Monday, January 3, 2022

The Big Bad Wolf May Turn Out To Be Less Dangerous in a Few Years

I was watching one of the many YouTube videos about how the Chinese real estate bubble is going to do what it did to Japan in 1989.

You younguns' are probably too young to remember how Japan was such a powerhouse economy that it was going to surpass the U.S.  They were going all out on AI research while the U.S. concentrated on PC software.  You may recall a truly paranoid Michael Crichton novel, Rising Sun, built around this rapidly growing technical and economic megastar.

It did look pretty impressive from the outside at the time.  Japanese real estate became so pricy that 100 year mortgages became common.  The Australian government sold the land under their embassy in Tokyo and did a 99 year lease on the land, paying off 2/3 of their national debt with the proceeds.  Then the overheated bubble burst and Japan had decades of economic doldrums.

China is in a similar bubble, much worse than the 2000s housing bubble.  Fortunately, few other nations are as hopelessly locked into the future value of Chinese real estate as everyone was to the U.S. and its complex system of mortgage futures based on subprime mortgages.  

The idiot whose report drove much of that five levels of indirect real estate finance went to work for the Bank of China. I am hoping to find out he worked his same magic to sink them.

In short, in a heavily regulated economy, the only real investment available to Chinese is real estate (or actually apartments). Because this is the only real way to accumulate wealth, Chinese were buying apartments far from where they lived just to climb on the real estate elevator (like that farm worker in Salinas who took out a $720,000 mortgage at the height of our bubble).  

Many of those apartments were just shells with no fixtures or anything else required to make them habitable much less property that could be rented and thus provide a return on investment.   Of course, you have seen the 13 story apartment building that literally fell over.  (Fortunately no one lived there as is the case for many of these buildings.)

Once the CCP started imposing even slightly sensible investment rules on big developers like Evergrande, the whole house of cards started to fall.  If real estate prices fall even a little, Chinese stop buying them to flip, the developers cannot make payments on their bonds and stock prices and bond prices fall.

A side effect is commodities associated with this orgy of speculative building fall as well: iron ore and copper.  Even commodities a long ways removed like DRAMs fall.  At some point; along with their increasing problems with supplying electric power, a lot of Chinese will lose their jobs while watching their greater fool investments sink to nothing.  

Can the CCP survive?  I do not know, but I suspect Big Bad China will turn into a toothless tabby unable to project (or at least threaten) power.  An impoverished China may lose control of the Biden and Trudeau governments.  I love when a plan splatters together.


  1. According to "The Coming of the Third Reich" by Robert Evans (The first of his great three part magnum opus on the Third Reich), some people were able to cobble together a means to adapt to the hyperinflation through borrowing against future receipts and government bonds to pay taxes at a later time. I have to review what he said exactly, as it's been a while since I read that book.

  2. The CCP also has a population problem, just not the one you think.

    After a couple of generations of the 1-child policy, there are very few women and none of them (and none of the men) want to have kids.

    The population is aging incredibly fast, the birthrate is way below replacement (worse than in Japan), and the CCP is finally aware of a problem they have. They are trying economic incentives, but what they have is a cultural problem.

  3. Agreed. They more so than Russia, have a serious population bust coming.

  4. It is a shame that America did not do something similar with the land under THEIR embassy.
    I still have (somewhere) a book from thirty years ago, "Japan as Number One, Lessons for America." Given the timing of that book relative to the "Lost Decade" and the doldrums for Japan, it may be time for someone to write a book, "China as Number One, Lessons for America" and do similar magic.