Gwynne Dyer: China’s impending financial crash

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      Building a skyscraper is the ultimate expression of economic confidence, and more than half of the 124 skyscrapers currently under construction in the world are being built in China. But confidence is often based on nothing more than faith, hope, and cheap credit, and a frenzy of skyscraper-building is also the most reliable historical indicator of an impending financial crash.

      The Empire State Building and the Chrysler Building, the twin symbols of New York’s emergence as the world’s financial capital, were started at the end of the “Roaring Twenties” but completed in the depths of the Great Depression. The Petronas Towers in Malaysia were built just before the Asian financial crash of 1998. Burj al-Khalifa in Dubai, now the world’s tallest building, was just starting construction when the Great Recession hit in 2008.

      China avoided that recession by flooding its economy with cheap credit—but that credit has mainly gone into financing the biggest property and infrastructure-building boom of all time. Such booms always end in a crash, but this time, we are told, will be different.

      “This time will be different” is the traditional formula used to reassure nervous investors in the last years before a great economic bubble collapses. It was a constant refrain in the run-up to the Western financial crash of 2008-09, and now it is being heard daily about the Chinese property boom.

      People in the West want to believe that China’s economy will go on growing fast because the fragile recovery in Western economies depends on it. Twenty years of 10 percent-plus annual growth have made China the engine of the world economy, even though most Chinese remain poor. But the engine is fueled by cheap credit, and most of that cheap money, as usual, has gone into real estate.

      Take the city of Wuhan, southwest of Shanghai and about 500 kilometres in from the coast. It is only China’s ninth-largest city, but in addition to a skyscraper half again as high as the Empire State Building it is currently building a subway system that will cost $45 billion, two new airports, a whole new financial district, and hundreds of thousands of new housing units. It is paying for all this with cheap loans from state-run banks.

      Last year Wuhan municipality spent $22 billion on infrastructure and housing projects although its tax revenues were only one-fifth of that amount. The bank loans were made to special investment corporations and do not appear on the city’s books. The only collateral the banks have is city-owned land, and that is not a reliable asset in current circumstances.

      Land in Wuhan has tripled in price during the property boom, and could quickly fall back to the old price or below if confidence in the city’s future were to falter. That is quite likely to happen, since Wuhan’s housing stock is already so overbuilt that it would take eight years to clear even the existing overhang of unsold apartments at the current rate of purchase, and never mind all the new stuff.

      Multiply the Wuhan example by hundreds of other municipal authorities that are also borrowing billions to finance a similar “dash for growth,” and you have a financial situation as volatile as the “sub-prime mortgage” scam that brought the U.S. economy to its knees. Except that when the Chinese property boom implodes, it may bring the whole world economy to its knees.

      It would be nice to think that the worst of the recession is over in the developed countries, and that the emerging economies will continue to avoid a recession at all. But sometimes the cure can be worse than the disease. China’s strategy for avoiding the economic crisis that has gripped the developed countries since 2008 has laid the foundations for an even worse home-grown recession in the near future.

      “If you have had a good crisis, success can become a curse,” wrote Albert Edwards, chief economist at the French bank Societe Generale, in late 2010. At that point, Chinese bank lending had almost doubled in three years; it has now almost tripled in four. The government knows that the property bubble is dangerous and is trying to switch spending to consumption, but that is a delicate operation that has to be done slowly, and there just isn’t enough time.

      When a housing and credit bubble goes out of control, Edwards warned, “You tap your foot on the brakes and whole thing starts crashing and you can’t control it.” China is heading for a classic “hard landing”, and when it comes, it will slow the whole global economy to stall speed. The next global recession is not far off, it will be at least as bad as the last one, and this time few of the emerging economies (except perhaps India’s) will be exempt.

      Nobody knows what will happen in China itself when growth stops and unemployment soars, but the Communist regime is clearly frightened of the answer. Maybe it can ride the crisis out until growth resumes at a slower pace in a few years, but with its Communist ideals long abandoned, its only remaining claim on people’s loyalty has been its ability to deliver constantly rising prosperity.




      Mar 12, 2012 at 11:22am

      as my 'Mother' says, "Who knows..And Who Cares !"

      petr aardvark

      Mar 12, 2012 at 11:59am

      if that happens - China will probably put its savings into its own economy rather than buying US T-bills.


      Mar 12, 2012 at 12:38pm

      Communism & Capitalism two sides of the same shitty coin.


      Mar 12, 2012 at 4:09pm

      Google China's ghost cities, for a documentary by SBS Dateline (Australian TV) about the Chinese real estate market. China is building huge cities filled with residential and commercial skyscrapers and mega malls, that are largely empty of people. It must be seen to be believed. China invests 60% of its GDP building these monoliths that go unoccupied because the vast majority of the population does not have the earning capacity to afford the housing. China's housing bubble makes the one that happened in the US a walk in the park. It's bound to crash eventually.


      Mar 13, 2012 at 7:42am

      @Sheeple: Can't remember who said it, but it's been said. "Communism is the exploitation of man by man. Capitalism, of course, is just the reverse."

      Mike C

      Mar 13, 2012 at 12:28pm

      "This time will be different" because before, not one of those crashes was due to the fact that the global economy arguably depended on a single one economy in order to survive. If the Americans, the European Union, Mother Russia or any of these economies and its people could sustain itself without China there may be hope. At this point, China knows these economies will continue to feed money into it and even if it is a bubble, I don't think it's in any danger of bursting any time soon.


      Mar 13, 2012 at 5:03pm

      China's population is rapidly expanding of course so much of this real estate can be absorbed into the market.

      The big crash coming won't be in China's real estate but in the US bond market. Hyperinflation is already baked into the cake with the vast expansion of credit. The resulting inflationary price increases will be a disaster heading for the USA.

      petr aardvark

      Mar 14, 2012 at 12:44pm

      the one child policy while probably a good idea at the time- is also going to result in a large population of older people and a much smaller younger working population. Rather like Japan.


      Mar 14, 2012 at 12:54pm

      China owns huge chunks of Canada.

      Harper is permitting China, to buy out the oil sands. They are bringing their own people, to work their vast oil sands projects. China refuses to pay Canadian wages. They also are going to refine the oil in China, for the cheap labor and work for their own people. Canadian contractors are having trouble, collecting their money from the Chinese.

      Gordon Campbell shipped BC mills to China, along with their raw logs. This put 131,000 BC mill people out of work. China also owns BC mines. They are bringing their own people for those jobs too.

      China owns many company's in Canada. They are also taking our natural gas, even though China has vast fields of NG. They are also going to need Canada's food crops. China can never fail, having our resources and their people working in Canada. China is after the Philippine Islands, that are rich with resources. The Philippines have asked the U.S. to arm they can protect their resources from China.

      Once upon a time...Canadian industry went to China, to exploit the cheap labor and the even more cheap child laborers, who only earn pennies a day. Seems these Canadian corporations in China, have a lot of trouble with corruption. That's exactly what they deserve, for turning their backs on Canadians. I have not one lick of sympathy for any of them.

      Save Vancouver

      Mar 16, 2012 at 11:51pm

      Good, maybe then we'll have affordable homes in Vancouver again.