As bad as the American economy is right now, there is at least one place where things are much worse:  China.

Six months after a spectacular Olympics hosted in Peking turned Potemkin, the infrastructure which awed the world stands vacant and useless.

“Empty,” says Jack Rodman, an expert in distressed real estate, as he points from the window of his 40th-floor office toward a silver-skinned prism rising out of the Beijing skyline. 

“Beautiful building, but not a single tenant.

“Completely empty.

“Empty.”

So goes the refrain as his finger skips from building to building, each flashier than the next, and few of them more than barely occupied.

In total, half a billion square feet of commercial real estate was added to Beijing’s skyline in just two years.  One hundred million square feet of brand new office space is vacant, the equivalent of 30 World Trade Center towers, and more than a 14-year supply if it could be filled at the pace of the region’s boom years.

But these aren’t boom years.  The Shanghai Stock Exchange Index is down 55% from where it stood a year ago.  It’s five-year chart resembles a towering volcano, which not suprisingly, has blown its top.  The Chinese building boom which over the last four years fueled significant worldwide increases in the cost of concrete, steel, copper, and oil, is over.  Prices of all these commodities have collapsed, and they’re not coming back soon.

Perhaps even worse still is that the losses on the loans from Chinese banks to finance the new infrastructure have not been written down.  Homes are still priced in the hundreds of thousands of dollars in a city where the annual wage is $6,000, a ratio that makes California’s housing prices at the peak of their building boom look positively rational by comparison. 

“These are like New York prices, but we are Chinese. We don’t have that kind of money,” said Zhang Huizhan, a 55-year-old businessman who owns a Chinese furniture factory. He has been looking for five years for an apartment for him and his wife within their budget of $150,000.

Just as in California, the prices of all those empty homes will eventually come down to the level that the market can support.  But until they do, the economic tailspin will continue.  And once they do, the banks that hold large amounts of those notes will be in bankruptcy.  Is it any wonder then why China didn’t squeal too loudly when they were asked to buy US Treasury notes with a ridiculously low return at a time when American deficits are likely to increase inflationary pressure on the dollar?

Mr. Luo, a Chinese bank regulator said of America, “We hate you guys. Once you start issuing $1 trillion-$2 trillion . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”  It’s a no-brainer, trading an investment with zero return for one with negative return is an easy decision.  But it is not the kind of business decision that is going to lift the world out of an economic morass.

Chinese exports are falling, unemployment is rising, and the Olympics are over.  Along with Japan’s recent experience, China’s is a cautionary tale about the limited effects that government-generated infrastructure booms have on an economy.  Sure, a few laborers get construction jobs for a while, but once it’s over, the revenue stream is small, the jobs are gone, and so is the incentive to build anything else for a very long time.

(ht: GR)

UPDATE:

Talk about perfect timing.  Here’s an NBC report about Chinese investors who got out of their market before the bust who find things so bad there, that California’s real estate market is a value by comparison.

Share This