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When this bubble bursts

When this bubble bursts

They will not have China to bail them out:

For so long we have heard nothing but how the Chinese were doing things right. Hundred of millions rising up out of poverty. News cars replacing bicycles on the streets of Beijing. An economy that could not be stopped, which grew year after year after year by 10%+. But there is trouble brewing.


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I travel to China a few times a year for business. My business takes me away from the main “tourist” areas and into regions/neighborhoods where Westerners hardly ever go.

There are many new buildings, both commercial and residential. You see them in clusters at the edge of Shanghai and Dalian. In many buildings, there are no interior walls and you can see straight through to the other side.

At night, entire blocks of multi-story residential buildings do not have a single light emanating from the windows. Occasionally, you see a exterior security light.

There are hundreds of such “Potemkin Village” buildings in China.

Wow. That’s frightening – the implications for the world’s financial markets are enormous if that story is typical of the rest of China (and not just an over dramatization for TV.) I guess if you are a Communist totalitarian regime, and own all the land, banks, and developers, you can just build and build and build until you run out of money, land, or developers. China is not about to run out of any of these anytime soon, but when they do, look out below.

The implications of the “Ghost Cities” remind me of those gas lines back in the Carter years, caused by having the government send the gasoline to where it wasn’t needed.

Of course there’s trouble brewing. That’s what happens when you use the vast transfer of wealth from exporting goods to build make-work projects to keep your unused population busy rather than to actually raise the economic fortunes and allow them to pursue things like innovation and free thought.

The Chinese had more money and more people than they knew what do do with, so they put the people to work building things that will likely never be used. By the time people start to actually move into these cities, they will already be decaying to the point where they will need serious repairs due to lack of use (an empty building actually decays FASTER than one that is occupied, even when generally well maintained).

It’s entirely an inefficient use of the wealth that has been generated by exports and world trade, but it’s useful to the government to prevent the populace from revolution in order to have freedom.

Time for the Chinese people to have their own OccupyGhostCities?

Coupled with the demographic nightmare China is all but certain to face … an inverted population pyramid as the one-child policy has been willfully adopted in the Chinese consciousness … exacerbating a trend which would have taken effect anyway with increasing per-capita income, and the graying of China will allow even less opportunity for working-age Chinese to fill those empty malls and cities. They’ll be busy working to provide for the retirement and health care of the fast-growing, over-65 segment of the population.

There is a lag between below-replacement fertility levels and total population decline. Japan has been at below-replacement levels since the 1970s and just realized its first year of actual population decline a few years ago (it was about -10,000). The decline is increasing every year, 2010 bringing an estimated decrease of 123,000 in Japan’s population.

According to the 2010 CIA World Factbook, China’s fertility rate now stands at 1.54 (2.1 being replacement level). Hong Kong, Taiwan, and (majority Chinese) Singapore are all far below even that, showing it to be increasingly likely that as China continues to develop economically, its fertility rate will continue to decline.

With fewer and fewer working-age people supporting more and more elderly … it’s not going to be a pretty picture. They will envy our ratios.

LukeHandCool (who loves babies and wants at least one more … even though it’s extremely late in the game … basically the two-minute warning at the end of the fourth quarter).

Are they trying to avoid a revolution since they cannot reasonably provide instant gratification to even a majority of their population, or is it because they cannot accommodate a low GDP consumer oriented economy, or something else?

Demand curve slopes downward because of inverse relationship between price and quantity. That is, except in China.

In point of fact, China has never been doing “everything right” or even most things right. In truth, I’d be hard pressed to point to anything they’ve actually done right.

China is pretty much a “Potemkin Everything” and their international fiscal policy is mostly a shadow play. Their economy is not and never has been as advertised.

China is faced with a massive contradiction that very few Chinese are able to grasp and none able to deal with. This is not new — they have been unsuccessfully trying to deal with it for well of a hundred years.

China cannot deal with this contradiction and remain Chinese. I foresee interesting time ahead.