More Ghost Projects? China’s $350 million ‘Bridge to Nowhere’

From a post I wrote a few hours back

Last week I noted that state owned companies have been taking over property activities in Guangzhou which should add to the existing glut of inventories. The same article says that: Big-ticket spending is already picking up: Since mid-October, Chinese authorities have approved railway and airport projects valued at 845 billion yuan ($138 billion).

It is unclear whether this has been part of the announced mini stimulus. In the past the Chinese government has vehemently denied that this will be in the same amount of the 2008 stimulus at $586 billion. But when one begins to add up spending here and there, injections here and there, these may eventually lead up even more than 2008

Yet again the Chinese government will be expanding ghost projects just to attain their 7+% statistical growth target.

Well, it  appears that China has a $350 million 'bridge to nowhere'.

According to the New York Post

The bridge was supposed to be a key link for trade and travel between China’s underdeveloped northeast provinces and a much-touted special economic zone in North Korea — so key that Beijing sank more than $350 million into it.

Now, it is beginning to look like Beijing has built a bridge to nowhere.

An Associated Press Television News crew in September saw nothing but a dirt ramp at the North Korean end of the bridge, surrounded by open fields. No immigration or customs buildings could be seen. Roads to the bridge had not been completed.

The much-awaited opening of the new bridge over the Yalu River came and passed on Oct. 30 with no sign the link would be ready for business anytime soon. That prompted an unusually sharp report in the Global Times — a newspaper affiliated with the Chinese Communist Party — quoting residents in the Chinese city of Dandong expressing anger over delays in what they had hoped would be an economic boom for their border city.

The report suggested the opening of the mammoth, 3-kilometer bridge has been postponed “indefinitely.”

While the 'bridge to nowhere' may have a geopolitical component—"Foreign analysts have suggested the apparent lack of progress might indicate wariness in Pyongyang over China’s economic influence in the country, which has been growing substantially in recent years as Pyongyang has become more isolated from other potential partners over its nuclear program, human rights record and other political issues"—it doesn’t negate the fact that taxpayer money and resources had been squandered from central planning miscalculation and from the reckless use of the other people's money.

Also this adds to the growing list of China’s malinvestments or ghost projects.

Infographics: China's Top 10 Ghost Towns

From Caixin Online:

Add to the List of China’s Ghost Projects: A Replica of Manhattan

Last week, I wrote (bold original)

debts are NOT just about statistics. Since every debt incurred postulates to money allotment in the economic stream—whether this has been in properties, stocks, bonds, grandiose political projects, welfare or warfare state or a combination of—such extrapolates to the commitment of resources in the direction of money allocation.

A fantastic example have been China’s ghost projects

Add to this list a mimic of New York’s Manhattan 

From the Bloomberg:

China’s project to build a replica Manhattan is taking shape against a backdrop of vacant office towers and unfinished hotels, underscoring the risks to a slowing economy from the nation’s unprecedented investment boom.

The skyscraper-filled skyline of the Conch Bay district in the northern port city of Tianjin has none of a metropolis’s bustle up close, with dirt-covered glass doors and construction on some edifices halted. The area’s failure to attract tenants since the first building was finished in 2010 bodes ill across the Hai River for the separate Yujiapu development, which is modeled on New York’s Manhattan and remains in progress

This is a wonderful example of the distinction between statistical and real economic growth.

Central bank and government policies aimed at attaining artificial (statistical) economic growth for political purposes or goals via debt financed spending boom not only creates excess supply, they knock off real growth overtime as resources have been sunk into non profitable projects while simultaneously transforming existing liabilities into credit risks

Tianjin, a city of 14.7 million people whose center is about 125 kilometers (78 miles) southeast of Beijing’s, saw its economic growth cool to 10.6 percent in the first quarter of 2014 from a year earlier, from 17.4 percent in full-year 2010, compared with a moderation in national expansion over the same period to 7.4 percent from 10.4 percent. An annual pace of 10.6 percent would be the weakest for Tianjin since 1999.

The government financing vehicle, Tianjin Binhai New Area Construction & Investment Group Co., reported revenue fell to 5.9 billion yuan ($950 million) in 2013, and profit dropped about 37 percent to 246.6 million yuan, according to its annual report.

