Great Chinese Property Bubble

No doubt China is a great country and civilization with a history going back to several millenniums comparable to India, Egypt, Mesopotamia, etc. However, recently, China is hitting headlines for some wrong reasons. (I am not sure my colleague who is of Chinese origin, but an UK Citizen, will agree with my view. He often argues that China is hitting the headlines for all right reasons.)

As China made its massive population the cheapest hardworking labour in the world, the greedy corporates of USA decided to dump the blue collar labour in their own country and exported those jobs to China. This still is one of the core reasons for record US unemployment, highest in the recent history of USA. Chinese labourers are working in poor labour (near slavery?) conditions and humanitarian track record of China is among the worst in the world. However these issues do not bother US Corporates, if money can be made cheap. Remember the recent news of suicides in several Chinese factories.

Cheap (and often stated to be of low quality) Chinese goods are flooding global markets and have created havoc in many countries resulting in closure of several industries in those countries. Recently, China won and half completed a metro railway project in Saudi Arabia undercutting several other competitors. It is reported that China is losing money in this project but happy and it means that they have now taken the undercutting abroad.

Both Saudi and China are totalitarian regimes and intolerant. One is based on communism and doesn't like religion and claims there is no God. Another one is based on extreme form of religion and insists that their way of viewing God is the only right way. It is a paradox that Saudi relies on skill set of expatriates of different religions such as Hindus, Christians, Parsis, Buddhists, Jains, etc but no religious freedom. Saudi beheads its criminals and does not allow women to drive or has any theatres. Saudi follows their religious law and restricts freedom of speech and expression, which has similarities to Chinese communism, where also both are denied. A chinese citizen -Liu Xiaobo- was awarded 2010 Nobel Peace Prize but he is in prision for the criminal offence of working for fundamental human rights in China. Whilst violent 'Communism' was exported all over the world by Soviet Union in early 20th century, now-a-days it is violent religious 'Terrorism' that is being exported around.

Now the million dollar question is whether Chinese Property Bubble will burst in 2011. It is widely acknowledged that the Property Bubble in China is much worse than that of US in 2007/08. The average price to rent ratio in China now stands at 40x vs. 23x of USA just before the onset of 2008 crisis. The main reason is that the government owned companies / banks driving up the investments to support GDP growth, even during the financial crisis. Artificially suppressed exchange rates also contributed to the growth of Great Chinese Bubble.

As in the Japan of 1990 and USA in 2008, the Chinese banks have exposure to the property market and any crash will then will result in banking crisis. A banking crisis will soon turn into a credit crisis and then economic crisis. So, if the Chinese property bubble bursts, definitely the global problems would multiply.

However, there are many who dismiss the above views saying China is different and they can control these issues. Well, that is what I also want so that the predictable 2011 is good for investing. My portfolio would not show much fluctuations and that is good. However, it is worrying that such complacency was exhibited prior to the United States sub-prime crisis and European sovereign debt crisis as well.

If China Property Bubble bursts the initial casualty will be drying up of demand for Raw materials. China is currently the global leader in consuming major commodities such as copper, steel, cement, etc. As the commodities take the southward direction, the mining companies and mining equipment manufacturers would follow. Investor sentiment would be affected and the global stock markets may test new lows. Bears would be happiest persons.

Let us hope that as China lovers say that the Chinese government has "ample resources" to bail out its banks and other sectors, in case of a crisis, which would prevent any exacerbation of the problem.