The world's next great economic crash
China cuts US Treasury holdings
China was to be America’s economic savior but it’s moving toward bailing on US debt. We trim, blend, and append four 2010 articles from: (1) the Christian Science Monitor, Jan 21, on the crash by Gordon G. Chang; (2) MarketWatch, Feb 13, on the boom by Chris Oliver; (3) the Los Angeles Times, Feb 13, on banks by David Pierson and Don Lee; and (4) Bloomberg, Feb 17, on holdings.
by GG. Chang, by C. Oliver, by D. Pierson & D. Lee, and by Bloomberg
China: the world’s next great economic crash
Last year China overtook America as the planet’s largest car market, passed Germany as the biggest exporter, and Japan to become the world’s second-largest economy.
Official growth for the fourth quarter of 2009 was 10.7% and 8.7% for the entire year. However, power consumption statistics, a crucial indicator of economic activity, show the economy expanding at only two-thirds the announced rate.
In the post-cold-war period, the government took advantage of then-surging foreign demand. Yet global trade is now stagnant after dropping significantly last year. Chinese exports declined 16.0% in 2009.
The role of consumption declined from a historical average of 60% of the economy to about 30% last year. No country has a lower rate.
China already has one empty new city -- Ordos in Inner Mongolia. New factories are underutilized. Thousands of facilities, especially shopping malls, are vacant.
Flat consumer prices last year belie official reports of roaring retail sales. So does the full-year 11.2% decline in imports, another sign of sluggish domestic demand. And if the economy is really growing by double digits, why stimulate?
China has disbursed a $1.1 trillion stimulus, around a quarter of the total economy. Now, perhaps as much as 95% of China’s growth is attributable to state investment.
Beijing has record-setting reserves -- now $2.4 trillion -- but can’t convert them into renminbi. The added demand would raise the price of the Chinese currency, so foreigners would have to spend more of their own currency to buy Chinese goods, and so would buy fewer Chinese imports. And exporting is China’s critical sector.
Legendary short-seller James Chanos, who predicted the failures of Enron and Tyco, calls the country “Dubai times 1,000 -- or worse.”
China's tropical getaway becomes latest property boom
Real-estate prices on Hainan island, where white-sand beaches and jungle-covered mountains suggest Hawaii, have jumped by more than one-third in the last five weeks.
A good part of the real-estate spike comes from Beijing's announcement in early January that the island would be developed into an international tourism destination.
In Sanya, one of the island's main cities, luxury condos have risen as much as 40% since the start of the year, bringing prices close to similar properties in Beijing and Shanghai.
The number of vacant apartments -- estimated to be as high as 30% in Sanya -- raise the prospect that prices could tumble and recession follow as in the US.
Estimated nationwide land prices more than doubled in 2009, but that figure is likely well below the true rate of gains.
Land prices in seven cities tripled while those of 10 cities, including Beijing and Shanghai, rose an average of 147%.
China restrains banks
Those lucky enough to own multiple apartments face no added cost because China imposes no property tax. As a result, apartment space estimated at hundreds of millions of square feet sits empty.
Worried about a bubble, Chinese officials reduced bank funds for lending for the second time in a little more than a month. The action worried investors that China might then not consume enough to continue global growth, which rattled financial markets around the world.
The amount of credit banks extended to land speculators from 2003 to 2009 was equal to 40% of China's GDP. In the US, the figure was 80% of GDP from 2000 to 2007.
In Beijing, developers can barely keep pace with demand as the amount of residential floor space sold in 2009 skyrocketed 82% from the year before.
New developments mostly target the wealthy, because builders can reap higher profits, shutting out ordinary Chinese.
The average price of an apartment in the capital is 15 times a typical resident's annual household income. The US ratio is about 3 1/2.
In Shanghai, home prices have swelled 87% from the previous peak in 2007.
Real estate accounted for about 25% of China's GDP in 2009, taking into account secondary sectors such as cement and steel.
JJS: With trying to deal with its bubble, China also tries to deal with owning so much US debt.
China cuts US Treasury holdings
China’s ownership of US government debt fell in December by the most since 2000, allowing Japan to regain the position as the largest foreign holder of Treasury bonds. Japan’s holdings rose 1.5% in December to $768.8 billion while China’s dropped 4.3% to $755.4 billion.
US households have owned a quarterly average of $714.7 billion of Treasuries through the end of September 2009, compared with $242.3 billion for the same period in 2008.
China’s Treasury holdings peaked at $801.5 billion in May, and net sales in November and December were the first consecutive months of reductions since late 2007. If this scale is sustained, then it would suggest that China is moving to diversify its holdings.
Chinese Premier Wen Jiabao said in March 2009 he was “worried” about China’s Treasury holdings and wanted assurances that the nation’s US investments were safe. Central bank Governor Zhou Xiaochuan proposed a new global currency to reduce reliance on the dollar.
JJS: What it all means for the US is that its government would have to live within its means -- a boon for taxpayers. For the world, it’d mean the US could not easily afford its military adventurism -- a boon for poor civilians everywhere.
Jeffery J. Smith runs the Forum on Geonomics.
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