The next bubble - Chinese Property & Construction Debt ?

If you haven't heard of it, try to get your hands on Project X. It is a movie about teenagers plotting to throw a house party while the parents are away. And what they actually pull off is beyond huge ... it is a party of epic proportions. The kind you wish you had, that turns you into an instant local hero in the eyes of your fellow party monsters for years to come. 

But so too is the fall out and hangovers afterwards - epic. Warning - if you have kids, you might decide to preemptively lock them up for good after seeing this. 

It seems like the party might soon be over for Chinese property developers too.   Available information seems to point out that until recently Chinese construction was like a Project X type house-party of epic proportions. Everybody has had a ball of a time, building ghosts cities and constructing new developments all over the place like there is no tomorrow. 

Source: http://www.ibtimes.co.uk/china-ghost-town-city-441932

Read more about it:

• here and watch the video clip
• here
• and here- and watch the video clip
• and here

But as with all good things in life, it seems like that part of the house party where everybody were having a blast, might be over. The party music is not pumping that loud anymore, the bottomless beer is starting to run out, the pretty people don't look that pretty anymore, and head aches are setting in. 

The first cracks in the wall started appearing. In the last 2 or so weeks the first debt defaults on Corporate Bonds started happening - sit tight and read the Bloomberg article here

It is interesting to note that during the previous (East) Asian collapse (which coincidentally also had an exceedingly optimistic construction growth spurt in places like Thailand), the first rumbles of collapse also started with default on bonds issued by construction companies - read more about that here. 

Read these two articles by Zerohedge for further information:

• Article 1 - Zerohedge
• Article 2 - Zerohedge

Obviously one cannot keep on kicking the can down the road and borrow money like there is no tomorrow. At some stage somebody has to pay the Pied Piper. 

And undoubtedly, other people would have made brave decisions on where to invest your money.  At this stage it is anybody's guess how much (international?) investment might be tied up in these bonds - and what exactly will be extent of contagion this time? How will it impact the economy? What about global markets?

But what is clear, is that barring a small miracle, the epic house-party just might be over.

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The Subprime crisis - another contagion case study

Below is a short presentation that summarizes key aspects of the Subprime crisis - factors causing and contributing to the bubble, and what happened in the aftermath of this #bubble.

Bubble spotting - Sub-prime crisis / Housing bubble 2007-2008 from Benjamin Van As

The Subprime crisis (for at least the second time in recent history - the other being the Asia debt and currency crisis in 1997), showed the massively devastating effect that contagion can have on the financial markets on a global basis.  Whilst the crisis (at least on the surface) appeared to have its original in one market (being a specific portion of the residential housing market), it quickly proved that it was not an isolated problem, as the problem spread into various other local and international investment markets.  

Due to the increasing complexity of financial instruments these days, as well as the interwoven nature of markets and international cross-border transactions, going forward it is safe to say that it will become more and more difficult to isolate a sick patient (market experiencing a bubble) in time to prevent loss of money. 

Furthermore the current electronic age is aiding and abetting in both the ease as well as speed of transmission (infection).  The fall and or crash of a specific market on one side of the world will within minutes or seconds cause a ripple effect and spread to other markets. And one cannot stop this by quickly unplugging the computer after hearing the lightning strike or seeing the flash.

The risk of contagion will therefore in all likelihood pose very unique challenges in the financial world going forward.  One could argue that, as a minimum, the nature and extent of due diligence required prior to making any kind of future investment decision, would require some serious consideration. But not only this -  political as well as financial policy formulation can perhaps do with some rethinking as well. There seems to be not enough consideration or understanding of the potential cause and effect of proposed strategies or policies these days. And general ignorance about Newton's Laws. The words "unintended consequences" and "collateral damage" have become meaningless and empty rhetoric, used by those who have little intention of taking any responsibility for their decisions. 


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