Insights on China's Real Estate Problems

12/10/2014 12:01 am EST


Jim Jubak

Founder and Editor,

Shocking recent data on China's wasted real estate investments has MoneyShow's Jim Jubak speculating on what the implications are for China's growth going forward.

Recent estimates have said that there might be as much as almost $7 trillion worth of wasted investment in China's real estate sector. What that really means is that these are apartments, whole cities, not just apartment blocks, whole cities that have basically been built and are now standing empty.

That's an immense number, $7 trillion, but think about what that means for growth rates and stock financial markets in the past and going forward. Okay, when you build an apartment building, it goes into GDP, so building an apartment building pushes growth up to 9% in China and everybody looks like we're talking about productive investment and it's going to continue, that that 9% growth is not a one-time increase but it's going to continue going forward. However, what you do is you build that apartment, it goes into GDP in that quarter, but then the apartment stands empty. There's nothing going on that keeps GDP going. Essentially, it starts to subtract from your wealth that you've taken money that could've gone into other things that might've produced a return, and instead, what you're getting is no return and that's what we're really seeing now.

They were seeing this incredible glut of supply in the Chinese market in terms of real estate. That's an indicator of how wasteful investment was in China and it's not just China. I mean one of the things that has happened around the world is that because money was so cheap, we've had investment that has turned out to be wasteful in gold mines, in iron mines, in Chinese real estate, all these things where the actual returns on this investment, when you looked at how much supply had been created, really wasn't going to justify the investment and it was only because money was essentially free that this investment was made.

If you then, by analogy, think back to say the US real estate bubble and bust-the subprime mortgage crisis-you realize that you're talking about a phenomenon that doesn't get turned around overnight. You've got to somehow soak up that supply. You've got to restructure a lot of deals as people restructured their mortgages. You've got to pump money into the market to get growth as the Fed did in the US real estate market. All those things take time.

Not all of them can be done because we've, again, spent a lot of money getting recovery from the global financial crisis so that we've got another supply glut and it's not clear that we've got the money to prime the pump again but, again, it's not going to be overnight. This is not the kind of blip that turns around, a blip in August that turns around by say February. What you're seeing is people start to hunker down. What you're seeing is growth really looking slow for an extended period of time and that's the environment that we're looking at as we go into 2015. It's not that this is a world where there's no growth. It's not a world which is headed toward recession, but it's a world where growth looks really, really slow for an extended period of time. That suggests that interest rates are not going to go up in the United States or anywhere else for that matter very, very quickly, in fact, may stay relatively low.

JP Morgan Chase (JPM) has basically said we're looking at more demand for bonds than we're going to have supply for bonds and 2015 will be the sixth time out of the last eight years that that's been the case and that'll keep rates down lower than expected. All of that argues that 2015 may not be a horrible year, but it looks like a relatively slow year.

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