— “The Financial World According to Inya” Column by Inya Ivkovic, MA
China’s empty skyscrapers are glittering, vast shopping malls are fairly empty, and people’s factors are largely underused, all of which evidences China’s speculative excess that is threatening to destroy the Asian giant and potentially taking down with it the rest of the global economy.
In the 1970s, communist China embraced Capitalism and, to put its money where its mouth is, the government decided to elevate the township of Huaxi in the Yangtze River Delta from bamboo huts and ox carts to an industrial and commercial powerhouse, where many of its 30,000 inhabitants now live in bona fide mansions and drive luxury sedans. This is also an area where the construction and real estate markets are booming. Party heads have given their stamp of approval to build one of the world’s tallest buildings, shedding about 2.5 billion yuan for a 1,076-foot tower. On top of it, the tower’s architects have envisioned a restaurant, called “New Village in the Sky,” where Huaxi’s “new money” can dine and revel in an amazing view over rice fields, fishponds and orchards. Perhaps insatiable, Huaxi officials are planning something even grander, a skyscraper that would cost six billion yuan and rank as the world’s second tallest building. The only taller building would be Burj Khalifa in Dubai.
There is something fundamentally scary about China’s approach to the financial and credit crisis of 2008/2009. Although China’s economy was not as impacted as the rest of the developed world, the country still put together a massive bailout package. The only problem was that China did not really need all that new infrastructure investment, which, alas, did not stop it from jumping on the bailout wagon with the rest of the world. As a result, China ended up with many empty office buildings, deserted shopping malls, and an underutilized infrastructure. If anything is going to burst China’s bubble, this might be it — too much of a good thing!
The fact is that China has managed to defy the Great Recession for the past two years, while the rest of the world ran away with its tail between its legs. In concrete terms, China’s output grew at an inconceivable growth rate of 10.7% in the fourth quarter of 2009. The reason that China thought its economy might need a bailout was that foreign demand for its products has dropped significantly. Nevertheless, to keep everyone busy, the government poured in four trillion yuan in stimulus money and buoyed its banks to lend a record 9.59 trillion yuan in 2009.
It is true that China was a significant factor in keeping the global economy afloat. However, if China’s bailout bubble bursts, the effect could be devastating. Even the slightest efforts to wean off China’s economy from the government udder have caused a significant ripple effect. For example, in January, China’s authorities ordered banks to curb their lending, which sent China’s market and most of the world markets into a tailspin. Imagine what would happen if China’s real estate market were to crash?
I’m not the only one concerned, nor do I have a special crystal ball. Much smarter guys than me have come to the same conclusion. For example, James Chanos, a hedge fund manager, president and founder of Kynikos Associates, as well as one of the few who had sounded the warning bell on Enron Corp., is very clear in his opinion that China’s economy and the Chinese markets might be overheating to dangerous levels. Chanos’ opinion is echoed in George Soros’ words from a January 28, 2010, interview, too.
Of course, there are other respected investors who are sticking with China. Regardless, investors should be very cautious and make sure they do thorough due diligence on the Chinese companies they buy. Check out what companies you buy are doing with their investment capital. If we are talking about, for illustration purposes, a food company, if it is buying real estate instead of soybeans, you should not be invested in it.