The Great Crash of China

I’ll confess to being something of a (short-term only) sino-bear, so this piece from the Far Eastern Economic Review a few weeks ago on China’s looming economy troubles perhaps over-fits my biases, but it’s still worth reading. The gist: Bryan Klein of CFR argues that a combination of capital misallocation, non-performing loans, an over-rapid forced transition to high value-added manufacturing, a post Olympics malaise, a collapse in the domestic stock market, and a recession in its main export markets mean that China is going to hit the economic wall sooner and harder than its many supporters expect.

By the end of 2007 almost half of China’s GDP growth was attributed to exports and government consumption, a dramatic reversal from 2003 when growth was dominated by investment and private consumption.

While savings rates have been traditionally high, immense wealth has been invested in the stock market and real estate. The Shanghai index lost two-thirds of its value since its peak in mid-October 2007 and the Hang Seng is down over 50% from its peak a year ago.

While fixed asset investment may be rising, one-third is continuing to pour into the real-estate sector (up 29% year-on-year) despite vacant commercial floor space in China rising by 6.1% at the end of July (the latest month for available statistics). Real estate prices are experiencing their slowest growth in 18 months and new home prices in Guangzhou and Shenzhen have actually declined. Meanwhile growth in new car sales, while still robust, is slowing.

Not surprisingly, consumer confidence, according to official Chinese statistics, is drifting downwards and Western ratings on Chinese commercial banks, the holders of unused commercial real estate, are being lowered. Those on the cusp of entering the middle class are faring poorly as tens of thousands of small and medium sized enterprises go bankrupt.

Guangdong Province alone, the heart of China’s low-cost manufacturing base, has seen half of the shoe manufacturing industry close shop (over 2,200 factories) this year.

More here.

Perhaps unsurprisingly, this piece has sparked a great deal of (often emotional) debate, including here and here and here.