International Real Estate, STAFF NEWS & ANALYSIS
Inflated Yuan Drives Chinese Hunger for Real Estate
By Staff News & Analysis - January 01, 2010

Li Nan has real estate fever. A 27-year-old steel trader at China Minmetals, a state-owned commodities company, Li lives with his parents in a cramped 700-square-foot apartment in west Beijing. Li originally planned to buy his own place when he got married, but after watching Beijing real estate prices soar, he has been spending all his free time searching for an apartment. If he finds the right place — preferably a two-bedroom in the historic Dongcheng quarter, near the city center — he hopes to buy immediately. Act now, he figures, or live with Mom and Dad forever. In the last 12 months such apartments have doubled or tripled in price, to about $400 per square foot. "This year they'll be even higher," says Li in the Jan. 11 issue of Bloomberg BusinessWeek. Millions of Chinese are pursuing property with a zeal once typical of house-happy Americans. Some Chinese are plunking down wads of cash for homes. Others are taking out mortgages at record levels. Developers are snapping up land for luxury high-rises and villas, and the banks are eagerly funding them. Some local officials are even building towns from scratch in the desert, certain that demand won't flag. And if families can swing it, they buy two apartments: one to live in, one to flip when prices jump further. – Bloomberg

Dominant Social Theme: The odds of an implosion …

Free-Market Analysis: While the entire world it seemed was united some time ago in praising the Chinese miracle, the Daily Bell (being compulsively contrarian) was in the midst of writing a series of articles about how the Chinese economy was actually the largest bubble economy in the world, pushed into the stratosphere by easy money and lots of it, a shambolic banking system and a handful of old men governing with one eye on the clock.

We have since seen all these conclusions and more echoed throughout the mainstream (and alternative) press and while we would never claim to have such clout as to start a brushfire reappraisal of China's financial situation, we are proud of the work we have done in pointing out that China's growth is, well … unusual.

Dear reader, there is something … yes, something odd about growth rates of 10 and 15 percent per QUARTER. We figured it had to be central banking hyper-stimulation. And lo, last year, when "growth" recently "slowed," the Chinese went ahead and dumped US$4 TRILLION into the economy. This was hailed as a far-sighted move by some in the Western mainstream press but from our point of view was a confirmation that China's main strategy toward growth was just a variant of the same old Keynesian pump ‘n dump.

It is not hard to build an economy in a short period of time. The USSR did it. Easy Germany did it. Japan did it. China's doing it now. All you do is take bunch of money (print it or use tax dollars or both) and direct them toward heavy industry. For about a generation, you'll be like a hero because the country will benefit immensely from the sudden industrialization. But then, once the easy gains are made, growth will start creeping down or in some cases come to a halt. Happened in the USSR, happened in the satellites, happened in Japan, and it will happen in China, too, in our opinion.

Command and control economies are very good at building something from nothing. What they are not so good at is letting the business (artificial to begin with) grow to the next level based on market signals and price points. The dead hand of socialism having made the great industrial progress possible, now serves as a weight upon progress and eventually derails it altogether. This will likely happen to China.

We still admire the partially unblocked free-market economy that China allowed to evolve. As in many developing countries, and increasingly developed ones, there are actually two economies. There is the bottom part that is free-wheeling and free-market. This is the bit that China has let evolve to its credit. Then there is the top strata where all the real monetary, fiscal and regulatory policies are made. This is in almost all countries now of any size a roughly similar instrumentality. It consists of a tight circle of mostly older men with their hands on the levers of control. These controls are pulled at the behest of the power elite, or at least in cooperation with the Anglo-American power elite.

China is by no means subservient to the West at this point but her economy is a bad mimic of the worst parts of the Western systems. It has a powerful and hyperactive central bank, a party that spews out regulation after regulation (ignored whenever possible) and a tax system that will sooner or later adopt the baneful certainties of Western taxing authorities as well. Its banking system, from our point of view, is a "system" in name only. The entire Chinese economy runs on the fuel of monetary inflation and that is not an element that is EVER containable, though the Chinese seem to believe they can contain it.

After Thoughts

We don't know what will happen to China. Maybe the country can continue building a 20 percent per quarter clip forever. But we kind of doubt it. We think, in fact, China's modernity may be something of a façade, concealing institutions that have been built up around this raging furnace of monetary inflation. Without fiat yuan to print, we don't think China would have come nearly so far or so fast. Her leaders would have been forced to build up her industrial capacity over decades, even centuries. Relationships and marketplaces take time to mature. But when you use central bank manipulation to get there, and the manipulation inevitably collapses, you can lose a great deal of what you thought you had gained.

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Posted in International Real Estate, STAFF NEWS & ANALYSIS
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