The Great Fall
Beijing’s Multiplying Bubbles

Much has been made of a coming Chinese housing bubble, but as the Wall Street Journal reports, Beijing’s bubble woes go far beyond real estate:

A succession of asset bubbles has formed in China, caused by a torrent of speculative money sloshing from stocks to bonds to commodities. 

The biggest apparent bubble is in housing, but prices have surged for niche assets, too, such as calligraphy, antiques and art. In May, futures prices for soybean meal, used as pig feed, jumped 40%. The trading volume of 600 million tons was nine times higher than China’s annual consumption. The pipe-making material PVC is up 40% so far this year on the Dalian Commodity Exchange.

The world’s second-largest economy is slowing. Easy credit and successive fiscal stimuli, designed to keep China aloft, mean it is awash in money that is chasing an increasingly small number of investment opportunities. China’s money supply has quadrupled since 2007, and the new cash is largely trapped inside the country by government capital controls.

The WSJ story paints a troubling picture of a volatile Chinese economy, as speculative investors with few investment options rapidly shift from one asset type to another, creating mini-bubbles with knock-on effects around the globe. Chinese trading in iron ore futures, for instance, caused global prices to surge 50% from January to April this year, even though China expected a glut of iron ore at its ports. The memory of last summer’s Chinese stock market crash, which caused a global downturn, is fresh in the minds of analysts who fear a repeat in other markets.

It is unclear whether the leadership in Beijing can keep a lid on the problem. In July, the Politburo publicly acknowledged for the first time that asset bubbles represent “risks and potential threats that deserve high attention.” So far, though, the central leadership has only taken small steps to curb the excesses of the housing market, for instance—largely by allowing city governments and banks to take the lead. In other markets, as the Journal puts it, “regulators are playing a game of whack-a-mole against speculators, quashing one bubble only to see another inflate.”

For all its reputation as an economic behemoth, China faces serious economic problems, many of them of its own making: a soaring debt-to-GDP ratio, an abundance of easy credit that is fueling speculation, and currency restrictions that impede investment outside China. China promises both endless growth and stability, but the situation cannot continue on indefinitely: sooner or later, the bubble(s) will burst.

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