What if the Chinese property bubble goes nuclear? | Hacker News Reader

What if the Chinese property bubble goes nuclear?

independent.ie

34 pointstokenadult77 comments

China can make all the bad investments they want. Unlike any other western country, the government prints their own money debt free and can thus just bail out all the bad loans forever. The boom bust cycle is just an aspect of fractional reserve / debt as money banking. In China the banks operate like partially privatized central planning and are closely directed by the government. There is such extreme cognitive dissonance about this in the western financial press. They just don't get why China doesn't bust. Check out the history of Chinese bail outs and bad loans. It's really quite interesting. Loans and funds and banks and all that fail all the time in China and the government just prints up some money and bails them out if they're politically important. Goof ball investment schemes which are the Chinese equivalent of LTCM fail all the time and everybody loses their money and nobody bats an eye in China, but it doesn't bring the system down.

So, is that system a time bomb for China (and the rest of the world), when one day a financially critical entity doesn't have the right political influence and goes belly up, bringing the house of cards down? Or, is there some reason to think this can go on forever and the political system will keep bailing everyone out?

I think the parent would argue that if the state chose not to support a given entity, it would simply support all the others and so financial collapse could still be averted. Edit: and the state can do that because it's a dictatorship quite willing to print its own money (though the US sadly little different today).

The point here isn't that collapse is inevitable but that if you postpone collapse forever, you'll pay a worse price in price distortion than you'd pay if you let the system collapse.

Perhaps the people in the slums will riot because they're tired of watching the empty ghost cities rot. But given the imbalance here, that possibility might be present universally.

> Perhaps the people in the slums will riot because they're tired of watching the empty ghost cities rot

Despite the recent price inflation of luxury goods, the cost of rice and noodles has remained constant. Workers can still eat for 12rmb (us$2) a day, or 20 if they want vegetables and some pork. The water and power supplies are still reliable, and the governments in China are investing in infrastructure to keep them so. Construction and its flow on industries is what's keeping a large chunk of Chinese workers employed. Whereas there's problems with the luxury property market and other high end industries, the Chinese are carefully watching their social bottom line, such as ensuring cheap food and water for workers. There's still a long way to go in health care, education, and clean air though.

"China can make all the bad investments they want. Unlike any other western country, the government prints their own money debt free and can thus just bail out all the bad loans forever."

wow, it has been a very long time since I read anything remotely as economically ignorant and facile as this statement.

for one, the implication that the Chinese hold US debt and that they in turn are not borrowers is categorically false.

second, the Chinese hold less than 7% of the US debt but if you listen to the general media and commentators it sounds like it is more like 70%. The fact is that the vast majority of the US debt is held by the Federal Reserve.

Credit bubbles, like every other economic bubble is disastrous because it is a gross mis-allocation of resources. The piper shall not be denied. He is a hellish collector that will break every bone in your body if you don't pay. But the thing is, he's a bit unpredictable because you never know exactly when he'll knock on your door to collect. But knock he will.

May I respectfully suggest that before you attempt to comment on something as complex as macroeconomics you take at least a single course in the discipline?

Hmm,

I reread the parent and I still couldn't find a single reference to US debt, which is all you discuss in your post.

I have a degree in economics, the parent's argument seems fine - it might contradict your dogma but it's a fine rendition of current reality.

Also, I'm sure no influential economist would say "In the long run, we're all dead," right?

>I have a degree in economics, the parent's argument seems fine - it might contradict your dogma but it's a fine rendition of current reality.

Except it ignores the fact that if the Chinese government has to print too much money in the face of a major issue, they will cause inflation or hyperinflation which will kill their economy anyway.

here's the implied reference: "Unlike any other western country..."

> May I respectfully suggest that before you attempt to comment on something as complex as macroeconomics you take at least a single course in the discipline?

That's not being respectful. Please stick to the substance.

"May I respectfully suggest that before you attempt to comment on something as complex as macroeconomics you take at least a single course in the discipline?"

Did you?

"Central banks can issue currency, a noninterest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.

That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit. To be sure, if a central bank produces too many, inflation will inexorably rise as will interest rates, and economic activity will inevitably be constrained by the misallocation of resources induced by inflation. If it produces too few, the economy’s expansion also will presumably be constrained by a shortage of the necessary lubricant for transactions. Authorities must struggle continuously to find the proper balance."

Alan Greenspan

what does that prove? beyond buttressing my points and I suppose showing that you are capable of ctrl+c/v?

> Unlike any other western country, the government prints their own money debt free ...

Don't you mean " Like Europe and the US, the government prints their own money debt free ..."

I mean, some players fell in 2008 but most of the debt in the US from the housing crisis was covered by Federal loans to banks that were judged "too big to fail".

