Enough bubbles to take a bath

THE MASS MEDIA does its customers a disservice by presenting all the news as if they were covering a sporting event. Yesterday, the English-language print media was filled with stories declaring that China’s economy had at last grown to become the second-largest in the world, surpassing that of Japan. One newspaper said it had “seized” second place (as if economies can seize anything), while another reported that it had captured the “second-place crown”.

Perhaps they should be forgiven, for it’s obvious they know not what they do. Many people, more often on the left than not, view the dynamics of national economies as a zero-sum contest–as if they were spectators at a baseball, football, or hockey game. The economists remind us that the potential for win-win is always there, but few people listen.

I’ll have to edit the part of the About section at the top of the site that refers to Japan as having the world’s second largest economy, now that they’ve been relegated from the equivalent of the Global Economy Premier League. But maybe not today.

As Gordon Chang points out in Forbes , the Chinese property market has become the 500-lb bubble in the middle of the room. When it pops–and you know it will–investors will take a bath so large the media will be inundated with water sports stories 24/7.

Mr. Chang’s piece is subtitled, Why 64.5 million apartments in China use no electricity. He explains:

There were, a few months ago, 64.5 million urban flats that showed no electricity usage for six consecutive months. That’s one in four city apartments, enough housing for some 200 million people. The value of vacant apartments held by speculators is about 15% of gross domestic product. Beijing’s bank stress tests assume a 60% fall in property prices. In fact, official statistics show that property price increases slowed in July.

And there is more bad news for the residential market. Property developers, who are already building 20 million flats, have company. Local governments are constructing another 20-30 million, and other government agencies and companies are also building housing for employees.

In any other country, developers would be slamming on the brakes. In China, they are hitting the accelerator.

In other words, this is not merely a bubble, it is an effervescence of animal spirits. As in all bubbles, the investors act as if the principles of economics no longer apply:

Chinese leaders, in the months ahead, have an impossible task. They must keep powerful property developers happy, not alienate hundreds of millions of Chinese who think they should be able to own their homes, and somehow repeal the law of supply and demand.

A review of history is in order, and here would be a good place to start:

February 1637, Dutch guild of florists announced that futures contracts in the international trade in the tulip bulb futures investing market would be treated as options.

As a result:

Tulip bulbs were being sold from one party to another – many times over – before it was ultimately delivered. Payment for bulbs were not due until they were actually dug from the ground in the summertime. This was termed by the Dutch as windhandel, or “wind trade”.

“Wind trade” sounds as good a term as any for more than 60 million unused and unaffordable apartments with perhaps as many as 40 million more on the way.

But they’ll ignore history. The bubble merchants always do, and the bubble always breaks. This time, one wonders how many people will care which economic squad is at the top of the table in the aftermath of that collapse.

Afterwords:

Other people, including Mr. Chang, have been warning about this bubble for a few months now, as we saw here, in a tale of Potemkin villages, unsold automobiles being parked on lots, and the world’s largest shopping mall that is 99% vacant. That would inflate the size of a national economy, wouldn’t it?