bused daily to the new city hall, but the housing is still largely unoccupied.

“Why would anyone go there,” asks Zhao Hailin, a street artist in the old town. “It’s a city of empty buildings.” Ordos officials declined to comment for this story.

...The government is reluctant to crack down too hard because construction, steel, cement, furniture, and other sectors are directly tied to growth in real estate. In November, for example, retail sales of furniture and construction materials jumped more than 40 percent. At the December Central Economic Work Conference, an annual policy-setting confab, officials said real estate would continue to be a key driver of growth.

The worst scenario is that the central authorities let the party go on too long, then suddenly ramp up interest rates to stop the inflationary spiral. Without cheap credit, developers won’t be able to refinance their loans, consumers will no longer take out mortgages, local banks’ property portfolios will sour, and industrial companies that relied on real estate for a chunk of profits will suffer. _Bloomberg

The same story is repeated across China.  Once the large export market vanished, the Chinese government was forced to concoct something -- anything! -- to take its place.  If what they came up with was a real estate bubble, who are we to criticise?