And the government is now considerably more insulated from popular pressure than in 2008 so the printing can be done with fuller impunity.

The (apparently) infinitely expanding economy keep catastrophic crisis at bay but distorts the economy and constantly increases the concentration of wealth.

Capitalism's periodic financial crises have been a way to solve perhaps fundamental imbalances. The end of these crises may result, longer term, in more problematic results than otherwise.

>Capitalism's periodic financial crises have been a way to solve perhaps fundamental imbalances.

In theory (if you just leave the crisis to play out) that's what should happen, but in practice it rarely does. Not without the correct political response.

The too-big-to-fails in the US could have been allowed to go bankrupt, but it would have caused a catastrophic economic bottleneck because they have so many counterparties. Following regular insolvency procedures for a small enterprise is complicated enough and can take years as the creditors fight it out among themselves over how to divvy up the remainders of liquidation. Imagine how much of a clusterfuck it would be if half the country was either a creditor or a debtor in some respect. Worse, you wouldn't know if half of the rest of the country was bankrupt or not until you resolved the clusterfuck.

What could have happened was for a temporary nationalization so that the banks could have continued operating in a limited form so as to avoid the bottleneck and give time to tie up the loose ends. This is what Sweden did in the 90s. Their fundamental balance was resolved and they returned swiftly to growth.

When the too-big-to-fails are too politically powerful, however, they just tell the government to make them solvent again and the government promptly does it. Spectacularly bad lending decisions then resume and the power of the heads of those banks increases even more as the cancerous organization grows even larger. The fundamental imbalance has worsened.

That's what always amazed me. Are the banks rich ? When inspecting their balance sheets, assuming (probably wrongly) that they're not hiding anything, I'm richer than they are percentually.

Now what I mean by that is that if you take the ratio of assets + money I own and divide it by the money I owe, and even ignore things like the NPV of my business (unless I close it tonight, it's not zero, right ?), then that ratio is a lot bigger for me than it is for stuff like JP Morgan and so on (for one, it's significantly bigger than 1, somewhere between 1.3 and 1.5, hell if I'm optimistic on my house, maybe even 2, but I'm dreaming. JPM is nowhere near 1). That's how banks' capital works : lots of big loans. The majority of their capital does not even actually come from their shareholders, but from fractional reserve banking. Most banks have values that are below 1, which you would think makes them bankrupt, but I guess I'm seeing that wrong.

Creating a new bank means you effectively get to multiply money, over time, by a factor of 20 to 50, depending, assuming you can make enough loans and deposits. Given that that's how that works, how can that possibly not be a crime ? The more I read about that, the more I'm inclined to go into finance and find a few more of those kinds of transactions I can do.

So can you explain a stupid question to me ? Why can't I borrow the amounts these big banks do in my own company, skim off 2% for myself (they, on average, do about 4%, so 2% seems like a sweet deal), and be richer than Bill Gates (by a very nice factor) ? Sure I can't afford the lawyers necessary for doing that, but ...

While mostly true, I'd add some qualifiers:

* A disturbing amount of that debt is unofficial (as well as uncounted), so won't be getting bailed out.

* This does mean that they've overstated their GDP, possibly by quite a wide margin (by however much unrecognized losses there are on that debt).

Yes, the Chinese government can (maybe) stabilize in the after effects of any property bubble not built on foreign debt, but it's still wasted investment.

Let's take a look at a single bank in China which had a 22.49% bad loan rate in 2002. The government just bought the loans with some electronically printed money and everything just kept chugging along.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=apBRO...

"Bank of China said it had loans and overdrafts of 1.74 trillion yuan ($210.3 billion) at the end of 2002. The bank's bad loan ratio stood at 22.49 percent or 409 billion yuan at the end of last year. The Beijing-based lender in 1999 transferred 352 billion yuan of bad loans to China Orient Asset Management, one of four companies set up by the government to dispose of banks' bad assets, and has disposed of 63.7 billion yuan of those."

Now in the U.S for that bailout to take place the government would have to borrow that money from the Fed and the taxpayer would have to pay it back eventually. In China, nobody borrows it and nobody pays it back.

>Let's take a look at a single bank in China which had a 22.49% bad loan rate in 2002. The government just bought the loans with some electronically printed money and everything just kept chugging along.

THAT part of the economy will keep chugging along, but shadow lending (which is growing at a fantastic rate and now comprises about ~60% of GDP) will not. The government isn't about to buy THEIR loan books. China's shadow banking system could well go nuclear.

>Now in the U.S for that bailout to take place the government would have to borrow that money from the Fed and the taxpayer would have to pay it back eventually. In China, nobody borrows it and nobody pays it back.

In principle the US kind of did the same thing actually:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axKqz...

