China shows WHO is boss?

[touchring]

Re: China shows WHO is boss?

I am trying to understand what is it about "high speed rail links" that has everybody so ga-ga? Japan has had high speed rail for a long time. So have the French...and to a minor degree the Brits and the Belgians [Eurostar].

So what. How does being able to whisk people back and forth at enormous speed over tremendously expensive railbeds and in tremendously expensive rail carriages, automatically confer on an economy or a nation some innate competitive advantage?

I think you will have to travel to several places in China to understand the impact of a high speed train system. China is one country, but the conditions vary greatly from city to city and province to province.

The Guangzhou to Wuhan line example I mentioned, goes through 3 provinces. If you include Hong Kong which is connected to Guangdong, Guangdong province has a population of nearly 130 million people. The major cities of Guangzhou, Shenzhen near to Hong Kong are almost developed cities, not very different from the latter. The cities to north along where the line goes, especially the smaller cities, are much poorer.

To give a better analogy you can envisage, this line has the same economic benefits as creating a high speed rail that connects Paris to Frankfurt, to Prague, and then to Warsaw, a 700+ mile distance that can be covered in just over 3 hours. The journey from Frankfurt to Prague is about 1 hour. It will be possible to live in Prague and go to work in Frankfurt, 200 miles away, and on a train, one could take a nap, reply emails, or surf the net for the entire hour.

Rail has many benefits over air, no need to go to the airport an hour before departure to check in and pass through security, shorter walking distance to the departure place, and depending on the cellular network infrastructure, you can go online, make a phone call without incurring IDD, rail is smoother than air, no turbulence, no changes in air pressure, and if the city metro is connected to the high speed train station, one could hop over to a connecting metro train.

[GRG55]

Re: China shows WHO is boss?

Transfer of goods and services across great distances always helps commerce. People can be seen as capital and so that also helps. Think about the immense benefit that Walmart/UPS/Fed Ex and every other US company gets due to the enormous investment of the US government in our highway system. Perhaps on the individual level (commuter) it is not as much bang for the buck. But companies like Walmart/Home Depot/basically most manufacturing companies -reap enormous benefit from this subsidy.

So how much more value added and how much more valuable a business does Walmart/UPS/FedEx have if the goods and packages are moving along at 350 km/hr instead of highway speed?

[touchring]

Re: China shows WHO is boss?

So how much more value added and how much more valuable a business does Walmart/UPS/FedEx have if the goods and packages are moving along at 350 km/hr instead of highway speed?

Goods don't have to move at 350km/hr. High speed rails are built separately from conventional rail. So if people move from conventional rail to high speed rail, more goods can be transported by train (which is cheaper than trucking) - which I believe is the reason why Warren Buffett acquired Burlington?

Furthermore, high speed rails don't use petroleum fuel, they run by electricity. This gives it an advantage over buses if oil becomes too expensive or difficult to get e.g. China completes its nation wide high speed rail network, if WWIII breaks out in the Middle East over oil, China won't be as badly affected. For really short distances, people can travel by electric bicycles, for intracity travel, by metro, high speed rail lines for long distances, and perhaps even high speed rail links to Japan, Korea, Taiwan and South East Asia in the future. China won't shut down even if it stops importing oil.

Considering the amount of money that NATO spends on military presence in the Middle East, Afghanistan, China's rail projects are really cheap.

The network shown in the map below is expected to be completed over the next couple of years.

[iyamwutiam]

Re: China shows WHO is boss?

So how much more value added and how much more valuable a business does Walmart/UPS/FedEx have if the goods and packages are moving along at 350 km/hr instead of highway speed?

Transport of goods and services is essential to the growth of any economy -export oriented or domestically. The presumption that China 'already' has a robust highway system is incorrect. Their highway infra-structure is decades behind the US and Europe. But like Finland they maybe fortunate -Finalnd saved billions in putting up telephone wires in remote parts of the country when wireless came along - and so with in a span of a decade they were able to connect the whole country with out absorbing the tremendous cost of having POTS.

If you look at the map -a lot of the development is along the coast-similar to our NY/NO, etc -for both transfer of imported goods and export of manufactured goods.

At worst -if Europe does not buy their goods they can dump them in Indonesia, Korea, India etc. Believe it our not -on a recent trip to India -most of the street vendors are selling goods made in China. China's dominance in this market is truly astounding and they can shift//dump their goods in Asia/Russia with no problems (as they are already doing).

The point is -that this infra-structure had to be done anyway -whether highways/trains/airport/docks. They happen to be a the point where instead of using diesel locomotives they can build a state of the art rail system that connects the entire country. Of course thats going to be good for the country as a whole. The benefits of the US highway system wasn't seen for decades -but it forms the backbone of US commerce -before that it was the rail system.

So -the investment in infra-structure which had to be made anyway -is finally being made -but they are ahead of US/Europe and Japan -because hey didn't have as much legacy infra-structure. It is the same as Japan building new state of the art factories post world war II that decades later gave them a competitive edge over the US/Europe who had already made huge investments in their plants during and pre WWII. The advantage is not conferred overnite but it will show up in the long run.

