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China – one country that’s never been an European colony. Ruled by communists, ushered into an economic success by Mao after 1978,China boasts of an impregnable world-class economy. China’s economy grew 7 times as fast as America’s over the past decade (316% growth vs. 43% ). In 2010, China(5.87 trillion) overtook Japan(5.47 trillion) to become the second largest economy in the world after US.
But going by the latest trends, it seems to be crashing as a mind boggling 64 million condos lie vacant in People’s Republic of China. The condition has worsened to extentl that the world’s biggest mall (in China) has been reportedly 99% empty since 2005. The most amazing fact to come out is : By 2025, China will build enough skyscrapers to fill TEN New York-sized cities !!!
The Crash Story
As fears of an impending collapse in Chinese property prices abound, parallels are being drawn with the housing bubbles and the subsequent fallout in Japan during the 1990s and the United States during the recent financial crisis. High price-to-income and price-to-rent ratios for property and the high number of unoccupied residential and commercial units have been cited as evidence of a bubble. High price-to-rent ratios for real estate, such as in Beijing where the ratio is 500:1 months compared to the global ratio of 300:1 months. Homes are readily available in the US for 100 times the monthly rent. Residential housing investment as a share of China’s GDP has tripled from 2000 to 2011, similar to the peak of the U.S. housing bubble. The condition has worsened to the extent that the local governments are behind all land sales and are heavily reliant on the revenue from such sales. Thus, they are incentivized to ensure that the prices of land available to developers remain high. Certain cultural beliefs have also contributed to the desire for home ownership. In China, it is often considered to be a requirement for a man to own a house in order to be eligible for marriage !!!
The ever-growing bubble has ensued the growth of “ghost” towns. Home prices have plunged by one third recently, from 2006, in Kangbashi, the ambitious second city built on the outskirts of Ordos. And it is merely the most spectacular example of a new Chinese phenomenon, in many cities – unsold flats, unlet shops, empty office blocks. Kangbashi was reported to house 300,000 people. Ninety percent of the homes here are empty. Ordos is investing billions of dollars on itself instead of letting that money migrate elsewhere. But what about the quarter of a million empty homes in the new city just waiting for people to move-in?
It looks to outsiders as though the great Chinese building boom is over, the real estate extravaganza that shook the world. Debate about mainland China’s property bubble recently has seemed to cease being about whether the bubble exists. Instead, popular conjecture has turned to when it will burst and how bad the aftermath will be.
(Fact :- When you buy Chinese stocks, you are basically financing the Chinese government. Eight of Shanghai’s top ten stocks are government owned)