China’s Bubble Waiting To Burst

FROM far away, the China Pavilion towers like an inverted red pyramid over everything else at the £30 billion World Expo 2010.
It is a symbol of growing Chinese confidence about the country’s rise in the global economy and the strength of its one-party political system.
The Expo is a far bigger economic event for China than the 2008 Beijing Olympics, with 10 times as many visitors and huge investments in the host city of Shanghai.
As many as 70m people, most of them Chinese, are expected to come. A million have already queued in the past 14 days to view their own nation’s grandiose display of power, wealth and civilisation.
“It’s wonderful,” said Siu Wei, 24, an engineer, “far better than any other country’s show. So let the whole world see China today.”
“Mind you,” said his girlfriend, “I really liked the British pavilion with the seeds because it had imagination — like, seeds are the source of life.”
He did not look convinced, even though both had just emerged from Britain’s distinctive £30m “seed cathedral” of delicate waving strands, each encasing a seed, like a giant fluffy ball.
For the hosts, Expo 2010 is about a triumph of will — not imagination.
Shanghai, China’s commercial capital, has transformed itself by pouring billions in state-ordained investment into new subways, flyovers, tunnels, bridges and airport terminals.
However, some economists dare to say the Expo may be a symbol both of China’s economic might and of flaws in its system.
According to Fan Yongming of Shanghai’s prestigious Fudan University, the Expo has accounted for half of the city’s fixed asset investment over the past eight years. Nobody is sure what will take its place.
That is exactly the dilemma facing China’s planners, who engineered a stunning 11.9% growth in the first three months of this year while Europe and America struggled with recession and debt.
Marc Faber, the bearish investor who peddles boom, doom and gloom in his reports, believes China could crash within 12 months as falling prices in stock and commodity markets indicate that a property bubble is about to burst.
Faber is unkind enough to point out that the 1873 world exhibition in Vienna was followed by a classic 19th century slump and depression.
He is among an emerging chorus of analysts who suggest China only saved itself from crashing exports and a recession at the price of a binge in state spending that overheated the economy and will lead to ruinous debts.
“It is the greatest bubble in history with the most massive misallocation of wealth,” said James Rickards, formerly of hedge fund Long Term Capital Management. He told a business summit in Hong Kong that stock market speculation on credit and wasteful spending by officials were disasters waiting to happen.
Rickards even said it is time to take China and Russia out of the investment-fashionable Brics grouping — coined by Jim O’Neill of Goldman Sachs — because only Brazil and India are what he called “real economies”.
While Faber and Rickards may be mavericks, they have been joined by Kenneth Rogoff of Harvard and by Jim Chanos, a renowned hedge fund investor, in predicting that China could overheat and crash.
Rogoff said bursting the Chinese debt bubble would cause a recession throughout Asia in the next 10 years and Chanos warned that China was addicted to property development as a growth and revenue driver.
Andy Xie, an independent economist in Shanghai who is closer to the market, said powerful interest groups have paralysed economic policy, and local governments survive financially by inflating the price of land — all of which they own.
State-owned companies are bingeing on low interest rates and do not want rates to rise. Exporters, backed by the powerful Commerce Ministry, refuse to countenance a rise in the yuan. Meanwhile, the spectre of inflation has returned to food markets in Chinese cities.
There was a perfect contradiction recently when Xie Xuren, the finance minister, said “the government is committed to expansionary policies for recovery” — just hours after the central bank tightened reserve requirements for banks.
A hawkish adviser to the central bank, Li Daokui, last week pressed the case for raising interest rates from the benchmark 2.5% one year deposit rate after consumer price inflation reached 2.8%. So far there has been no move.
Officials also seem to think they can stop the property juggernaut by piecemeal measures to cut speculation and increasing the supply of low-cost housing. But a recent study by HSBC said credit-fuelled demand exceeds supply and the frenzied momentum of the market has pushed the ratio of property values to GDP to levels approaching those of Japan in the 1980s.
Stepping outside the dreamworld of Expo on to Shanghai’s bustling streets, every third shop seems to have turned itself into an estate agency and newspapers are bursting with property advertisements.
Official statistics — which are unreliable — show house prices in Shanghai are rising at 11% a year but agents and local people say the reality is more like 50%.
Yet there is growing evidence that while the top rank of Chinese consumers are spending like never before, the wealth gap epitomised by the property market is dividing society and leading to trouble.
“Demolition and rebuilding amounted to 47% of fixed-asset investment over the last five years so China’s biggest city put half its investment into construction,” said Wang Lianli, a popular online economic analyst. “But the government forgot that people who live in these homes need jobs and livelihoods, not just a few industrial parks in the suburbs,” she said.
Even the spate of stabbings of children in schools over the past few weeks has been blamed by media commentators on mental pressure and despair among society’s losers.
Boosting domestic consumption and thus improving everyday life are aims urged on the Chinese government not only by some officials but by almost all of China’s foreign trade partners.
However, faction fighting in Beijing over the past two years has left advocates of the traditional low-wage, low-cost export strategy in commanding positions. There is no realistic sign of change.
Investors are beginning to sense that Chinese officials may not be able to realise their contradictory objectives — cooling the real estate market, curbing inflation, keeping growth above 8% and raising real wages — at the same time.
The first signals are coming through in the markets. The Shanghai composite index has been the worst performer in Asia this year.
Shares of the biggest banks, ICBC, Bank of China and China Construction Bank, have neared record lows because investors fear a replay of the bad debt banking crisis of the 1990s, which ended with a state bailout.
Despite all that, sagacious Chinese investors take a long view of their country’s development which is more in harmony with Expo’s message of a “better city, better life”.
“Yes, there are bubbles in some property markets but there will be strong demand because China is industrialising and people are moving into cities,” said Wang Yiwen, a Shanghai investment manager.
As he sat sipping rare tea — similar to that presented by President Hu Jintao to Russia’s Vladimir Putin — in a perfectly reproduced tea house set in a giant sports stadium for the comfort of the richest spectators, Wang reeled off some typically Chinese figures.
“On average, every year more than 10m farmers move to settle in cities,” he said, “and every year millions of graduates also need to settle down. All of them need to buy a house, with the family’s help if necessary.”
Wang said the recent decline of 20% in the stock market was due to heavy flotations that drained 600 billion yuan (£60.4 billion), a selloff in banks and property shares and the expectation that inflation and interest rates were both on the way up.
However, out there in the provinces of China’s hinterland are tens of millions who want the better life promised by Expo 2010 — and Wang is among those willing to bet that nothing will stop them.

http://business.timesonline.co.uk/tol/business/markets/china/article7127675.ece