11 April 2010

China Bubble Drawing International Attention


Billionaire investor George Soros said that there is “undoubtedly” a bubble in Chinese real estate, which could “reverberate” in the world if it bursts. _BusinessWeek
Up to 60% of China's GDP is based upon construction. The Chinese construction and real estate boom continues picking up steam, despite attempts by the Chinese government to calm things down.
To get a really rollicking bubble going, you need three things:

Cheap Money
A Great Story
Big Dreams
Über-bullish commentators (and biased long-only investors) almost always focus on No. 2, the great story, as if it were the eminently justifiable driver of the rise. They rarely acknowledge the importance of factor No. 1, cheap money, as a vital means of greasing the wheels.

And factor No. 3, big dreams, comes as a result of combining 1) and 2) with a childlike faith in the Buzz Lightyear slogan: "To infinity and beyond!"

By the standards of this simple "bubble conditions checklist" - cheap money, great story, big dreams - China has all three in spades. _TaipanPublishingGroup
In times of widespread recession and excessive public debt, large investors look for safe havens. At this time China appears to be one such safe haven, with what seems to be a perpetual motion growth machine.

Interestingly, visions of future growth in China are also fueling another ongoing investment bubble -- in commodities, including oil. Many analysts are convinced that China's growth runup is still in the early stages, and will continue to drive up prices of oil and other commodities. That rosy view contrasts starkly with the views of James Chanos, Marc Faber, and Kenneth Rogoff.

First, here are Mr. Chancellor's 10 criteria for mania:

1. A compelling growth story; 2. Faith in the competence of the authorities; 3. Huge increase in investment; 4. Surge in corruption; 5. Easy money; 6. Fixed currency regime; 7. Rampant credit growth; 8. Moral hazard (a belief that authorities won't let the bubble pop – and have the power to keep it going – so risk is ignored); 9. Financial structures turn precarious; 10. Rapidly rising property prices fuelled by money made in the bubble, which is plowed right back into the bubble. All these conditions are present in China – in spades.

And I'd add one more criterion, a reverse indicator, which emerges at the end of a trend: For example, a book telling us that our own economic system cannot compete with the new autocratic order. In the 1960s it was Russia that would bury us. In the 1980s it was Japan. And now it's China. A “scholar” named Martin Jacques just wrote a book titled, When China Rules the World: The End of the Western World and the Birth of the New Global Order . Yeah, right.

By whichever criteria you use, China is a classic mania. Still, you may ask, why should it pop now? _Globe&Mail

One cannot predict exactly when an investment bubble will pop. It has a lot to do with a growing public awareness that the jig is up. Image is everything in the bubble trade.

In China, the government has control of most public sources of information. And the Chinese government still has trillions in hard currency assets, saved from better days in the export markets. For now, Chinese investors are content to stash their money in local stock markets, real estate, and banks.

But if China ever gets around to cleaning up its rotten banks and state-owned enterprises, that job may take a huge chunk out of those hard assets to do right.

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