[touchring]

Re: China shows WHO is boss?

The benefits of the US highway system wasn't seen for decades -but it forms the backbone of US commerce -before that it was the rail system.

The US high system is a double edged sword, it relies on cheap oil, and a huge military to guarantee cheap oil.

From a business point of view, over a long period of 30-40 years, it will be far cheaper to build a Coruscant like electric transportation network than to maintain a huge blue wave navy and military presence in the Middle East.

[GRG55]

Re: China shows WHO is boss?

Okay, time to stop tip-toeing around the edges and get to the core of the argument.

The marvels of high speed rail are part of the "China story" that is being flogged on us from all sides...not just by the Chinese political class, but also by our own politicians, our financiers, and our multi-national CEOs.


In reality the Chinese story is an intertwined series of individual story lines, each of which has a kernel of truth as it's foundation. Let's just take a cruise through a couple of them, before we hop back onto the high speed train for the return journey:

• Chinese GDP is growing at 8% to 9% per annum. Doubtless China has one of the fastest growing economies in a moribund world where total global GDP is still shrinking. But to imagine that a Chinese economy dependent on exports could possibly continue to grow at such phenomenal rates, when entire markets have utterly collapsed, is ludicrous. Any rational comparison with other export dependent economies, such as Germany and Japan, tells us that. However, we continue to be fed the dogma that somehow "China is different"; apparently it having discovered how to repeal the laws of economic gravity that apply to all the rest of us.
• China will lead the world in developing and implementing "Green" technologies into its economy. This laughable story line is gaining momentum rapidly, especially after being heavily promoted in the run up to Cophenhagen. People point to China's growing presence in solar panel manufacturing, and its efforts in the areas of wind turbines and electric car technologies. China is a nation that has systematically poisoned its air, water, soil and even, on occasion, its milk supply...all for the benefit of the dozen "wise men" that run the country and their few well-connected friends who are the "glorious rich". "Green" anything is just not part of the national psyche or cultural make-up of the country. Period. To the degree that China makes anything "green" it's because there's an export market out there somewhere, and just like air conditioners, refrigerators, and clothing at WalMart, China will try to be the low cost provider in order to compete for that market.
• China uses more than half the world's iron ore and nobody can compete with its steel industry. China has the largest installed base of steel making of any nation on earth. And the stimulus program is causing even more capacity to be installed right now, even though a significant portion of the existing capacity is currently idle because Chinese steel makers, who have to import the raw materials and energy with a cheap yuan, can't compete with the vertically integrated steel mills in the USA, Brazil and even Russia. So China has two choices...either dump the excess steel on export markets [which is now attracting tariffs] or try to use it internally to build things like rail lines and bridges - what I call the "Japanese solution". Although boosting steel capacity supports the industrial superpower story line, this isn't a sustainable economic development model as the Japanese found out. 'Nuff said.

Coming back to high speed rail...China's [current] competitive advantage is abundant and cheap labour. So abundant that, like so many other third world nations, China exports significant amounts of its labour as industrial workers to Africa & Central Asia, and sex trade workers to the more "developed" economies. Economies built on cheap labour move the labour to where it's needed...cheap labour doesn't commute, mostly because cheap labour isn't valuable enough or scarce enough to cover the costs of commuting. Go to any cheap labour third-world economy and look at the living standards and criteria of the labour there...even the cheap labour economies that don't look like third world nations - Dubai being the poster child for this group - aren't any different when one scratches the surface. Despite the pictures of shiny new apartment buildings we all know that the vast majority of Chinese workers never see the inside of such places [China's fabled property market being another one of those intertwined story lines].

Expensive commuter links, such as high speed rail [and private jets], make sense in a meritocratic economy because real talent is limited, valuable, and in high demand...and therefore benefits the economy from being able to be moved around quickly. China today is the antithesis of a meritocracy. There is no benefit to moving abundant, cheap labour around the country at high speeds. There is even less real benefit to moving Chinese Politburo members around the country at great expense on high speed rails [if they even use it, which I doubt].

China's high speed trains serve the same purpose as China's human orbital mission [42 years after Gagarin]...

BEIJING (AP) -- Astronaut Yang Liwei, the icon, is everywhere in China, lionized in the state-run press not only as the country's first man in space, but also as an elite pilot, a star student and Communist Party member, a devoted family man -- a ''national treasure,'' as one colleague is quoted saying...

...and the People's Liberation Navy aircraft carrier...

...Chinese Defence Minister Liang Guanglie was quoted in state media in March 2009 saying China no longer wanted to be the only major global power without an aircraft carrier. China will not remain the world's only major nation without an aircraft carrier indefinitely, state press 23 March 2009 cited the nation's defense minister as telling his Japanese counterpart. Liang Guanglie made the remarks to visiting Japanese Defense Minister Yasukazu Hamada on Friday, the Oriental Morning Post said, in discussions that took place after a recent spike in tension in the South China Sea. "Among the big nations only China does not have an aircraft carrier. China cannot be without an aircraft carrier forever," the paper quoted Liang as saying...

