Hello there Purchasing Power Parity GDP advocates and China horn tooters in general, let’s discuss real estate. 
Bonds of China’s Largest Property Developer Crash
Please consider Another Big Chinese Property Domino Is Wobbling.
Shares and bonds of property giant Country Garden Holdings dollar-denominated bonds maturing in January 2024 are trading at 25% of their notional value, compared with 81% as recently as mid-June.
Contracted sales at the country’s top 100 developers plunged 33% from a year earlier in July, according to China Real Estate Information.
Beijing’s latest moves to support the sector—including making it easier to buy an apartment—don’t seem likely to help much. The fact that even the biggest developers can still run into trouble, nearly two years after Evergrande’s struggles first reached a fever pitch, presumably gives potential home buyers little confidence.
Speculative demand for housing—in the form of second and third, often unrented homes—supported the market for years, helping paper over China’s weak demographics. But the protracted downturn and the government’s hands-off approach appear to have seriously undermined the assumption that housing prices will keep going up endlessly, over the long run.
Goldman Sachs says China’s urban housing demand will fall to 11 million units this year, from 18 million units in 2017. The country’s developers built around 13 million units a year on average over the past decade. And the bank says Chinese developers have around $9 trillion of inventories—including raw land and uncompleted projects—equivalent to around 4.8 years of estimated contracted sales this year.
Purchasing Power Parity Silliness and the Myth China Passed the US in GDP
The subject of Chinese real estate came up a few times recently with still more readers insisting China passed the US in GDP.
One reader commented “The best comparative measure of national economies is widely accepted to be Purchasing Power Parity (PPP). Comparison of nominal GDP by converting all output to dollar equivalents is not meaningful. PPP GDP captures the real productive value of an economy. By PPP, China’s economy surpassed that of the U.S. several years ago and is substantially larger.”
Let’s review Purchasing Power Parity Silliness and the Myth China Passed the US in GDP
Hoot of the Day
The CIA clings to non-PPP based GDP. What a hoot! The CIA has nothing to do with this. If anything, it is the IMF that wants to back PPP for political reasons. I will skip other inane comments and get straight to the point.
Michael Pettis: “Adjusting GDP for differences in purchasing power makes a great deal of sense in certain cases, but the way it is done is so filled with problems that it is extremely difficult to find any economist who takes these measures very seriously,” and to that I would add, especially for countries that hide debt as assets and who calculate GDP in vastly different ways.
New Comments Today
- If you are going to cherry pick how China over counts GDP you have to also point out the way that the US over counts GDP. The US imputes a huge chunk of GDP that China does not (like owners equivalent rent). Also in the US a significant portion of GDP is generated by transactional inefficiency (legal and accounting services) and price gouging (health care) which happen to a much smaller degree in China or anywhere else for that matter. Even if the Chinese like to carry assets at book value rather than market value this is common conservative approach to company valuation in finance even in the US. I am not convinced that this way of carrying assets introduces an overwhelming amount of bias.
- The bottom line to our world is about real physical entropy changes. This is what ultimately matters the most to most things. On this front the Chinese economy clearly dwarfs the US economy. For example China has about 1/3 the electricity generation capacity of the entire world.
Grossly Distorted Procedures
I have picked on the US countless times over GDP calling it “Grossly Distorted Procedures”. Many have not read my past comments questioning US GDP.
But the property bubble in China is unlike anything else in the rest of the world. China has vacant malls, vacant airport, vacant entire cities. The State Owned Enterprises are all insolvent.
The physical entropy idea is nonsense. Wasting energy to build stuff no one uses is hardly a good measure. And China’s export model makes it overly dependent on energy imports while the US is nearly energy independent. How about we factor in the environmental damage due to coal use in China? What about China’s water pollution and breathable air?
Only crackpots would suggest energy as the best measure of an economy.
Accurate Reader Comments
- One reader commented “So many are just looking for a reason to talk trash about the USA. I wouldn’t read much into it.”
