China’s State Driven Bubble

Who is responsible for inflating China’s Bubble?

Her Government.

This from the New York Times, (bold emphasis mine)

All around the nation, giant state-owned oil, chemical, military, telecom and highway groups are bidding up prices on sprawling plots of land for big real estate projects unrelated to their core businesses.

“These are the ones that have the money to buy the land,” says Prof. Deng Yongheng at the National University in Singapore. “Because in China, it’s the government that controls the money supply and the spending.”

By driving up property prices, the state-owned companies, which are ultimately controlled by the national government, are working at cross-purposes with the central government’s effort to keep China’s real estate boom from becoming a debt-driven speculative bubble — like the one that devastated Western financial markets when it burst two years ago.

Land records show that 82 percent of land auctions in Beijing this year have been won by big state-owned companies outbidding private developers — up from 59 percent in 2008.

This is looking very much like the transitioning phases of the Austrian Business Cycle...

(all charts from World Bank China’s Quarterly report and IMF’s People’s Republic of China: 2010 Article IV Consultation)

From the rapid expansion of circulation credit….

to exploding money supply growth…

mostly directed at future oriented capital structure in this case, real estate.

Frothy real estate markets…

….the deepening exposure by the banking system to the property-real estate sector.

Add that to the Chinese government’s crowding out of the private sector by her state owned enterprises bidding up on land, which worsens the bubble conditions and fosters systemic malinvestments.

And most importantly, artificially suppressed interest rates have been crucial to these dynamic.

Well, since bubbles come in phases, muted inflation hasn’t YET been much of a factor in pressuring interest rates higher.

So perhaps the bubble will persist.

This reminds me of Ludwig von Mises who once wrote, (emphasis added)

The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last.

In fullness of time, China’s policies of turning stone into bread (philosophers' stone) will end in tears.

For now, party on!