They are all essential ingredients to maintain the China story both inside and outside China...to lend credence to and promote the growing universal belief that China is set to become the next great global economic and political power.

In due course some good might come from China's extravagant high speed rail expenditures, in the same way that some good will probably come from Dubai's oversized, ultra-modern container port infrastructure...but I seriously doubt either makes any economic sense for the type of economy these nations actually have.

In closing, I will grant that China is facing a demographic time-bomb. And perhaps, just perhaps, a meritocratic economy will evolve partly in response to this inevitability. And maybe, just maybe, the Chinese Politburo understands this and is taking far-sighted steps today to accomodate that eventuality. Maybe. But I doubt it.

Our Chinese high speed rail journey is over. Time to go shop for trinkets...

[c1ue]

Re: China shows WHO is boss?

I think the view that China is just as vulnerable as the US is true, but the level of vulnerability is different.

For every threat of carbon taxation used as import tariff barrier, there is the converse inability to use cheap Chinese labor/goods to offset inflation due to currency devaluation.

Thus I see the threat to 'carbon tax' Chinese imports as no more strong than the threat of rising inflation causing regime change in currency account deficit nations.

Ultimately the CAD nations must devaluate in order to lighten their existing and ongoing debt load - this overrides any other consideration IMO. The carbon tax/trade barrier is just a fillip to certain constituencies as well as a nice excuse to tax domestic populations more: Look we're saving American/French/German jobs by taxing Chinese imports! (ignore the higher taxes you yourself are paying. The higher prices are because the products a 'green'. etc etc.)

The reality is also that China has a much lower standard of living and can stand it. Even a maintenance of the existing standard is survivable though at least some growth would be good.

On the other hand CAD nations are facing significant standard of living erosion. This - especially in elective governments - is political suicide.

[GRG55]

Re: China shows WHO is boss?

I think the view that China is just as vulnerable as the US is true, but the level of vulnerability is different.

For every threat of carbon taxation used as import tariff barrier, there is the converse inability to use cheap Chinese labor/goods to offset inflation due to currency devaluation.

Thus I see the threat to 'carbon tax' Chinese imports as no more strong than the threat of rising inflation causing regime change in currency account deficit nations.

Ultimately the CAD nations must devaluate in order to lighten their existing and ongoing debt load - this overrides any other consideration IMO. The carbon tax/trade barrier is just a fillip to certain constituencies as well as a nice excuse to tax domestic populations more: Look we're saving American/French/German jobs by taxing Chinese imports! (ignore the higher taxes you yourself are paying. The higher prices are because the products a 'green'. etc etc.)

The reality is also that China has a much lower standard of living and can stand it. Even a maintenance of the existing standard is survivable though at least some growth would be good.

On the other hand CAD nations are facing significant standard of living erosion. This - especially in elective governments - is political suicide.

In this multi-year deleveraging world I see absolutely no desire to avoid inflation...in fact I see exactly the opposite...an increasingly desperate effort on the part of most governments and central banks to reflate more and more aggressively.

[touchring]

Re: China shows WHO is boss?

The railway lines do not imply that China won't go through a bust. Booms and busts are part of capitalism. China as a country has gone through that process hundreds of times and probably had more than a hundred Great Depressions.

Some excerpts from Wikipedia:

http://en.wikipedia.org/wiki/Economy_of_the_Han_Dynasty

The Han Dynasty (206 BC – 220 AD) of ancient China experienced contrasting periods of economic prosperity and decline.

The Han economy was defined by significant population growth, increasing urbanization, unprecedented growth of industry and trade, and government experimentation with nationalization. In this era, the levels of minting and circulation of coin currency grew significantly, forming the foundation of a stable monetary system. The Silk Road facilitated the establishment of trade and tributary exchanges with foreign countries across Eurasia, many of which were previously unknown to the people of ancient China. The imperial capitals of both Western Han (Chang'an) and Eastern Han (Luoyang) were among the largest cities in the world at the time, in both population and area.

http://en.wikipedia.org/wiki/Economy...e_Song_Dynasty

The Song Dynasty (960–1279) of China was a period of Chinese history marked by commercial expansion, economic prosperity, and revolutionary new economic concepts. Private trade grew and a market economy began to link the coastal provinces with the interior. The enormous population growth rate from increased agricultural cultivation in the 10th to 11th centuries doubled China's overall population, which rose above 100 million people (compared to the earlier Tang, with some 50 million people).[1]

Beyond domestic profits made in China, merchants engaged in overseas trade by investing money in trading vessels that docked at foreign ports as far away as East Africa. The world's first development of the banknote, or printed paper money (see Jiaozi, Huizi), was established on a massive scale. Combined with a unified tax system and efficient trade routes by road and canal, this meant the development of a true nationwide market system in China.