Bad assets -> liabilities on the public balance sheet -> turned into cash (via QE)

It wasn't quite to the same extreme as China, obviously. That QE cash created also didn't get spent on goods and services, it was just piled into higher yielding investments. The cost of clothes didn't go up, but the NASDAQ and luxury apartments in Manhattan bloody well did.

In China the state banks just kickstart lending again (usually to SOEs) no matter what the losses. This cycle of never ending debt-driven keynesian investment stimulus with no market discipline leads to some of their more spectactular white elephants - like entire mini-cities full of housing where nobody lives, malls where nobody shops and weird theme parks that nobody visits.

Since the people employed to build all these things are still getting paid and spending their paychecks, inflation on goods and services in China is pretty high.

Do you think China has invented a financial perpetual money machine? "Prints their own money debt free and can thus just bail out all the bad loans forever."

"With deflation raising its head in Europe many economists believe that a devaluation of the Chinese currency will hit Europe like an economic broadside – in particular the economies with the most debt (ahem) whose repayment requirements will grow substantially under continued deflation."

I'm pretty good at macro-economics, but I couldn't understand this sentence.

Perhaps it's just a mainstream media attempt to confuse the reader into thinking he/she doesn't really know economics.

But if you think you have a handle on what this sentence means, I would welcome your interpretation. Hit reply below and fire away.

Inflation is good for debtors, because as the value of the currency shrinks, so does the value of your debt, that becomes easier to repay in real term - with inflation, salaries grow nominally, tax revenue grow nominally etc. With deflation, the opposite happens.

Excellent explanation. Thanks.

I concur w/ danmaz74’s statement. But what is the cause and effect relationship of “devaluation of the Chinese currency will hit Europe like an economic broadside “ . Is it less Chinese purchases of European goods?

Aren't there a lot of people living in really bad conditions in China?

Why does the Chinese government not allow these people to move into these empty buildings? Wouldn't any rent being paid be better than the buildings sitting there earning nothing?

It could be done with a lottery or with very clever analysis of who would be best suited for these buildings. (need teachers, butchers, shop keepers/merchants, police, fire-fighters, etc., in the appropriate amounts)

The buildings just sitting there seems like the worst option, doesn't it?

I'm probably very ignorant on the economics of this type of thing but I would be very interested in learning. Does anyone know of a detailed explanation of why these buildings aren't being populated?

There are several Eiffel Tower replicas all over the world, 3 in China, 1 of them is full-scale: http://en.wikipedia.org/wiki/List_of_Eiffel_Tower_replicas

A low rental price on a high-end condo would immediately devalue the condo and any surrounding units - which is worse to the property development people than no rental income at all. They live by essentially propagating high prices for development.

By "property development people" do you mean the hired construction companies or the Chinese government?

Doesn't the Chinese government own these cities and buildings?

"Doesn't the Chinese government own these cities and buildings?"

No. There is private property in China, even if the laws for it isn't as strongly protected as in other countries.

So when do the investors of these properties expect these buildings to start generating income?

Who are these wealthy investors? Couldn't the money be better invested in thousands of ways?

Sorry if these questions are dumb, I'm just really interested in this and can't wrap my head around it.

1. When they decide to sell the property

2. Just like in the U.S., mostly normal "middle class" people with the help of banks

3. In the past decade, not really, real estate has been less volatile and outperformed the Shanghai stock market as an example.

Only because the shanghai stock exchange is mostly insider trading and at least in the property market, you might win without that much guanxi.

These questions aren't dumb. In fact, they stem from a sense of how things should work and asking them lead to exploration to why things aren't as we expected. That's how interesting and awesome things are discovered.

I don't have all the answers as this issue is very complex.

I try to answer parts of it based on what I know (from travels in China and reading articles about China).

First, there really aren't that many ways to invest your money in China. The equity market there is quite nascent and rocky. Fraud happens quite a bit more than the US and there simply aren't that many choices. The finance industry in China is underdeveloped and heavily regulated.

The other issue is that a lot of the money was borrowed from state owned banks when lending was cheap and there was a lot less accountability.

Lastly, China runs a pretty big trade surplus.

So basically the conditions lead to a situation where China was or still is awash in capital and very few places to invest. Real estate really isn't that bad of a choice. China moved 500 million people out of poverty and into the middle class in the last couple of decades. Those people will want places to live. In the long term, real estate in China isn't a bad bet but all that wealth China created need to trickle down to people and get spread among the larger population so they can afford to live in these new places.

Just as a general observation, China's development is very uneven. They are good at what they've focused on but lacking systematically (for example, great highways and roads but no one really enforcing traffic laws so people drive the wrong way all the time). They lack larger systems that make everything work together. Those things can't just happen overnight like China's manufacturing industry did. It will take time for them to realize the problems and find solutions to them.