The company has 20.7 billion yuan of debt due in 2014, including loans, corporate bonds and commercial paper, almost triple 2013’s amount. Another 13.9 billion yuan is due next year. It sold 2.5 billion yuan of seven-year notes in May at a 6.5 percent coupon to repay bank loans and interest, according to a prospectus.

All these means that such imbalances will require market clearing or massive re-pricing that would entail capital losses.

The conclusion from my introductory quote.

And the imbalances accrued from misdirected resources in response to interventionist policies fertilize the roots of depression.

 China's political economy is headed in the aforementioned direction

China’s Replica of Paris is a Ghost Town

China’s real estate industry has the propensity of imitating famous European architectures. 

From the Reuters:

Tianducheng, a gated community near Hangzhou, capital of coastal Zhejiang province, boasts its own Arc de Triomphe and rows of European-style villas to attract China's newly wealthy.

"(It) can house up to 100,000 people comfortably," said Lu Xiaotian, a director at the Zhejiang Guangsha Co. Ltd, the estate's developer.

Unfortunately, the European fashioned gated community has reportedly been a ghost town.

Some pictures courtesy of Business Insider

See more pictures here

The above is just one of the numerous ghost projects epitomizing the Chinese government’s assimilation of policies that promotes “abolishing slumps and thus keeping us permanently in a quasi-boom” grounded on the misinterpretation of Say’s law of “supply creates its own demand” or from a rigid adaptation from Kevin Costner’s Field of Dreams, “if you build they will come”. This also signifies as an example of wastage of capital from centrally planned projects.

Incidentally the developer, Zhejiang Guangsha Co Ltd is a publicly listed company at Shanghai, which represents a “province share holding system” or largely a local state owned owned enterprise (SoE) with private sector facet. 

Many private companies are vehicles used by the local state to promote the political objectives of the national government, as well as, the career goals of local politicians. Thus as previously discussed, the interests of the private sector and the state has been complexly interwoven. Yet the same sectors have acquired huge debts from boondoggles as the above that has put the Chinese economy in jeopardy or has raised the risks of a China bubble bust with far reaching ramifications.

The sustainability or viability of these massive credit fueled “build and they will come” social projects have recently been under intense scrutiny by the national government and by the markets.

Interesting times indeed.

China Bubble: Diminishing Returns of Credit

Here is an example why asset bubbles are being blown in China.

From the Bloomberg:

China’s economy is proving less responsive to credit, escalating pressure on Premier Li Keqiang to strengthen the role of private enterprise.

The government’s broadest measure of credit rose 58 percent to a record 6.16 trillion yuan ($1 trillion) in January-to-March, when gross domestic product gained 7.7 percent, compared with 8.1 percent a year earlier. Each $1 in credit firepower added the equivalent of 17 cents in GDP, down from 29 cents last year and 83 cents in 2007, when global money markets began to freeze, according to data compiled by Bloomberg.

The diminishing returns to lending heighten focus on the need for what the International Monetary Fund said yesterday are “decisive” policy changes in the world’s second-largest economy. Without a refocus away from state-approved projects, Li and President Xi Jinping risk overseeing both a further slowdown in growth and an increase in non-performing loans.

The article reveals of the Chinese government’s entrenched adaption of Keynesian policies which views credit as an indispensable macro tool used to attain economic growth. 

The Zero Hedge has great on charts representing the above dynamics:

China’s credit boom…

…amidst languishing economic growth

Policymakers hardly distinguish on the character of credit. For them, credit growth of any kind presupposes increased consumption or “aggregate demand”.

And the above report only validates my suspicion that the Chinese government’s covert stimulus has been channeled via state owned enterprises (SOE) since late last year.

In order to avoid controversies from the peering eyes of world, the Chinese government uses the SOEs, which remains a substantial force in her economy, as principal conduits for the transmission of social policies

Yet as explained yesterday much of the credit expansion has only been channeled into yield chasing speculations which has been evident by the ballooning property bubbles and massive expansion of the shadow banking system. 

The existence of ghost communities (towns or shopping malls) are manifestations of wanton misallocation of resources or capital wastage, thus the clueless media and policymakers scratch on their heads on the so-called ‘diminishing returns’ from credit in producing “economic growth”. 

