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China?s Housing Bubble Ponzi Scheme

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  • China?s Housing Bubble Ponzi Scheme

    You think we had a housing bubble? It’s nothing compared to China’s, as described in a recent article by Charles Hugh Smith. Here’s how it works.

    Almost all land in China is controlled by local governments and developers can only get a 40-year lease on the property. The lease payments, and the initial development fees, make up 40% of all local government revenue, so local governments have an incentive to keep lease payments as high as possible. This is further driven by local corruption lease fees going directly into the pockets of local officials, state subsidized housing units going primarily to the families of local officials, and so on.

    At the same time, many large economic enterprises are state-owned, and these state-owned enterprises (SEOs) have access to government loans at or near zero percent interest. They have used their access to free credit to invest in the speculative luxury real estate market, driving the prices higher, so an increasing amount of the liquidity of China’s central banks is tied up in luxury condos. The assets are still there, and are nominally increasing in value, as lease fees to the local governments keep escalating. But the bulk of the Chinese people have been priced out of the market and over 60 million luxury condos are currently vacant across China.

    This is another greed-fueled disaster waiting to happen, and when it does, it will have global ramifications. China’s sovereign investment funds are too important to economic activity outside of China for it not to.

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