Who Will Pay for China's Housing Bubble?

This home-made clip features Hugh Hendry, founder of Eclectica Asset Management, walking around the streets of China (presumably Beijing or Shanghai) and pointing out numerous empty buildings. Huge debt must have been incurred in erecting these buildings and without tenants there is no prospect of servicing the debt. What’s more, the workmanship also seems shoddy as a nearly-completed 13-story building in Shanghai collapsed last month.

Who will pick up the tab for creating all the overcapacity in the Chinese economy?

Hendry has perhaps looked at only a limited sample, but the video provides food for though in the greater economic scheme of things.

Source: YouTube, March 27, 2009 (hat tip: Edward Harrison, Credit Writedowns).

Comments

[Susan Weerts]

It was shot at Guanzhou, or Canton (in Cantonese) China. It was a vibrant manufacture base due to its proximity to Hongkong. It has been slowing down since export plunged. It was the first city in china to prosper after economics reform many years ago.

The city planning has been havoc in China. Every entities, include government agents and universities, involve into the real estate development as long as they can get fund to finance the projects. It is the ultimate place where the Chinese wealth comes from.

Even with the robust export growth during the past years, the margin for the factories was so thin (5cent out of every $1) that most of manufacture relied on the volume just to survive. The middle mans, such as in Hong Kong, took lion share of the profits.

The real estate projects in China virtually print its own money. At its peak, the real estate developers reaped more than 300% profits. Even today, the profits are more than 60-70%. It is no wonder that the real estate developers are highly-leveraged and over-extended.

The developers operate under the notions that every companies in the world will come to China to open not just one office/base but at least one office/bases in every provinces. Every peasants in rural China will come to the city to buy at least one apartment. The real estate boom will go on forever. This is the developers ' “field of dreams”--”If you build it, HE will come.”

2009 Jul 29 08:51 AM

[johnqh]

The problem is that this observation has been true for at least ten years. Even in 2000, you can easily see empty apartment buildings (and office buildings) all over Shanghai. All numbers pointed to a crash (yes, from 2000!)

Fast forward to 2009, you can still easily empty apartment and office buildings, but the previous empty ones are occupied.

I am not saying there isn't a housing bubble. But if you followed the story for the last decade, it felts like crying wolf.

2009 Jul 29 05:39 PM

[Polanski]

You fellows just do not understand China. They can not buy land as an investment. Yet, there is a lot of savings and investment money floating around. They buy houses, which in their case is really condos. They do not live in them they just own them. There are whole buildings in Shanghi that have no tenants, but the units are sold and paid for. My wife is Chinese. She owns two such really high end units, but almost never even sees them, and does not live in them.

R. Linam

2009 Jul 30 03:47 PM

[coreopsis]

And just what is the point of this inane article by Plessis.

The answer to your question: the CHINESE. Get over it, Monsieur le Prieur.

2009 Aug 01 12:59 PM