- Another accurately commented “Everyone knows the standard of living in China for the average person is nowhere close to the US.”
- A third accurately commented “The number one reason China is unlikely to overtake the US is communism. It doesn’t work.”
What Product Was Produced?
An important point regarding property bubbles and China pertains to payments. In the US, a mortgage is given when the house is complete.
In China, real estate firms sell homes before completing them. Buyers make mortgage payments even before they are in possession of the property. These payments are used to finance new construction.
Nothing Produced, Mortgage Boycott
In many cases, Chinese builders produced nothing at all.
Evergrande blew up over this. And now, an even bigger developer is crashing.
For discussion, please see my August 2022 post A Mortgage Payment Boycott Fuels the Implosion of China’s Property Bubble
The Secret Behind China’s Ghost Cities
Curiously, vacant, crumbling, uninhabited buildings are worth more than if someone tried to make them livable.
Rent would not come close to paying the mortgage and you would have unhappy tenants anyway.
Flashback 2021
Some of us have been aware of this for years. Others cling to the preposterous idea that China has overtaken the US and concoct ridiculous methods of justifying that idea.
What Happened to China’s Ghost Cities?
On December 17, 2022 I wrote A Reader Asked, What Happened to China’s Ghost Cities?
Please give it a look.
More Reflections on PPP
Pettis: “Unless you believe that the US fails to recognize losses on investments to anywhere near the same extent, if you really want to compare the two economies more usefully you would have to do at least two adjustments: you would have to adjust China’s GDP upwards for price differentials and also adjust it downwards for unrecorded losses.”
“Chinese lenders, banks as well as households, treat a substantial portion of the debt as if it were implicitly or explicitly guaranteed by central or local government agencies. This means investment losses don’t show up as losses (expenses) because it is politically difficult to do so, and are instead rolled over and so show up as assets.”
But another difference – and this may be just as important, or even more so, then relative price differentials – is that the two countries’ balance sheets are not comparable, because of debt, and have materially different ways implicitly to recognize the gap between the cost of an investment and the value of that investment. Adjusting for this fact, I would argue, is just as important in any comparison of the two economies as adjusting for price differences.
Yeah, OK. The US drops bombs and gives then to Ukraine who immediately uses them. This added to GDP.
The US also has crumbling malls and a commercial real estate market mess as well. But in the US, we have write downs and losses on CRE and residential property. In general, bad debts are written down by banks. In China they are papered over.
And nothing, anywhere in the world matches the enormous scale of China’s property bubble that added to GDP even before any property was produced.
What’s the PPP on a Home in Dallas vs Beijing?
Someone please explain what the “equivalent” price of a home in Chicago, Dallas, New York, and Beijing is on a PPP basis.
Do we factor in air conditioning, style, location, amenities, crime, and pollution?
How about we start with whether or not the new construction is occupied and livable, assuming the house exists at all.
PPP Repeat Conclusion
“Adjusting GDP for differences in purchasing power makes a great deal of sense in certain cases, but the way it is done is so filled with problems that it is extremely difficult to find any economist who takes these measures very seriously,” and to that I would add, especially for countries that hide debt as assets and who calculate GDP in vastly different ways.
Despite the fatal flaws in PPP, and despite failing to account for the world’s largest property bubble, I expect more ridiculous comments justifying PPP, about energy as a measure of product instead of a means to make a product, and certainly because “So many are just looking for a reason to talk trash about the USA.”
Thoughts of the Day
- Comparisons of US to China using PPP is horrendously flawed. China, by any realistic measure, did not pass the US in GDP.
- “It is far, far better and much safer to have a firm anchor in nonsense than to put out on the troubled seas of thought.” John Kenneth Galbraith (1958).