In contrast to the mainstream impression and as shown above, inflationist and interventionist policies reduce aggregate demand over the long run. Thus, macro tools will hardly solve on real micro problems.

To add, the 58% jump in credit growth in the first quarter only means that much of the 7.7% “growth” represents a statistical artifice or a mirage.

The call to focus on private enterprises via economic freedom should signify a policy imperative. This means that the Chinese political economy should further decentralize and that the Chinese government must relinquish political power to the marketplace. This also suggest that people should be allowed to keep their savings from the stealth predations enabled by financial repression policies (e.g. negative interest rates)

But it is doubtful if officials will sacrifice political privileges.

Nonetheless real "private enterprise" based reforms will constitute real growth over the longer term.

Unfortunately there will be short to medium term consequences from all the intensive accumulation of malinvestments. 

Where every action has an attendant consequence, markets must be allowed to clear these imbalances. Otherwise these will continue to mount, until it snaps with greater intensity.

Bottom line: In a recast of Newton's 3rd law: for every bubble boom, there will be a corresponding bubble bust.

Belgravia: London’s Ghost Village?

Central bank inflationism has only been fueling excessive speculation on global property markets. And the emergence of ghost communities, which are symptoms of bubbles, may not confined to China.

Belgravia, known as one of the wealthiest districts in the world, located at central London in the City of Westminster and the Royal Borough of Kensington and Chelsea, seem to be transforming into a ghost community largely due to foreign buyers.

From CNBC:

An odd thing was happening, or rather not happening, as dusk fell the other day across Belgravia, home to some of the world's most valuable real estate: almost no one seemed to be coming home. Perhaps half the windows were dark.

It seems that practically the only people who can afford to live there don't actually want to. Last year, the real estate firm Savills found that at least 37 percent of people buying property in the most expensive neighborhoods of central London did not intend them to be primary residences.

"Belgravia is becoming a village with fewer and fewer people in it," said Alistair Boscawen, a local real estate agent. He works in "the nuts area" of London, as he put it, "where the house prices are bonkers" — anywhere from $7.5 million to $75 million, he said.

The buyers, increasingly, are superwealthy foreigners from places like Russia, Kazakhstan, Southeast Asia and India. For them, London is just a stop in a peripatetic international existence that might also include New York, Moscow and Monaco.

Bank of England’s QE

Rampant property speculation has partly been abetted by the weakening of the British pound relative to emerging markets currencies, largely brought about by the balance sheet expansion by the Bank of England.

Except for India’s rupee, China’s yuan, the Philippine peso, and Russia’s ruble have mostly firmed against the British pound since 2008.

Yet prospects of a “triple dip” recession have only spurred political pressure on the Bank of England to pursue more quantitative easing which may add more fuel to more speculative frenzies.

Of course aside from sheer speculation, political money (e.g. slush funds) looking for overseas shelter could also play part in exacerbating speculative activities.

Ghost communities can be seen also in the US.

From the same CNBC article:

London is not the only city where the world's richest people leave their expensive properties vacant while they stay in their expensive properties someplace else; the same is true in parts of Manhattan. But the difference is that so many of them here are foreign, and that they look to be buying up entire neighborhoods.

"Many areas of central London have become prohibitively expensive for local residents," a recent report by the Smith Institute, a research group in London, said recently.

Worst, central bank fueled property bubbles incite social divisions or political chasms between haves and the have-nots epitomized by the politically correct terminology called “inequality”.

Again all these are symptoms of the global pandemic of bubbles.

Chinese Builds Ghost City in Angola

China seems to have (allow me the metaphor) ‘exported’ her bubble policies to Africa

From the BBC, (hat tip Bob Wenzel)

A giant new Chinese-built city has sprung up on the outskirts of Angola's capital Luanda.

Nova Cidade de Kilamba is a brand-new mixed residential development of 750 eight-storey apartment buildings, a dozen schools and more than 100 retail units.

Designed to house up to half a million people when complete, Kilamba has been built by the state-owned China International Trust and Investment Corporation (CITIC) in under three years at a reported cost of $3.5bn (£2.2bn).