That makes a lot of sense. Thanks.

That also helps explain why the Chinese are investing so heavily in US companies and real-estate and even in places like Africa.

http://www.brookings.edu/blogs/brookings-now/posts/2014/05/8...

I wonder how difficult it would be (regulation wise) to create hedge-funds in China to help potential investors put their money in more diverse (and relatively safer) investments.

If you can navigate the politics, personalities, culture, and regulations, there is A LOT of money to be made doing that in China. In general, there is a lot of money to be made in China selling the level of sophistication common in the West but doing it in a way that's culturally acceptable to the Chinese. If you're interested, check out James Fallows' "China Airborne". It's about the nascent airline industry in China but it's a bellwether for other nascent sophisticated industries in China. For example, when Boeing needed to get China to follow the same strict practices that the US airlines do, they had to tell the Chinese that they need to meet the "international" standards. While it is true the standards are international, what Boeing didn't mention is that the US pretty much wrote those standards. The Chinese find it a lot easier to accept that it's an international standard everyone has to follow instead of an American standard.

That's not true, you buy and sell limited time span land use grants: http://en.wikipedia.org/wiki/Chinese_property_law

E.g. the government gets it back after some period like 70-90 years. You don't own the land you just buy and sell use of it for time periods.

Nobody is banking on that being true later either, though it is the law of the land now. What is the gov going to do at the 90 year mark, confiscate everyone's home whose ancestors bought 90 years ago? Tricky....

I also never understand why it's seen as so important that real estate prices go up. Statements like "Chinese-based parents who are funding their children's purchases are helping the Irish property recovery." from the article always baffle me. Isn't it great if real estate is cheap? It means people can afford to live there and spend there money on other things and keep the economy going that way. I certainly prefer that over what's going on in SF. I understand that often times people will take out mortgages against there houses if the price goes up and that way money goes back into the economy. But in my opinion that's not real money and will only lead to another 2008.

That's what I'm thinking, even if the property and surrounding properties are devalued now at least they would be creating an economy in the city. They could always raise the prices later. I just don't understand how empty could ever be better unless the cost of maintaining a lived in building was higher than a non-lived in building..

Then again, I see the same thing here in the US. Companies like Cisco buy huge office buildings and leave them empty for years. I suppose it's because building prices are cheap now. I always thought it was because there was a movement for workers to work from home more.

The rent in San Francisco and Marin County is going up too fast. I hate to say this on this board, but I'll be glad when the tech bubble bursts. I have some friends in San Francisco and I'm so glad they are protected by rent control. Marin County only has rent control in San Anselmo. If you live in San Anselmo and you live in a detached "Mother in-law" unit you have rent control. As to Landlords, who consistently raise rents to whatever the market bares--don't complain when your Tenants really don't give a dam about your property, or you? Your tenants know the difference between gouging, and reasonable rent increases. Being a Landlord is a little different than making money in the stock market. That person who has carved out a litte life in your community, and home--sometimes as to pass you in the Hallway in order to get to the bathroom? "But, I'm just doing what Everyone else is doing?" Sometimes--relationships are more important than maximizing capital, maybe that's how the term mother in-law unit came to fruition? "Hell, throw her out--I hear it's cheap to live in Chicago? By Mom!" I just don't get it I guess?

SF could fix pricing without rent control by making more units available. New buildings being made, only going to 6 floors -- that's silly. Or vastly improve public transit so that it's seamless to live further away.

Complaining about people charging as much rent as the market will hold is as silly as being upset McDonald's is charging as much as they can. It's like, to be expected. Otherwise, you're effectively asking the landlord to gift you money.

Rent control is what makes the cost of rent go up fast. You get this right?

If you're a landlord and afraid that rent control will cheat you someday, you front-load the difference by setting rent at an insane rate before anyone moves in. And since all the other landlords are doing the same, you don't have to worry about anyone undercutting you.

The English system seems to work.

Landlords can charge what they like. But there are Local Housing Allowance rates. These are used by local councils - the organisations who pay Housing Benefits - to set maximums for different styles of properties. (HB is, like the rest of the benefit system weirdly complex but at least LHAs mean someone can understand the maximum possible rent they might be entitled to.)

So a person wanting to claim housing benefits has to seek a property priced according to the LHA rates. Since this is a reasonable portion of the rental market people not claiming that benefit also have those cheaper properties available; or they can pay whatever they like for more expensive properties.

(People claiming HB used to be able to claim the actual LHA rate, and keep the difference between the LHA and the rent. Government thought this would encourage rent negotiation, by giving people claiming benefit a strong incentive to get cheaper rents. Sadly, HB is subject to massive amounts of fraud and so that system was subverted quickly by fraudsters.)

