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We returned from a grand tour of China nearly two years ago, and the one overwhelming economic perspective I’d gained was that China was experiencing a housing bubble that was near the bursting point. Today’s headlines indicate this is still true, and an explosion of the Chinese housing bubble could have economic repercussions for the U.S. every bit as great, or greater, than the risks of European economic meltdown. I’m not sure there is much we could do about it — the bricks and mortar in China are set in place, and the shelves at U.S. Walmarts are currently crammed with Chinese goods.

Here’s my first-hand observations upon returning from China in 2010, as reported in my blog then:

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 is being forced beyond what markets will absorb. China’s urbanization is impressive, but in my book, excessive.

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McDonald’s, my alumni group, just announced that U.S. 2010 4th quarter sales were up 4.4% in the U.S. Almost simultaneously, Nation’s Restaurant News announced that the number of independent U.S. restaurants declined 2% — losing some 5500 restaurants, in 2010 vs. 2009. The number of chain restaurants remained level. What’s going on? Rising commodity prices for groceries are tougher for independents to swallow than the more cost-efficient chains. As for McDonald’s, they continue to re-invest in “re-imaging” their restaurants, and coffees and other special beverages, together with strong promotions, are boosting brand appeal for the Golden Arches, though even McDonald’s sees some small price increases coming. As consumers, we need to watch for the bargains, as prices for almost everything, from groceries to gas, begin to climb. When I retired from McDonald’s at the Millennium, some 50 million customers a day were dropping by globally; Today it’s 62 million a day, and that still occasionally includes myself, as in this visit to a Shanghai McDonald’s last fall.

Lower Manhattan became famous, as it has for so many things when in the 30s, more than 200 skyscrapers (of more than 20 floors) were built there in a decade. Since 1990, when Chinese Premier Deng proclaimed that Shanghai would build a world-class financial district on the mud flats across the river from Shanghai proper, some 400 skyscrapers have been built there. We recently visited, and viewed the awesome day and night skyline of the Pudong district, as it is known, both from our hotel rooms at the Peninsula Hotel on he famous Bund, across the river, and down from 93rd floor restaurant the Shanghai World Financial Center, in the Center of Pudong, now I believe the world’s 3rd tallest building. A Chicagoan, Marshall Strabala, is the lead architect of the Shanghai Tower, now under construction there, which will soon soar above the Financial Center. Seen from across the river, Pudong resembles a space-age version of the Financial District in Lower Manhattan. If architecture can connote such a thing, we may be looking at the world’s financial capitol of the 21st century.

When we left Shanghai for the airport week before last, we decided to do so on the world’s fastest train, The Shanghai MagLev, a 19 mile magnetic levitation line completed in 2004 for a modest investment of $1.3 billion.

It is the world’s only such line. We actually took the photo of the speed meter as the train was slowing down. It hit 431 Km/h or 218 Mph on our 7 minute run to the airport. The acceleration and ride is totally smooth and quiet, and the cabins are wide and comfortable. If you sit on the side nearest the opposing track, as we’d been advised to do, you hear a sharp “crack” as the Mag Lev running the other way passes, at a combined speed of more than 400 Mph.

The Mag Lev is a thrill, and the only land vehicle faster is the Bugatti Veyron sports car. The Shanghai MagLev is essentially a demonstration line, the Shanghai to Beijing line currently beginning development will be a conventional high speed railroad. I doubt that we’ll see a Mag Lev in America in our lifetimes, because of the extreme costs, but it is a wonder.

On our trip through China the past two weeks, we were driven in Chinese-made cars, as well as a Buick Regal. The Buicks are built in Shanghai, where they are  considered a luxury brand. We saw them in every city and town we visited, and drove in a black one for 3 days in Beijing. An interesting Chinese brand is built by BYD, formerly a Chinese battery company that makes a lot of the world’s cell phone batteries. A guy named Warren Buffet has invested $250 million in BYD, which company PR lore says stands for either Build Your Dreams, or Bring Your Dollars — you pick. Another car we rode in, and it is shown here, is built by FAW (First Automobile Works) HongQi, a state-owned company, and has the look, fit and finish of a Lexus. FAW also builds a luxury limousine, including the one the President of China rides in, that sells for a modest $1.2 million. At the car-building city of Changchun, we saw dealers for virtually every global brand and saw car carrying trucks, each with 16 new Chinese cars aboard, by the hundred. China is now the largest automobile market in the world, out selling the U.S. by 60%, and its cars are nearly ready for the U.S. market. Watch for their EVs (electric vehicles). Warren Buffet is.

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 is being forced beyond what markets will absorb. China’s urbanization is impressive, but in my book, excessive.

December 2017
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