Thursday, May 31, 2007

Why China's Growth Is Not Sustainable

There is a quasi-religious belief in some circles that China's current boom will last for decades. For those who seek facts rather than faith, consider the following excerpts from National Geographic's current article China's Instant Cities: (emphasis added)

"From 2000 to 2005, Lishui's population went from 160,000 to 250,000, and the local government invested 8.8 billion dollars in infrastructure for the region it administers. During those five years, infrastructure investment was five times the amount spent in the previous half century. In money terms, what was once 50 days' work is now done in one.

For the past three decades, China's economy has averaged nearly 10 percent annual growth. The economy is fueled by the largest migration the world has ever seen: An estimated 140 million rural Chinese have already left their homes, and another 45 million are expected to join the urban workforce in the next five years.

Such cities must expand and attract industry on their own, because the central government no longer provides the funding and guidance of the old planned economy.

Chinese cities aren't allowed to raise funds through municipal bonds or sharp tax increases, so they turn to real estate. Legally, all land belongs to the nation, but local governments can approve the sale of land-use rights—the closest thing to private ownership. Cities acquire suburban land from peasants at artificially low set rates, approve it for development, and sell for a profit on the open market. Across China, an estimated 40 to 60 percent of local government revenue is acquired in this way.

Formerly, the 16.5 acres (6.7 hectares) had belonged to the village of Xiahe, but in 2000 the city government bought the land-use rights for one million dollars. Three years later, Lishui flipped the land to Yintai Real Estate for 37 million dollars. Given that corruption is endemic in Chinese real estate, the actual price may have been even higher.

In such an environment, everybody gambles on growth. Most of the city's massive investment in infrastructure had been borrowed from state-owned banks, which also loaned money to the developers—Yintai had borrowed over 28 million dollars for its Jiangbin venture. If the real estate market went cold, the whole system was in trouble. During the past five years, the average price of a Lishui apartment had risen sixfold."

Allow me to summarize: local governments must rip off peasants and fuel a speculative real estate bubble in order to fill their coffers. They currently have no other choice.

This is the very epitome of unsustainability: a fiscal policy guaranteed to spark social outrage and guaranteed to bring on a speculative bubble's collapse.

If it is now your religion that China's boom will extend for decades, then your faith is resting on some very tenuous threads of reality.

What happens when there's no more peasant villages to steal and flip for a 50-fold profit? Then how will local governments collect revenue for their payrolls and infrastructure?

What if local housing stops rising six-fold and actually declines due to overbuilding or the deflation of the global real estate bubble (i.e. "hot money" flowing in from outside or from government banks)?

What if farmers/peasants begin to actively resist the theft of their land? This is apparently already the case in many locales.

These are just a few of many such pressing questions regarding the sustainability of the system.

Frequent contributor U. Doran sent in two links describing the unsustainability of the Shanghai stock market: China Crash - domino effect on US markets (great charts)

Shanghai stock bubble compared to Nasdaq bubble (stunning charts)

Longtime correspondent Albert T. sent in this link describing the cooling real estate market in Shanghai: Shanghai eases land restrictions for foreigners:

"Concerned about a slowdown of contracted foreign investment, the Shanghai municipal government has eased restrictions to lure foreigners to invest in property development again, in a reversal of an earlier policy aimed at cooling down the real-estate sector.

"Shanghai's property market also showed signs of cooling down in January-April, although housing prices in all other major Chinese cities continued to grow significantly. The average property price in Shanghai fell 3% in the first quarter, compared with a 9% increase in the same period last year."

Albert summarizes the situation thusly:

"This is an interesting development. I smell a bubble bursting, and they need the final sucker to bail out the speculators (everyone). "

When everyone is a speculator playing with borrowed money, it's a mania/bubble, regardless of the nation or the era--and all mania/bubbles end the same way. If you need further evidence that the bubble in the Shanghai stock market is a mirror of the bubble in Shanghai real estate, consider this tidbit from Shanghai slump as China cools markets:

"An indicator of the widespread speculation gripping the Shanghai exchange came last month with a Chinese government website reporting that one in 10 maids in the city, China's financial capital, had quit their jobs to take up trading full time."

When maids are quitting to play the stock market and local governments are relying on flipping stolen land to speculators, the mania/bubble is clearly about to burst. Maybe afterward, when people have lost their fortunes and their anger knows no bounds, then a more sustainable model of development will arise.

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