Steel & Glass

Every now and then you can discover a hidden message in the New York Times, if you have the background knowledge to read between the lines.  It's almost always a 1-2 combination of flat news-of-the-day story positioned next to a softer article about some local culturish thing affecting the subject of article 1.  Article 2 never directly states its intentions, but there's enough context between the lines to decode the message.

The top left article on nytimes.com right now details China's Central Bank declaring a not insignificant hike in their prime interest rates.  Since the global market crash in late 2008, it's been largely China's booming export and construction industry driving global growth, thanks partially to heavy government stimulus in the form of infrastructure and planned housing projects.  Chinese banks were also a main factor in their strong recovery, as they were much more liberal with their lending during the post-crash period, whereas American banks (the ones still in business) were more averse to lending (Matt Taibbi has a great article from a year ago about how American banks took TARP and other federal subsidy funds and, instead of lending as intended, bought treasury securities which were paying out a higher yield than the negligible interest rate they were paying at the discount window to borrow the money in the first place, effectively loaning the government back its own money and collecting a 2-3% spread.  I'll try to find and link it later.)  The rate hike is an effort to deflate inflation concerns, both specifically targeting the housing market and for their currency in general.

So China's booming economy and pegged currency exchange rate meant they were exporting like crazy and had more money than they knew what to do with, and banks were shoveling money out the door.  So they found something to spend the excess cash on: more construction projects.  Even today, new high speed rail plans are being contracted, and so many dams are being built on China's stretch of the Mekong river that Thailand, Cambodia, and Vietnam are asking for a ten year freeze on construction to find alternatives that won't completely annihilate the downstream fishing industry.

They also build cities.  Not developments; cities.  The second NYT article of interest details Ordos, a large but mostly poor city of 1.5 million that serviced the materials mining industry in the Mongolian highlands.  Specifically, the article is about the new 15-square-mile patch of nothingness that has been transformed into a modern metropolis of glass, steel, fresh pavement and heavy landscaping, as an emulation of Dubai and other shining jewels of architecture in the middle of otherwise hostile geography.  Offices and apartments and houses are being snatched up immediately after (or even before) construction at record prices, but they're being purchased as investments.

My mother would find this story familiar.  She got her first taste of mass-construction planned-community real estate in 2004 when she moved to Naples, FL.  She bought a condo during a construction phase for $120,000 and then sold it six months later for $180,000.  Then she bought another condo at 150k and sold it for 200k the next year.  This became a main source of income for her as she flipped condos left and right, each one basically identical to the last, in identical sculpted communities, increasing the asking price 20% each time.  She continued playing the insane Naples housing market until she was stuck in a half-finished development for over a year (towards the end of the bubble in 2007) and sold at 70% of the original asking price, when she moved into a new speculative retirement/golf community in the middle of nowhere in New Jersey.

So that new Ordos district is basically a ghost town; a city built for 300,000 has approximately 30,000 permanent residents, and the local economy seems driven by hotel revenues generated by Chinese government officials occasionally visiting the area.  The new property is owned but largely unused (like much of the Naples landscape after around 2006), and nobody wants to sell at a discount because they feel that real estate prices must and will rise.  Ladies and gentlement, I bring to you the Great Housing Bubble of China.

Of course, the Times can't print "China's period of rising interests rates to defer inflation and speculative housing prices is basically the same thing as our 2004-2008 bubble", but they can dedicate front page space to the plight of Ordos and let us draw our own conclusions.