During the Song Dynasty, the merchant class became more sophisticated, well-respected and organized than in earlier periods of China. Their accumulated wealth often rivaled that of the scholar-officials who administered the affairs of government. For their organizational skills, Ebrey, Walthall, and Palais state that Song Dynasty merchants:

...set up partnerships and joint stock companies, with a separation of owners (shareholders) and managers. In the large cities, merchants were organized into guilds according to the type of product sold; they periodically set prices and arranged sales from wholesalers to shop owners. When the government requisitioned goods or assessed taxes, it dealt with the guild heads.[14]

Shen Kuo (1031–1095), a minister of finance, was of the same opinion; in his understanding of the velocity of circulation, he stated in 1077:

The utility of money derives from circulation and loan-making. A village of ten households may have 100,000 coins. If the cash is stored in the household of one individual, even after a century, the sum remains 100,000. If the coins are circulated through business transactions so that every individual of the ten households can enjoy the utility of the 100,000 coins, then the utility will amount to that of 1,000,000 cash. If circulation continues without stop, the utility of the cash will be beyond enumeration.[34]

Foreign travelers to China often made remarks on the economic strength of the country. The later Muslim Moroccan Berber traveler Ibn Batutta (1304–1377) wrote about many of his travel experiences in places across the Eurasian world, including China at the farthest eastern extremity. After describing lavish Chinese ships holding palatial cabins and saloons, along with the life of Chinese ship crews and captains, Batutta wrote:

Among the inhabitants of China there are those who own numerous ships, on which they send their agents to foreign places. For nowhere in the world are there to be found people richer than the Chinese.[36]

The world's first paper money
Huizi currency currency, issued in 1160.

The central government soon observed the economic advantages of printing paper money, issuing a monopoly right of several of the deposit shops to the issuance of these certificates of deposit.[1] By the early 12th century, the amount of banknotes issued in a single year amounted to an annual rate of 26 million strings of cash coins.[57] By the 1120s the central government officially stepped in and produced their own state-issued paper money (using woodblock printing).[1] Even before this point, the Song government was amassing large amounts of paper tribute. It was recorded that each year before 1101 AD, the prefecture of Xinan (modern Xi-xian, Anhui) alone would send 1,500,000 sheets of paper in seven different varieties to the capital at Kaifeng.[67] In that year of 1101, the Emperor Huizong of Song decided to lessen the amount of paper taken in the tribute quota, because it was causing detrimental effects and creating heavy burdens on the people of the region.[68] However, the government still needed masses of paper product for the exchange certificates and the state's new issuing of paper money. For the printing of paper money alone, the Song court established several government-run factories in the cities of Huizhou, Chengdu, Hangzhou, and Anqi.[68] The size of the workforce employed in these paper money factories were quite large, as it was recorded in 1175 AD that the factory at Hangzhou alone employed more than a thousand workers a day.[68] However, the government issues of paper money were not yet nationwide standards of currency at that point; issues of banknotes were limited to regional zones of the empire, and were valid for use only in a designated and temporary limit of 3-year's time.[57][60] The geographic limitation changed between the years 1265 and 1274, when the late Southern Song government finally produced a nationwide standard currency of paper money, once its widespread circulation was backed by gold or silver.[57] The range of varying values for these banknotes was perhaps from one string of cash to one hundred at the most.[57] Ever since 1107, the government printed money in no less than six ink colors and printed notes with intricate designs and sometimes even with mixture of unique fiber in the paper to avoid counterfeiting.

Foreign Trade

The Song Dynasty actively promoted overseas trade. About fifty countries carried out overseas trade with the Song Dynasty, among them Ceylon, Langkasuka, Mait, Samboja, Borneo, Kelantan, Champa, Chenla, Bengtrao, Java, India, Calicut, Lambri, Bengal, Kurum, Gujara, Mecca, Misr, Bagdad, Iraq, Aman, Almoravid dynasty, Sicily, Morroco,Tanzania, Somalia, Ryukyu, Korea, and Japan.[80] Pearls, ivory, rhinocero horns, frankincense, agalloch eaglewood, coral, agate, hawksbill turtle shell, gardenia, and rose were imported from the Arabs and Samboja, herbal medicine from Java, costusroot from Foloan (Kuala Sungai Berang) cotton cloth, cotton yarn from Mait, and ginseng, silver, copper, and quick silver from Korea.[81]

http://en.wikipedia.org/wiki/Economy...e_Ming_Dynasty

The economy of the Ming Dynasty (1368-1662) of China was the largest in the world during that period. It is regarded as one of China's three golden ages (the other two being the Han and Tang periods). The period was marked by the increasing political influence of the merchants, the gradual weakening of imperial rule, and technological advances. Many Chinese scholars believe that the Ming economy displayed capitalistic characteristics, similar to the earlier Song.[1]

Coinage
Despite issuing paper money in the early part of the dynasty, the Ming ended up using silver as a means of exchange in their economy; this is due to the massive inflow of silver into the Ming economy throughout the dynasty. The amount of silver used by the Ming economy was extraordinary; the Zheng clan, which was a major clan of merchants in the late Ming, regularly engaged in transactions of several million taels, at a time in which English traders considered tens of thousands of pounds an extraordinary fortune. However, both coin and paper money were used throughout the Ming dynasty. Ming demand for silver was such that at one point most of the output of the mines of Peru went straight to Ming China. [1]

Manufactures

The Ming manufacturing industry was more varied and advanced than that of the Song. Ming iron production surpassed all previous dynasties, with annual production of 195,000 tons a year, compared to 125,000 tons during the height of the Song Dynasty (960-1279) and 180,000 tons for the whole of 18th-century Europe. The Ming charged a 1/15 tax on all iron production.

