Chinas Bubble

information based on research

China’s Bubble

China has seen an unprecedented amount of construction in the past few years, mostly to ready the country for the Olympics. This rapid expansion has been fueled by the communist party and china’s central banks. Dozens of huge cities sit empty, waiting to be occupied. The Chinese government kept building as the housing industry in the United States went belly up, incurring huge amounts of shadow debt within its banking system. It’s slowly being propped up by the government to avoid massive defaults like we saw here in the America.

So what is shadow debt? It’s basically loans granted and guaranteed by the central banks, but these cities are empty, and not making money for those who built them. Billions of dollars of empty commercial property repeated dozens of times. Is it sustainable? Technically no, what’s even worse is that the amount of debt in the Chinese economy is currently unknown.

The only reason it has lasted is because the Chinese economy operates on command. The government is forcing banks to make loans, and telling them not to worry if they go unpaid, that the government will ensure they continue to operate, they print money. This only works because the Yuan is a fixed currency; the government dictates its value.

If this was allowed in a free economy the value of the currency would decline, just as we have seen as the Federal Reserve has propped the banks here and across the world. But the devaluation of currency has become competitive in an attempt to make one countries goods cheaper than another’s. The Bank of Japan prints twice as much money as the Federal Reserve has. Why do you think Toyota has rebound from the recession and numerous recalls? The Japanese central bank has devalued their currency making the price of Toyotas closer to others, when you buy a Toyota you pay a premium because it’s imported and they have made this premium cheaper.

Not only has the Chinese government racked up huge debts, but municipal debt in china has tripled as they have sent billions on the newly built infrastructure that isn’t being used and therefore isn’t being paid for. In order to contain their asset bubble China must ensure the decline in construction does not hinder economic growth, which must be seven to eight percent to sustain its current population’s way of life. It must keep these loans going, and they have to find jobs for tens of millions of people as they exit the construction sector. The Chinese central bank will end up owning these cities if they do not become occupied. They will eventually fall apart and become ruins of a city never occupied. A massive fortune up in smoke!

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