Example rates for Cheltenham, UK: http://www.cheltenham.gov.uk/downloads/file/3659/local_housi...

https://en.wikipedia.org/wiki/Local_Housing_Allowance#Bedroo...

Sure benefits rates are set by the government but there's no corresponding measure to ensure the market will provide properties at that rate. The government has just cut 14-25% off the rates they'll pay with their "bedroom tax" policy, hoping that people will reallocate themselves to properties more efficiently. But after a year of the policy being in effect, 60% of people affected are in arrears with their rent, i.e. most people have just stayed put and hoped for the best.

I'm not sure benefit fraud is as prevalent as you state - a TUC survey from a couple of years suggest it's usually overestimated: http://www.tuc.org.uk/social-issues/child-poverty/welfare-an...

Bedroom tax has been in force for people in private accommodation for many years. The new bedroom tax only affects people in public housing.

The bedroom tax is stupid. The aim is to make people move to smaller properties. People need money to move - you need to pay any existing rent arrears; any utility arrears; you then need a deposit and a month's rent advance for the new property (but I don't know how that works for public housing); and then you need vehicles to do the moving. Right at that point where the person needs more money they have some money taken off them.

Since the government likes "Nudge" they should have combined bedroom tax with a package that does all the logistics for moving and a single long term loan to cover some tightly controlled costs of moving. This would only be available to people who need to move in the next year or so after the introduction of the bedroom tax.

I haven't really looked at your poll, but:

> On average people think that 27 per cent of the welfare budget is claimed fraudulently, while the government's own figure is 0.7 per cent.

This says nothing about the amount of fraud in HB compared to other benefits. If there is near zero fraud in all benefits except HB it'd be fair to say that HB was riddled with fraud.

Rather than relying on a biased (nothing wrong with that, but a union using a YouGov poll is clearly using the poll to support their position) source using an online poll here are the actual figures: https://www.gov.uk/government/collections/housing-benefit-re...

> The total GB value of Housing Benefit (HB) overpayments outstanding at the beginning of Q2 (2013/14) stood at over £1.3 billion; an increase of 10% on this point the previous year.

£1.3bn per quarter is a substantial amount of money, even if it's a small percentage of total HB paid.

Note that these talk about overpayment and fraud, not just fraud; and that they are National Statistics and they have been assessed by the UK Statistics Authority: https://www.gov.uk/government/publications/assessment-of-com...

Note also that the amount of fraud present in HB has severe affects on people legitimately claiming HB: it makes ministers (who seem to ignore actual figures) want punitive HB regimes; it makes councils spend time and money on fraud detection which makes claiming HB unpleasant and lengthy; it increases the evidence burden for claimants which means that bank / building society statements are requested by councils which is pretty unpleasant and increases risks of data breaches.

> Isn't it great if real estate is cheap? It means people can afford to live there and spend there money on other things and keep the economy going that way.

Real estate prices rising means that the people are getting more wealthy. When real estate prices fall, it means that people are most likely getting less wealthy.

> I understand that often times people will take out mortgages against there houses if the price goes up and that way money goes back into the economy.

What you're describing here is called "re-financing", it's a perfectly normal means of borrowing money against your house if you have enough collateral. I've never heard of people doing it so that money goes back into the economy, it's usually to re-invest money into your house like for construction or whatever, and your monthly payment just increases.

I've never heard of people doing it so that money goes back into the economy, it's usually to re-invest money into your house like for construction or whatever

Isn't spending the extra money on construction sending the money back into the economy?

>Real estate prices rising means that the people are getting more wealthy. When real estate prices fall, it means that people are most likely getting less wealthy.

That uses real estate prices as an indicator for how the economy is doing. However, it doesn't mean the economy gets better because real estate prices are up. This almost reminds me of the backyard furnaces during the great leap forward. Metal output was seen as a indicator of good industry and so Mao had everyone melt perfectly good pots and pans and other stuff to improve the indicator. However, most of the metal was useless and the pots and pans were gone.

What the article described sounds similar to me. Housing prices are way up, economy indicator looks great, but people are living on the street.

> What you're describing here is called "re-financing", it's a perfectly normal means of borrowing money against your house if you have enough collateral. I've never heard of people doing it so that money goes back into the economy, it's usually to re-invest money into your house like for construction or whatever, and your monthly payment just increases.

So the money does go back into the economy. Also: Not all re-financing results in a larger mortgage than before. Some people re-finance to get lower interest rates on the same or smaller principal.

"Real estate prices rising means that the people are getting more wealthy. When real estate prices fall, it means that people are most likely getting less wealthy."

Can you elaborate? For most necessities, we're happy when the price goes down. But for housing, we're happy when it goes up. Why? What's so special?

