Chinese Economy - Tremendous Overcapacity in Real Estate and Industrial Sectors | The Long Crisis

Vitaliy Katsenelson of the Contrarian Edge blog has presented a compelling presentation entitled, China – Mother of all Black Swans which may be viewed in full Here.

Mr. Katsenelson addresses the issues of China’s tremendous overcapacity in the commercial and residential real estate market as well as in most industrial sectors. He vividly demonstrates that 10 years of double-digit growth rates in the Chinese economy has led to high levels of capital misallocations.

For example, South China Mall, the second largest shopping mall in the world which is second only to Dubai Mall, has a 1500 store capacity, 7.1 million square feet of rental space, was opened in 2005, and still has 99% of its space empty.

Another example, is that the Chinese government built a city named Ordos, located in inner Mongolia, which was designed for one million residents. The city features a high level of infrastructure, with well designed office buildings, residential dwellings, retail space, and pleasant amenities, but is still a ghost town, mostly empty of residents.

Overall, the Chinese planners have made a gross mistake in forecasting that is all too common for politicians and bureaucrats. The capacity for industrial production was increased based on straight line projections that high growth rates could be maintained forever. However, since most of China’s factories produce items for export, and China’s main customers such as Europe and the United States are now in a state of depression, China is faced with vast industrial overcapacity as growth in their export markets is non existent. In fact, recently exports have dropped about 25%.

If Mr. Katsenelson points are valid, as I believe they are, the world economy is in very big trouble. China is widely viewed as the engine that will pull the world out of recession, which is actually a depression in many nations. However, should China indeed prove to be the mother of all black swans with the consequences of the amount of over production and bad loans on bad projects overpowering even their deep reservoir of foreign exchange reserves, China may well turn out to be an anchor which carries the world economy to depressing depression depths.

For additional arguments as to why conditions in China may be about to unleash a ferocious black swan upon the world I suggest that you surf over to the Contrarian Edge blog.