China’s Scary Housing Bubble: Global Ripples Ahead



Global Ripples Ahead

Vikram Mansharamani

Vikram Mansharamani is the author of “Boombustology: Spotting Financial Bubbles Before They Burst.” He is a lecturer on financial markets at Yale University.

Updated April 15, 2011, 7:05 PM

China today exhibits many of the tell-tale signs of a great speculative mania. Higher prices in many of its asset markets are generating demand more rapidly than supply. The cost of money is inappropriately cheap, driving mal-investment and creating overcapacity.

The ripple effects of a real estate slowdown in China will be felt in commodity markets around the world.

Confidence is bubbly, with skyscrapers rising, art markets booming, and conspicuous consumption galloping forward. Moral hazard runs rampant, and national-provincial dynamics are generating growth in gross domestic product through unnecessary and low return-on-investment activity. Amateur investors seem ubiquitous, and the largest developers today are state-owned enterprises using money from state-owned banks to buy land from the state. All of these indicators point to the fact that the Chinese economic story is unsustainable.

The most visible manifestation of the bubbly conditions in China can be found in the property markets of major coastal cities. A deflation of the property bubble plaguing these cities will be accompanied by a material slowdown in demand for commodities.

Consider the impact on steel, a product for which Chinese consumption accounts for almost 50 percent of global production. Approximately half of Chinese steel consumption is in construction, most of which is for property development. Any slowdown in construction would reduce global demand for steel and also for iron ore, which is used in steel production.

Likewise, given that 40 percent of the dry-bulk shipping industry is connected to moving iron ore to China, the property slowdown will be felt in Norway, Hong Kong, Singapore, Greece and other shipping centers. Because the shipyards in Korea, Singapore and China have themselves expanded to meet increased demand for ships, they too will face significant overcapacity. And on it goes. For better or worse, the Chinese property markets have a global value chain. The ripple effects of a real estate slowdown will be felt around the world.

China has been a story of investment led growth; capital expenditure as a percentage of G.D.P. remains elevated in comparison to China’s own history as well as that of other rapidly developing countries.

Many commodity markets currently reflect substantial continued investment. If property markets deflate, and overinvestment and excess capacity are revealed, Chinese growth may be 5 percent 6 percent for the next decade, an outcome for which the world and commodity markets are not prepared.

The “Art” of Spotting Bubbles



The Next Art Bubble

Last week the prices for Chinese art skyrocketed to their highest levels yet, but comparisons to the Japanese art bubble prove that a crash is near, says Vikram Mansharamani.

by Vikram Mansharamani  | April 13, 2011 1:42 PM EDT

New York’s Asian Art Week was spectacular. A delicate pear-shaped Chinese vase was the star of the week, skyrocketing past its pre-sale estimate of $800 to $1,200 to sell for more than $18 million. A carved celadon-glazed ceramic Qianlong vase sold for $7.9 million, double its high presale estimate. Combined, Sotheby’s and Christie’s International took in a record $202 million during the week, 56 percent above the prior 2007 peak.

The electricity transferred over to Europe, where a Beijing collector paid a record $31 million for a Chinese scroll on March 26 at an auction in Toulouse, France. And this week has been equally exciting. Global art collectors descended upon the Hong Kong Convention and Exhibition Centre for Sotheby’s 3,600 lot series of auctions. A painting by Zhang Xiaogang set a new record, selling for more than double pre-auction estimates. The most anticipated auction was Thursday evening’s sale of the Meiyintang collection of imperial Chinese porcelain.

Thursday evening’s auction disappointed. Despite telegraphing an expected auction sales range of between HK$700 million and HK$1 billion ($90 million and $128 million) (with rumors suggesting a significantly higher sales price was probable), Sotheby’s posted auction sales of less than HK$400 million for the collection. Might this be an early warning sign of an art bubble about to burst? What are the implications of an art market slowdown?

From most accounts, China appears to be the most important driver of the art market today…and not just as a source of desired art. Wealthy Chinese buyers are the largest source of incremental demand, with Chinese billionaire buyers as the most confident. Art dealer Andrew Kahane, who specializes in Chinese art, summarized the buying desires: “Chinese buyers want to be seen spending a lot of money. They want to be seen setting world records.”

These developments certainly point to a rising sense of confidence, perhaps even overconfidence, among the Chinese. Might the ups and downs of the art business be a reflection of surging and waning confidence? Is it possible that recent world record art prices are an indication of unsustainable economic conditions? Could China be in the midst of an unsustainable asset bubble?