Privatization

Another key feature of the Ming manufacturing industry was privatization. Unlike the Song, in which state-owned enterprises were dominant, the Ming quickly privatized their manufacturing industry. The result was a boom in production. In addition to the iron, the coal, steel, pottery, and salt industries, which had been state-owned since the Tang, were privatized. By the middle of the Ming Dynasty, powerful groups of wealthy merchants had replaced the state as the dominant movers behind Chinese industry.[1]

Emergence of wage labor

The Ming government abolished the mandatory forced labor by peasants used in early dynasties and replaced it with wage labor. A new class of wage laborers sprung up where none had existed before. In Jingde alone, it was reported that there were no less than 300 pottery factories, all operated by wage laborers[2].

Trade and investment

In the early Ming, after the devastation of the war which expelled the Mongols, the Hongwu Emperor imposed severe restrictions on trade. Believing that agriculture was the basis of the economy, Hongwu favoured that industry over all else, including that of merchants. However, after his death, most of his policies were reversed by his successors. By the late Ming, the state was losing power to the very merchants which Hongwu had wanted to restrict.

The Ming dynasty also engaged in a thriving trade with both Europe and Japan. The amount of silver flowing into the Ming dynasty was estimated by Joseph Needham at 300 million taels, which is equivalent to more than 190 billion dollars in today's money. In addition to silver, the Ming also imported many European firearms, in order to ensure the modernity of their weapons.[1]

Trade and commerce thrived in this liberalized economy, and was aided by the construction of canals, roads, and bridges by the Ming government. The Ming saw the rise of several merchant clans such as the Huai and Jin clans, who disposed of large amounts of wealth. The gentry and merchant classes started to fuse, and the merchants gained power at the expense of the state. Some merchants were reputed to have a treasure of 30 million taels.

Overseas Trade

The Ming engaged in much overseas trade. A respected sinologist, Joseph Needham believed that the amount of silver flowing into Ming China through trade amounted upwards to 300 million taels of silver. To put this into perspective, the Ming government's entire annual revenues were only 27 million taels, and the Ming had 31% of the world's GDP.[1]

For comparison, the US economy today is about 20% of world GDP.

http://en.wikipedia.org/wiki/Choe_Bu

Choe Bu (1454–1504) was a Korean official during the early Joseon Dynasty (1392–1910). He is best known for the account of his shipwrecked travels in China from February to July 1488, during the Ming Dynasty (1368–1644).

Choe was impressed with the sights of Hangzhou, writing:

It truly seems a different world, as people say ... Houses stand in solid rows, and the gowns of the crowds seem like screens. The markets pile up gold and silver; the people amass beautiful clothes and ornaments. Foreign ships stand as thick as

Choe Bu observed that, despite Hangzhou's greatness, it was no competition for Suzhou, while the former was merely a supplemental commercial feeder that served to enrich the Jiangnan region.[21] After visiting Suzhou on March 28, Choe Bu remarked on this economic hub of the southeast:

Shops and markets one after another lined both river banks, and merchant junks were crowded together. It was well called an urban center of the southeast ... All the treasures of land and sea, such as thin silks, gauzes, gold, silver, jewels, crafts, arts, and rich and great merchants are there [and] ... merchantmen and junks from Henan, Hebei, and Fujian gather like clouds.[22][23][24][25]

He described the bustling cities of Linqing and Dezhou in the northern province of Shandong, although he stated that the merchant activity and sizes of these two cities did not match the grandeur of Hangzhou and Suzhou in the south.[26] In fact, Choe remarked that only these two and a handful of other cities in northern China matched the prosperity of southern China, stating that the north was poverty-stricken and underdeveloped compared with the south.[26][6][7] He also believed that southern Chinese displayed a finer degree of cultivation, social order, literacy, and industriousness, while northern Chinese seemed quarrelsome if not criminal.[6][7] Choe wrote that while people of the south were well-dressed and had plenty to spare, people in the north often lacked supplies of everything and feared bandits.[7] Brook writes:

Choe found that people all across China, and in nearly every social strata, participated in business affairs.[15] He wrote that even Chinese scholar officials—who were traditionally scorned if they took part in any private business venture—[28] would "carry balances in their own sleeves and will analyze a profit for pennies".[15]

Choe's comments are valuable to historians seeking to better understand Chinese culture and civilization in the 15th century; for example, historians' seeking for clues about how widespread literacy was in China, Choe's comment "even village children, ferrymen, and sailors" were able to read serves as a valuable piece of evidence.[37][38] Moreover, Choe asserted that they could describe for him the mountains, rivers, old ruins, and other places in their regions, along with the significance of dynastic changes.

[touchring]

Re: China shows WHO is boss?

