China’s Great Property Gamble

shanghai-construction-2005-october.jpg

Source of Picture: Chinasnippets.com

Perhaps this post will help explain why a perplexed Hong Kong-based financial analyst wrote to me the other day, in response to my probably failed efforts to adequately explain rising chemicals demand in China:

“I stilll don’t understand why polymer imports from PP, PE, PVC, and even SM (+15% per month avg) are up by so much this year.”

One reason is a property boom that has some scary long-term implications (all the SM for EPS for insulation, for example, and PVC. Despite China’s self-sufficiency in PVC local carbide plants suffered when oil prices collapsed.)

Fund manager Stephan van der Mersch, writing on the China Financial Markets blog describes a recent trip to Guiyang, the capital of Guizhou province as follows:

“I thought I’d seen insane excess in the past – 200 thousand square meter malls completely empty next to apartment complexes with 40 thousand units and 30% occupancy rates, etc. etc.

“But what we saw over there is rather hard to fathom. It seems the Guiyang city mayor had the same idea as the Shenzhen mayor – to move the old downtown to a piece of undeveloped land.

“Of course Guiyang has a quarter the population and probably a quarter the per capita income of Shenzhen.

What was most distressing was that the (recent) development has been totally uncoordinated – a project with 15 buildings here, in another field two miles away a project with one building, another mile in another direction three buildings, sprawled over what was easily over 30 square kms. of farmland well north of town.

” We conservatively guesstimated that we saw US$10bn of NPLs in one afternoon. The only buildings that were occupied were six-storey towers built to accommodate the peasants who had been displaced by the construction.”

Michael Pettis, author of the blog, later in the same post repeats his prediction that China could suffer a Japanese-style long period of slow growth rather than a dramatic crash – because of China’s control over the banking system.

But he warns that this could be at the expense of consumer growth, as I had written about earlier on this blog, if the cost of cleaning up the banks is forced onto the public.

And he adds that the current property boom is being driven by:

*Buying sentiment returning to levels of the last boom – 2007

*Developers buying land again, resulting in land prices once more skyrocketing

*Negative real interest rates on bank deposits and, as mentioned many times before on this blog, the explosion in liquidity

*Construction industry loans being rolled over from short into long-term liabiltiies

If a meaningful portion of Chinese household savings is in real estate that never will be occupied or won’t transact for the next decade (and then transacts at a potentially lower rate 10 years out given that the building has been rotting for ten years and the construction quality sucks), are those savings really there?,” he writes.

“China needs to increase domestic consumption for stable internally driven growth. You can’t increase domestic consumption if you’re buying real estate. So this is yet one other way that this whole liquidity injection is preventing a transition to a consumption-based economy. You really do wonder how long the Chinese will keep up this level of “pump priming”. If they realize how much they’re screwing themselves for the next decade, the central government might just tighten liquidity.’

If and when liquidity is tightened signifcantly in China, a major support to global chemicals pricing and demand wil have been removed.

Michael’s blog is currently being blocked in China, he says.

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