July 1 is a big day. It is not only the beginning of the U.S. Federal fiscal year, and my own birthday, but it is the 90th birthday, this year, of the Chinese Communist Party, founded in Shanghai in 1921. We spent two weeks touring China 8 months ago, and couldn’t help but note the urban explosion of housing, industry and private business, yet within a context of central state planning. Millions were pouring into the cities from rural China, and construction cranes blacked out the urban horizons. How long could China hype its economy, we wondered. This weeks Economist Magazine (June 21-July 1) attempts to explore what comes next for China in a brilliant 14-page special report. The big question: will the newly empowered Chinese middle-class and the Communist Party find common ground to move forward together, or will a new era of repression result?

Founding place of Chinese Communist Party, 7/1/1921


I wrote a blog on what we saw as the Chinese housing bubble, on Oct. 28, last year, shortly after we returned from our visit to Shanghai, Beijing and points between. Here it is: The Chinese Housing Bubble Could Burst
October 26, 2010 in China, housing bust | Tags: Beijing, China, housing bust, Milwaukee, purchasing power parity, Shanghai, Swiss franc (Edit)
Just back from 2 weeks in China, I came away with one overwhelming impression: China is temporarily hyping its economy building millions of urban residences that won’t be filled, creating a housing bubble that will make the one in the U.S. pale into insignificance. This brand new city of high rises along the Yangtze River in central China, for example, is just 5 years old and has a population of 600,000, larger than Milwaukee. Everywhere we went, from Shanghai and Beijing to cities in the interior, construction cranes span the horizon and modern highrises crop up in clusters that could house another 20,000 here or 50,000 there. 80% of the Chinese are rural, and 15 million a year move into cities in search of jobs in new and growing industries. By 2004, China had 108 cities with populations over one million, and that will swell to 221 such cities by 2025, vs. 35 in all of Europe. My feeling is that jobs won’t grow fast enough to keep up with the housing boom, and I understand from a recent article (http://www.zerohedge.com/article/next-chinas-property-bubble-step-function-explosion-vacant-inland-cities) that there are already 65 million vacant new urban homes in China. Building all these homes employs a lot of people, generates a lot of investment in construction and artificially makes the economy seem more active and prosperous than it is. But how long can China get away with a currency with buying power 40% below the dollar, and nearly 70% below the Swiss franc? As purchasing power tries to balance out, the demand for cheap Chinese goods may falter, industrial growth may slow, and China will have a housing bust to end all busts. Then what will the central planners do — manage another people’s revolution? My sense is that China’s growth is going too fast, and being forced beyond what markets will absorb. China’s urbanization is impressive, but in my book, excessive.

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