In due course some good might come from China's extravagant high speed rail expenditures, in the same way that some good will probably come from Dubai's oversized, ultra-modern container port infrastructure...but I seriously doubt either makes any economic sense for the type of economy these nations actually have

I've traveled around China about a dozen times over the last 15 years or so, I've not been to Dubai, but coming from Singapore, I can imagine what Dubai has experienced in recent years. It would be somewhat similar to Singapore, but at many times the scale, relative to the size of the native population.

To compare Dubai with China apple for apple would be inaccurate. There is some similarity but it is definitely not entirely the same.

Firstly, Dubai depends almost entirely on foreign capital. The Chinese bubble is largely internal investment with some investments from Asian countries - the West is too fearful of Chinese laws to invest in China, and besides there are huge restrictions. Take for example Beijing, you must have a work permit in order to buy a flat, and you are limited to one unit if I'm not mistaken.

Secondly, the overbuilding in China is not as severe as what you have in Dubai, at least not for the whole of China. In some cities like Shanghai, there is hardly land left for you to build. Land in Shanghai city center is good as gold.

Thirdly, the building in China is largely laissez faire, there are no single or group of sovereign funds or state companies dominating the industry. There's no risk of the whole industry going down when one state company defaults.

Four, the real demand for Chinese flats is largely internal, not expats from India or Europe that will flee when things go bad.

Notwithstanding, the Chinese real estate bubble will burst and the fallout will be hard. But it will bounce back fairly quickly - definitely much quicker than Dubai or Florida.

[GRG55]

Re: China shows WHO is boss?

I've traveled around China about a dozen times over the last 15 years or so, I've not been to Dubai, but coming from Singapore, I can imagine what Dubai has experienced in recent years. It would be somewhat similar to Singapore, but at many times the scale, relative to the size of the native population.

To compare Dubai with China apple for apple would be inaccurate. There is some similarity but it is definitely not entirely the same.

Firstly, Dubai depends almost entirely on foreign capital. The Chinese bubble is largely internal investment with some investments from Asian countries - the West is too fearful of Chinese laws to invest in China, and besides there are huge restrictions. Take for example Beijing, you must have a work permit in order to buy a flat, and you are limited to one unit if I'm not mistaken.

Secondly, the overbuilding in China is not as severe as what you have in Dubai, at least not for the whole of China. In some cities like Shanghai, there is hardly land left for you to build. Land in Shanghai city center is good as gold.

Thirdly, the building in China is largely laissez faire, there are no single or group of sovereign funds or state companies dominating the industry. There's no risk of the whole industry going down when one state company defaults.

Four, the real demand for Chinese flats is largely internal, not expats from India or Europe that will flee when things go bad.

Notwithstanding, the Chinese real estate bubble will burst and the fallout will be hard. But it will bounce back fairly quickly - definitely much quicker than Dubai or Florida.

I have always appreciated your first-hand observations and experiences from SE Asia that you share with us touchring.

The analogy with Dubai was not to imply that they are identical, just that there appear to be an increasing number of "Dubai-like" elements to the emerging China story...and that makes me cautious to accept the breathlessly positive prognostications about the near to medium term in China. So we are in complete agreement that an "apple to apple" comparison is inaccurate.


Nevertheless, let me point out that contrary to the prevailing view, the property market in Dubai [and in the rest of the GCC] was also largely "internal". It was a rigged game open only to a few select players among the Ruling Families and favoured Merchant Families...perhaps 5% of the entire population of the emirate [nationals and expats combined] actually participated [I am excluding all the bankers, lawyers, architects and engineers that generated fees along the way, because their participation never involved any ownership]. Here's one scenario of how the game was played:

• Ruling Family member secures "land rights" to a section of shallow, inshore water on favourable terms [since The Family owns it all to start with ];
• Said Ruling Family member's real estate development company either direct funds [often in partnership with an Islamic investment bank] or syndicates the dredging to convert the plot into usable land fill, and the creation of an extravagant development plan that includes the usual mix of luxury villas, flats, townhouses, five-star hotels, commercial and retail spaces. The size of the largest of these developments simply dwarfs anything I have ever seen in any other real estate market anywhere in the world...coastal China perhaps is the one exception [?].
• The development plan is carved into packages that are sold off to individual construction and development companies [one company will bid on the right to build 100 villas, another on the rights to build a hotel and shopping mall, etc.]. Generally these new players have to finance this activity and build in accordance to the original plan, while marketing continues to be done by the original project proponent...who now has little to no skin in the game [it's great work if you can get it ;)].
• Although externally a lot of fuss was made about selling to the individual expatriate, the marketing campaigns actually targetted the wealthy locals [Saudis, Kuwaitis, Emiratis] and institutions who, at the height of the insanity, were buying entire office towers and blocks of villas off-plan. This is the reason that many of these huge projects were "sold out" within days of the sales office opening for business. Yes, some of the flats were flogged to expat Emirates Air flight attendants, but that was always a pretty small market...:rolleyes: [one of the main reasons most expats generally steered clear is that expats tend to be mobile and there has never been a liquid secondary market for residential properties in any of the GCC countries, Dubai included].
• In the case of Dubai the extravagant marketing campaigns abroad were intended to help promote "Dubai Inc." as a holiday and business destination, not necessarily to attract any significant number of Northern European property buyers [an example would be the long running pictorial adverts for "The World" at London's Heathrow airport].
• And today we have a region of stranded assets - early stage developments still in the hands of the original project proponents that have run out of funds [like Dubai World's property subsidiaries], funded construction that's now in the hands of the investment banks [which are being pushed by the local Central Banks to raise new capital and write down these assets within 2 fiscal years], and private family office portfolios and local pension plans stuffed with unsellable property and no appetite to acquire any more...which backed up the entire chain. And yes, I know an Emirates flight attendant who along with her ex-boyfriend own two flats on Shaikh Zayed Road they would love to sell...in case you know anyone interested.

