
What if the Chinese property bubble goes nuclear? - tokenadult
http://www.independent.ie/life/home-garden/homes/what-if-the-chinese-property-bubble-goes-nuclear-30440285.html
======
narrator
China can make all the bad investments they want. Unlike any other western
country, the government prints their own money debt free and can thus just
bail out all the bad loans forever. The boom bust cycle is just an aspect of
fractional reserve / debt as money banking. In China the banks operate like
partially privatized central planning and are closely directed by the
government. There is such extreme cognitive dissonance about this in the
western financial press. They just don't get why China doesn't bust. Check out
the history of Chinese bail outs and bad loans. It's really quite interesting.
Loans and funds and banks and all that fail all the time in China and the
government just prints up some money and bails them out if they're politically
important. Goof ball investment schemes which are the Chinese equivalent of
LTCM fail all the time and everybody loses their money and nobody bats an eye
in China, but it doesn't bring the system down.

~~~
lingben
"China can make all the bad investments they want. Unlike any other western
country, the government prints their own money debt free and can thus just
bail out all the bad loans forever."

wow, it has been a very long time since I read anything remotely as
economically ignorant and facile as this statement.

for one, the implication that the Chinese hold US debt and that they in turn
are not borrowers is categorically false.

second, the Chinese hold less than 7% of the US debt but if you listen to the
general media and commentators it sounds like it is more like 70%. The fact is
that the vast majority of the US debt is held by the Federal Reserve.

Credit bubbles, like every other economic bubble is disastrous because it is a
gross mis-allocation of resources. The piper shall not be denied. He is a
hellish collector that will break every bone in your body if you don't pay.
But the thing is, he's a bit unpredictable because you never know exactly when
he'll knock on your door to collect. But knock he will.

May I respectfully suggest that before you attempt to comment on something as
complex as macroeconomics you take at least a single course in the discipline?

~~~
joe_the_user
Hmm,

I reread the parent and I still couldn't find a single reference to US debt,
which is all you discuss in your post.

I have a degree in economics, the parent's argument seems fine - it might
contradict your dogma but it's a fine rendition of current reality.

Also, I'm sure no influential economist would say "In the long run, we're all
dead," right?

~~~
hueving
>I have a degree in economics, the parent's argument seems fine - it might
contradict your dogma but it's a fine rendition of current reality.

Except it ignores the fact that if the Chinese government has to print too
much money in the face of a major issue, they will cause inflation or
hyperinflation which will kill their economy anyway.

------
hackaflocka
"With deflation raising its head in Europe many economists believe that a
devaluation of the Chinese currency will hit Europe like an economic broadside
– in particular the economies with the most debt (ahem) whose repayment
requirements will grow substantially under continued deflation."

I'm pretty good at macro-economics, but I couldn't understand this sentence.

Perhaps it's just a mainstream media attempt to confuse the reader into
thinking he/she doesn't really know economics.

But if you think you have a handle on what this sentence means, I would
welcome your interpretation. Hit reply below and fire away.

~~~
danmaz74
Inflation is good for debtors, because as the value of the currency shrinks,
so does the value of your debt, that becomes easier to repay in real term -
with inflation, salaries grow nominally, tax revenue grow nominally etc. With
deflation, the opposite happens.

~~~
hackaflocka
Excellent explanation. Thanks.

------
dm2
Aren't there a lot of people living in really bad conditions in China?

Why does the Chinese government not allow these people to move into these
empty buildings? Wouldn't any rent being paid be better than the buildings
sitting there earning nothing?

It could be done with a lottery or with very clever analysis of who would be
best suited for these buildings. (need teachers, butchers, shop
keepers/merchants, police, fire-fighters, etc., in the appropriate amounts)

The buildings just sitting there seems like the worst option, doesn't it?

I'm probably very ignorant on the economics of this type of thing but I would
be very interested in learning. Does anyone know of a detailed explanation of
why these buildings aren't being populated?

There are several Eiffel Tower replicas all over the world, 3 in China, 1 of
them is full-scale:
[http://en.wikipedia.org/wiki/List_of_Eiffel_Tower_replicas](http://en.wikipedia.org/wiki/List_of_Eiffel_Tower_replicas)

