Is China First Feeling the REAL Negative Impact of their Olympics Property Bubble?
Monday April 11, 2011, 10:04 am EDT
China’s central government has created internal growth targets for the various administrative divisions within China. These local governments, in turn, have turned to real estate development as an easy way to reach their centrally assigned internal growth targets. The result is tens of millions of unoccupied, luxury apartments that the average Chinese laborer cannot afford. Part of this is due to China’s stringent requirements for acquiring real estate: 50% down with the balance paid off in three years. When apartments sell for $300,000 and the average laborer earns less than $6,000, the market won’t clear.
But, even more importantly, the phenomenon of these so-called ghost cities suggests that much growth in China has been illusory. An Australian news program called Dateline recently did a report on these ghost cities. The whole 15 minute report is well worth watching, but perhaps its most salient part is the following exchange between the reporter and a Hong Kong-based financial analyst, Gillem Tulloch:
GILLEM TULLOCH: It’s essentially the modern equivalent of building pyramids. It doesn’t really add to the betterment of lives, but it adds to the growth of GDP.
REPORTER: And maintaining economic growth is the government’s number one priority.
GILLEM TULLOCH: It’s basically happening because China is a command economy and the Chinese Government can dictate where the resources are spent.
REPORTER: And so, if the order goes out to build, local governments build?
GILLEM TULLOCH: That’s right. If the central government sets a GDP target, they have to meet the target and the easiest way to do it is just to build.”
All of this makes one wonder what the broader implications for China’s economy are. Clearly, an economy whose real estate sector has been overbuilt and is not clearing in a normal matter is not a sustainable one. One need only to travel to Detroit to see the malign effects of too much housing with too little demand. With that in mind, I decided to take a look at some of the more prominent Chinese companies trading on the US exchanges. Intuition would suggest that those Chinese companies which have diversified internationally will be less affected by the economic mismanagement at home; nonetheless, the ultimate effects of illusory growth may be bad for all Chinese stocks.
finance.yahoo.com |
