Chinese Government Frets Out Loud About Property Bubble Taking Down the Economy

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China’s economic miracle is addicted to credit, no matter what the source, that was plowed into the ground to build no matter what, houses, high-speed rail lines, forests of skyscrapers, massive industrial overcapacity, entire ghost cities….

These activities created millions of jobs and propelled GDP forward at a phenomenal pace, even if it turned out that no one would ever need that plant, live in that unfinished apartment, move to a ghost city, or shop at the deserted mall. And there might never be enough passengers to allow one or the other high-speed rail line to service the debt that was incurred to fund it.

What’s left behind is a still growing and partially hidden mountain of debt – and the threat that this contrived economic activity, this malinvestment, funded by unsustainable credit growth can’t be, well, sustained forever. That moment when it can’t be sustained any longer, when the house of cards comes tumbling down, has become a threat so serious that the government is fretting about it out loud in the Chinese media.

The Bank for International Settlements already pointed out that “Chinese authorities became increasingly worried about strong credit growth and introduced a number of restrictive financial measures, including tighter oversight of lending in the shadow banking system.” They managed to throttle current credit growth down to around 17%.

Then China announced with atomic-clock accuracy that GDP growth in Q2 was 7.5%, as always hitting or exceeding the number mandated by the leadership (we wonder how they can measure GDP accurately a couple of weeks after the end of the quarter, when other countries publish “estimates” much later and revise them months and years down the road, often dramatically, but hey, let’s not quibble over details).

With credit growth at around 17% per year, and GDP growing at less than half that rate, the mountain of debt in relationship to the economy continues to pile up. Hence “unsustainable.” What happens when “unsustainable” turns into actual consequences? That’s the very moment Chinese officials fret about.

So Zhu Baoliang, head of the economic forecast department at the State Information Center, which is part of China’s economic planning agency, the National Development and Reform Commission, was quoted by the state-owned Xinhua News Agency, which reports to the State Council. This isn’t an unauthorized leak or an official speaking off the cuff at an unguarded moment. This is the government’s megaphone.

The property sector – China’s epicenter of malinvestment and bad debt – had “too great an influence” on China’s economic health, Zhu was quoted as saying. Approximately 60% of financing and manufacturing activities are related to it, he said. Which is enormous. “If any big problem occurred in the real-estate industry, it would have a great impact on the economy.”

But the real-estate industry is precisely where the problems are now occurring, though governments at every level are furiously engaged in keeping that bubble going while limiting its growth for as long as possible. When a single sector that is riding on top of the largest construction bubble in history has such an enormous impact on the rest of the economy and drives 60% of manufacturing and finance activities, it doesn’t take an outright implosion to take down China’s specialized economy. All it takes is a moderate slowdown. And POOF.

The fact that the government is making its concerns public so bluntly appears to be a sign that it is preparing the population and the business community for whatever is to come. Diversifying an economy away from the dominating mega-property sector that kept manufacturing and financing flush with activity and money, and doing so quickly before the bubble inevitably implodes, will be another miracle for China’s central planners to figure out how to perform, and do so pronto.

It’s so bad that a trusty Communist Party newspaper exhorted the people to buy homes in a ghost city because there’s “no downside for home prices.” Read…. Chinese Construction Company Threatens To Default, Debt Dominoes Are Lined Up

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  3 comments for “Chinese Government Frets Out Loud About Property Bubble Taking Down the Economy

  1. Bone Idle
    Jul 22, 2014 at 6:41 pm

    Having previously worked in non western countries for over 15 years on many infrastructure projects I can say these countries are great for building things with borrowed money.
    However it generally goes that there is no money for maintenance and the built item deteriorates in quick fashion.

  2. Rodster
    Jul 23, 2014 at 5:26 am

    A perfect example of an infinite growth economy in a finite world. Too bad the entire globe has gone down this path. It won’t end well. It never does. Good luck with that Yuan world currency.

    • Aussie
      Jul 24, 2014 at 11:14 pm

      If you have the backing (physical gold) it does not matter if the entire economy collapses, because the whole global system will come down when China crashes! And they have between the BRICS, much gold!

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