China is overloaded with real estate and construction “bubbles,” which according to Prem Watsa, chairman of Fairfax Financial Holdings, could burst anytime. A similar situation surfaced back in 2011, but China sailed through it by significantly growing its credit.
“There is a monstrous real estate and construction bubble in China, which could burst anytime,” Watsa says.
Signs of growing China bubble
Watsa in a letter to the shareholders of Fairfax Financial Holdings Limited, lists down a few observations from Anne Stevenson Yang, an American, who has been in China for over 20 years and is the founder of JCapital Research in Beijing.
China saw around 5.9 billion square meters of commercial buildings between 2008 and 2012, which is comparable to 50 Manhattans in just five years. In the fiscal 2012, China completed 2 billion square meters of residential floor space or approximately 20 million units compared to an average of 2 million homes in a year built by the United States, at its peak. By the end of 2013, there were around 6.6 billion square meters of new residential space under construction in China, which are approximately 60 million units.
In Yinchuan, there are 30 million square meters of apartments available for the population of 1.2 million people. This equals 300,000 units that can accommodate 900,000 people, excluding delivered but unoccupied units. The city of Guiyang, capital of Guizhou Province, has approximately 5.5 million extra units for a city of 5 million.
Regarding home ownership, China expects a rate of 100% compared to 65% in the United States. There are even cities reporting ownership over 200% like in Tangshan, near Beijing.
Federal aid partly responsible: Watsa
A surge in the credit system is the potential financer of this real estate development. To support the real estate growth, the Chinese banks have surged equal to the entire U.S. banking system or 15% of world GDP.
A rise in the real estate market has enabled companies to borrow aggressively and invest in the real estate or lending on real estate in the shadow banking system. Japan faced a similar situation back in 1980s.
China has seen a huge influx of money since 2009 following the Federal Reserve aid along with aggressive growth in China backed by higher interest rate. According to Bank of America Merrill Lynch, the shadow banking system in China is approximately $4.7 trillion or 51% of the Chinese GDP.
Watsa, also, advises the investors to watch a recent BBC documentary, How China Fooled the World.