China’s Minsky Moment may be starting

Ordos Dec11.pngLong-standing readers may remember the video posted in January 2010 showing ‘China’s empty city’.

This was the new city being built in Inner Mongolia, to help ensure local officials met China’s GDP growth target. Unlike the West, GDP in a communist country is a target, not a result. Thus East Germany under communism was alleged to have GDP equal to the UK. Reality was somewhat different, as was shown after the Berlin Wall fell in 1989.

Ordos was, and is, a great example of this policy inversion in practice. Since 1995, officials have been building a completely new city 30km from the old city of Ordos. It is meant to house 1.6 million people, and until recently speculators have ensured all the property has been sold.

The only downside is that the city is more or less empty.

Now the Wall Street Journal updates the story:

• 2 months ago, one of the main property developers committed suicide
• He left debts of Rmb 263m ($41m)
• He had borrowed at an interest rate of 3%/month

The boom was great whilst it lasted. As one saleswoman told the Journal, “everyone has at least two or three properties and lots of people have seven or eight.” Now, prices have stopped rising and sales have slowed, as bank lending has been cut.

Nationwide, China has 306 billion square meters (3294bn square feet) of property under construction. But sales to the end of October were just 709 million square meters. And prices have begun to fall, as the government moves to reduce inflation.

As the Journal notes, “speculators buy property because it is rising in value”. When prices stop rising, they often head for the exits. But as Hyman Minsky observed, they then find there is no way to sell.

China has an awful lot of empty property owned by speculators such as those in Ordos. Last year, for example, its Academy of Social Sciences estimated there were 64.5 million empty houses and apartments that were owned by somebody, but used no electricity.

The Minsky Moment for its banking system is probably now underway.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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One Response to China’s Minsky Moment may be starting

  1. Lanoie 11 December, 2011 at 8:48 pm #

    I love your blog

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