China's coming collapse
How could there be so many new buildings going up when, at the same time, so many others already sit empty? Simple. China is engaged in an elaborate shell game to hide a mountain of bad debts piling up on the balance sheets of its banks, developers and state–owned enterprises. In the case of real estate, it's a matter of turning a blind eye to staggering losses, says Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing. In an interview last year, he pointed to situations where buildings sit half empty, yet landlords refuse to lower their rental rates. To do so would sink the value of the underlying land, which was used as collateral for the developer's loans. "The rational response would be to lower the rental asking price, but that would mean the value of the collateral would be lowered and the bank would be forced to write down the loan," he says. "So the building stays empty. Economically it makes no sense."
This same scenario is playing out across the country on a massive scale, say experts.
"Shell game" doesn't actually cover it. "Ponzi scheme" would be a better choice. Or "musical chairs" except where there are 4 chairs and 100 participants and someone has spilled gasoline on the floor and half the players are chain smokers. That might cover it.
The list goes on and on. But for how much longer, wonder some China watchers. The rush to build over the past five years has left China drowning in overcapacity in many key sectors. In Liaoning province, the government is spending hundreds of millions of dollars to build five mega–ports over the next couple of years, even though China's ports are already operating far below capacity. Likewise, according to a report by Pivot Capital Management that analyzed China's manufacturing capabilities, China continues to build new steel mills, cement factories and aluminum smelters even though up to one–third of existing plants sit idle.
In plain terms, should China's economic miracle turn out to be a mirage, all of that would be at risk. "If China fails, or even if this fixed investment model fails, countries like Australia and Canada are in deep trouble," says John Lee, a foreign–policy expert at the Hudson Institute who is also a research fellow at the Centre for Independent Studies in Sydney, Australia. For one thing, commodity prices are likely to plunge. That could throw a wrench in plans for the oilsands, which require high oil prices to remain profitable, and crimp much of the manic exploration activity in mining. Canada's resource sector was one of the primary drivers for employment over the past decade, according to Statistics Canada, so a correction in China would also rob this country of a key engine for job growth. It would also sap provincial and federal governments of needed tax and royalty revenue, hurting their balance sheets.
Hat tip to Jimbo at VCI.
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