Going on the record concerning the Chinese real estate market

Even a casual observer of international economic trends can see the structural weaknesses that have accumulated in the Chinese real estate market.

Here are the facts:

A typical story:

I wonder what my 28-year-old Shanghainese friend Robert thinks about that. He and his fiancée could never dream of buying an apartment on their own, but his fiancée won’t marry him unless he has one. Robert is lucky: his parents are spending their life savings to buy them a tiny apartment. Residential property prices have climbed 50 percent during Wen’s last five-year term, according to statistics bureau data, to the highest level since China privatized home ownership in 1998.

The market dynamics at play here are broken.

Prices are unmoored from inherent value. The correction that is coming will be large, with the functional wealth of many couples erased as housing prices fall.

Upside down mortgages will lead to defaults, rising credit prices, corporate failures, and sick banks. The epic scale of the Chinese real estate bubble leaves nothing to the imagination when it comes to its future implosion: it will be messy, bad, badly messy, and messily bad.

Accumulated past momentum that propped up Chinese GDP growth rates will be eliminated as construction rates plunge. Investors with too much exposure to Chinese debt will suffer painful writedowns.

To that end, we turn to the New York Times:

Chinese junk bonds also have a unique structure, which could leave investors vulnerable.

Mainland China’s domestic bond market remains largely off limits to foreign buyers. So most investors buy offshore Chinese bonds, which are issued through holding companies headquartered in places like the Cayman Islands.

The bonds tend not to be backed by the actual businesses and underlying assets in mainland China. That means foreign bondholders may have little legal recourse if a company defaults on its debt, especially if local banks or other Chinese creditors make claims.

This implicates that larger global financial markets in the coming undoing of the Chinese real estate bubble. The pain will be global.

Now, this isn’t set to happen tomorrow. But when it does, I want to be on the record as predicting it.

We return to the Atlantic:

The situation seems dangerously out of balance. In an interview with CBS’s 60 Minutes last week, Wang Shi, CEO of Vanke, one of China’s biggest property companies, said he thinks there is a property bubble, and that if the bubble bursts, there could be Arab Spring-like protests. When I saw my Shanghainese friend recently, he made the same point. In his experience, he said, young people are frustrated by rampant corruption, and many people can’t find good jobs. “If the economy slows down, or housing prices drop,” he said, “there could be serious unrest.”

Unrest in China. Panic in the global financial markets. The elimination of massive, but faux wealth.

The music is still playing. But not for too much longer.


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