China: the biggest bubble in economic history - update2

When we first wrote about triple zero financing, credit bubbles in the US, refinancing frenzy etc., most people thought we were just pessimistic by nature. Unfortunately, these excesses were not halted, but continued until they provoked a credit crisis in 2008. The consequences were disastrous, and pushed the global financial system to the edge of complete meltdown.

We have mentioned a few times that China is on the same path, building excesses and bubbles. A few months ago, the most extreme example so far was shown by a documentary on 'Ordos 100'. This is a new city built in China, somewhere in Inner Mongolia, 30 km from the city of Ordos. It is built with government money, as part of the 600Bn USD stimulus program, and is completely empty now. It includes musea, an airport, empty homes, highways etc etc.

This city has brought excitement in the world-wide community of architects. Hip architects like the Swiss Herzog & deMeuron have been working on buildings in the city. But, it remains empty, and the hundreds of apartments can be visited; still in their design stage.

Ordos is empty, but has pushed up Chinese GDP and growth. This shows how empty Chinese GDP growth is as a measure of wealth generation.

The documentary below was made by Al-Jazeera, and is just mind boggling.

This does not mean that the Chinese economy is just fake. The internet, fibre optics and mobile telecom were not an illusion either. But it creates a context in which it become easy to believe in miracles, and people lose their sense of reality. Chinese growth is based on several worrying factors :

• money supply growth (easy credit) that reached a growth rate of 40% in H1 2009

• the rebuilding after the Sichuan earthquake was counted as "growth", where it is just replacement of destroyed value

• construction of large-scale offices, apartments, luxury condo developments that remain unoccupied

• speculation due to massive liquidty (stocks, real estate)

• projects are primarily for prestige, not for profitability.

A lot of the Chinese growth in recent years has been inefficient, and profitless. As Japan knows (and Belgium), building useless highways, bridges and shipping lifts, does not raise wealth, but raises only government spending. It highlights once more the intransparent nature of the Chinese economic statistics and GDP calculations. More importantly, it shows that the current high level of Chinese GDP growth is not sustainable.

I do not know, how many ghost towns have been built to sustain growth, and maintain the Chinese 10%-growth illusion. But this resembles one big Ponzi scheme, the biggest bubble in economic history.

Update : Artikel De Morgen: China Inc., Bubbel of Messias

De Morgen schrijft in een groot weekendartikel van senior writer Frank Demets dat er 4 belangrijke bubbels zijn in China:

1. CHINA DRIJFT OP BUBBEL VAN GOEDKOOP GELD

...Die toevloed van geleend kapitaal droeg fors bij tot een stijging met 80 procent van de marktkapitalisatie op de beurs van Peking. "Het onderstreept hoe het beursgebouw in China het nieuwste casino geworden is", besloten enkele commentatoren laconiek...

2. CHINEES VASTGOED IS OVERGEWAARDEERD

De indicator die het best aangeeft of er sprake is van een bubbel, is de verhouding tussen de gemiddelde prijs van een huis en het gemiddelde inkomen. Volgens het gezaghebbende Britse weekblad The Economist ligt die verhouding in China rond de tien. In het Japan van de jaren negentig kostte een woning achttien jaarinkomens.

3. DE ENORME CONSUMENTENMARKT IN CHINA IS EEN MYTHE

4. 's werelds ATELIER IS AFZETMARKT KWIJT

Read also the new post