The recent auction records are not as anomalous as they may appear. Chinese influence on art markets has risen steadily over the past year. In May 2010, the art world was energized by a Chinese buyer paying a world record $106.4 million for a work by Pablo Picasso. Last November, an 18th-century vase from the Qianlong period, which had been found in a dusty old attic, was purchased at auction for $86 million (presale estimates had ranged from $1.3 million to $2 million) by a buyer from mainland China. It was the highest price ever paid at auction for a Chinese antiquity.

Overconfidence and hubris, manifested in world record art prices, should be as disturbing to policymakers and investors as it is exciting to Sotheby’s and Christie’s.

Traditional buyers have noted this newfound buying pressure, finding it frustrating when seeking to purchase art. Morgan Long, head of art services at The Fine Art Fund, noted that funds “have come across frantic bidding from people from the Chinese mainland. We haven’t been able to buy anything we wanted at the prices we were looking for.”

One of the largest asset bubbles ever formed was in Japan during the late 1980s. The bursting of the “Bubble Economy,” as it has since been known, might have seemed, even at the time, almost inevitable when examined through the lens of art markets. Consider the parallels.

In the then-highest price ever paid for a painting, van Gogh’s Still Life: Vase with Fifteen Sunflowers sold in 1987 to a Japanese buyer for almost $40 million, approximately four times the previous record for a painting.

The Japanese art craze possibly peaked (along with its asset markets) when Ryoei Saito, chairman of Daishowa Paper Manufacturing, paid $82.5 million for van Gogh’s Portrait of Dr. Gachet and over $78 million for Renoir’s Le Moulin de la Galette in May 1990. He then proceeded to shock the art world and the sensibilities of collectors worldwide by stating he would cremate the paintings with his body upon his death.

The similarities with Japan suggest that the enormous Chinese influence on the art market is an indicator of a forthcoming bust in China. It reflects a national overconfidence that has been a consistent ingredient in financial bubbles. Prudent investors would take great pride in selling at world record prices. Wanting to buy at world record prices is a spectacular reflection of hubris in action.

The disappointing results from Thursday’s Meiyintang auction might indicate that expectations of continually rising prices are now ahead of themselves, and that overconfidence and hubris are running out of steam. Was this auction revealing the first cracks in what has otherwise been a very positive story? Is this a sign of an imminent bust?

Seductive rationalizations about China’s enormous population, its tremendous wealth generation, or its industrious labor force are hard to transcend. Policymakers, investors, and corporate boardrooms, however, must attempt to do so because the ramifications of a China bust are so large. For example, China’s influence on the commodity markets has been domineering. If China’s appetite for materials were to slow materially, then many commodities would be over-supplied and prices would fall. Commodity markets have at least partially been supporting the emerging markets growth story, and without that story, the world will likely grow at a significantly slower rate.

Despite the allure of seductive rationalizations, healthy skepticism combined with a careful monitoring of the art market can help one realize that it’s unlikely to be different this time. Overconfidence and hubris, manifested in world record art prices, should be as disturbing to policymakers and investors as it is exciting to Sotheby’s and Christie’s, for in today’s increasingly interconnected world, even the slightest disturbance can ripple from China to Iowa.

Vikram Mansharamani is a lecturer at Yale University where he teaches a popular seminar called “Financial Booms and Busts.” His new book is Boombustology: Spotting Financial Bubbles Before They Burst.

©2011 The Newsweek/Daily Beast Company LLC

MegaMalls and Empty Purses


(originally published in April 2011 by YaleGlobal Online, picked up by the Khaleej Times, The South China Morning Post, The Korea Times, and numerous others)


Mega malls and empty purses

Vikram Mansharamani   13 April 2011

China is not only a booming country, for years it has been one of the world’s fastest growing economies. Industrialisation, urbanisation, modernisation and entrepreneurship all appear to be on steroids in the world’s most populous nation. There’s relative consensus among global investors that China will continue growing at eight per cent for the foreseeable future, providing much needed support to the global economy.

By almost any metric, economic progress in China over the past several decades has been phenomenal: GDP per capita, literacy rates, health care, infant mortality, life expectancy and national wealth have all improved remarkably.

However, as the famous disclaimer reads on most mutual fund advertisements, “past performance is no guarantee of future performance,” and this appears to be the case with respect to China’s progress. In fact, China today exhibits many of the signs that characterise the great speculative manias throughout history.

