China's Scary Housing Bubble: A Threat to Commodity Markets
New York Times
Vikram Mansharamani is the author of "Boombustology: Spotting Financial Bubbles Before They Burst." He is a lecturer on financial markets at Yale University.
UPDATED APRIL 15, 2011, 7:05 PM
China today exhibits many of the tell-tale signs of a great speculative mania. Higher prices in many of its asset markets are generating demand more rapidly than supply. The cost of money is inappropriately cheap, driving mal-investment and creating overcapacity.
The ripple effects of a real estate slowdown in China will be felt in commodity markets around the world.
Confidence is bubbly, with skyscrapers rising, art markets booming, and conspicuous consumption galloping forward. Moral hazard runs rampant, and national-provincial dynamics are generating growth in gross domestic product through unnecessary and low return-on-investment activity. Amateur investors seem ubiquitous, and the largest developers today are state-owned enterprises using money from state-owned banks to buy land from the state. All of these indicators point to the fact that the Chinese economic story is unsustainable.
The most visible manifestation of the bubbly conditions in China can be found in the property markets of major coastal cities. A deflation of the property bubble plaguing these cities will be accompanied by a material slowdown in demand for commodities.
Consider the impact on steel, a product for which Chinese consumption accounts for almost 50 percent of global production. Approximately half of Chinese steel consumption is in construction, most of which is for property development. Any slowdown in construction would reduce global demand for steel and also for iron ore, which is used in steel production.
Likewise, given that 40 percent of the dry-bulk shipping industry is connected to moving iron ore to China, the property slowdown will be felt in Norway, Hong Kong, Singapore, Greece and other shipping centers. Because the shipyards in Korea, Singapore and China have themselves expanded to meet increased demand for ships, they too will face significant overcapacity. And on it goes. For better or worse, the Chinese property markets have a global value chain. The ripple effects of a real estate slowdown will be felt around the world.
China has been a story of investment led growth; capital expenditure as a percentage of G.D.P. remains elevated in comparison to China’s own history as well as that of other rapidly developing countries.
Many commodity markets currently reflect substantial continued investment. If property markets deflate, and overinvestment and excess capacity are revealed, Chinese growth may be 5 percent 6 percent for the next decade, an outcome for which the world and commodity markets are not prepared.