- “Few things are harder to put up with than the annoyance of a good example.” Mark Twain, The Tragedy of Pudd’nhead Wilson (1894)
Looking for Deflation? Cast Your Eyes on China, Not the US
Please consider China Exports and Imports Collapse, Harbinger of the Global Economy?
More importantly, please consider Looking for Deflation? Cast Your Eyes on China, Not the US
Demographics in China have turned hugely negative. Coupled with a massive debt bubble that resulted from China trying to achieve ridiculous GDP targets, China is following closely in the deflationary footsteps of Japan.
China has not passed the US in GDP and will not do so any time soon.
[…] In recent years, Yang Huiyan, the chair of Chinese real estate giant Country Garden, has experienced a significant decline in her wealth. Over the past two years, her net worth has plummeted by a staggering $24.8 billion, largely due to the drop in shares of Country Garden, which have reached an all-time low. This turn of events marks a dramatic reversal for Yang, who was once hailed as the world's youngest female billionaire when she made her debut on the wealth rankings in 2007 at the age of 26.[0]The impact of this decline in wealth has been devastating for Yang Huiyan, once considered China's richest woman.[1] As the chairperson of Country Garden, she has seen her fortunes decrease by more than 80% since June 2021, falling from a peak of $28.6 billion to $5.5 billion.[1] Her father, Yang Guoqiang, who founded Country Garden, had transferred a 70% stake in the company to her in 2007 before its initial public offering.[1] However, due to his age, he has since stepped back from the company.[1]According to Bloomberg's Billionaire Index, Yang Huiyan has lost 84% of her wealth, making her one of the biggest losers in terms of wealth among billionaires worldwide. The decline in her wealth can be attributed to the economic crisis brought on by the pandemic, which has resulted in a loss of approximately $28.4 billion in revenue.The situation has become increasingly dire for Yang Huiyan, as her building conglomerate, Country Garden, teeters on the edge of default. The company's shares have fallen 23% in Hong Kong, following news that it has missed interest payments on two U.S. dollar bonds. Although Country Garden still has a grace period of 30 days before a default can be triggered, the decline in the company's shares has contributed to Yang's significant loss of wealth.[0]Yang's wealth is primarily derived from her 57% stake in Country Garden.[1] The company's shares fell 23% in Hong Kong this week, as it failed to pay $22.5 million that was due on August 6. This decline in shares has directly impacted Yang's net worth, which reached its peak at $29.6 billion in 2021.The financial troubles faced by Country Garden have also had a wider impact on the Chinese property sector. As one of China's leading developers, the company's missed interest payments and declining shares have caused investor interest in the sector to dwindle.[2] Shares in the construction market in Hong Kong have plunged 16% as a result of these developments.[3]The decline in Country Garden's shares has been accompanied by a series of other setbacks for the company.[0] Moody's recently downgraded its rating to B1 from Ba3, placing it in junk territory. The company also canceled a $300 million share sale and capital raising, further exacerbating its liquidity concerns.The challenges faced by Country Garden reflect the larger struggles of the Chinese property market. Contracted sales at the country's top 100 developers have plunged 33% from a year earlier, indicating the impact of the economic crisis on the industry.[4] The decline in gross profit margins, forex fluctuations, and the downward trend in the real estate market have all contributed to Country Garden's financial woes.The potential default of Country Garden is a cause for concern, as it could have far-reaching effects on China's housing market. With four times as many projects as Evergrande, another troubled developer, a debt crisis at Country Garden could significantly weaken buyer confidence in solvent private developers. The company is currently seeking funds to resolve its debt crunch while aiming to protect the rights of its creditors.Overall, the decline in Yang Huiyan's wealth and the financial troubles faced by Country Garden highlight the challenges in the Chinese real estate market. As the company fights to overcome its liquidity concerns and the wider economic crisis, the future remains uncertain for Yang and the once-prominent real estate giant.0. “World's Onetime Youngest Female Billionaire Sees Wealth Plunge 82% As Default Risks Grow” Forbes, 10 Aug. 2023, link to forbes.com. “China's Largest Developer on Precipice of Default” RealMoney, 10 Aug. 2023, link to realmoney.thestreet.com. “Top Chinese Real Estate Developer Yang Huiyan Loses 84% of Her Wealth” Market Realist, 10 Aug. 2023, link to marketrealist.com. “She lost more money than anyone on Bloomberg's billionaires list since Covid. China's property crisis is to blame” KAKE, 9 Aug. 2023, link to kake.com. “Bonds of China's Largest Property Developer Crash to 25 Percent of Notional Value – MishTalk” Mish Talk, 10 Aug. 2023, link to mishtalk.com; […]
“China has vacant malls, vacant airport, vacant entire cities.”
