Excellent answers chaps.
I may also add a couple of things. China’s building boom is what had some analysts review at least in part their predictions about future growth. A few, like Edward Chancellor, decided to take an even deeper look at China as a whole. The results were very mixed and, in my opinion, not encouraging.
All the major Chinese banks are State-owned or State-controlled. This has led to “a history of poor lending decisions” as banks are directed by the State to open their “credit spigots” to fuel growth. This came particularly true in 2009 when, to counter the effects of the world economic downturn, banks were directed to increase lending as never before: in 2009 new bank loans amounted to a monster 10 trillion renmimbi (RMB), equivalent to 29% of China’s GDP. This sum went to fund infrastucture projects, property developments and State-owned and State-partecipated enterprises. Chinese banks pulled a similar stunt before and it went real bad: in 1999-2000 50% of total outstanding loans were “non-performing”. Beijing recapitalized the banks and moved the non-performing loans into “asset management companies”. To this day nobody knows how much money was lost. And it has got worse since Chinese authorities have become even more secretive about non-performing loans starting about 2006. How robust are China’s banks then? The answer is “we don’t know”.
As said, a good chunk of this immense sum went into infrastucture projects and property developments: the Chinese seem to have gone “building crazy” in recent years. The are a few reasons for this. First of all China has legalized property of land by private subjects. Second, the main source of income for “local authorities” is now the sale of land. Third, it is said that China will have need for all of these airports, high-speed railroads and office buildings as her economy expand at a record pace and that the investments will pay themselves of in the not so distant future. There’s also an “unofficial” reason: leading bureaucrats are given growth target for their area by Beijing. Meet or exceed these targets and you will be richly rewarded, fail and you will be harshly punished. As you may have guessed local authorites have become enthusiastic to say the least about promoting and encouraging building projects since this means they’ll meet or even exceed the targets set by Beijing. When there are news of whole towns crumbling like a house of card or being swept by a landslide that’s a result of this policy. It doesn’t matter if apartment blocks or factories are built with cheap concrete or on unstable soil: the important thing is build and build quickly. As you may have guessed things aren’t very rosey at the moment: in urban areas ownership ratio is now already about 70% according to Deutsche Bank. New immigrants simply cannot afford to buy a house as prices keep on rising so luxury flats and even cheap units stay empty. Yet new housing is being produced at record pace. To mask this, “ghost” societies have been set up as nominal owners. Commercial property is even worse, as thrifty Chinese aren’t exactly rushing to shops to buy big screen TVs and designer clothes.Yet building continues at record pace, with new high-rise complexes built right next to wholly empty ones on a seemingly monthly basis.
To make things worse China suffers from an immense “overcapacity” in infrastructures. While large traffic jams are reported by the Western media, reality is much different. Highways run at about 12% capacity and tolls collected are nowhere near enough to cover costs. Airports outside the great cities run at less than half capacity. The projected 18000 km of high speed railways are already running into troubles: simply put they would never reach the minimum passenger volume to break even and even bureaucrats in Beijing are starting having second thoughts.
Similar problems afflict China’s heavy industries. Overcapacity is being reported in critical industries such as steel, cement, glass, shipbuilding and, curiously, wind power. Despite the present construction boom cement industry run at about three quarter capacity. Would you invest in an industry which, in a time of boom, has such overcapacity? No, because returns would be negligible (and Krugman won his Nobel prize for his analysis of a similar situation in Pacific Rim economies. Yes, he fell that low recently).
