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A few weeks ago I shared that my main concern is not a Greek debt contagion infecting all of Europe but rather China’s real estate bubble. I know that I’m straying outside of any circle of competency when I opine on economic scenarios like this but the reason I’m not as worried about the European situation is that it is widely discussed, analyzed and well, known. On the other hand, the question of the real stability of the Chinese economy is not. And of course, it is things that are less expected that blindside everyone.
Another reason is that while most are distracted by the current crisis in Europe, they are losing sight of the fact that the Chinese property bubble is worse than its US counterpart (btw, FT’s video site is down right now so the link won’t work but come back to it).
Finally, the main reason why China has my attention is that it is the last (wobbly) leg of the global economy to be still standing. The US is mired in a deep recession. Japan’s economy is weak and they have their own debt problem to deal since the day is close at hand when they won’t be able to finance their debt sales domestically. And of course we all know what is going on in Europe.
Each economic zone, including China, has injected a tremendous amount of stimulus to dampen the deflationary effects of the credit crisis that started in 2008. As well, monetary policy is either accommodative or extremely so in all of these countries. This means that governments and central banks have very little to no dry powder as we head into very perilous times.
This is basically the reasoning outlined in Alan Abelson’s column from last weekend’s (May 29th 2010) Barron’s:
While we feel no constraint about pooh-poohing the cockamamie story about China giving the boot to its euro-zone debt holdings, we must confess that its awesome real-estate bubble and its attempts to let some of the air out as well as signs that its growth might be easing off its torrid pace are genuine causes for concern. And our unease on those scores is only reinforced by the dodgy movement of its equity markets, which, of course, had been world beaters up until this year.
Our concern, moreover, is echoed in the recent economic commentary by Northern Trust’s savvy Paul Kasriel and his able sidekick, Asha Bangalore. They even venture that while the investment world has been in a state of high anxiety about the financial woes of Greece, Portugal and Spain, it would have been better advised to be more worried about what could happen in China and, specifically, about that nation’s efforts to slow bank lending in order to damp down inflationary pressures in the prices of goods and services as well as property values.
As Paul and Asha point out, “the historical record with regard to a managed deflation of asset prices is not too encouraging,” to say the least. While asset prices often continue to shoot up merrily, real economic activity slows significantly. Which is why, in their view, global investors have particular reason to fret when an important economy like China’s suffers a double whammy of rising inflation in the price of goods and services as well as of asset prices.
And that’s also why they contend that the Sino restrictive economic policies (in league with India’s similar approach) “could have a much more adverse effect on the U.S. economy and stock market than the goings on in Greece, Portugal and Spain.” Although it seems to us they may be downplaying some of the larger and truly nasty implications of Greece etc., theirs is certainly a novel view and commends itself for that alone as well as the track record of its exponents. And we certainly have no quarrel with their argument that worrywarts might shift their attention to China.
A similar foreboding about China is expressed by David and Jay Levy in their latest edition of the Levy Forecast, which we find an invariably rewarding read. They point out that “when the global economy got clocked in 2008 and 2009,” China was hard hit, but the government steadied the economy via a combo of vast fiscal stimulus, extraordinary monetary policy and meaningful prodding of “the banks to pump loans into the economy like mad.” The result was a strong upswing in asset values and a full-blown real-estate bubble.
Not entirely comfortable with what its strenuous exertions have wrought, Beijing has set about containing the massive bubble in property values. Alas, as the Levys warn, asset-price bubbles tend not to stop expanding and hold; rather, they just keep expanding until they run out of steam or are unexpectedly popped, and then, as we still have rueful reason to know, they collapse.
It’s conceivable, the Levys concede, that China’s real-estate bubble might float on for another year; but if it doesn’t — and we’d give odds on that — the omens for its own and the global economy are both pretty dire.
I’m comforted by the knowledge that brilliant folks at Levys think along the same lines. But keep in mind that they are not infallible soothsayers. At last year’s turning point in March, they wrote: “Don’t look for a ‘bottom;’ just look out!“. To be fair, they were technically referring to a recovery of an economic variety, not an equity market recovery. And they did warn that corporate profits, in their estimation, would not recover (wrong) and that housing would continue to be anemic (correct).
In any case, I hope that explains a bit better why China is keeping me awake at night.
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