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July 31, 2006
Another Bubble Set to Burst That Bears Watching
...and they don't handle setbacks as well as we do, physically or emotionally. It's fascinating stuff.
China's economy is out of control
China is growing so fast -- using cheap money to build steel mills, highways and textile factories it doesn't need – that the coming crash grows uglier by the day....In the second quarter, China's gross domestic product grew by an extraordinary 11.3%. That's a significant speed-up from 9.9% growth in 2005, 10.1% growth in 2004 and 10% growth in 2003.
That's a problem, because an economy can have too much growth. In China, it has led to massive overinvestment in manufacturing assets in sectors already suffering from oversupply. Investment in fixed assets -- everything from steel mills to cement plants to oil refineries to highways -- grew by 30% in the first half of 2006.
Although the reported profits of China's largest industrial enterprises climbed 28% in the first half of 2006 over the same period in 2005, companies in some sectors have seen profits squeezed, sometimes to the vanishing point. According to government numbers, 80% of the profits in the Chinese economy went to companies in the oil, power, coal and nonferrous metals sectors. The other 30 sectors of the economy shared just 20% of corporate profits.
The iron and steel sector is the current poster child for the problem -- and a worrying sign of things to come in other sectors. Profits in the sector dropped by 20% in the first half of the year. The problem is overcapacity. Too many steel companies have added too much capacity, driving down the price they can charge for their product.
...Higher prices pull more money into real estate, of course. In the first six months of 2006, real estate investment climbed 24.2% over the same period in 2005. According to the National Bureau of Statistics, 1.41 billion square meters of housing were built from January through June 2006, up 21% from 2006. And as the boom ages, prices soar and excesses multiply. Units in the Tomson Riviera luxury apartment complex in Shanghai, for example, are priced at as much as $20 million. (I love the complex's slogan: "dedicated to the elites." How things have changed in Communist China.)
But then it gets you wondering, "so...what does happen if China comes apart at the economic seams?" Would a cataclysmic social restructuring in quite possibly a horrendous and bloody manner erupt at some point? I mean, you don't get to
Posted by tree hugging sister at July 31, 2006 02:44 PM
Comments
Two words - Warlord Period. Those HK and Taiwanese Tong that own all those factories on the Pearl River Delta are not going to take it on the chin for Beijing - they'll declare a Republic of Canton and get on with it. The PRD accounts for over 40% of China's GDP, with less than 10% of its population.
Posted by: John at July 31, 2006 04:52 PM
That'll result in some interesting, ummmmm, internal political discord, won't it, John?
Posted by: The_Real_JeffS at July 31, 2006 05:29 PM
Indeed it could.
Posted by: Kathy K at July 31, 2006 09:09 PM
JeffS - That's what I meant by Warlord Period. It happens every 100 to 400 years in China. The Center likes to pretend they are in control, but as soon as the facade cracks, regionalism shows up again. The Five Kingdoms, Southern Song versus Yuan Dynasty, collapse of the Ming, Warlord Period. Same crap, different century.
Posted by: John at July 31, 2006 09:17 PM
John, I'd add that the rest of the world's perception of China, especially outside East Asia, is SO monumentally forgetful. They think lots of money has fundamentally changed the place; of course, it has, and it hasn't.
And, worldwide, I'm sure not one person in a hundred outside China could name the bloodiest conflict in human history before World War Two. Hint: it wasn't World War One.
Posted by: Dave J at July 31, 2006 10:05 PM
Dave J - read Spence much?
Posted by: John at July 31, 2006 10:23 PM
Same crap, different century.
And bigger guns?
Posted by: tree hugging sister at August 1, 2006 08:32 AM
Thanks, John -- I should have noticed "Warlords" in your post, but I am not up to speed on Chinese history, other than it's pretty bloody.
And bigger guns?
And a lot of them.
Posted by: The_Real_JeffS at August 2, 2006 10:14 PM