One of America’s leading China experts says that the Chinese economy and currency are both on the verge of collapse following excessive real estate speculation and failure to move away from a growth model dependent upon investment and asset inflation.
Speaking to Finanz and Wirtschaft Anne Stevenson-Yang, co-founder and research director of J Capital said that the central government has failed to transition towards a more sustainable growth model for China, and that the economy remains “one hundred percent focused on how to push growth with more investment.”
According to Stevenson-Yang China’s current economic model uses investment to achieve growth through increases in housing prices, leading to a neglect of other key economic metrics amongst regulators and marketplace winners.
“For the average middle-class or upper-class person in China the focus is all on how much will property prices increase this year…they are not thinking about questions like: How can I get my salary to go up?….they are not thinking about these fundamental economic things.
“That’s what the government is thinking about too, because that’s the way to drive growth and the way they get people excited and to get them to buy into the idea of the great Chinese miracle.”
Stevenson-Yang says this dependence upon asset-inflation to drive growth has already created a property bubble in the urban conurbation around Beijing, with drab industrial cities such as Zhuozhou in Hebei province seeing a tripling or even quadrupling of property prices within as little as a year.
According to Stevenson-Yang both the government and market are betting on high-speed rail to facilitate the creation of urban communities as far as 200 miles outside of Beijing, by enabling members of the working class to commute to the city centre.
“The story goes that all these people who can’t afford to live in Beijing but work there are going to live in places like Zhuozhou instead and that they are going to take the high speed rail into Beijing.
“Everybody is speculating like mad, but in the end nobody wants to live there.”
In Stevenson-Yang’s estimation property developer Evergrande epitomises the problem with China’s housing market and economic growth model and is “the biggest pyramid scheme the world has yet seen,” due to its high levels of leverage yet the low levels of occupancy of its 270 projects around the country.
For this reason Stevenson-Yang believes that China “is going to hit a wall,” which could be triggered by a bank failure, the inability of a reputable investment product to deliver returns or the capsizing of a major property developer.
Chinese currency headed for devaluation
Stevenson-Yang also anticipates a devaluation of the Chinese yuan as a result of the money supply expansion required to provide refinancing support to property developers.
“The reason why the developers can just keep on selling is because they keep getting refinancing,” she said.
“All the refinancing means that China has to keep expanding the money supply and when you keep expanding the money supply you have too much money and the value of the money declines.”
While the People’s Bank of China and the State Administration of Foreign Exchange have managed to keep the Renminbi stable thus far this year, Stevenson-Yang says their efforts are unsustainable, even given the copious war chest of foreign reserves amassed by the central bank.
“The only reason foreign corporations…are willing to take an exchange rate of around 6.7 Renminbi to the dollar is because the Chinese government is standing behind the exchange rate paying those dollars.
“At some point that has to stop because the Chinese government won’t have those dollars anymore.”