Because people invest absurd sums of borrowed money into houses? If people borrowed hundreds of thousands to invest in for instance the corn industry, they'd be cheering for the price of corn to go up.

When house prices go down, many people really do become less wealthy, because they have lots of money invested in houses. Similar to how Google's shareholders would become less wealthy if the value of Google stock fell by 90%.

The difference between Google stock and a house (if you only have one) is that you need the house, but I have not practical value for Google stock other than it's monetary value. If I sell my house I need to buy another one or rent. So I am happy if my house's value goes up, but only if it's relative to other houses in areas I would be interested to move to, because it would open the option to swap it out for another one that's better or in a location I would prefer. So if real estate prices go up everywhere that wins me nothing. I am rich, but only on paper. Housing being relatively cheap also allows for people with low capital to try out business ideas that they couldn't elsewhere. Berlin in the early 2000s was filled with awesome little shops, restaurants and cafes that would have been impossible in any other comparable city. One of the big reasons was the cheap real estate.

Good point. Even if real estate prices going up everywhere wins me nothing, however, real estate prices going down always causes me a loss if I've purchased a house with borrowed money. For instance, if I borrow $500k to buy a house, and its value soon after falls to $300k, I still owe the bank 500k yet my assets are only worth $300k, meaning my net worth is down by $200k. If I was renting this wouldn't happen.

I think culturally there's too much willingness to buy houses with borrowed money. The proverbial average Joe wouldn't leverage themselves to buy any other investment worth hundreds of thousands with borrowed money, yet it's seen as perfectly reasonable to borrow hundreds of thousands of dollars to buy a house. The inherent risk involved in investing a large sum of borrowed money just seems to be ignored, and then people do everything they can to keep house prices rising in order to avoid this risk materialising.

For most things, we don't go to a bank and borrow 80-90% of the principal and pay it off over 30 years, effectively paying 2.5 times what we borrowed. If the house is worth less than what we paid for it, we made a really bad investment. In fact, if the value hasn't more than doubled, ... You get the idea?

Since most people at that point would declare bankruptcy, if house prices dropped by enough to make it really worth their while to do that, banks would be screwed (since they have at most 2% reserve).

If banks are screwed, companies and countries can no longer roll over debt (for example in the US that would mean the Federal government would have to raise tax to 100%, and even then it would take a year before they could spend a single dollar again). The US state would be bankrupt in less than a month if interest rates rose to about 5%. Europe would be bankrupt in less than a month if interest rates rose to less than 2% (because they'd have to replace cheap loans with expensive ones they can't pay. The alternative is to pay back the money, but you know, if you can't pay 1% of the money, it seems unlikely that you can pay 100%).

Most companies also roll over debt. Most companies are not like Google and Facebook. So if this happened, and they could not roll over debt, companies like Exxon Mobil, GM, ... would simply be bankrupt. Since most people who have jobs have jobs at companies like these ...

Why do they do it this way ? It's the modern way of printing money. They switched to it because giving the state direct control of the money printers has always led to collapse. At the end of the 19th century, it was leading to constant collapses of currencies, sometimes 5 years or less apart. These collapses came with revolutions, wars, ... very ugly. So now we have the loan system.

Now I guess we see who's smarter : the US/Europe who "loan" money, or China who prints whenever they feel like. There's a few other tiny banking systems that feel they should get a second chance (seems even more lunatic than the China way to me though). History has not yet shown how the Western system can fail, but it has shown time and again that the system China is currently using blows up. "This time it's different", well let me give the standard answer every economist gives : "that could very well be true <chuckle>".

Money only works as long as it's mostly not spent, but in can rotate through the system indefinitely. So as long as the circle "banks -> companies -> people -> houses -> banks" works, with the central bank controlling how much money banks have to keep inflation stable ... Parliaments and dictators have shown themselves incapable of this. But of course, the western system is effectively a system that is an unknown. Every system fails at some point, we may very well be at the point where the western loan system fails.

But I don't think so. History would seem to indicate China has some room to grow, but will collapse into chaos before a few decades pass. The western system will probably carry on until it doesn't. But that could be millenia away as far as we know.

It's seen as important that real estate prices go up because a significant proportion of the population have borrowed money to invest in houses. If real estate prices fall, the wealth of people with houses/mortgages is reduced.

One way of looking at this is that a significant proportion of the population have a 'vested interest' in increasing real estate prices. Some would also argue that continuously rising house prices are economically beneficial, as if house prices fall, then the homeowners/mortgagees who lose wealth from the fall will spend less, reducing consumer spending and hence 'harming' the economy.

I have a feeling the problem is jobs. What are the industrial jobs that will form the community's foundation? No jobs means nobody wants to move there.

Perhaps, but I think the problem actually might be "new wealth doesn't know how to invest". In other words, people who've come into the cities, earned some money, and now are wondering what to do with it.

