Friday, January 06, 2012

China's Collapsing Future: 1...2...3...

1. Ghost cities
The Chinese government has announced plans to build 20 cities a year for the next 20 years, but they seem to be forgetting one thing: people. According to some estimates, there are already 64 million vacant apartments across the country. One recent development, Daya Bay, is designed for 12 million people, but even the state-controlled media admits that 70% of its residential units are unoccupied. China analyst Gillem Tulloch considers it the modern equivalent of building pyramids. "It doesn't really add to the betterment of lives," he said, "but it adds to the growth of GDP."

Residential real estate construction now accounts for a tenth of China's GDP compared to just 6% in the U.S. at the peak of the housing bubble in 2005, and prices have become severely inflated. The average home price in China is about nine times the mean annual income, while the historic average in the U.S. is three, and only reached 5.1 at the peak of the housing bubble. Real estate prices have now started declining, which will have an impact on everything from prices for commodities like iron, copper, cement, and coal to a slowdown in the global credit market. A UBS analyst called the Chinese real estate market "the single most important sector in the entire global economy, in terms of its impact on the rest of the world" because of the materials needed for all that construction.

2. Cooking the books
Those falling real estate prices may cause government authorities to default on their loans. The severity of the debt underreporting uncovered by the Bloomberg report can be seen on the books of the banks financing the construction. For instance, the Industrial and Commercial Bank of China, the largest of the banks, reported loans of 931 billion yuan, but the Bloomberg survey of 2% of its borrowers found totals of about 266 billion yuan. Extrapolating those figures suggests that ICBC could hold debts of over 13 trillion yuan ($2.05 trillion), and ICBC is just one of several banks involved.

China is well known for intellectual property theft -- one consulting group called it the second most common form of fraud in a country -- and without an official governing body or accounting standards, the finance sector has fallen victim to the same kinds of wholesale lies. Activist investors like Andrew Left and Carson Block have taken the place of regulators, and the two men have called bluffs on a number of Chinese companies. Left precipitated a 17.4% drop in China MediaExpress Holdings after calling the company a "phantom" and saying it was "too good to be true." Last year, as my colleague Dan Newman described, Block published a screed against RINO International, asserting that many of its customers were fictional, which led to a total collapse of the stock and its delisting from Nasdaq.

3. Civil unrest
The Chinese government's draconian land-grab policies have become all too real in places like Wukan, in Southern China. Most rural land in China is nominally owned by village collectives, but officials can seize it by paying a (usually undervalued) fee. The townspeople in Wukan responded to the confiscation of a pig farm by destroying police vehicles and government buildings, and the protest turned into a full-on revolt earlier this month as residents set up blockades to keep the police out and armed themselves with homemade weapons. After negotiations last week, the uprising appears to have come to a resolution.

Even if the Wukan uprising turns out to be an isolated incident, it's still evidence of China's growing pains. The Asian power's transformation into a modern economy and its coming-of-age in the information era make for strange bedfellows with the regime's command economy and media and speech controls. This explosive mix can only last so long. At least one Chinese official, Zhu Mingguo, secretary of the southern Guangdong province, believes the Wukan rebellion is a sign of things to come. "In terms of society, the public's awareness of democracy, equality, and rights is constantly strengthening, and their corresponding demands are growing," he said. _MotleyFool
The overbuilding of ghost infrastructure is a catastrophic waste and misallocation of resources. A large number of these ghost buildings and structures will never be occupied or utilised because the construction was so shoddy -- they will collapse before good use can be made of them.

As for the "cooking of the books," the truth will never be fully known. Shadowy methods of funds disbursal and record-keeping go far back in Chinese history. The multi-level governance model of modern China creates plenty of secret cubby-holes and crevices where mischief and mistakes can be hidden away from prying eyes.

Civil unrest in China is largely hidden from the greater outside world -- and from most of China. Tight control of the media and the internet prevents the truth from being as widely exposed as it would otherwise have been. But new information and communication technologies are allowing Chinese activists to spread the word among themselves. Often, they are able to get the word out to collaborators on the outside for wider disbursal.

China is gradually growing old before most Chinese can enjoy the benefits of affluence. Different levels of Chinese government and state owned enterprises are full of corrupt criminals, cronies and hacks. In truth, no one -- from the top to the bottom -- actually knows what is going on, or is truly in control. All that they can do is to try to sit on any bad news as long as they can.

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