Unfortunately much of what I hear about China suggests similarities, including the dominance of State entities in the property development game [Yes, they ALL CAN get into trouble at the same time if/when the market rolls over]. And I don't think we should fool ourselves into thinking it's not foreign capital that is driving the China bubble today. It may be PBOC sterilized imported Dollars instead of FDI, but it's come from abroad make no mistake.

Finally, I have no idea if the following report from this morning's Bloomberg is an accurate portrayal of what is really going on in China, but if it is...the highlighted parallels with what happened in the GCC are noteworthy.

China Property Bubble May Lead to U.S.-Style Real Estate Slump

Dec. 31 (Bloomberg) -- Li Nan has real estate fever. A 27- year-old steel trader at China Minmetals, a state-owned commodities company, Li lives with his parents in a cramped 700- square-foot apartment in west Beijing.

Li originally planned to buy his own place when he got married...

...Act now, he figures, or live with Mom and Dad forever. In the last 12 months such apartments have doubled or tripled in price, to about $400 per square foot.

“This year they’ll be even higher,” says Li in the Jan. 11 issue of Bloomberg BusinessWeek.

Millions of Chinese are pursuing property with a zeal once typical of house-happy Americans. Some Chinese are plunking down wads of cash for homes. Others are taking out mortgages at record levels. Developers are snapping up land for luxury high- rises and villas, and the banks are eagerly funding them. Some local officials are even building towns from scratch in the desert, certain that demand won’t flag. And if families can swing it, they buy two apartments: one to live in, one to flip when prices jump further.

And jump they have. In Shanghai, prices for high-end real estate were up 54 percent through September, to $500 per square foot. In November alone, housing prices in 70 major cities rose 5.7 percent, while housing starts nationwide rose a staggering 194 percent...

...Although parallels with other bubble markets, the China bubble is not quite so easy to understand. In some places, demand for upper middle class housing is so hot it can’t be satisfied. In others, speculators keep driving up prices for land, luxury apartments, and villas even though local rents are actually dropping because tenants are scarce. What’s clear is that the bubble is inflating at the rich end, while little low- cost housing gets built for middle and low-income Chinese [which is exactly what happened in the GCC]...Koyo Ozeki, an analyst at U.S. investment manager Pimco, estimates that only 10 percent of residential sales in China are for the mass market. Developers find the margins in high-end housing much fatter than returns from building ordinary homes...

...How did this bubble get going? Low interest rates, official encouragement of bank lending, and then Beijing’s half-trillion- dollar stimulus plan all made funds readily available. City and provincial governments have been gladly cooperating with developers: Economists estimate that half of all local government revenue comes from selling state-owned land...

...Companies in the chemical, steel, textile, and shoe industries have started up property divisions too: The chance of a quick return is much higher than in their primary business...

...The second danger is that Beijing will try, and fail, to let the air out of the bubble...The government is reluctant to crack down too hard because construction, steel, cement, furniture, and other sectors are directly tied to growth in real estate. In November, for example, retail sales of furniture and construction materials jumped more than 40 percent. At the December Central Economic Work Conference, an annual policy-setting confab, officials said real estate would continue to be a key driver of growth [Can't live with it, can't live without it ]...

...no one knows for sure how much of the more than $1.3 trillion in last year’s bank loans funded real estate ventures...Analysts figure a substantial portion of that sum went into property, much of it indirectly. Banks often lend to state-owned companies for industrial purposes. But the state companies can then divert the funds to their own real estate businesses or relend the money to an outside developer...

...For now, the party continues...

[c1ue]

Re: China shows WHO is boss?

In this multi-year deleveraging world I see absolutely no desire to avoid inflation...in fact I see exactly the opposite...an increasingly desperate effort on the part of most governments and central banks to reflate more and more aggressively.

I fear you still fail to understand my point: a debasement of currencies and the resulting inflation can be at least partly offset in the public's perception by an accompanying fall in goods prices.

After all, if the prices of everything go up in an obvious fashion, even the most strident media campaign would be hard pressed to assert otherwise.

This dynamic is exactly what underlay the 'strong US dollar' policy of the past 3 administrations and at the same time allowed China to in turn undercut the 'strong US dollar'.

[GRG55]

Re: China shows WHO is boss?

I fear you still fail to understand my point: a debasement of currencies and the resulting inflation can be at least partly offset in the public's perception by an accompanying fall in goods prices.

