Day By Day

Tuesday, June 28, 2011

Is China Riding a Bubble

CNN reports:
Jim Chanos, the hedge fund manager who is famously shorting China, told Fortune late last year that the country was "embarking on something unprecedented." He was referring to the massive construction boom that has been underway for years, and that was supercharged by a 2008 stimulus package that pumped four trillion yuan ($586 billion) into the economy. In his opinion, the speculative bubble in real estate would end in a big pop, empty buildings, and pain for the country's broader economy.

For those who side with team Chanos, data is seeping out of China that suggests that he may right.
Read the whole thing here.

And then there is this, from the New York Times:

SHANGHAI — The head of China’s national audit office warned on Monday that the country was facing growing risks because of a sharp rise in local government debt and poor controls over borrowing by investment companies set up by municipalities, provinces and other bodies.

Liu Jiayi, the top auditor in China, said on Monday that at the end of last year local government debt had reached $1.7 trillion, or about 27 percent of the nation’s gross domestic product. He said better regulation was needed to manage the debt risks.

“The management of some local government financing platforms is irregular, and their profitability and ability to pay their debts is quite weak,” Mr. Liu said in a speech Monday. 

The release of the report by the national auditor, who works under China’s cabinet, or State Council, comes as worries are growing that China’s economy is overheating. Beijing is now trying to rein in bank lending to moderate growth and tame inflation and property prices.
Read it here.

Unwise investment patterns, a runaway housing bubble, massive government debt, much of it at the provincial and local level, and widespread corruption -- sound familiar? All the signs point to a massive economic collapse in China in the next few years, and I shudder to think of the financial, social, and political consequences of that.

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