Those buildings are not populated for several reasons: 1.Sits in the suburb area where the public transit is very poor. 2.Lacks basic public facilities like schools and hospitals.

Basically, those ghost cities are the outcomes driven by the local government's insatiate desires to sell more lands to real estate developers, the revenue from which has become a critical part of its total income.

Not really a detailed explanation but when I was there a few months ago the guy I was with said that a lot of them were sitting around unfinished because they didn't have any buyers. A lot of them are so called luxury buildings where I'm sure the developers don't want people who can't afford that type of life living, they were pointing out buildings where apartments were 1.5M RMB ($250k) which given the wages in China is just a bit ridiculous.

The factory I was visiting was constantly complaining about how nobody wanted to work in the south of China anymore and that all the workers had moved up to Shanghai, yet there was all this construction and plans for huge growth in the area. I just couldn't figure out how they were justifying these plans.

>Why does the Chinese government not allow these people to move into these empty buildings?

For the same reason why the American government doesn't let people move into the large number of empty high end luxury apartments in downtown Manhattan.

They all belong to somebody.

In China, you need to know people to get a loan. Once they have loans, the bank isnt following up.

People take a loan, invest 25% in a crappy building. Take 75% and the bank takes the useless property when they dont receive the money...

So yeah, a lot of bad / empty buildings in China..

I am amazed that so few of the comments even mention that the source of the submitted article is a newspaper in Ireland, where all the same arguments about

1) governments always being able to bail themselves out

and

2) excessive investment in buildings that no one can afford to occupy being a good idea

are a recent and painful memory. Ireland is still a long way from recovering from its real estate bubble, as are Spain and many parts of the United States. Commentary that suggests that China is somehow different and special and exempt from general economic principles should refer to more real-world historical examples.

Ireland was prevented from enacting any kind of stimulus by the ECB. In fact, it was told in no uncertain terms to do the complete opposite - bail out the banks and enact austerity at the exact time when she had plunging demand. This caused spiraling GDP contraction.

Ireland dutifully obeyed, because the ECB controls her money supply and so holds a metaphorical loaded gun to her head.

The ECB cannot order China to implement self destructive austerity, however. China is still sovereign in her own currency.

In principle Ireland could bail herself out too, but it would involve leaving the Euro, defaulting and a spectacular political showdown that she really doesn't have the heart for.

You know, I doubt that's the case. Greece and Cyprus have crossed the EU, lied to them, and committed acts that should have meant getting kicked out of the EU. Nothing happened. If anything the EU keeps giving them more money.

So now everybody knows : clearly the EU is more interested in expanding their membership and maintaining power than it is interested in financial sense and applying treaties.

So while Ireland certainly seems to think the EU has a gun to their heads, this is only true if Ireland's parliament cooperates. Ireland's parliament could simply order it's banks to print Euros, lie to the ECB (they're already doing that, after all. That's what the Euro crisis was about). Ireland's parliament could simply vote to do that, and while they're at it, vote a law that this does not violate the European treaty. Then it'd be up to Brussels to kick them out, and they've already shown that they won't do that, no matter what. They're sovereign, there's a million ways they could do this.

So in short : you're right, in theory. In practice, the law is simply what parliament votes to be law, and they could shortcut your reasoning at any point. Given what's already happened in the PIGS, I think they will at some point in the not-too-distant future show us that theory and practice are very different indeed.

>You know, I doubt that's the case. Greece and Cyprus have crossed the EU, lied to them, and committed acts that should have meant getting kicked out of the EU. Nothing happened. If anything the EU keeps giving them more money.

The ECB doesn't want them gone. In both cases (and in Italy too) parties or individuals that have genuinely expressed a desire to renegotiate their deal with the ECB or leave the Euro if that failed have been destroyed.

In Italy's case, Berlusconi was replaced with an unelected technocrat the second he made a move in that direction. They did a lot of behind the scenes dirty work to make that happen on the day it happened. I'm not sure how they made him resign, but it seems like blackmail might have been involved.

In Greece's case there were TWO parties that promised to renegotiate their deal with the EU and the vote was basically split between them. The EU backed one and said that disaster would strike if the other got elected. The former won and promptly broke its promise.

In Cyprus's case, the ECB offered an ultimatum that threatened to blow up the Cypriot economy literally 2 hours after the new prime minister had been elected into office. If he didn't cram down losses on depositors, they'd yank OMT. This one is perhaps the most shameful of all. They targeted him at that point because they knew they could make him panic, force his hand and get him to react the way they wanted. Cyprus was most likely a test to see how European citizens would react to cramdowns (they're tiny; bailing them out would have been trivial, so it wasn't about the cost of making them whole).