After all, if the prices of everything go up in an obvious fashion, even the most strident media campaign would be hard pressed to assert otherwise.

This dynamic is exactly what underlay the 'strong US dollar' policy of the past 3 administrations and at the same time allowed China to in turn undercut the 'strong US dollar'.

I have no doubt that officials will continue to use such techniques as "massaged" CPI figures to show how inflation is "contained" and inflation expectations are "well anchored". Taken to the extreme these sorts of statistics can, and have, been used to instill the "fear of deflation" in the general population and politicians, which serves a useful cover for aggressive reflation policy.

However, my point is that unlike the "past 3 administrations" the USA, China and the rest of the world have never faced the level of de-leveraging currently underway [the combination of both amplitude and duration]. That is an entirely new dynamic, with which the current authorities worldwide have ZERO experience.

Although we may not be anywhere near the end of this trend, the salad days of continuous declining traded goods prices are behind us...[even after adjusting for quality differentials, next years car is going to cost you more than this years]...

[touchring]

Re: China shows WHO is boss?

By now, it is apparent that China wouldn't care if the real estate bubble bursts and if its people and banks get caught - if people get caught it their own business. All China cares is that the yuan remains at parity to the dollar, and Chinese dollar holdings are safe. For as as long as the yuan is at parity to the dollar, the dollar will be worth some money and China can swap dollar for commodities. The US can forget about devaluing itself out of the job recession. China won't allow that to happen, not unless it swapped all dollars for commodities.

...The second danger is that Beijing will try, and fail, to let the air out of the bubble...The government is reluctant to crack down too hard because construction, steel, cement, furniture, and other sectors are directly tied to growth in real estate. In November, for example, retail sales of furniture and construction materials jumped more than 40 percent. At the December Central Economic Work Conference, an annual policy-setting confab, officials said real estate would continue to be a key driver of growth [Can't live with it, can't live without it ]...

[Rajiv]

Re: China shows WHO is boss?

There was an interesting article by Charles Hugh Smith -Will China's Real Estate Bubble Pop the Global "Recovery"?

China's real estate market, built almost entirely on speculative demand, is a reflated bubble. When it pops, it could trigger a global rout in both speculative equities and real estate.

My ever-insightful blogging colleague Maoxian (who blogs from Beijing) kindly gave me permission to reprint this chart:


Click on chart to go to Maoxian's post on this topic

The chart plots a real estate-based stock index (red line) and an index of property prices (white line). Clearly, the stock index leads the property index; the stock index topped out a few months before property prices plummeted.

Rather ominously for China real estate speculators, the stock index topped out in July 2009 and is carving out a lower high.

China's real estate market is different from the North American market in several fundamental ways.

1. As correspondent Mike D. (writing from Harbin) recently reminded me, home ownership in China (85%) is much higher than it is in the U.S. (69% and falling). The reason is simple: the Central Government transferred ownership of most occupied dwellings to their occupants a generation ago, when the leadership chose a path of State-controlled "command capitalism with Chinese features."

Occupants paid a small sum for their home, and thus they were given instant equity.

The Central State retains ownership of all land in China; everyone gets a 99-year lease.

2. As Mike D. noted, such a gigantic transfer of equity and property from a Central State to its citizenry is unprecedented, and thus any attempt to forecast the long-term consequences has little historic precedent for guidance.

3. As a result of this transfer of ownership, most Chinese families had a very low-cost ownership stake. This enabled families with multiple wage earners and/or middle-class incomes to save (by Western standards) an extraordinarily large percentage of their net income.

4. Until recently, most Chinese paid no income tax, and even now, only high-income citizens are expected to pay (how many actually do is unknown/questionable).

5. There are no property taxes in China, so the cost of owning an empty house or condo is very low. Our friends own a spacious condo in Suzhou, about 90 minutes west of Shanghai, and their monthly condo maintenance fees are around $20 per month--a far cry from the $300 to $400/month (and up) paid by U.S. condo owners.

6. Many Chinese lost money in the insane Chinese stock market bubble which popped in 2007, an experience that was akin to the Nasdaq dot-com bubble and decimation in the early 2000s. Since stock ownership was restricted for decades, this "first taste" reinforced the view that stocks were highly risky and undoubtedly manipulated. Real estate is thus widely viewed as a "safe" investment.

7. Even though real estate cratered along with stocks in the global financial meltdown, Central Government stimulus and "quantitative easing" (flooding the country with easy to borrow money) has engineered a rebound, fueling a complacent sense that "real estate never goes down."

8. The re-sale market in China is very thin; there are few sales of "used" (existing) homes because the supply of brand-new homes is vast. Also, since people buy condos as long-term investments akin to savings, there is little "flipping" for short-term gain.

Add these factors up and you get exactly what you see everywhere in China: a massive over-building of luxury dwellings and households owning multiple high-end dwellings as investments. Many (if not most) are empty because the costs of ownership are so low and finding renters is either not "worth the hassle" or difficult due to the huge oversupply of luxury units and feeble demand from high-income renters.

Contrary to received wisdom, there is little unmet "organic" demand for housing in China, especially the luxury market.
.
.
.
.
.