~~~
ajmurmann
I also never understand why it's seen as so important that real estate prices
go up. Statements like "Chinese-based parents who are funding their children's
purchases are helping the Irish property recovery." from the article always
baffle me. Isn't it great if real estate is cheap? It means people can afford
to live there and spend there money on other things and keep the economy going
that way. I certainly prefer that over what's going on in SF. I understand
that often times people will take out mortgages against there houses if the
price goes up and that way money goes back into the economy. But in my opinion
that's not real money and will only lead to another 2008.

~~~
tomphoolery
> Isn't it great if real estate is cheap? It means people can afford to live
> there and spend there money on other things and keep the economy going that
> way.

Real estate prices rising means that the people are getting more wealthy. When
real estate prices fall, it means that people are most likely getting _less_
wealthy.

> I understand that often times people will take out mortgages against there
> houses if the price goes up and that way money goes back into the economy.

What you're describing here is called "re-financing", it's a perfectly normal
means of borrowing money against your house if you have enough collateral.
I've never heard of people doing it so that money goes back into the economy,
it's usually to re-invest money into your house like for construction or
whatever, and your monthly payment just increases.

~~~
jeffdavis
"Real estate prices rising means that the people are getting more wealthy.
When real estate prices fall, it means that people are most likely getting
less wealthy."

Can you elaborate? For most necessities, we're happy when the price goes down.
But for housing, we're happy when it goes up. Why? What's so special?

~~~
logicchains
Because people invest absurd sums of borrowed money into houses? If people
borrowed hundreds of thousands to invest in for instance the corn industry,
they'd be cheering for the price of corn to go up.

When house prices go down, many people really do become less wealthy, because
they have lots of money invested in houses. Similar to how Google's
shareholders would become less wealthy if the value of Google stock fell by
90%.

~~~
ajmurmann
The difference between Google stock and a house (if you only have one) is that
you need the house, but I have not practical value for Google stock other than
it's monetary value. If I sell my house I need to buy another one or rent. So
I am happy if my house's value goes up, but only if it's relative to other
houses in areas I would be interested to move to, because it would open the
option to swap it out for another one that's better or in a location I would
prefer. So if real estate prices go up everywhere that wins me nothing. I am
rich, but only on paper. Housing being relatively cheap also allows for people
with low capital to try out business ideas that they couldn't elsewhere.
Berlin in the early 2000s was filled with awesome little shops, restaurants
and cafes that would have been impossible in any other comparable city. One of
the big reasons was the cheap real estate.

~~~
logicchains
Good point. Even if real estate prices going up everywhere wins me nothing,
however, real estate prices going down always causes me a loss if I've
purchased a house with borrowed money. For instance, if I borrow $500k to buy
a house, and its value soon after falls to $300k, I still owe the bank 500k
yet my assets are only worth $300k, meaning my net worth is down by $200k. If
I was renting this wouldn't happen.

I think culturally there's too much willingness to buy houses with borrowed
money. The proverbial average Joe wouldn't leverage themselves to buy any
other investment worth hundreds of thousands with borrowed money, yet it's
seen as perfectly reasonable to borrow hundreds of thousands of dollars to buy
a house. The inherent risk involved in investing a large sum of borrowed money
just seems to be ignored, and then people do everything they can to keep house
prices rising in order to avoid this risk materialising.

------
NicoJuicy
In China, you need to know people to get a loan. Once they have loans, the
bank isnt following up.

People take a loan, invest 25% in a crappy building. Take 75% and the bank
takes the useless property when they dont receive the money...

So yeah, a lot of bad / empty buildings in China..

------
tokenadult
I am amazed that so few of the comments even mention that the source of the
submitted article is a newspaper in Ireland, where all the same arguments
about

1) governments always being able to bail themselves out

and

2) excessive investment in buildings that no one can afford to occupy being a
good idea

are a recent and painful memory. Ireland is still a long way from recovering
from its real estate bubble, as are Spain and many parts of the United States.
Commentary that suggests that China is somehow different and special and
exempt from general economic principles should refer to more real-world
historical examples.

