Paul turned me on to this intriguing video from Australian Public Broadcasting.
Documentary by SBS Dateline (Australian TV) about the Chinese real estate market. 15 minutes.
[Click “Watch.”]
This news piece builds a convincing case that China has a staggering real estate bubble – bigger by far than anything seen before.
· China is building whole new cities, all at once, that can house millions but stand almost empty. Watch just the first couple minutes of the video.
· They built the biggest shopping center in the world but after 6 years it still stands empty.
· The average Chinese earns $6,000 a year while the new apartments sell for $100,000 and sometimes $300,000.
· Terms in China for home buyers require 50% down and the balance in 3 years – no default problems in China.
· Many buyers appear to be wealthy Chinese who are buying speculatively.
· The reporters claim that China is doing all this to pump up national GDP.
· The report also suggests that when the bubble breaks, there may be substantial social unrest.
· The vaunted Chinese consumer economy may be propaganda.
For me the story is amazing – stimulus on steroids – and it poses more questions than answers.
· Do we care if China pumps up its GDP?
· What will be the effect on the West in general and us in particular when the bubble bursts?
· Where does the Chinese government get the money for this construction?
· Could this cause the Chinese to become cash strapped and make them “dump” US Treasuries? That would cause enormous interest rate increases.
· Could there really be riots, etc? How would that affect the rest of us?
In a related but long and very esoteric story, Reuters is reporting that the Federal Reserve made changes a few years ago to control Chinese actions in government bond auctions. We did this secretly so that China would not know that they were the focus of our “reforms”. Does America actually have any secrets?
U.S. Caught China Buying More Debt Than Disclosed
If you care about such things, this article is interesting reading.
Chinese entities hold at least $1.115 trillion in U.S. government debt, and are thought to account for roughly 26 percent of the paper issued by Washington.
China's vast Treasury holdings are both a lifeline and a vulnerability for America – if the Chinese sold their Treasuries all at once, it could undermine U.S. markets and the economy by driving interest rates higher very quickly. Scenarios of this sort have been discussed in Washington defense-policy circles for at least a year now.
Starting in 2007, some of the 20 elite "primary dealers" – Wall Street firms authorized to bid on behalf of customers – began reporting irregularities in "guaranteed bidding" which was a way for China and other big buyers to maintain some anonymity during the frequent Fed auctions. US auction rules limit any buyer to no more than 35 percent of a particular batch of Treasury securities at a single auction. Allowing buyers to purchase more might lead to manipulation. The Fed wants to avoid any repeat of the Salomon Brothers Treasury trading scandal in the early 1990s.
In order to finance American government debt, the Treasury's Bureau of the Public Debt sells to investors through auctions that are held weekly – sometimes four times per week – in batches ranging from $13 billion to $35 billion at a time.
In 2009, the Treasury concluded that China was buying much more in U.S. government debt than was being disclosed, potentially in violation of auction rules, and it wanted to bring those purchases into the open – all without ruffling feathers in Beijing. Not knowing the full extent of these holdings would make it even more difficult to assess China's political leverage over U.S. finances. So they changed the rules regarding guaranteed bidding and kept the reasons quiet.
Now Reuters, thanks to leaks, is making the whole thing public.
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