The ECB is run by an unelected commission who work largely behind the scenes. They work only for the benefit of European banks, and against the interests of all EU citizens, whether in the core or the periphery.

Vice on HBO did a good segment on this. Definitely worth checking out if you have access. A little extra bit here: https://www.youtube.com/watch?v=qPjGWcM3Awc

TL;DR: if it goes boom.. the world will just move on as usual and we just get back up.. just like the US market.. except China wasn't as hyped up and the media is still control by the government so it won't be as bad as the US.

Are there any good books that looks into this problem and how it came about?

South China Mall is still empty? Should take an online street view research before bad journalism.

http://www.thenanfang.com/blog/tag/south-china-mall/

TLDR: Not empty anymore, but they must be making a hell of a lot less than planned, and have taken a huge hit to their projected profitability doing this. I'm sure they reflected this in their stock price and GDP projections, right ?

VICE did it. Better. http://www.youtube.com/watch?v=qPjGWcM3Awc

My guess would be that nothing serious would happen, because China has a government that can effectively implement whatever policy they want without caring too much about public opinion and they still have all the production facilities and cheap workforce, which wont suddenly go away because of a housing bubble.

What destroyed the US industries (apart from high tech) wasn't the housing bubble or the oil prices. It was the high price for labor.

Also, the reason why the housing bubble in the US caused so much trouble is that the US imports more than it exports.

We have the exact opposite situation in China, where far more products are exported than imported, so destruction of wealth in China isn't going to hit their economy nearly as much as it did hurt the US/EU.

Labor prices might even go down as a result, which will make them even more competitive.

>What destroyed the US industries (apart from high tech) wasn't the housing bubble or the oil prices. It was the high price for labor.

No, it was the high price of the dollar.

You do realize that it doesn't matter for an importer of US goods if the high prices for US products are a result of high labor price or high dollar price.

The importer just sees that the same product produced in the US is far more expensive than somewhere else.

>You do realize that it doesn't matter for an importer of US goods if the high prices for US products are a result of high labor price or high dollar price.

No. I never said it did matter to them. It DOESN'T matter to them.

It matters to us!!!

The US already has way too much downward pressure on wages - causing MASSIVE income inequality, huge private debt overhang and anemic demand. More downward pressure will simply cause half the country to drop into poverty.

What it DOESN'T have is enough downward pressure on the dollar - causing exports to become more competitive and industry to start coming back, bringing jobs with them.

My point was about the decline of US industries, not about the income of workers. What matters here is the price of the produced products and you're at a disadvantage in a global economy when the prices are too high.

I suspect that either option (reducing wages or value of the dollar) would reduce buying power of US citizens since US has to import so many goods thus creating downward pressure no matter which option you choose.

Anyways, I agree that those problems have to be solved but I'm quite sure that the current consumption level is unsustainable and that this will change in the future in some way or another. Same goes for the EU. (where I live)

I just hope that this will happen in a peaceful way.

The US still exports a lot, and is a leader in services and knowledge. Sure, china produces iPhones, but all the R&D is done in California. Heck, even the natural resources consumed for our imports aren't coming from labor rich manufacturing countries, but from places like Australia.

Technology can change a lot. Our rate of food consumption was considered unsustainable until the green revolution. We were supposed to run out of oil 20 years ago, and we are getting better about recycling. It doesn't have to become a distopia, though it could.

>The US still exports a lot, and is a leader in services and knowledge. Sure, china produces iPhones, but all the R&D is done in California.

Unfortunately that R&D created maybe 30,000 jobs. This is an economy of 300 million people, so that's good jobs for 0.001% of the population.

What about the other 99.999%?

http://www.npr.org/blogs/money/2012/03/20/149015363/what-ame...

>My point was about the decline of US industries, not about the income of workers.

You probably shouldn't have said "What destroyed the US industries...was the high price of labor" then, should you?

>What matters here is the price of the produced products and you're at a disadvantage in a global economy when the prices are too high.

As I explained once before this is due to the high value of the dollar.

>I suspect that either option (reducing wages or value of the dollar) would reduce buying power of US citizens since US has to import so many goods thus creating downward pressure no matter which option you choose.

Reducing wages reduces buying power period. Reducing the value of the dollar only reduces the buying power for imported goods. Right now I think flat screen TVs, jeans and cheap plastic crap from China are cheap enough and it wouldn't hurt for that stuff to go up in price a bit.

Housing, education & healthcare are the major line items on household budgets. THESE things won't go up in price.

>Anyways, I agree that those problems have to be solved but I'm quite sure that the current consumption level is unsustainable

Current consumption is too low to support full employment. In the EU and the US. This has to change. Both economies need to engage in massive debt writedowns and/or stimulus to return demand to normal levels.

Reply on news.ycombinator.com