But on a recent trip back to Luanda, the BBC's former Angola correspondent Louise Redvers discovered that most of the buildings currently lie empty, as this footage she recorded shows.

Watch the footage from BBC here

China’s Tiger by the Tail

Apparently China’s policymakers remain staunch devotees of Keynesian economics and promoters and practitioners of boom bust cycles.

The Bloomberg reports,

Policy makers have cut the amount banks must keep in reserves twice since November to free up cash for lending, in a bid to insulate the world’s second-largest economy from the effects of a global slowdown. Interest rates haven’t been reduced since 2008.

New local-currency lending was 1.01 trillion yuan ($160.1 billion) in March, the People’s Bank of China said on its website after the market closed. That compared with the median 797.5 billion yuan estimate in a Bloomberg News survey of 28 economists and 710.7 billion yuan the previous month. M2 money supply climbed 13.4 last month, accelerating from a 13 percent growth in February, the central bank said.

Instead of allowing the markets clear on the outstanding imbalances brought about by previous policies, China’s policymakers have decided to keep riding the tiger's tail.

According Mises Institutes Vice President Joseph Salerno,

It has now become clear that the Chinese government has made its choice to avoid a “hard landing” by attempting to ride the unloosed inflationary tiger for as long as it can. But its strategy of massviely expanding fictitious bank credit unbacked by real savings will cause added distortions and exacerbate unsustainable imbalances in China’s real economy. As the Austrian theory of the business cycle teaches, this will only postpone the needed recession-adjustment process and will precipitate a “crash landing” that may well shatter China’s burgeoning market economy. This would be a tragedy of the first order for the entire global economy.

As pointed out many times here, the recourse towards inflationism by China’s political authorities has been seen as necessity for the survival of the incumbent command-and-control structure of China’s political institutions. A financial and economic bust will only magnify the growing forces of malcontents which Chinese authorities have fervently been trying to contain.

And given the enormous scale of malinvestments, like her Western contemporaries, China’s authorities will likely push for more inflationism until economic realities prevail or until real savings get depleted.

Reports the Wall Street Journal,

China’s real-estate sector is enormous—accounting directly for 12% of gross domestic product, according to estimates by the International Monetary Fund—and changing fast. To capture developments in the sector, data are collected from more than 80,000 real-estate developers and reported up through the county, city, and province statistical system….

A key concern for investors is China’s overhang of unsold property. A trip around virtually any Chinese city reveals hosts of half-finished tower blocks waiting to be completed and sold. Analysts fear that excess supply could put a dent in prices, and reduce the real-estate investment that is a key contributor to China’s domestic demand.

Official data show 2.98 billion square meters of residential property under construction at the end of February. Wall Street Journal calculations show that is more than two square meters for every person in China and enough to satisfy demand for almost the next three years without a single extra apartment being built.

So unproductive grand projects already highlighted by ghost cities and malls as seen in the video below (hat tip Bob Wenzel) will mount, as scarce resources will continue to get funnelled into projects that consumes capital.

Bottom line: A Tiger by the Tail by the great Friedrich von Hayek represents an allegory of the allures of inflationism

An excerpt from the synopsis of Hayek’s work by Professor Salerno,

In brief, Hayek argues that all depressions involve a pattern of resource allocation, including and especially labor, that does not correspond to the pattern of demand, particularly among higher-order industries (roughly, capital goods) and lower-order industries (roughly, consumer goods). This mismatch of labor and demand occurs during the prior inflationary boom and is the result of entrepreneurial errors induced by a distortion of the interest rate caused by monetary and bank credit expansion. More importantly, any attempt to cure the depression via deficit spending and cheap money, while it may work temporarily, intensifies the misallocation of resources relative to the demands for them and only postpones and prolongs the inevitable adjustment.

The policies of permanent quasi booms or ‘extend and pretend’ policies will eventually get exposed for the fiction they sell—through a colossal bust or “a tragedy of the first order for the entire global economy”.

For now, profit from political folly.

Nonetheless it would be best keep vigilant over developments in China.

More Signs of China’s Bubble: Unused State of the Art Sports Stadiums

China’s manifold grand real estate projects like ghost cities and empty malls are manifestations of her “spend you way to prosperity” bubble economy. And there is more, China has been erecting ostentatious sports stadiums that has hardly been used.

