The Chinese government's announcement last week that growth for 2011 slowed only slightly to a still impressive 9.2% was greeted enthusiastically by the world's stock markets. Investors also remain buoyant on China's future. They appear to be buying the official line that the gigantic property price bubble is gradually and smoothly deflating, posing little risk to an engine that's so crucial to the future of global trade.
But the math tells a different story. The housing frenzy has driven prices so high, so fast, that a crash on the scale of the real estate collapse in Japan in the 1990s is a virtual certainty. And China's already exaggerated official growth rate could take a pounding, all the way to the zone of the unthinkable, into the low single-digits.
For this analysis, I'll borrow heavily from my former professor and mentor at the University of Chicago's Booth School of Business, Robert Aliber. Affectionately known to his students by his initials "RZA," Aliber is now retired to New Hampshire, but he writes a superb newsletter for his friends and clients. He spotted the reckless credit expansion, huge trade deficits and asset bubbles that now haunt both the U.S. and European economies long before most experts.
As Aliber puts it, "In China, the housing boom is a far bigger source of growth than is widely recognized, and it's totally unsustainable." Read more at CNNMoney
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