China – The Reality of the Bubble
By Staff News & Analysis - August 05, 2010

China's Real Estate Bubble Threatens to Burst … Two years after the US subprime crisis, China is seeing its own real estate bubble as a result of massive state stimulus programs. Many economists are warning it could burst soon, with unpredictable results for the global economy. … In an air-conditioned showroom, salespeople in yellow uniforms take potential buyers on tours of the facility. "In one year, we already sold 90 percent of North America, Asia and Europe," customer consultant Qi Yunbu says proudly. "Now we're preparing Africa, Oceania and South America for sale." "Xingyao Wuzhou," loosely translated as "Shining Star over Five Continents," is the name of this Chinese blend of Dubai and Disneyland, a €2.3 billion ($3 billion) development designed to imitate the world map. The gigantic residential and leisure complex is being built around and within an artificial lake. The developers apparently want to make sure that the residents of this aquatic paradise will lack for nothing. The plans include the world's largest indoor ski center, golf courses, a seven-star hotel, the world's largest musical fountain and miniature replicas of famous structures like the Tower Bridge in London and San Francisco's Golden Gate Bridge. – Spiegel Online

Dominant Social Theme: It's not looking good for the Chinese economy.

Free-Market Analysis: There are no less than two eye-opening recent stories in Germany's mainstream Spiegel Online dealing with the Chinese real-estate bubble. You can see an excerpt of one above. The other is called "Chinese Fight Property Seizures by the State," and gives us a fairly clear picture of what is actually taking place in China from a property rights point-of-view. This has become a dominant social theme of sorts, at least a sub-theme and surprisingly so: "China's economy is going to deflate ruinously and further retard the West's recovery."

Of course, we don't believe the West is recovering anyway, but certainly a Chinese real-estate deflation would make things worse. Real estate is where the Chinese have been putting excess savings and this has bid up the price fairly dramatically. Spiegel writes: "Saving money is hardly worthwhile in China. After a number of turbulent episodes in the markets, some of them dramatic, citizens are now shying away from investments in stocks. Under these circumstances, the Chinese long viewed buying a condominium or a house as the most sensible and profitable investment."

The article tells us that Chinese pay up to 20 times salary to buy a condominium versus about eight in such cities as Tokyo. Meanwhile, the other Spiegel article really gives you feel for how chaotic and brutish Chinese state-capitalism really is. In the People's Republic land is the state's and is leased back for periods of time, up to 70 years. Not only that, but municipalities have taken to removing land almost at will from individuals and groups in areas where the real-estate market is hot.

The municipalities sell the land to developers and pocket the fee – which often goes directly into the pockets of the officials themselves. This kind of aggressive mercantilism is most damaging to the credibility of the state. Yet, we are not surprised. We've written many times in the past that China's "market-oriented" economy is nothing of the sort at the top where decisions are made. This article on Chinese property seizures shows you directly what Chinese capitalism is made of:

Yang Youde, for example, comes from three generations of farmers. Until recently, he was growing melons and cotton, and raising fish, on the outskirts of Wuhan, a city of 9 million people. Today weeds run rampant on his fields, and almost all the fish in his large pond have starved to death. The 56-year-old spends almost all of his time defending his property against seizure by local authorities and speculators.

The facades of new luxury apartment buildings are getting closer to Yang's property, and most of his neighbors have already capitulated. Yang reports that one desperate man and his wife set themselves on fire, while others have drowned themselves in their ponds.

Yang's property, which consists of brick huts, looks like a fortress. He has built a perch above the shed where he keeps watch. He says that in August 2009, after he had submitted a petition against the planned seizure of his farm, the police came and dragged him away to one of China's notorious so-called "black jails," where he was held for 51 days. "They strung me up by my hands and put out cigarettes on my skin," he says. Now he intends to defend his farm with the one thing he has left: his life.

Western news media has generally reported on the Chinese industrial miracle with a certain amount of breathlessness and a good deal less scrutiny. Now suddenly we are sensing a shift – a sub-dominant social theme in the making, if you will to accompany the one elucidated at the beginning of this article: "The China miracle is over – and we report this sorrowfully but objectively."

Yes, the over-riding objective may be to buttress Western media credibility at a time when it is likely at or near an all-time low. We have seen and documented in past analyses (just yesterday in fact) the way the powers-that-be are scrambling to explain why the current socio-political/financial system (the consortium of the wise men of central banking) was blind to the unraveling of Western economies. Presumably, the elite does not want to have to explain a similar lack of awareness as regards China.

After Thoughts

In the other article in today's Bell, we try to put an impending China financial crash into a larger frame of reference by combining it with additional sociopolitical, economic and military trends. But there is no doubt as we see it that Western mainstream media rhetoric is undergoing a profound shift when it comes to China. We don't need to characterize such coverage as intrinsically promotional, either. Sometimes, Western media themes merely recognize reality. The real promotion from our point of view was that China's leaders had created a vital "free-market" economy. That promotion is apparently winding down.

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