The Business Insider writes

The stadium-building frenzy that took over China in the lead up to the 2008 Olympics hasn't stopped.

The glitzy new Shanghai Oriental Sports Center opened earlier this summer, and more venues are currently under construction in cities and towns across the country.

But these stadiums have one little problem: no one uses them.

China's domestic sports scene is still in its infancy — with basketball and a corruption-hit soccer league the only viable organizations.

Here are two samples of these grand edifices.

Click here to see more pictures of the hardly used stadiums from the Business Insider

Central Planning Failure: China’s “Train Wreck” Edition

Think government knows what is best for us?

This from Charles Lane of the Washington Post (hat tip Cato’s Dan Mitchell) [bold emphasis mine]

For the past eight years, Liu Zhijun was one of the most influential people in China. As minister of railways, Liu ran China’s $300 billion high-speed rail project. U.S., European and Japanese contractors jostled for a piece of the business while foreign journalists gushed over China’s latest high-tech marvel.

Today, Liu Zhijun is ruined, and his high-speed rail project is in trouble. On Feb. 25, he was fired for “severe violations of discipline” — code for embezzling tens of millions of dollars. Seems his ministry has run up $271 billion in debt — roughly five times the level that bankrupted General Motors. But ticket sales can’t cover debt service that will total $27.7 billion in 2011 alone. Safety concerns also are cropping up.

Faced with a financial and public relations disaster, China put the brakes on Liu’s program. On April 13, the government cut bullet-train speeds 30 mph to improve safety, energy efficiency and affordability. The Railway Ministry’s tangled finances are being audited. Construction plans, too, are being reviewed.

Liu’s legacy, in short, is a system that could drain China’s economic resources for years. So much for the grand project that Thomas Friedman of the New York Times likened to a “moon shot” and that President Obama held up as a model for the United States.

Rather than demonstrating the advantages of centrally planned long-term investment, as its foreign admirers sometimes suggested, China’s bullet-train experience shows what can go wrong when an unelected elite, influenced by corrupt opportunists, gives orders that all must follow — without the robust public discussion we would have in the states.

This exemplifies what has been wrong in China. Similar to our previous accounts of ghost cities and Potemkin malls, what has largely been touted as the “Chinese growth miracle” seems more like a boom bust cycle from reckless centrally planned ‘delusions of grandeur’ financed by Chinese taxpayers.

And cracks appear to be widening as time goes by. Once malinvestments reach a “tipping point” or a critical mass then these cracks will break into a torrent.

Next, this further shows how wastage and inefficiency of government spending translates into huge negative externality costs. Centralization "orders that all must follow" translates to systemic fragility where losses are borne by everybody "could drain China's economic resources for years", while losses from decentralization are distributed hence anti (less) fragile (Nassim Taleb-Fooled By Randomness).

In addition, the above likewise exhibits how taxpayer resources are wasted on facilities or infrastructure projects that are hardly demanded for by consumers. Because non-profit oriented central planning decision making neglects the risk-reward tradeoffs and are instead guided by political goals, taxpayers end up absorbing the consequences of wrong decisions (sales can't cover debt service and safety issues).

Moreover, this is another example where government finds it too easy to spend someone else’s money. To quote the illustrious economist Milton Friedman “If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand.” Apparently this is a universal trait for politicians and bureaucrats.

And importantly, discretionary power over spending other people’s money becomes too much a temptation to resist claims over other people’s money as one’s own. Thus, concentration of power, enabled by arbitrary laws, serves as breeding and nestling grounds for corruption, in the above case "embezzlement".

Finally central planners believe that they know better of what society needs than of the individual through the markets. As the above also shows, they don’t.

This further validates the knowledge problem proposed by the great F. A. Hayek as evidenced by majestic mistakes which continually plagues the “unelected elite”:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design

China' Potemkin Cities and Malls

Here are two videos showing China's obsession towards Keynesian GDP spending which has resulted, so far, to 64 million vacant apartments from China's building of 10 new cities every year. (pointer to Israel Curtis, Mises Blog)

This obsession towards achieving statistical GDP from central planning reminds me of two John Maynard Keynes quotes,

The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi boom.

