This Is What A Bubble Looks Like

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Email Zip This Is What A Bubble Looks Like Patrick Chovanec, An American Perspective From China | Sep. 10, 2011, 6:28 PM | 3,936 | 9 A A A   x Email Article From To Email Sent! You have successfully emailed the post. Patrick Chovanec URL Patrick Chovanec s a professor at Tsinghua University's School of Economics and Management in Beijing, China

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Two years ago, I appeared in a TV report by Al Jazeera’s China correspondent Melissa Chan about the “ghost city” of Ordos, Inner Mongolia, which illustrated — in extreme form — my somewhat eccentric hypothesisthat the Chinese real estate market was being driven by the willingness of investors to buy and hold emptyvillas and condos indefinitely as a “store of value,” like gold, an unproductive but supposedly safe place to stash their cash.  Her report inspired a steady stream of journalists to make the pilgrimage out to Ordos, and helped turn my ”store of value” explanation into a stock part of the discussion about China’s ongoing real estate boom.

Last week Melissa returned to Ordos to see what, if anything, had changed, and asked me to comment and help make sense of what she had seen.  You canwatch the segment by clicking here.  Suffice it to say, Ordos remains largely empty, and construction continues — although there’s a growing nervousness about how long it can last.  As I’ve frequently said, demand in China for real estate as an unproductive “store of value” may be extremely persistent, but that doesn’t mean it’ssustainable.  And the longer it persists, the more worrisome the overhang becomes.

After you’re done with that, check out this recent TV report by Steve Engle at Bloomberg, about the debt-funded building binge that’s taken place in just one relatively obscure city in Hunan.  Note the guy being interviewed about halfway through who talks about all the high-rise condos that have been built and what the occupancy rates are.  Steve’s segment is actually a companion to a Bloomberg investigative piece about local government debt that I’ve mentioned before as a must-read.

Then take a look at this Bloomberg segment, from earlier this year (January 2011), about China’s largest mall, which is standing almost entirely empty.  You may find it interesting to compare it with this Bloomberg article, about the very same property, written in April 2007 — empty then, still empty now.  As the later report states, the original developer went bust and then Peking University bought it, and now doesn’t know what to do with it.  The real gem comes at the very end:

Reporter:  Despite obvious problems, the malls owners plan to expand.

Mall Manager:  We’ve been trying hard to make money, and we’re actually heading towards that direction.  We still have some 200,000 square meters soon to be developed.  I think we’ll balance out as soon as those 200,000 square meters are open.

Ah yes, we’re losing money on each unit we sell – but we’ll make it up on volume!  The solution, as always, is to keep building.

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Receive email updates on new comments!cvszEmail9 Comments 10 3 Flag as Offensive Gary Anderson (URL) on Sep 10, 6:44 PM said: It is stupid to jack up the price of commodities in order to build empty houses. It is the height of folly. It is---Las Vegas!

The problem is that these properties deteriorate as they remain vacant. If they didn't deteriorate it would make sense to build for a rainy day, but it doesn't work that way. Reply 5 0 Flag as Offensive Me on Sep 10, 7:51 PM said: @Gary Anderson: You right to mention that properties deteriorate. And they will deteriorate pretty fast as China use lousy construction. If people haven't moved by now it is more than likely they will not move soon unless the prices come down by a large percentage. Reply 6 1 Flag as Offensive Brewskie on Sep 10, 8:17 PM said: @Gary Anderson: Deteriorate if unoccupied? Sir, they deteriorate regardless - often within several, or a few years! So do roads, bridges, dams, power pole lines, etc. Even homes worth $1 million USD don't match the standards of the West. The Bird Nest: how man times has it been used since the Olympics? ONCE. Showin' rust, poorly built, bad welds: a true testament of Chinese construction. Reply 1 1 Flag as Offensive slainson (URL) on Sep 10, 7:02 PM said: There are enough other projects that need to be done in China that it seems silly to build houses and malls that no one needs. How about converting the entire country to renewable energy as soon as possible? That involves construction, too, and also is an investment in the country's future. Reply 6 1 Flag as Offensive Geology Joe on Sep 10, 8:01 PM said: @slainson: Green energy reminds me of an experience I had once when I sat down at the blackjack table in Bally's in Vegas many years ago. Another player sat in and asked about the odds. The concrete hair-do'd gum smackin' gal dealin' the cards didn't even look up at him and said "Hun... I don't know the odds, but I can guarantee ya that if ya stay here long enough I'll take away everything you own."

Now that's Obama's definition of a Green Job. Reply 2 0 Flag as Offensive Brewskie on Sep 10, 8:20 PM said: How bout this for a side-effect of a bubble? Pork prices up 60% this year!

An old Chinese saying goes, “The world will be in peace as long as there are grains and pork.” Reply 0 2 Flag as Offensive facebook What are these? Strikes! Earn three of them in a month, and you'll be sent to the Penalty Box for 24 hours. How do you earn strikes? Write comments that our editors kick to the Bleachers. Want to get rid of the strikes and start fresh? Write excellent comments that our editors promote to the Board Room. on Sep 10, 9:18 PM said: to the gloomers everything is a buble
http://seekingalpha.com/user/926530/instablog/full_index Reply 2 0 Flag as Offensive gmj on Sep 10, 10:10 PM said: @facebook: Everything IS a bubble.
Roman empire: bubble.
Feudal system in Europe: bubble.
French monarchy: bubble.
Economy of Soviet Union: bubble.
US post WWII economic growth: bubble.
Oil-based world economy: bubble.
Global population explosion: bubble.
Energy output of Sun: bubble.
Expanding universe: bubble. Reply 0 0 Flag as Offensive jack sprrow on Sep 11, 12:10 AM said: Maybe the put their money to buying empty houses rather than buying $USD. Maybe the house is worth more in 10 years than $USD. Im trying to rationally think why they would buy vacant housing. Maybe why every asset class is rising besides the $USD. could be the reason they are stock piling commodities. Buying foreign mining companies. Securing their future. When the housing goes pop in china, they will need a heap of YUAN to recapitalise their banks and then when all the money flows back into china, it may mean a sell off of US treasuries. Would it be conceiveable that the chinese would dump all US bonds and push yeilds upwards.. The US would see that as an act of war and then attack china, like they did to IRAQ. Reply Join the discussion with Business Insider
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