Might China slow to a more sustainable GDP growth rate, say five per cent, in the coming years? Significant evidence suggests that such an outcome is not as outlandish as the global investment community currently believes. A Chinese slowdown of this magnitude would have material impacts upon commodity markets, emerging markets and even the S&P 500’s business and earnings mix. In short, how China goes, so goes the world economy. Given this global economic interdependence, it’s highly imprudent for policymakers and investors not to consider the possibility of such a slowdown.

Given the highly uncertain and probabilistic nature of booms, busts and the sustainability of growth, the application of a multidisciplinary framework seems particularly apt in determining various scenarios and their relative probabilities. Consider the approach one takes to identifying animals: You stumble upon an animal and seek to determine what type it is. You might first look at it, followed by listening, and observing its behaviour. So if the animal has feathers and webbed-feet, and “quacks” while waddling, the probability of it being a duck is high.

Likewise, the same method can be used to assess the Chinese economic boom, using multiple lenses to determine the relative likelihood of a forthcoming bust.

From a microeconomic perspective, one method of identifying an asset-price bubble is to spot self-fulfilling or reflexive dynamics underway. In China today, higher prices in many of its asset markets are generating demand more rapidly than supply. Such dynamics are rarely stable and create situations prone to rapid corrections.

Consider property markets in which willingness to lend and prices rise together in a self-fulfilling manner. Chinese bankers have been lending money against collateral, the value of which is in part rising because of the banker’s willingness to lend. As property prices rise, banks’ collateral is worth more; the bankers feel more secure and smart, so they lend more. The cycle repeats. Unfortunately for the bankers, they’ll eventually discover that they themselves created the sense of safety and intelligence that they enjoyed. As happened with the subprime collapse in the West, reality eventually sets in, bankers step back and collateral values fall.

From a macroeconomic perspective, most asset bubbles are associated with “easy” or cheap money that drives overinvestment and overconsumption. Evidence of such easy money can be found in Chinese commercial real estate, where both entire cities – like Kangbashi, in Inner Mongolia – as well as gigantic malls remain virtually empty. ‘Time’ magazine profiled Kangbashi as a modern “ghost town,” and foreign newspapers have referred to the South China Mall in Dongguan as the “mall of misfortune.”

Chinese buyers have also set recent world records in the prices paid for a dog and a pigeon!

From a political perspective, we need to acknowledge the fact that the Chinese government remains communist in spirit, albeit increasingly less so. The party’s structure drives uneconomic activity as provincial leaders aspire to get noticed by producing more jobs and generating more GDP than the other provinces. Anecdotal reports are alarming: Perfectly usable infrastructure is destroyed and rebuilt to generate GDP. Likewise, job creation and economic activity are prioritised over sustainability and profitability.

The ramifications of a meaningful slowdown in Chinese economic activity are profound, ranging from the risk of domestic social instability to a collapse of several commodity markets.

On the global economic front, China’s voracious appetite for commodities has motivated significant expansions throughout the global commodity complex, and many industrial markets, including shipping, capital goods and more, continue to be driven by Chinese demand.

Unfortunately, the forthcoming slowdown may arrive at a particularly inopportune time. Many Australian and Brazilian mines have undertaken massive capacity expansions. Likewise, many Norwegian and Greek dry bulk-shipping companies have expanded their fleets in anticipation of rising demand. To accommodate this need for more ships, many Singaporean and Korean shipyards expanded their capacities. And so the story goes… What happens if the very foundation upon which these expansion stories are built is faulty? Might the emerging-markets tale that’s been the darling of global investors be less compelling than widely believed?

And what happens to multinational companies in a slowing world? Might the demand for US treasuries drop, resulting in higher costs for capital in the United States? Is it conceivable that the consensus belief that the renminbi will appreciate is instead met by depreciation as Beijing grasps at hopes of export-led growth? How might 25 per cent depreciation affect global imbalances?

The stakes are high. Policymakers, investors and corporate boardrooms must consider the risk of a material Chinese slowdown. Despite the allure of “China is different” explanations, there is a reason well-read and seasoned investors claim the four most expensive words in the English language are “it’s different this time.”

Vikram Mansharamani, PhD, is the author of Boombustology: Spotting Financial Bubbles Before They Burst (Wiley, 2011). For the past two years, he has taught the popular undergraduate seminar “Financial Booms and Busts” at Yale University
© 2011 Yale Center for the Study of 

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