If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is.

The obvious result has been an ongoing quasi-boom (as Keynes has predicted) but which ultimately will be faced with the restrains from natural the law of economics which equates to a prospective bust (from the Austrian perspective).

The desire to uphold the Keynesian unemployment goals will backfire and result to China's version of today's MENA political crisis.

First video is from Dateline


Second video from AlJazeerah

To quote the great Ludwig von Mises,(bold highlights mine)

There are still teachers who tell their students that “an economy can lift itself by its own bootstraps” and that “we can spend our way into prosperity.” But the Keynesian miracle fails to materialize; the stones do not turn into bread. The panegyrics of the learned authors who cooperated in the production of the present volume merely confirm the editor’s introductory statement that “Keynes could awaken in his disciples an almost religious fervor for his economics, which could be affectively harnessed for the dissemination of the new economics.” And Professor Harris goes on to say, “Keynes indeed had the Revelation.”

There is no use in arguing with people who are driven by “an almost religious fervor” and believe that their master “had the Revelation.” It is one of the tasks of economics to analyze carefully each of the inflationist plans, those of Keynes and Gesell no less than those of their innumerable predecessors from John Law down to Major Douglas. Yet, no one should expect that any logical argument or any experience could ever shake the almost religious fervor of those who believe in salvation through spending and credit expansion.

China To Build The World’s Largest Megacity

Drunk with the recent success of combining capitalism with her “communist” political structure, the Chinese government has embarked on a grand scale of central planning—China plans to build the largest megacity in the world!

This from the Telegraph,

China is planning to create the world's biggest mega city by merging nine cities to create a metropolis twice the size of Wales with a population of 42 million.

City planners in south China have laid out an ambitious plan to merge together the nine cities that lie around the Pearl River Delta.

The "Turn The Pearl River Delta Into One" scheme will create a 16,000 sq mile urban area that is 26 times larger geographically than Greater London, or twice the size of Wales.

The new mega-city will cover a large part of China's manufacturing heartland, stretching from Guangzhou to Shenzhen and including Foshan, Dongguan, Zhongshan, Zhuhai, Jiangmen, Huizhou and Zhaoqing. Together, they account for nearly a tenth of the Chinese economy.

Over the next six years, around 150 major infrastructure projects will mesh the transport, energy, water and telecommunications networks of the nine cities together, at a cost of some 2 trillion yuan (£190 billion). An express rail line will also connect the hub with nearby Hong Kong.

China’s government seems increasingly manifesting signs of overconfidence, a harbinger of bubble bust.

As previously explained in China’s Bubble and the Austrian Business Cycle, imploding bubbles are frequently highlighted or foreordained by “grand” braggadocio (mostly real estate) projects, but instead of the private sector, this time the symptom could emerge from the government.

In addition, while many experts have been obsessed with the supposed certainty of the “deepening” of urbanization trends, I am not one of them. That’s because I see technology as a pivotal offsetting force that leads not to concentration but to decentralization. And technology induced decentralization should apply to most social activities which includes politics, economics, demographics and others.

This is one aspect, which I think, central planners in China or elsewhere seems to have overlooked. Of course, substituting their “expert” knowledge over people’s preferences is another major factor, as exhibited by some of China’s existing ghost cities

China's Bubble And The Austrian Business Cycle

Is China in a bubble?

That's THE current debate between China optimists and pessimists.

And this has been accentuated by reports that China will surpass Japan, by next year, as second in the order of ranking among the world's economic heavyweights.

The Economist underscores the mainstream polemic, (bold emphasis mine)

``NEXT year China will overtake Japan to become the world’s second-largest economy. Its rapid ascent has led some to question whether China will follow in Japan’s footsteps, with the bursting of a massive bubble followed by years of decline. But China is still far poorer than Japan was at its peak, and thus has more room to improve productivity. A transition of surplus labour from agriculture to industry and services would increase efficiency and bring its economy more in line with the developed world. And China’s stimulus package has produced much needed infrastructure that will reinforce future growth. But in the long run, a shift away from investment and exports towards domestic consumption would make China’s output more sustainable, and help it to avoid experiencing a bubble like Japan's."

I do not share the mainstream economic gobbledygook.

