Markets can remain irrational longer than you can remain solvent.
–John Maynard Keynes
Note: I’m very busy right now but should have a more substantial/on topic post up later in the week. In the meantime, I thought this was an interesting topic which fits with my post on China last week.
Mannerheim’s comment in response to my post on why China has to buy US debt reminded me of the at times bizarre overbuilding which has been documented in China:
You allude several times to China’s fear of letting their currency rise so trade with the US will balance; this is because they’ve designed their economy entirely around low-wage manufactured exports to the West and therefore need to keep their currency artificially weak to keep their products cheap for Americans. If the yuan rose against the dollar Americans would switch to buying goods manufactured in Southeast Asia or Mexico, and millions of Chinese would lose their jobs and have a serious bone to pick with their ruling elites (off topic, but these are the same frustrated young men who will never find wives due to the one-child policy and the penchant for aborting daughters). I often see the figure cited that China’s leadership feels it must grow its economy by 8% annually just to maintain social stability (and even so riots are not uncommon in major Chinese cities), so a sharp revaluation of the yuan could very possibly lead to economic collapse and all-out insurrection.
This need to continuously post spectacular growth figures has been speculated as the cause of what are known as China’s ghost cities. These are entire cities or developments within cities which are wholly or mostly vacant. The Daily Mail ran an article back in December with satellite photos. The Atlantic ran a piece back in June titled Why China’s Ghost Towns Matter for Our Economy. There is also a popular video on Youtube by the Australian program Dateline on this:
I’m personally not sure what to make of all of this. At one level given the size of China and its economy, these monstrous vacant developments are probably exactly what a tiny error in planning would look like. On the other hand, my experience is that any visible corporate or government absurdity tends to be just the tip of the iceberg. Inefficient systems tend to do a better job of keeping up the facade of efficiency than they do at actual efficiency. So glaring visible failures like this make me suspect that there is far more of this kind of waste which no one on the outside can see. I also am skeptical that any country can keep up China’s level of growth long term. If one is looking for symptoms of cracks in the system, these would seem to fit. However, bubbles (assuming this is one) have a tendency to make fools of us all. My personal long term bet is that China eventually runs into a wall very similar to the one Japan ran into in the late 80s and early 90s. But as the Keynes quote mentions, this could be a long way off.