Is China heading for a crash?

[animal world]

Just read an interesting article with the above title and worth reading. One famous contrarian hedge fund manager, Jim Chanos, seems to think so. He's worried about China's stimulus that approaches a quarter of its GDP. He also speculates that China's official numbers about growth and consumption do not reflect reality. For instance, car sales have increased but gasoline consumption has held steady (i've read about such inconsistencies at other sources as well).

Anyway, i thought to bring this article to your attention:

http://www.politico.com/news/stories/1109/29330.html

[gato]

I think the real estate market is going crash in the near future. A 100 square meter apartment in central Shanghai now cost an average of US$400k, much higher than what most people's income could afford. Most buyers are investors, and many apartments are sitting empty, while their owners wait for the price to appreciate. There was a crash in real estate prices in 2001ish. It just might happen again after the effects of the stimulus die down. If the demand is artificial, eventually the prices will come down, just like it did in the US.

Reportedly, the real estate prices in the so-called 2nd-tier cities aren't going up as rapidly in light of the stimulus (mostly by way of loose lending) compared to the 1st-tier cities like Shanghai, Beijing and Shenzhen. It's another sign that much of the real estate buying is for investment.

[wushijiao]

But even if there is a collapse in Shanghai/Beijing real estate (which it seems would be inevitable), to what extent would it dent GDP growth?, since at the end of the day, China is a manufacturing country and isn't built on consumption/real estate to the same extent as the US.

Also, here's an interesting map of the main areas of China in terms of GDP input. Shanghai and Beijing are important, of course, but less so than one might think.

http://www.chinalawblog.com/2009/11/china_retail_or_i_heart_qingda.html

[animal world]

I heard as well about the Chinese housing bubble. Correct me if i'm wrong, but in China people tend to buy real-estate without using a mortgage, and certainly not that crazy stuff like sub-prime, entirely undocumented (!), mortgages that fueled the housing bubble here a few years ago. So, if the housing market in Beijing and Shanghai crashes, it won't reverberate throughout the Chinese economy.

Wushijiao, i have a question about these economic clusters. How exactly are those percentage contributions to GDP input determined? You probably don't know either. What i'm getting is, do they reflect manufacturing for export or for domestic consumption? I suspect it's the former.

[Outofin]

in China people tend to buy real-estate without using a mortgage

Most of my friends and family paid their loans in 3 or 5 years. I think they're crazy and I don't know how they managed doing that. Here 30-year mortgage is the standard.

For instance, car sales have increased but gasoline consumption has held steady (i've read about such inconsistencies at other sources as well).

Many say electricity output is a more reliable indicator than GDP. That makes sense to me. I never heard of the car-gas argument. The car sale numbers are mostly from public companies. I read too many reports about how successful GM is in China. (Of course, that could be a desperate public relationship campaign.)

[xianhua]

It's not through lack of trying, but I've never managed to figure out exactly how most Chinese families manage to accumulate savings which are substantial enough to educate their children through university and then give them enough to buy a house (or substantial deposit). I suppose living without cars or mortgages helps.

[stoney]

China is a manufacturing country and isn't built on consumption/real estate to the same extent as the US.

China has been manufacturing products for western countries for years. I wonder how much the demand for all this stuff has decreased since the economic downturn in the west. And with unemployment now more than 10% in the USA, will the demand drop even more. This could be a bigger problem than a correction in housing prices.

[gato]

A few comments.

1. China's export sector has already crashed, which is why the government is spending so lavishly (mostly by requiring the government-owned banks to grant loans on loose terms) to prop up the economy.

http://ghanabusinessnews.com/2009/10/14/china-export-declines-as-global-economy-recovers/

Seasonally adjusted, exports declined 20.1 percent from a year earlier and rose 6.3 percent from the previous month.

2. There is a great inequality of wealth in China. 10% of the population probably owns around 70% of the country's wealth. Most of the people that visitors to this forum know are probably in the upper middle class, so their ability to buy houses and pay for education is not necessarily representative of the public as a whole.

