Rogoff Says China Crisis May Trigger Regional Slump Feb. 24 (Bloomberg) – China’s economic growth will plunge to as low as 2 percent following the collapse of a “debt- fueled bubble” within 10 years, sparking a regional recession, according to Harvard University Professor Kenneth Rogoff. “You’re not going to go a decade without having a bump in the business cycle,” Rogoff, former chief economist at the International Monetary Fund, said in an interview in Tokyo yesterday. “We would learn just how important China is when that happens. It would cause a recession everywhere surrounding” the country, including Japan and South Korea, and be “horrible” for Latin American commodity exporters, he said. China, set to surpass Japan as the second-largest economy this year, has helped pull the world out of its deepest postwar slump. Record lending, soaring property values and accelerating economic growth prompted the government to begin retracting stimulus measures implemented during the global recession. “Their response to the latest financial crisis clearly raised the risk that they have a debt-fueled bubble in the economy,” said Rogoff, who in 2008 predicted the failure of big American banks. In 2008, China cut interest rates, started rolling out a 4 trillion yuan ($586 billion) spending package and scrapped quotas limiting lending by banks to counter slumping exports. ‘Best Bet’ While Rogoff said he isn’t sure what will cause China’s bubble to pop, he said land is “the best bet” as it is “the most common source” of crises. Real estate values in Shanghai and Beijing have “taken a departure from reality,” said the economist, co-author of “This Time is Different,” a 2009 book that charts the history of financial calamities in 66 countries. A collapse would depress output gains to 2 to 3 percent, a “very painful” period which would persist for about a year and a half, Rogoff said. The slowdown won’t lead to a Japan- like “lost decade,” he added. In a speech earlier yesterday, he said China will do “very well this century.” China, the world’s fastest-growing major economy, expanded 10.7 percent from a year earlier last quarter. The World Bank forecasts a 9 percent expansion in 2010. China may provide more than a third of global growth in this year, according to Nomura Holdings Inc., Japan’s biggest broker. The country’s policy makers aim for a minimum of 8 percent growth annually to create jobs and avoid social unrest. Migrant Laborers The global financial crisis left 20 million Chinese migrant laborers unemployed and more than 7 million college graduates seeking work by March last year. In February 2009, a clash between police and about 1,000 protesting workers from a textile factory in Sichuan province injured six demonstrators, rights group Chinese Human Rights Defenders reported. World exporters are increasingly relying on China as consumers in the U.S. and Europe retrench. Honda Motor Co. and Nissan Motor Co. are adding capacity in China, which last year overtook the U.S. as the biggest car market. Rio Tinto Group’s sales to China overtook those to North America and Europe in 2009, reaching 24.3 percent of the total from 18.8 percent a year earlier, the mining company said this month. Chinese policy makers are trying to cool lending that helped property prices in 70 cities climb at the fastest pace in 21 months in January. The government aims to reduce new loans to 7.5 trillion yuan this year from a record 9.59 trillion yuan in 2009. The People’s Bank of China raised the proportion of deposits that lenders must set aside as reserves twice this year to cool the economy. “If there’s a this-time-is-different story in the world right now, it’s China,” Rogoff said in the speech at a forum hosted by CLSA Asia-Pacific Markets, a unit of Credit Agricole SA, France’s largest retail bank. People say China “won’t have a financial crisis because there’s central planning, because there’s a high savings rate, because there’s a large pool of labor, blah blah,” he added. “I say of course China will have a financial crisis one day.” ******************************** Interested in hearing other’s thoughts on this topic

I too am interested what others think of this and the Chinese situation in general. To add to the discussion, I am curious if anyone has more particular thoughts on the state of the Chinese monetary policy (money supply grew almost 30% this last year) and how this will tie in with future inflation and exchange rate policy for the country.


While savings is high, the dis-saving is also alarming. Most of the people’s life-time savings now are instantly wiped out by buying houses and/or pay for healthcare. Therefore, inflation actually outpaces wealth and most people are going to lose in the long term.

I just got back from Bejing and Shanghai and I would like to report my firsthand observation that they are still kicking a$$ over there in a mega way. The food rules, the chicks are all hot, taxis are cheap, the people are joyful and fun, and the massage dominates. What more do you want.

