China’s Ghost Cities Haunt Global Economy
In the U.S. housing crisis, investors lost billions by buying into securities backed by subprime mortgages that turned sour after the borrowers were unable to pay. In China’s version of the real estate bubble, it’s a plain-vanilla financial product known as a trust that has been around since the 1970s that threatens to wreak havoc. And just like the market in the U.S. prior to the crash, in China trusts are all the rage.
In the wake of the 2008 crisis, the world looked to China, with its vast population of increasingly affluent potential consumers and its energetic building boom, as the saving grace for the global economy. Although Chinese authorities belatedly are taking steps to put the brakes on the nation’s overheated real estate market, it’s unclear whether it will succeed. Instead of China saving the world, aftershocks from a Chinese real estate or banking crash could sink the global economy already struggling to just stay afloat.
China’s Housing Bubble
For the past decade, property investment has been a primary driver of growth in China. As massive trade surpluses built up, exacerbated by China’s policy of pegging the yuan to the dollar, the country accumulated relativelyContinue Reading →
Real estate backed loans have been a primary driver of China’s growth. Surely that sounds familiar, but you are not going to believe how bad it really is. As ever, where projects are pushed by planners and not the profit test, expect malinvestment and bubbles galore.