As opposed to having a shortage of everything….. After all: Everything “we” ever did manage to build, has by now fallen down. And noone, anymore, has the ability to fix a broken lock, much less build an airport or repair a bridge.
A functional airport is a pretty valuable piece of kit. Ask a homeless, or homeowning for that matter, guy in San Francisco what he would prefer to be given: An airport, or a ban on erecting even something as simple as a cardboard box.
Then, look under the hood: In order to build those cities and airports, with sufficient nonchalance to not even bother counting properly even; you need a massively resourceful underlying economy: Mining, refining, earth moving, tool building, big-project management and coordination, product development…. etc., etc. All of which America once possessed. But no longer does, since all those resources has by now been forcefully transferred to idiots who produce nothing whatsoever and “make money off my home”, instead.
Those resources; higher order/capital goods if you wish; are not solely useful for building empty cities. They can be repurposed. An operational mine, is an awful lot more valuable than not having one. Having all that is a good thing. (Mostly: One of the things they can be repurposed for, is military means…) Massively “overproducing” final goods, while certainly not an ideal use of scarce resources, is still a sign you’ve got the ability to produce. Something out-of-control housing shortages, falling down bridges, buildings and planes; and increasingly even food shortages, most certainly are not.
As for “comparing” LTB or BBC or GDP:
Isn’t the purpose of that silliness exercise, supposed to be: “Determining” which “economy” produces the most value over all? If so, what the heck do “we” still produce, which can even hope to balance out the utterly massive overweight of darned near everything, which is currently produced in China? Don’t you reckon your implied valuation of the occasional rap song, would have to be pretty darned ridiculous, in order for it to make up for a hundred thousand miles of high speed trains and the like?
“We” USED to produce a lot. We don’t anymore. Now, all “we” “produce” is instead idiotic self promotion exercises like “GDP.” Along with paper pieces with dead guys’ faces on them. Which we, as part of “GDP,” then pretend compares favourably with building a bullet train which works. Instead of watching yet another ageing plane, or bridge, or building, or president.. from our golden-era, fall down.
The only reason this is even a “debate”, is that: One way of becoming a millionaire, is to start out a billionaire and then waste 99.9% of what you once had. At one point, “we” walked on the moon. Without even much aid of computers. While at that point, “they” starved to death trying to grow rice halfway as high up as the moon. And now, “we” have to resort to ever more silly and contrived arbitrary “measures”, to have any hope of pretending we’re even still sort-of in the race. That’s what decay, undifferentiated and all-encompassing, looks like.
I don’t eve want to sound like some sort of China-apologist. They’re commies. They’re very far from all-that. But, 50 years post 1971, we’ve decayed so badly, and so thoroughly, that we’re not even the proverbial flee on even that bunch of commies you-know-what. That’s the issue America faces. Not “China” this and that. Just this: “WE” are a failed state. Full stop. If we want to compare ourself with anyone, it’s Argentina. They too, were once bigshots, important and stuff. And they to, still retain an ever dwindling number of dilettante clowns, in tight orbit around their Fed and government, who cling to the silly idiocy that they somehow still matter at something. I suppose in soccer they still do. Just as we do, in rap music.
