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Everyone who thinks that the Chinese economy is in a big bubble that is about to burst, better think again, especially after the country’s central bank cut reserve ratios on Wednesday. China’s big red bubble is ahead of us!
China’s central bank actions replicate those of Japan’s central bank in the aftermath of the Plaza Accord in 1985, which added fuel to the country’s ongoing asset bubble at that time, helping it blow for another five years. But unlike Japan’s bubble that was accommodated by government policies, China’s bubble is directed by government policies. It is fueled by the systematic efforts of Beijing and provincial governments to preserve the old system of central planning, through massive construction and manufacturing projects for the purpose of employment creation rather than for addressing genuine consumer needs. Major Chinese cities are filled with growing numbers of new buildings that remain dark in the night, because they are vacant. They were built under the mandates of the Communist Party to provide jobs for the hundreds of thousands of people leaving the countryside for a better life in the cities, rather than to house genuine business tenants.
China’s real estate bubble is multiplying like a contagious disease from the eastern cities to the inner country. It extends beyond real estate to the other sectors of the economy, from the steel industry to electronics and toys industries. Provinces rush and race to copy each other, especially those of the inner country, where local corporate managers have no direct access to world markets, and end up following the policies of their peers of the coastal provinces. This practice became more evident in the aftermath of the Asian crisis, when economic growth slowed-down considerably and it became increasingly difficult for State Owned Enterprises (SOEs) to maintain staff levels or to provide employment for newcomers.
Government bureaucrats became obsessed with massive infrastructure projects, commercial construction, and duplicate factories as a quick source of growth. This means that they are too many steel companies, too many electronics companies, and too many toy companies, created for the purpose of providing to excess labor rather than genuine products to serve real consumer needs.
By and large, China’s bubbles are financed by state-owned banks and investment trust companies, which operate as government departments, within a central planning environment of controlled interest rates and government mandates, promoting the welfare of the “people” rather than true banks operating in a market system and promoting the interests of their depositors and stockholders. Appointed by CPC-controlled boards, Chinese bank managers lack the freedom, the expertise, and the incentives to evaluate investment alternatives. They, therefore, confine themselves into routine and predictable business, simply collecting deposits and financing government decided real estate projects and SOEs-providing the fuel for the next bubble, rather than searching for creditworthy clients.
State bank financing could explain why the Chinese bubbles have yet to burst. Banks have the direct backing of taxpayers and depositors (often workers required to deposit a certain percentage of their salary with state banks). This means that non-performing loans to real estate developers and near bankrupt corporations are financed directly by depositors and taxpayers. The Chinese Treasury Secretary doesn’t have to ask for legislative approval to help the banks with these loans, as is the case in the USA, that’s why the Chinese bubble has plenty of room to grow before it bursts—a bullish prospect for energy and resource suppliers.
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