A Chinese Ghost Town, Newly Built for People That Never Came

China is the dragon of the east, an economic powerhouse on a meteoric rise. In a world where most countries struggle to achieve a mere 2% rise in GDP China is disappointed to see 7.  Of course in the land of the Orient all is not what it seems.

When the western world was brought to its knees by the banking crisis China seemed to survive only slightly scathed. The communist appeared to be showing the birthplaces of capitalism how the game should be played. The easy credit and social lending that got Europe and the U.S. into so much trouble was no where to be seen in the land of Mao. This is not to say China was not suffering, with trade down it was facing recession too but its financial fundamentals were in much better shape. In fact it seemed on the surface to blow past its short term woes.

What appeared to be shrewd economic planning on China’s part has evaporated into a financial debacle. It seems the eastern giant’s magic economic elixir was nothing more than a well used vile of poison. To combat the results of the slowing world economy it started down the exact same road that had created the crisis in the first place. Cheap reckless credit to municipalities, reminiscent of the European Union’s lending to its member states, and a no holds barred real estate lending program gave the illusion of prosperity. The result was China created a housing bubble and large amounts of unsustainable regional public debt at the same time. It had avoided a small crisis by creating a bigger one.

As a consequence of China’s financial game playing its well oiled economic machine is facing a questionable future. Over extended municipalities and provinces are a ticking time bombs that threaten to swallow the Chinese financial system whole. This comes on the heals of a burst housing bubble, a bubble that partially collapsed in 2011. Even today whole sections of cities are vacant, ghost town monuments to financial foolishness. The tally of China’s municipal/provincial debt is a whopping 4.8 trillion dollars, or 60% of GDP. It is little wonder jittery credit agencies have downgraded China just like they have many countries in the west.

The fact is many people have been reading the Chinese tea leaves and what they are seeing is not good. Foreign Policy magazine wrote about the coming Chinese apocalypse last summer and similar predictions continued into the fall. The Wall Street journal says the real estate correction, as bad as it was, was not enough to fully correct the market. Others agree, the time frame for another possible collapse is seen as being sometime in 2014.

The rotting foundations of the Chinese economy likely would have already brought down the financial system of a less authoritarian government. Its ability to use covert and coercive methods to manipulate things behind the scenes have likely kept it afloat. Even so economic reality will not be denied.

Like all such happenings, the truth is it did not have to be. The Chinese could of weathered a temporary set back quite well. Some belt tightening here and some delayed plans there would of sufficed to keep it afloat until things straightened out. Unfortunately greed and ego would no let them accept a slow period. Internal politics also played a role. It is hard to keep a people happy when you cannot fulfill the unrealistic expectations you yourself have fostered. Whatever the reasons, the results are an economy whose growth belies its fragility. This is not to say everyone is singing a Chinese swan song but more are everyday.

The real questions is if the Chinese economy collapses what will it mean for China and the rest of the world? Historically economic collapse has been a prelude to a political chaos. Riots have already taken place in a land not known for open rebellion. Would the communist country try to hold itself together with Mao like force? Would a people now accustomed to their small but significant increases in freedom be re-relegated to little more than communist serfs? The reality is the political ramifications are an open question with no real answer and dependent on the size and severity of any collapse. For the world subsequent trade losses would also be a significant blow to an already crippled economy.

Whatever happens one thing is for certain, the Chinese Dragon is looking more like a crow everyday.

“The Conservative Mind”

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Reference Articles

China, the Biggest Housing Bubble in History

Economists: China Mirrors U.S. on Eve of Financial Crisis

5 Signs of the Chinese Economic Apocalypse

Shadows Lengthen (The Danger of Chinese Debt)