- China has a unique, state-driven model of capitalism that clueless economists have hailed as the “new model for economic success.”.
- Bubbles get so extreme — and China’s bubble is the most extreme of all — that once they start to unwind, you get an avalanche of deleveraging and defaults.
- I expect major problems in China likely by the summer or fall.
I have been warning for years that the greatest - and final - bubble to burst, in this century of bubbles, would be China. Now that cracks in the great red dragon's economy are widening, it's time to prepare for the worst.
China has a unique, state-driven model of capitalism that clueless economists have hailed as the "new model for economic success."
But I say China's model (and economy) will fail drastically, proving once and for all that government-planned economies do not work as well as free market capitalism balanced by democracy.
China has massively overbuilt everything: industrial capacity, housing, offices, malls, infrastructure, you name it.
It's overbuilt twice as much, and for twice as long, as any other government-driven emerging economy ever has. In fact, the last government-driven overinvestment spree occurred in Southeast Asia, and it resulted in a financial crisis between late 1997 and late 2002. And China has made that situation look puny by comparison.
There is no way this can end any way other than very, very badly. The question is: when will an economic collapse come? The answer is, sadly: sooner than you'd like.
Here are the seven signs the end is near…
Sign #1: Recently, a large Chinese property developer decided, for the first time, to discount condos by 40% when sales stalled.
The thing is, this is a shocking step to take in China. It's just not done.
The affluent Chinese line up to buy overbuilt, empty condos at insanely overpriced levels. They don't rent them out because there is no rental culture in the country. Ninety percent of homes are owned. They simply buy the property and let it stand empty… so when a developer cuts prices and thus devalues their investment, they get bitterly angry.
But this discounting trend is likely to spread rapidly now as more developers are forced to discount prices just to raise cash and avoid bankruptcy.
Sign #2: The richest man in China, with $31.9 billion, is Li Ka-shing. He and his son, Richard, have sold $3 billion of prime commercial properties in the last nine months. That tells me the smart money is leaving before the bubble bursts!
Sign #3: A Bain & Company/Chinese bank survey of affluent households showed that 60% of the rich are considering moving overseas because they don't trust government or the bubble, pollution levels are getting intolerable, and they want to get their kids an English-speaking education.
Sign #4: A number of major developers have gone bankrupt. These developers are highly leveraged and pose the greatest threat to the banking system, which has grown more through shadow banking and sub-prime lending in the last few years than anything sustainable. The worst new statistic, as developers pull back, is that housing starts in floor space dropped 37% in the first four months of 2013.
Sign #5: Bad loans are rising fast in China. The country's private debt is now higher than that of the U.S. or Europe, as you can see in the chart below. At 190% and rising, it's higher than emerging countries in Asia in 1998, when private debt peaked at 160% before a five-year currency and financial crisis.
But note that this chart doesn't include financial sector or government debt. When you add those numbers into the pot, my estimates of the country's total debt is around 277% of GDP. That's much higher than other emerging countries like Brazil, which is at 152%, India at 130%, and Russia at 78%.
Emerging countries don't have nearly the private debt of developed nations because their incomes are low and their citizens and businesses are less creditworthy. So for China to have a total debt of around 277% is unprecedented for an emerging country.
Sign #6: A major agricultural co-op closed its doors and investors couldn't withdraw their deposits.
Sign #7: A major Chinese solar company defaulted on its bonds - the first to occur in China.
Thus far, the government has quietly bailed out or covered over the defaults and cracks. But they're now hinting that they're going to let more defaults happen to "slowly let the air out of the balloon."
The Chinese government simply doesn't have a clue. Actually, no government does. They always think they can deflate bubbles slowly to ensure a soft landing.
Soft landings never occur in major bubbles.
Bubbles don't correct. They burst.
They get so extreme - and China's bubble is the most extreme of all - that once they start to unwind, you get an avalanche of deleveraging and defaults that build on each other.
Bubbles become black holes.
I expect major problems in China likely by the summer or fall.
When China blows, there won't be an effective stimulus policy from the U.S., Europe, or Japan, to counter such a shock. It will make the U.S. sub-prime crisis look like a Sunday afternoon picnic.