Human ingenuity cannot overcome a global drought, energy dissection and
dwindling easy to extract resources. They cause unrest and revolutions. Niger by France and the CIA ?
I agree that China papers over a lot of bad debts among other things. You cannot convince me that the US doesn’t paper over things as well. I think it goes beyond papering over bad debt in that we are papering over bad banks. We may soon find out which banks and CRE, for that matter, are papering over bad debts.
In Bangladesh 3 million people died in the 1940’s after Japan dissected the
rice route from Burma (Mynmar). The British couldn’t provide ships to ease starvation. There was no starvation in the ME and Africa under the British mandate. Yelen : Bangladesh poor died, the rich survived. They could afford the inflated prices of rice. They created the rice bubble.
Egypt has 100M people. Their population grow exponetially. Egypt cannot support
that Malthusian growth. Their econ declined sharply. They export their young to Europe, US, and S. America, spreading Islam, sending money back home.
A Chinese population shrinkage is a good thing. A global shrinkage from 8B
to 5B/6B is needed to adjust to our dwindling energy and commodities resources.
Population will continue to increase. You can’t easily stop it except under extreme conditions (artificially as in China, or through extreme conditions such as disease or drought, as human history has shown).
Human ingenuity is the main reason that population will keep increasing. We can figure out how to overcome barriers, like resource scarcity, disease, drought etc. As Kidhorn mentioned earlier, it used to take 90 people to produce the food needed for 100 people. Now it takes 2. Human ingenuity.
Not so.
According to United Nation statistics.
Population replacement level requires a minimum of 2.1 children per woman.
Nearly all developed countries are well below the 2.1 level – China hovering around 1.5.
Only Africa as a continent has replacement levels above 2.1.
Without immigration most western countries populations would drastically reduce.
Peter Zeihan has done a lot of research into this topic – although I don’t always agree with his conclusions
The pertinent question is how much housing Chinese investors have purchased in the US if the Chinese are forced to unload akin to the Japanese in 89-90..
“Demographics in China have turned hugely negative”
——-
China’s working population will shrink in the coming decades and keep the nation’s economy from surpassing America’s, research firm says
Phil Rosen
Aug 7, 2023, 11:48 AM PDT
– Decades of China’s one-child policy have led to an aging population and lopsided ratio between elderly and youth.
– The country is on pace to lose nearly half of its current population by 2100, per Terry Group, which says that bodes poorly for economic growth.
– Chinese government data showed China’s population shrank in 2022 for the first time since 1961.
China’s aging population will have a direct impact on its ability to compete with the US and other nations on the world stage, according to a report from consultancy firm Terry Group.
The latest United Nations projections say China will lose nearly 50% of its population by the end of this century. Further, the Terry Group researchers say it’s not only overall population decline that poses a threat, but the climbing proportion of elderly people.
In 1990, 5% of Chinese people were 65 or older. That’s nearly tripled to 14% today, and the Terry Group anticipates the cohort making up 30% of the population by 2050.
…
link to businessinsider.com
The government will be rolling out policies to reverse the demographic collapse but I don’t see how they can do it without reverting to hard oppression and even that probably won’t work.
They’ll just make ’em in jars.
Once robots start taking human jobs en masse, the old metrics go out the window. Economies will collapse worldwide as make work jobs disappear and tax revenue evaporates.
So population growth may not be a metric to worry about, unless you take the side that the that robot replacement of workers won’t happen and the world will continue as it is today.
150 years ago, most in the US worked on farms. Now 2% do. Making jobs less labor intensive has been going on forever. People will still have jobs. They’ll just be different jobs.
We both replied at the same time. However, your reply was more succinct. Well done.
Anything is possible. But we have been automating work for many centuries now and yet, there are still plenty of jobs and even worker shortages, all while population has grown from 1 billion to 8 billion.