~~~
crdoconnor
Ireland was prevented from enacting any kind of stimulus by the ECB. In fact,
it was told in no uncertain terms to do the complete opposite - bail out the
banks and enact austerity at the exact time when she had plunging demand. This
caused spiraling GDP contraction.

Ireland dutifully obeyed, because the ECB controls her money supply and so
holds a metaphorical loaded gun to her head.

The ECB cannot order China to implement self destructive austerity, however.
China is still sovereign in her own currency.

In principle Ireland could bail herself out too, but it would involve leaving
the Euro, defaulting and a spectacular political showdown that she really
doesn't have the heart for.

~~~
waps
You know, I doubt that's the case. Greece and Cyprus have crossed the EU, lied
to them, and committed acts that should have meant getting kicked out of the
EU. Nothing happened. If anything the EU keeps giving them more money.

So now everybody knows : clearly the EU is more interested in expanding their
membership and maintaining power than it is interested in financial sense and
applying treaties.

So while Ireland certainly seems to think the EU has a gun to their heads,
this is only true if Ireland's parliament cooperates. Ireland's parliament
could simply order it's banks to print Euros, lie to the ECB (they're already
doing that, after all. That's what the Euro crisis was about). Ireland's
parliament could simply vote to do that, and while they're at it, vote a law
that this does not violate the European treaty. Then it'd be up to Brussels to
kick them out, and they've already shown that they won't do that, no matter
what. They're sovereign, there's a million ways they could do this.

So in short : you're right, in theory. In practice, the law is simply what
parliament votes to be law, and they could shortcut your reasoning at any
point. Given what's already happened in the PIGS, I think they will at some
point in the not-too-distant future show us that theory and practice are very
different indeed.

~~~
crdoconnor
>You know, I doubt that's the case. Greece and Cyprus have crossed the EU,
lied to them, and committed acts that should have meant getting kicked out of
the EU. Nothing happened. If anything the EU keeps giving them more money.

The ECB doesn't want them gone. In both cases (and in Italy too) parties or
individuals that have genuinely expressed a desire to renegotiate their deal
with the ECB __or leave the Euro if that failed __have been destroyed.

In Italy's case, Berlusconi was replaced with an unelected technocrat the
second he made a move in that direction. They did a lot of behind the scenes
dirty work to make that happen on the day it happened. I'm not sure how they
made him resign, but it seems like blackmail might have been involved.

In Greece's case there were TWO parties that promised to renegotiate their
deal with the EU and the vote was basically split between them. The EU backed
one and said that disaster would strike if the other got elected. The former
won and promptly broke its promise.

In Cyprus's case, the ECB offered an ultimatum that threatened to blow up the
Cypriot economy literally 2 hours after the new prime minister had been
elected into office. If he didn't cram down losses on depositors, they'd yank
OMT. This one is perhaps the most shameful of all. They targeted him at that
point because they knew they could make him panic, force his hand and get him
to react the way they wanted. Cyprus was most likely a test to see how
European citizens would react to cramdowns (they're tiny; bailing them out
would have been trivial, so it wasn't about the cost of making them whole).

The ECB is run by an unelected commission who work largely behind the scenes.
They work only for the benefit of European banks, and against the interests of
all EU citizens, whether in the core or the periphery.

------
geetee
Vice on HBO did a good segment on this. Definitely worth checking out if you
have access. A little extra bit here:
[https://www.youtube.com/watch?v=qPjGWcM3Awc](https://www.youtube.com/watch?v=qPjGWcM3Awc)

~~~
melvinng
TL;DR: if it goes boom.. the world will just move on as usual and we just get
back up.. just like the US market.. except China wasn't as hyped up and the
media is still control by the government so it won't be as bad as the US.

------
wodenokoto
Are there any good books that looks into this problem and how it came about?

------
est
South China Mall is still empty? Should take an online street view research
before bad journalism.