Although establishing China's current conditions would likely be tricky and complicated.

First, we share with the bears that China could be in a bubble if they continue to pursue current interventionist policies on their banking, finance and the real economy.

For instance, easy monetary policies and a massive jump in money supply are suspected to have buoyed prices of real estate and the stock market as bank credit (circulation credit) have been presumed to have channeled into speculative activities.

Empirical evidence of this would be the emergence of several uninhabited or ghost cities [see China's Ghost Cities].

In the Austrian Business Trade Cycle, the manipulation of interest rates essentially leads to massive clustering errors or huge malinvestments that will eventually unravel-hence the boom bust cycle.

To quote Dr. Richard M. Ebeling, (bold emphasis mine)

``Unfortunately, as long as there are central banks, we will be the victims of the monetary central planners who have the monopoly power to control the amount of money and credit in the economy; manipulate interest rates by expanding or contracting bank reserves used for lending purposes; threaten the rollercoaster of business cycle booms and busts; and undermine the soundness of the monetary system through debasement of the currency and price inflation.

``Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from their interventions, regulations and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way."

Nonetheless, Chines corporations have remained cash liquid and may not have reached the state of wild orgy of misdirected investments.

According to the US Global Investors, ``Despite government infrastructure spending boom in China this year, Chinese companies have not aggressively deployed cash so far and corporate bank deposits kept soaring and reached around $3 trillion as of October. There exists a remote risk of “herd spending” down the road when domestic demand picks up strongly and profit cycle restarts, eventually resulting in economic overheating." (see Chart upper right window)

Moreover, private spending has taken over public spending since September; see chart above from US Global Funds

In other words, for the meantime it would seem like some semblance of economic recovery, however as earlier cited, the persistence of present policies are likely to foster massive economic and financial imbalances.

Moreover, China's stock market as signified by the Shanghai (topmost chart below) and the Shenzhen (bottom) benchmarks are quite distant yet from ALL time highs. [chart courtesy of Bloomberg]


Like in most bubbles, both real estate and the stock market benchmarks would likely reach new highs before inflecting as in the case of the Japan (1990) and the Asian Crisis (1997) with the exception of the US mortgage crisis (2007-8) [see previous post The Lost Decade: US Edition].

One possible factor that could offset or extend the bubble cycle would be China's thrust to integrate with Taiwan [see Tomorrow’s Investing World According To The Bond King] and with ASEAN [see Asian Regional Integration Deepens With The Advent Of China ASEAN Free Trade Zone].

In addition, while there have been indeed some signs of bubble, usually in the context of grandeur edifices such as China's unveiling of Speeding Bullet Train program, to quote Bloomberg,

Picture from Bloomberg

``Train C2019 covers the 120 kilometers between Beijing and Tianjin in 30 minutes, passing peasants in fields burning corn stalks and warrens of shacks occupied by people who aren’t sharing in China’s economic boom.

``The line is part of China’s 2 trillion yuan ($292.9 billion) investment in a nationwide high-speed passenger-rail network that may be too much train, too fast."

...these may not seem as extravagant yet-relative to other recent bubble afflicted economies or markets as Dubai.

In Why Dubai’s Debt Crisis Isn’t Likely THE Next Lehman, we noted, ``Dubai’s meteoric rise via profligate projects produced many of the world’s landmark projects (boondoggles), such as the only seven star hotel, the Burj Al Arab, the world’s tallest skyscraper, Burj Dubai (uncompleted), biggest indoor ski slope, Ski Dubai, largest shopping mall (in terms of total area and not gross leasable space), the Dubai Mall, the world’s biggest theme park, the Dubailand and the Palm Islands, the Palm Jumeirah, has virtually challenged Abu Dhabi’s role."

You see, 'delusions of grandeur' typically herald bubble climaxes, such as the emergence of towering skycrapers...
or even in the art markets as previously posted see Global Art Market As Bubble Meter, China's Fast Expanding Role

Bottom line: Political policies based on path dependency suggest that China will mostly endure a boom-bust cycle, although it may not necessarily redound to a Japan model or experience. However, these policy based imbalances would likely evolve overtime, and will be manifested in diverse asset markets, before facing her fateful day of reckoning.