There is a lot of incentive for owning than renting: 1. It’s almost a must for a guy to get a girl to marry him. 2. People need apartment ownership for a city “Hukou”. 3. There is almost no legal protection for people who rent, meaning landlord can kick people out whenever he likes in most cases. In addition, because of one child policy, many Chinese families buy an apartment with saving from three families: the couple themselves and two sets of parent-in-laws. That said, here is definitely a very big bubble in Chinese real estate. A $200k apartment’s annual rent is only $3000 in Shanghai(yes, It’s annual rate). However, it’s hard to predict when the bubble will burst. The government will do whatever it takes to postpone the inevitable. I personally plan to sell my real estate within five years because the young population around 30 will peak in about 2011 and once the demographic trend start to tick, it will be hard to stop real estate value from decreasing. Here is an interesting blog about Chinese bank’s NPL: Since I’m not an expert in NPL, not sure how true the data and analysis are. The author seems to be optimistic. However, if these banks need capital injection, it will be much different than in 2007: 1)many banks are already public traded, an injection will mean wipe out for many current equity holders 2) this time no foreign bank will be eager to buy shares in Chinese banks.

^Good info man, can you elaborate on this statement: "That said, here is definitely a very big bubble in Chinese real estate. A $200k apartment’s annual rent is only $3000 in Shanghai(yes, It’s annual rate). However, it’s hard to predict when the bubble will burst. " Are you saying there is so much supply out there that rent can’t go any higher (I have a hard time buying this because of the large urban population)? Also, I thought most people were buying apartments to live in not rent out particularly at such low rates (i.e. Why are they buying these properties if they can only get $250/mo back on them?). Lastly, I thought the overbuilding was more concentrated in the commercial sector, and everything I have read thus has suggested that if there is a RE bubble in China its likely in the CRE space. Thanks for the insights guys, as you can probably tell I am not very up to speed on this so help my education.

“Why are they buying these properties if they can only get $250/mo back on them?” This is a great question. I don’t have data on residential supply demand and I’m certainly not an expert in real estate. The information was from talking to friends and families. The specific number is from talking to a friend yesterday who owns an apartment in Shanghai valued >1,500,000RMB but rent is only about RMB2000 a month (rent return of 1.5%). Nobody is buying house for rent. People are buying because they believe the price only has one direction to go. And holding on to real estate in China is very cheap (no property tax) except for the opportunity cost. And for most Chinese people, the investment vehicles are very limited: real estate and A share stock market. So the opportunity cost might be missing the real estate bubble itself. To answer your question about why rent is so low. Firstly, the average income is still low. The monthly salary for a fresh graduate from a top school is about RMB3000, probably lower for migrant workers and others with no college degree. Secondly, most people rent are the ones who can’t afford to buy. Their income is probably at the lower end. The people with high income probably already own. Recently the government restated that they will maintain loose monetary policy in 2010. So it will be interesting to see how this thing unfold.

Thanks for that info. I also just read the blog pose you had given earlier, and just wanted to make sure I am getting this right. The government is essentially financing non-performing loans on the bank’s BS by taking them off the BS, packaging these NPLs and selling them in the form of bonds to foreign investors. In this way neither the government nor the banks take a hit when these NPLs are taken off the BS (no hit for bank because it doesn’t have to do anything, pay anything or raise more equity to stay liquid since it is likely only making these loans at the direction of the government to big in with; which really just makes it a part of the government) and the foreign investor has little risk because the backing is of the Chinese government. The thought process is to pay these things of over time and any additional recoveries going to bond payments are just an added and unexpected bonus. Am I on point thus far or have I missed something? So basically, the government is taking on and bad loans and then financing them through LT facilities in order to not incur an immediate hit against its own BS. My question is then what would prevent a third and fourth rollover (as the author insists can’t happen)? So long as China is growing and the government is a worthy credit why can’t they keep rolling these already issued bonds along with any new NPLs that arise in the interim? Sorry for all the questions but I am very curious and very grateful for the responses!!

I believe the author’s point is that China’s growth will eventually slow down after 2019, because of demographic change and other factors. If between now and 2019, Chinese banks pile up more NPL beyond banks’ own ability to write down, as was the case in 2009 because of the huge stimulus. Government will not be able to help them without printing money.