Will China's housing boom lead to a bust?

Boom, Baby, Boom…

What’s going on in China?

That’s what we’ve come here to find out. We paid a visit to China 25 years ago and haven’t been back since. More on China in just a minute…

Let’s look at what is going on in the West, first.

Yesterday, the Dow rose slightly – after taking a beating last week. Gold settled at $1,228.

Dear Readers are out of stocks. So we’re not particularly worried. But we’re deeply interested. Has the bear market/Great Correction resumed – as we said it would? Or is this just more ‘noise’ – with no particular meaning?

We don’t know. But we intend to be in cash and gold when we find out.

Back to the Middle Kingdom…

First impression: this is not the same country it was a quarter of a century ago. The last time we were here there were almost no private cars. Everyone dressed in drab grey outfits and rode bicycles. There were no shiny new buildings. There were almost no restaurants. And if you saw a truck, it was likely to be broken down beside the road, with a couple legs sticking out from beneath it.

Second impression: wow! So many daring new buildings…such broad streets…so many construction cranes…so many fancy cars…so many electric bicycles…

…there is no doubt that China is far outpacing Europe and the US in many respects…that the 21st century will be defined by what happens here, not what happens in the West.

Third impression: China is in trouble.

“Stocks dive on housing fears,” says the headline at China Daily.

The Shanghai Composite index suffered its biggest drop of the year yesterday – down 5% after losing 20% since January.

According to the papers, the market has been spooked by the government’s efforts to restrain real estate speculation. The Chinese have a lot of money. And Chinese investors have relatively few places to put it. They tend to buy real estate…or stocks. This has pushed up property prices by as much as 100% in some areas, over the last 12 months. And it has caused the government to worry about a bubble.

Is the Chinese economy a bubble? Most likely – yes. Will it blow up? Again, most likely, yes. In fact, it seems to be blowing up right now. After leading the world in the bounce phase, it now may be leading the world in a return of the Great Correction.

In a nutshell – China’s economy is unbalanced…with far too much weight given to exports. Typical of successful export-oriented Asian economies, it has built too much capacity.

The last big economy to run into this problem was Japan. After the big boom of the ’80s, Japan had too many factories…and too much capital invested in the export sector. When the stock market realized it, a big sell-off began. That bear market lasted at least until 2009 – 19 years. For all we know, it’s still not over.

Stock markets are always discovering what things are really worth. Right now, they’re realizing that China’s companies are not worth quite as much as they thought a few weeks ago.

Will the sell-off continue? We don’t know. But most likely – yes. Because a big boom is typically followed by a big bust.

But wait a minute. How can we reconcile Impression #2 with Impression #3? How can China be the country of the future and still face a big financial upheaval?

Well, that is the future!

Much the same thing happened in the US after 1929. The US faced a tough period of adjustment – made worse by the efforts of the Hoover and Roosevelt administrations. Instead of letting the problem take care of itself – as they did during the 19th century – the feds intervened heavily. In effect, they were trying to keep the future from happening.

You can slow the future… You can make it more painful. You can drag your feet and shut your eyes…but the future is going to happen, whether you like it or not.

As it came about, the future for the US was bright. It just had to live through the Great Depression and WWII first.

China must be facing its own tests and challenges. Maybe they will be political. Maybe they will be only economic. But they are bound to be monumental…

And the events in Thailand show us how they can be bloody too.

“Thai street battles escalate,” says today’s Financial Times.

As of this morning, 29 people have died. More than 230 have been hurt. And a quarter of the country is locked down in a ‘state of emergency.’

Thailand’s troubles look less and less like street protests and more and more like a civil war. Who’s right? Who’s wrong? Who are the good guys? Who are the bad guys?

Who knows? As in most civil wars, it’s probably a shame that both sides can’t lose.

But it shows what can happen….

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