Sunday, October 10, 2010

China: Is a Housing Bubble, a Fragile Economy, and an Agricultural 'Doomsday' Scenario Possible?

From Rick Bradner, at the Oil and Gas Bulletin.....

I’ll preface my remarks by stating my bias up front. I love China, the Chinese people, the food, the chaos, the confusion, the expectations, and all the contradictions. I’ve traveled there more than 10 times in the last 20+ years and have just returned from a 5 week visit. I lived and worked in Kunming from 1997-1999.

First, a brief recap on how we got here:
China has been in a more or less constant state of upheaval for the last 100 years beginning in 1912 when a revolutionary military uprising led to the provisional government of the Republic of China being formed in Nanjing by Sun Yat-sen. This republican government was fragmented and fairly powerless. Following the death of Sun in 1925, China descended into a more or less constant state of civil unrest including the Sino-Japanese War (1937–1945) ending in 1949 with the defeat of Chiang Kai-shek by the Communist forces of Mao Zedong. A range of policies aimed at social engineering such as “ the 100 Flowers Campaign”, “the Great Leap Forward” and “the Great Sparrow Campaign” added greatly to the human toll wrought by the drought of 1959-60. It was estimated that at least 25 million and possibly as many as 35 million Chinese died due to famine.

This was followed in short order by “The Cultural Revolution” which officially ran from 1966-1976 and ended with Mao’s death. Among other things, The Cultural Revolution brought the education system to a virtual standstill, with many teachers and professors being sent for “re-education” and this is still having an enormous impact on Chinese development policy.
The last major “revolution” was far more positive, when Dèng Xiaopíng came to power and opened up China to capitalism 30 years ago. The time since has been the longest period of stability the country has enjoyed in at least 150 years.

Is that Swan Black?
Education & the new leaders – The Cultural Revolution is the pivotal event in recent Chinese history. Economically, a major transition the country is going through as a result of the Cultural Revolution is replacing that generation’s relatively uneducated workforce with the “post-revs”. All else aside, this should deliver a significant move in productivity.
Politically, the next group scheduled to assume leadership of China beginning in 2012 will include the first of the post-Cultural Revolution generation to receive what would be considered a modern education.

It’s an open question as to what direction they will take the country. As the first computer generation, will they be open to a more liberal policy on internet access, or having never experienced the ravages of war, will they be less adverse to military adventures? Japan, Notwithstanding the enormous recent investments Japan has made, nor official denials, the Chinese neither like nor trust Japan. The memories of the atrocities of the Sino-Japanese War have not diminished. On my recent visit I saw frequent references to and recounting of Japan’s brutality in China. A military conflict between the nations within the next 15 years is a real (if small) possibility.

China’s bubble All protestations to the contrary, I believe that China is in the midst of a housing bubble approaching the levels of those in the U.S.pre-2008. Currently, there are NO property taxes in China. Given the limited number of available investment options, this has resulted in a large number of housing units being built and left vacant. I’ve heard estimates for different cities ranging from 30%-55%. There has been discussion recently of introducing a property tax.

It makes a lot of sense to do so as it would take a bit of air out of the “bubble” in prices and generate some revenue for hard-pressed municipalities who have to supply services, but many of the developers are government owned, carry a large inventory of unsold units, and have a substantial interest in stalling this idea for as long as possible. If a property tax comes about it will be quite low initially but the threat of escalation could take a lot of new construction out of the equation. This could seriously impact the commodities markets.

“A disaster for the world” Premier Wen Jiabao said Wednesday (Oct.6) that a rapid shift in the value of the yuan would be “a disaster for the world” I wouldn’t argue that the RMB isn’t over valued, but given that it’s pretty much the only major economy that’s reasonably stable at the moment, this is probably not the best time to kick the legs out from under their chair. The Chinese economy is really only 30 years old and is still pretty fragile; anything but a gradual move could derail it and the global recovery. “If the yuan isn’t stable, it will bring disaster to China and the world,” the Premier warned. I don’t think he’s too far off the mark.
China’s “Great Depression”? Something I’ve been thinking about a lot lately and that is admittedly pretty far off the map, is the possibility of a “Black Swan” agriculture event in China.

In 2008 I often countered the contention that the U.S. was then headed for another “Great Depression” by pointing out that in 1930 20% of the U.S. work force were farm workers (2% today) and that the “Dust Bowl” drought of the ‘30’s generated a 15%+ unemployment rate all by itself. This on the heels of the 1929 economic crash, created the “Great Depression”; a true “Black Swan”event. Official numbers suggest that farming in China still accounts for 800 million (61%) of it’s 1.3 billion people. Imagine for a moment the chain of events that might follow a repeat of the 1958-1960 drought.

For anyone interested in a daily update on the view from Beijing, there is an English language version of CCTV

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