3. The country's tax rate are very regressive. Profits earned on the stock market are exempt from personal income tax. Profits from real estate are subject only to a 1-2% tax on the sales price (as opposed to 20-40% of the profit). The government gets a large percentage of its revenue from sales taxes (VAT), which is regressive, meaning the effective tax rate (as a percentage of income) for the poor is higher than for the rich. Local governments rely mostly on sale (lease) of land rights for revenue raising. The higher the real estate prices, the more revenue the government can raise from sale of land rights, which causes local governments to be even more closely allied with the real estate developers than they otherwise already would be.

4. The increasing gap between rich and poor result in two seemingly contradictory phenomena: (1) slow growth in overall consumption and low consumption rate as a percentage of GDP, resulting in complaints that the Chinese save too much; and (2) rapid growth in consumption of luxury goods (China is now the largest market for luxury goods makers such as Louis Vuitton and Chanel). (1) is caused by the slow growth in median family income. The growth in GDP is boosting the income of the average person by that much. (2) is caused by the rapid growth in the income of the top 10% and even more rapid growth in income of the top 1%.

[wushijiao]

According to the NYT, China looks to be in good shape according to recent data:

"Strong data from China released Wednesday, especially in factory output and retail sales, underscored the speed of the giant economy’s rebound, thanks to extensive government stimulus measures that have put the economy on track to grow more than 8 percent in 2009.

Industrial output and retail sales for October both topped analysts’ expectations, with jumps of 16.1 percent and 16.2 percent, respectively, from a year earlier. The increases also were higher than in September, showing that the pace of recovery was continuing to pick up steam.

Separately, the customs office said exports in October had been 13.8 percent below the level of a year earlier, while imports had fallen 6.4 percent, more than expected. The drop in exports was less than that of a month ago, but the decline in imports accelerated slightly. "

Gato's point 2-4 are of very big concern, but it seems to me like they are more long-term issues that are not immediately relevant to whether the economy will collapse in the next year or so.

[imron]

I've heard people predicting a crash since at least 2000. If you predict it every year, eventually you'll be correct

[Lugubert]

2. There is a great inequality of wealth in China. 10% of the population probably owns around 70% of the country's wealth.

I've seen the argument that Sweden is grossly inequal, because 20% of the population owns 80% of the wealth.

In an ideal (?) state, where all study, work, earn, spend, save and live equally much/long, a steady state will be reached where 20% of the population owns 80% of the wealth. Obviously (again, ?), that's the oldest 20%...

Anyway, not earthshatteringly far from 10/70.

[gato]

I've seen the argument that Sweden is grossly inequal, because 20% of the population owns 80% of the wealth.

Anyway, not earthshatteringly far from 10/70.

I should make an amendment. 10/70 is just a number I remembered off the top of my head. The actual number may be something like 1-2% owns 70%. A Tsinghua University professor claims that it's 0.4% who owns 70%. That must be an approximation, as well.

http://blog.china.com.cn/art/show.do?dn=zhongyan&id=812113&agMode=1&com.trs.idm.gSessionId=0903920AC4B7EF5C7A894B3F16C7329D

据6月19日《人民政协报》报道，中国财富的“集中度”问题在政协十一届常委会第六次会议专题讨论会上受到常委和委员的热切关注。政协委员蔡继明说，“我国在社会财富增长加速的同时，出现了财富向少数人手中集中的倾向。中国权威部门的一份报告显示，0.4%的人掌握了70%的财富，财富集中度高于美国。

http://blog.ifeng.com/article/2854171.html

中国贫富差距究竟有多严重？

清华大学教授、全国政协委员蔡继明最近列举的一个数据再次将万千网民雷倒。

他说：“中国权威部门的一份报告显示，0.4%的人掌握了70%的财富，财富集中度高于美国。”

[chrix]

imron, that's exactly what I thought when I read this thread. Though ten years ago it was more en vogue to talk up the threat of hundreds of millions of landless peasants flooding the cities and so forth...

