china concrete

We often talk about how out of touch with reality China’s massive credit and economic bubbles are (see below). However, when we start talking about $15 Trillion here and $21 Trillion there we oftentimes lose touch with reality as such numbers become too big to comprehend.

The chart above looks at the subject matter in a different fashion. Between 2011-2013 China has used more concrete than the US has over the last 100 years. And while some might see this as evidence of an economic miracle, I will take the other side of the trade. This unbelievable boom in concrete use is a symptom of capital missalocation, malinvestment and a giant credit bubble that is ready to blow.

Here are just a few more bits about China that should scare the bejeezus out of you.

Chinese corporate borrowers owed $14.2 trillion at the end of 2013 Vs $13.1 trillion owed by U.S. corporations.
This means that as much as 10 percent of global corporate debt is exposed to the risk of a contraction in China’s informal banking sector.
Cash flows and leverage at Chinese corporations are the worst among global peers, having deteriorated from being the best in 2009.

As I have mentioned in the past, most of China’s economic growth over the last 5-6 years has been financed by massive credit expansion. The likes of which we have never seen before. The result?

$21 Trillion Debt Mountain. Roughly the same size as the entire US Banking Sector. It took the US 220 years to get to that number, it took China just 5 years of explosive credit growth.
$6 Trillion In Shadow Banking. Actually, no one knows how large this number is. I have read good data/reports putting this number at $10-15 Trillion range.
Empty cities, shopping centers, massive speculative bubble in real estate, built out infrastructure, rising cost of labor and export driven economy.

How much longer can this go on? Well, that’s a Trillion dollar question…..or a $40 Trillion dollar question. Apparently, it is already unraveling. Either way, one thing is for sure, this will not end well nor will it end in an orderly fashion.

Just How Big Is China’s Bubble? This Will Blow Your Mind Google

Bloomberg Writes: Chinese Still Prefer Property Over Stocks

Matthew Zhou and his wife spent 1.6 million yuan ($261,000) to buy a two-bedroom apartment in eastern Shanghai in August because they saw no potential to make money in China’s financial markets. “Home prices keep rising, so I’d rather buy a place now than put the money in the stock market,” says Zhou, 30, an information technology engineer at a state-controlled bank in Shanghai. Gains in equities “could never outpace the growth of home prices,” he says.

Okay Mr. Zhou, that’s quite a believe. Perhaps you should study history in order to see that over the long run capital markets appreciate much faster than real estate. In fact, real estate shouldn’t (outside of artificial stimulus) appreciate faster than the rate of inflation.

Real estate has attracted “the lion’s share” of household investment in China, according to a July report by Standard Chartered (STAN:LN). It has made up more than 60 percent of household assets since 2008, compared with 48 percent in the U.K., 32 percent in Japan, and 26 percent in the U.S., the report says.

That is massive. Another indication of a bubble.

Wang Jianlin, China’s richest man and owner of Dalian Wanda Group, the country’s biggest commercial land developer, says the property market is “definitely” in a bubble, though it’s “controllable, not big.”

Ok, Mr. Wang Jianlin, which one is it. By definition bubbles cannot be controlled. At least in this case you can’t have your cake and eat it too. If controlled, by whom? You, Chinese government or millions of Chinese citizens speculating on real estate. Will they be rational?

Michael Chang, a 33-year-old investment manager in Shanghai, isn’t concerned about bubbles. He spent 1 million yuan on a 215-square-foot, one-bedroom apartment in Beijing in August last year and 5 million yuan on a 1,400-square-foot unit in a Tishman Speyer Properties development in Shanghai this year. “You see home prices rally even when the curbs are in place, not to say when the bans are lifted,” says Chang, who expects Shanghai prices to rise 50 percent in the next five years. Citing a recent ranking of global housing prices in which Shanghai placed sixth and Beijing did not appear, he says: “Let’s talk about bubbles when Beijing and Shanghai rank among the world’s top five most expensive cities.”

Read The Full Article Here

If the statement above doesn’t scream “Bubble” nothing else will. Mr. Chang anticipates 50% rise in 5 years in an already overpriced market while there are literally hundreds of empty cities all over China.

Perhaps Mr. Chang is right. Perhaps it will go up 100% over the next 5 years. Who knows. Perhaps you should even invest with Mr. Chang. Markets tend to be irrational at times. However, make no mistake. This market will blow up and when it does millions of Chinese families will lose everything.

How do you say Revolution in Chinese?

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