~~~
waps
[http://www.thenanfang.com/blog/tag/south-china-
mall/](http://www.thenanfang.com/blog/tag/south-china-mall/)

TLDR: Not empty anymore, but they must be making a hell of a lot less than
planned, and have taken a huge hit to their projected profitability doing
this. I'm sure they reflected this in their stock price and GDP projections,
right ?

------
fourstar
VICE did it. Better.
[http://www.youtube.com/watch?v=qPjGWcM3Awc](http://www.youtube.com/watch?v=qPjGWcM3Awc)

------
DominikR
My guess would be that nothing serious would happen, because China has a
government that can effectively implement whatever policy they want without
caring too much about public opinion and they still have all the production
facilities and cheap workforce, which wont suddenly go away because of a
housing bubble.

What destroyed the US industries (apart from high tech) wasn't the housing
bubble or the oil prices. It was the high price for labor.

Also, the reason why the housing bubble in the US caused so much trouble is
that the US imports more than it exports.

We have the exact opposite situation in China, where far more products are
exported than imported, so destruction of wealth in China isn't going to hit
their economy nearly as much as it did hurt the US/EU.

Labor prices might even go down as a result, which will make them even more
competitive.

~~~
crdoconnor
>What destroyed the US industries (apart from high tech) wasn't the housing
bubble or the oil prices. It was the high price for labor.

No, it was the high price of the dollar.

~~~
DominikR
You do realize that it doesn't matter for an importer of US goods if the high
prices for US products are a result of high labor price or high dollar price.

The importer just sees that the same product produced in the US is far more
expensive than somewhere else.

~~~
crdoconnor
>You do realize that it doesn't matter for an importer of US goods if the high
prices for US products are a result of high labor price or high dollar price.

No. I never said it did matter to them. It DOESN'T matter to them.

It matters to us!!!

The US already has way too much downward pressure on wages - causing MASSIVE
income inequality, huge private debt overhang and anemic demand. More downward
pressure will simply cause half the country to drop into poverty.

What it DOESN'T have is enough downward pressure on the dollar - causing
exports to become more competitive and industry to start coming back, bringing
jobs with them.

~~~
DominikR
My point was about the decline of US industries, not about the income of
workers. What matters here is the price of the produced products and you're at
a disadvantage in a global economy when the prices are too high.

I suspect that either option (reducing wages or value of the dollar) would
reduce buying power of US citizens since US has to import so many goods thus
creating downward pressure no matter which option you choose.

Anyways, I agree that those problems have to be solved but I'm quite sure that
the current consumption level is unsustainable and that this will change in
the future in some way or another. Same goes for the EU. (where I live)

I just hope that this will happen in a peaceful way.

~~~
seanmcdirmid
The US still exports a lot, and is a leader in services and knowledge. Sure,
china produces iPhones, but all the R&D is done in California. Heck, even the
natural resources consumed for our imports aren't coming from labor rich
manufacturing countries, but from places like Australia.

Technology can change a lot. Our rate of food consumption was considered
unsustainable until the green revolution. We were supposed to run out of oil
20 years ago, and we are getting better about recycling. It doesn't have to
become a distopia, though it could.

~~~
crdoconnor
>The US still exports a lot, and is a leader in services and knowledge. Sure,
china produces iPhones, but all the R&D is done in California.

Unfortunately that R&D created maybe 30,000 jobs. This is an economy of 300
million people, so that's good jobs for 0.001% of the population.

What about the other 99.999%?

~~~
seanmcdirmid
[http://www.npr.org/blogs/money/2012/03/20/149015363/what-
ame...](http://www.npr.org/blogs/money/2012/03/20/149015363/what-america-does-
for-work)