[anonymoose]

From what I understand (although I have no hard facts, so I could be wrong), people in the government have a significant stake in property in Shanghai, and thus will probably do whatever they can to prevent the market crashing. On the contrary, they have an interest in inflating the market further.

[gato]

Yup. The almost completed 13-story apartment building that collapsed in Shanghai earlier this year was developed by a company controlled by a local official.

[animal world]

Gato, income equality has been increasing almost everywhere in the world. In the US before Reagan, until 1980, the top income tax bracket was 70%. Now it's 35% (and capital gains at a much lower rate). But it's a sacred cow to cuddle the wealthy although we have clearly seen that the only thing that "trickles down" to the masses are the huge losses corporations incurred because of traders' and CEOs' maniacally gambling the store away in order to increase their bonuses and stock options. The current House bill for Universal Health Care includes a clause to impose an additional 5% tax on people making over $1 million a year but this provision will undoubtedly be scrapped.

In China, do the wealthy also exercise guanxi to decrease their tax "burden" even further by paying tax officials to look the other way?

[gato]

In China, do the wealthy also exercise guanxi to decrease their tax "burden" even further by paying tax officials to look the other way?

Sure. You might have read about the Danone-Wahaha dispute, which was recently settled with Danone selling its interest in the joint venture at a huge discount to its Chinese partner. In the course of the dispute, Danone tipped off the Chinese tax officials that Zong Qinghou, their Chinese partner/antagonist and founder of Wahaha, was evading taxes. Zong reportedly paid millions in back taxes, without suffering harsher penalty such as jail terms that could imposed with evasion of such enormous amounts. He's a member of the National People's Congress and quite influential, you might say.

http://www.chinadaily.com.cn/bizchina/2008-04/15/content_6618511.htm

Billionaire beverage entrepreneur Zong Qinghou is being investigated for allegedly evading some 300 million yuan ($42.9 million) in taxes.

The Caijing report said the entrepreneur had paid more than 200 million yuan in arrears taxes in October, after the investigation kicked off, but still owes millions more.

People found guilty of evading more than 100,000 yuan worth of taxes - if that amount comes to more than 30 percent of their total tax bill - could face up to seven years in prison and fines of up to five times the value of the unpaid taxes.

His Wahaha Group, the nation's largest beverage maker, formed a partnership with French food and dairy giant Danone Groupe SA in 1996, but last year the pair became embroiled in a dispute over the ownership of the Wahaha brand and other businesses not included in the joint venture.

Edited November 12, 2009 at 03:00 PM by gato

[Daan]

The Economist wrote about this last month and concluded that China would probably be fine as long as they allow the yuan to float. They seem to have a point there, given the huge gap in economic growth in China and the United States these days. Pegging the yuan to the dollar means the Chinese central bank has less room to adjust its monetary policy to Chinese conditions.

[Outofin]

First, I don't know how they got the number of wealth distribution. I'm surprised they do. Second, we don't care about income gaps, we only care about the consequence. What will be the consequences? Rising crime tides like Brazil? Unhappy people? It boils down to, do the general public live a better live?

There are too many real and serious social and economic problems in China I'm constantly concerned. But I won't use words like "collapse" or "crash".

[animal world]

I should have avoided the word "crash" instead of copying the headline of the linked article verbatim. Who knows, it may be this contrarian hedge fund manager who is actively spreading the word of a forthcoming economic crash in China. He may have entered into contracts with Goldman Sachs to the effect that he's betting on a downturn in China's economy and stand to make billions if his hunch comes true.

It used to be that great wealth was generated by creating infrastructure (steel, railroads, computers, operating systems) from which most of society benefited one way or another. In the last decade, a great deal of wealth has come about by this crazy betting on how a segment of the market would perform. And this hard work is rewarded with the advantageous capital gains tax treatment!