And for that entire time period people have been worried about machines taking over all the jobs. It hasn’t happened after hundreds of years of automation and it probably won’t happen in the future, because human ingenuity also keeps creating “new” types of jobs.
All this human ingenuity that creates machines, robots, and new types of jobs, has also increased productivity, economic growth and living standards all over the world for centuries. I see no reason why it won’t continue to occur.
77 years is a long way to look ahead. The key words are “if current trends continue “. They might, or they might not.
2050 is hard enough to predict, and statistically I have a 1 in four chance of still being alive then.
Back in the 80s, China was projected to have 3 billion people by 2100. The US mid-west was also supposed to be like the Sahara dessert by 2000.
People in China don’t buy homes at all. It’s only a long term rent (99 years) of the space. The next century all the land will return to the Communist Party.
In EEUU, Japan or Spain you really own the land forever (Tough in Spain you only buy the surface, underground is State’s property: oil, coal or diamonds are not yours)
Most of the world’s countries do not allow their people to have rights to the minerals under the land that they own. The US is one of the few that do. In France if they find oil under my house they will buy my house at the price they want, move me off and pump out the oil. I would get nothing.
Good point Doug 87. I found out the area I live in had an oil boom 100 years ago or so. When it subsided they sold the land for housing development but kept the mineral rights. Not even sure how that works but do know I do not own the mineral rights on my properties. There is still one small oil well though still chugging in the back of the neighborhood. Assuming it’s slant drilling under my bedroom or something.
The PBOC will not support the “regional banks” ==> the banks are closed, the
money is gone.
That’s gonna leave a mark.
I have lived in China. I’m not there now. One thing I never see mentioned anywhere is the amount of property that Chinese people have in other countries. I know 3 different girls and their direct families have 4 houses in Western countries, Australia, USA and Canada. I think this is more common than a lot of people think. I always felt that a Chinese housing crash would lead to a major global housing crash as nobody appears to be factoring this in.
The price of Chinese property is indeed insane. 42 times average earnings from one statistic I read a few years ago. I believe that may have come down to the low to mid 30s now but not certain on this.
Ton Ton,
Some residents in my area in TX were discussing on a local forum tour buses with Chinese people around town. I didn’t believe it until I saw one. It was assumed they were scoping out real estate since this is not a tourist destination.
I didn’t confirm but if one was doing that it’s some of the best investment properties this side of the Mason Dixon and this side of the Yangtze. The 08 crash had next to no impact in these parts. Damn near impossible to lose money. I’m going look at a property myself today.
I think something similar happened with Japanese in the 80’s buying US properties. Didn’t work out so well.
Yes, I agree Babelthuap. Location is everything. I come from a western European country and I purchased a few years after the crash here. I also purchased outside of a main city close to where I come from. The property has risen a lot and I rent it out when I’m abroad and the rent is very high for the price I got it for. I think anyone buying in California, Canada or Australia though, in the popular areas, is going to see a massive drop.
China’s saving rate is high. Ghost cities, ghost bank accounts. To stimulate
the economy PBOC raided people bank accounts for an IOU. The money was spent
on cost centers doing nothing all day. The cost centers are gone, the money is gone.
They have a lot of premium stock pens now though!
The Chinese government is better if you want to build a huge megaproject quickly like an airport or highway. They just get it done and don’t worry about appeasing all the special interest groups. But, it’s bad if you want money directed towards the best uses. No single person or small group can figure out how to allocate capital better than an entire population. In the US, it’s rare to see development in the private sector that isn’t put to use. There are a lot of checks and balances in place to prevent it.
It’s form of government is also why China has failed to develop a middle class.
Essentially the Chinese government has decided their economy exists entirely to serve the demand of the rest of the world (worlds manufacturing) at the expense of their own citizens.
“No single person or small group can figure out how to allocate capital better than an entire population.”
Please explain that to K st in D.C.
“No single person or small group can figure out how to allocate capital better than an entire population.”
excellent quote