February 20, 2009

Tales of the Great Chinese Construction Boom (and the Coming Bust)

Mike Shedlock of the Mish's Global Economic Trend Analysis blog passes on an amazing story about the excesses of the Great Chinese Construction Boom. The story is from an American sculptor who regularly lives long periods in China.
I have been exchanging emails with Bill Hopen, a sculptor who frequently travels to China, often for months at a time. Bill writes ....
I've been to China a lot Mish, spent many months at a time there for the last eight years. China is already in a massive overcapacity real estate bubble. They are building three apartments for everyone that is lived in. Most apartments are empty and those that are rented do not come close to paying the interest on the loan.

There are huge department stores with products loaded on the shelves and staff everywhere and no one is shopping! Staff outnumbers customers five to one. It's surreal. They are ready, waiting for a great wave of shopping to come, but no wave is coming.

Eventually this "borrow and build" economy will be a pop heard round the world. China runs on construction, build build build, but there is no reason for that many places and spaces and big mall businesses with no consumers.


My comments were about apartments in Shanghai. Middle class folks (e.g. a doctor makes about $20,000 a year) will often buy one apartment one to live in and one as "investment". Sound familiar? The extras are mostly empty, or renting for much less than 6% interest on the money to buy the unit.

We rented a luxury two floor roof top terrace apartment (20th floor) in a gated compound with gardens, sculpture, playgrounds, walkways, waterfalls, bamboo fish ponds, fountains, and underground parking for $800 a month! The apartment is fully and nicely furnished with beds HDTV, kitchen dishes...everything.

The guy we rented from said he would sell it for $650,000. This was a normal price judging from many "bargain" offers in the windows of many area Realtors.

The typical real estate secured interest rate was 6 to 6 1/2%, so that's at least $36,000 interest per year, yet we were able to negotiate a rent of $800! And there were lots of apartments available. People would approach us with incredible deals. You could tell they were hurting, had bought extra apartments and were struggling with paying the mortgages, and were desperate for any help from any rent they could get.
This is an amazingly clear description of a financial system gone seriously bad. If this is indeed an accurate description of the state of the Chinese real estate market, I would imagine that it would be much more broadly discussed in mainstream media. Are the members of the mainstream media so fearful of annoying the Chinese central government that they are keeping it all hushed up?

The Chinese upper classes have been indeed getting their hands on increasing amounts of money. But I have a strong hunch, that when their liabilities are taken into account, there hasn't been enough increase in the number of actually wealthy people to sustain the amazing rate of construction in China.

There is a large number of people with cash to command for a while. This is easy to observe. The total amount of wealth is huge. There is an assumption of a more or less even spread of the assets along a part of the population.

Widespread construction is started, for it seems that there are a lot of reasonably wealthy prospective buyers. But people's personal balance sheets are actually quite opaque. Only later is it found out, that almost all of the actual net wealth is actually concentrated in a very few and select hands, as often is the case with these Ponzi-like me too-exercises. The net wealth of the rest is zero, or even worse.

Once everybody and their best friends have taken their maximum dose of debt, there is no more cash to command. This point, it seems, can be reached very suddenly. If the wealth is in the hands of a select few, there is naturally no drive for large scale construction of expensive assets, for those few can only make use of a very limited number. A single person can only make use of a certain limited number of personal accommodations. The same goes for all kinds of financial and economic planning that has been going on on the basis of completely wrong assumptions.

Next step: Complete chaos.

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