Thursday, November 12, 2009 1 comments ++[ CLICK TO COMMENT ]++

China's construction boom

Others may have seen it already but I ran across a reference at Naked Capitalism to an Al Jazeera news clip showing an empty district in China. I want to highlight this clip because this is the type of scenario that keeps people like me bearish on China. The clip deals with a town called Ordos* in Inner Mongolia:





First, a couple of notes. Since there are many wealthy people in Ordos—the story mentions it as having the second highest wealth per person, with Shanghai being first—it may not be representative of China in general. Secondly, we need to give it time (say 2 years) and see if this is a total bust. I find that some journalists write stories about newly completed real estate projects which require time to attract individuals and businesses.

The bears, including me, keep warning about China due to situations like this. You have tens to maybe hundreads of millions of dollars worth of buildings constructed, yet no one is occupying them. Like I said, we need to give it more time, but if it remains like this then this is a complete waste of wealth.

To make matters worse, the story points out how nearly all the homes have been sold but are left unoccupied. You may recall similar stories I have referenced in the past regarding other places in China. This is not a pretty sight. Basically people are speculating on homes and they don't even care about rental income. To put it in stock market terms, this is equivalent to someone buying a stock solely on the hope of appreciation while ignoring the underlying income generated by the business. Such a strategy is called The Greater Fool theory in stock investing and I'm sure there is a similar concept for real estate. (The reason wealthy people "invest" in these assets has to do with capital controls and negative real rates. If you were a wealthy person living in China, and wasn't permitted to invest overseas (at least openly) and real returns on savings was negative, you would probably funnell everything into real estate, gold, commodities, stocks or some such thing as well.)

If Ordos is an isolated case, we have little to worry; but if this situation is repeated in hundreads of other cities, China could easily see a spectacular real estate bust like the world has never seen. I wasn't paying attention to Japanese real estate in the 80's but it is possible that China may have an even bigger bubble (however, the rural area is still undeveloped so the bust will primarily impact the city dwellers, the wealthy, and the government.)



SIDE NOTE:

* On a completely unrelated note, it is interesting to run into Ordos in real life. Computer gaming fans may recall House Ordos from the revolutionary game Dune II, which gave birth to the modern RTS genre. Dune II was my favourite computer game of all time and it just so happens that my favourite House to play was Ordos.

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1 Response to China's construction boom

Portable Storage
November 17, 2009 at 3:23 AM

Thanks for the information it's good that the construction of China is on boom and as the Construction Sector is one of the important part of the economy of any country it will help in coming out of the economic financial crisis.

Thanks,
Portable Storage,
http://www.moveablecubicle.com

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