China Has Its Own Debt Bomb; Not unlike the U.S. in 2008, China is at the end of a credit binge that won’t end well

February 25, 2013, 7:04 p.m. ET

China Has Its Own Debt Bomb

Not unlike the U.S. in 2008, China is at the end of a credit binge that won’t end well.

By RUCHIR SHARMA

Six years ago, Chinese Premier Wen Jiabao cautioned that China’s economy is “unstable, unbalanced, uncoordinated and unsustainable.” China has since doubled down on the economic model that prompted his concern.

Mr. Wen spoke out in an attempt to change the course of an economy dangerously dependent on one lever to generate growth: heavy investment in the roads, factories and other infrastructure that have helped make China a manufacturing superpower. Then along came the 2008 global financial crisis. To keep China’s economy growing, panicked officials launched a half-trillion-dollar stimulus and ordered banks to fund a new wave of investment. Investment has risen as a share of gross domestic product to 48%—a record for any large country—from 43%.

Even more staggering is the amount of credit that China unleashed to finance this investment boom. Since 2007, the amount of new credit generated annually has more than quadrupled to $2.75 trillion in the 12 months through January this year. Last year, roughly half of the new loans came from the “shadow banking system,” private lenders and credit suppliers outside formal lending channels. These outfits lend to borrowers—often local governments pushing increasingly low-quality infrastructure projects—who have run into trouble paying their bank loans. Read more of this post

China Austerity Drive Becomes a Joke

February 25, 2013, 8:38 PM

China Austerity Drive Becomes a Joke

China’s leaders have been talking tough about graft, greed and gross extravagance again. One sign they’re serious this time: Their willingness to have a little fun with it.

Up until recently, the austerity campaign was suitably severe. There was tough talk from Communist Party chief Xi Jinping, who told a gathering of party heavyweights in November that corruption threatened their grip on power. He called for less pomp and ceremony for officials touring the countryside and urged comrades to make do with a little less banqueting. They should stick to four dishes and a soup and finish their food or else, he said.

Similar refrains have regularly appeared in the party mouthpiece, the People’s Daily. A recent commentary (in Chinese) said cadres need to avoid waste, hold only meetings that have a real purpose and observe the New Year holiday in a simple and modest fashion. “The people are looking forward to this – and they will be watching critically,” it warned.

But to help spread the party gospel even further, Beijing recently decided to take a more populist approach — making these themes part of the entertainment on CCTV’s widely watched Lunar New Year’s Eve gala – or the “Chun Wan Hui.”

In one of the CCTV New Year skits, comic Guo Degang took a swipe at the ex-Shaanxi work safety official Yang Dacai, dubbed the “Brother Watch” after photos of him appeared on the Internet sporting an array of expensive watches that normally would exceed a government salary. Mr Guo, who didn’t mention the sacked official by name, bragged he wore a hefty gold watch on his right wrist and a dozen more all the way up his left arm. Asked if it wasn’t risky wearing them he said: “I’m not afraid of wearing them and I’m not afraid of letting people see them,” he said, adding he had shortened his left suit sleeve so he could show them all off (in Chinese).

Still in character, he bragged of splashing out on a wedding banquet, inviting enough guests to fill 100 tables. He feigned outrage at apparently being upstaged by a banquet next door with 200 tables. On closer inspection, that banquet was paid for with public money, so it wasn’t a fair contest, he insisted. Read more of this post

China’s riskiest property market just collapsed. Is this how it starts?

China’s riskiest property market just collapsed. Is this how it starts?

By Max Fisher , Updated: February 25, 2013

The real estate market in Phoenix Island, a development project in the Chinese island province of Hainan, was so inflated, so outrageously expensive and unsustainable, that it became known as the Dubai of China. With its palm tree-lined streets, glimmering high-rises and ostentatious sports cars, it even looked a little like Dubai. And now, also like Dubai but maybe more in the vein of south Florida, the Phoenix Island real estate market that drove so much local economic growth has imploded.

Phoenix Island is an extreme case, but it’s in many ways symptomatic of China’s skyrocketing real estate market, which is both a blessing and a curse for China. A blessing because it helps to drive economic growth and domestic consumption, which the country’s economy needs more of to be healthy. It’s a curse because, as Americans are well aware, it can burst, pulling down much of the national economy with it.

If the national real estate market collapses in China, it would be disastrous not just for China but for the entire world economy, risking a third wave of the global crisis that began with the U.S. financial collapse and worsened with the Euro crisis. Is Phoenix Island an outlier, a crazy market so extreme that it tells us little about China? Is it the start of a major but recoverable setback? Or, in the worst-case scenario, is it the beginning of the end for China’s astounding 20 years of miraculous economic growth? Read more of this post