They said China is the global growth engine of the future, and last year, many analysts recommended Chinese companies and real estate as a way to offset the deteriorating economy in the US. While we agree that China will be one of the major growth engines of the future, soon to overtake the US as the largest economy in the world, we have stopped short of recommending Chinese assets as a way to hedge risk in the US at the present time.
The simple fact of the matter is that China is a global exporter and producer of goods for Western nations, and the West, for those who haven’t noticed is completely broke. Without income or credit, Western consumers can no longer afford to buy the goods coming out of China. This trend, in our view, will continue for several years to come as the debt-based systems of the West continue to collapse.
Even though China has a large enough population to create internal economic growth, their citizens simply don’t make enough money currently to offset the losses in exports. Arguably, China has tried to jump start their economy by infusing lenders with hundreds of billions of dollars, much like the US government has, but to no avail. It’s beginning to look more and more like the 2001-2007 bubble we experienced here in the US. While we don’t have as much available economic data for China as we have for the US, the cracks in China are starting to show.
In May we noted that Chinese home sales were down 50%, and we’re not talking over a period of a year. This happened on an almost month to month basis, as soon as the Chinese government tightened their lending standards, which shows that all of the demand was essentially manufactured by the government.
The China Morning Post is now reporting that there are millions of vacant homes on the mainland. Like Americans and Spaniards, many Chinese believed that they could make money flipping houses. Like their Western counterparts, they were wrong:
Yi Xianrong, an economist at the Chinese Academy of Social Sciences, a government think tank in Beijing, noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country, many of them bought up by people wagering on a constantly rising property market.
In the overseas edition of the Peopleâ€™s Daily, Yi said the â€shockingâ€ level of empty housing showed the dangers brought by the countryâ€™s property boom, which the central government has been trying to cool.
â€œIf this outsized property bubble does not burst, it will hurt residentsâ€™ well-being, and also affect national financial security and co-ordinated national economic development,â€ wrote Yi.
He wrote that the overheated property market was creating â€misallocation of resources, price distortions, squandering of wealth â€¦ and is magnifying national financial risks, so that the economic structure cannot be adjusted, ultimately leading to overall social instability.â€
source: Zero Hedge
While we believe Chinese assets will provide a much better avenue than the US for growing wealth over the next couple of decades, we would steer clear of Chinese assets for the time being. The entire global system is on the brink, and China is most certainly not immune.