Is the Chinese Miracle in Danger?…

At the beginning of the week, I mentioned on social media that Turkey can be the EU’s China, expressing that Turkey has serious shortcomings, but its growth model is nothing like China’s.

While I was talking about this, the real estate bubble has burst in China, apparently trigging a financial crisis.

The U.S. real estate market has by far the highest value compared to those in other countries. Therefore, the largest investments, loans and portfolios in financial terms are made, granted, and created in this country. In terms of market size, the United States is followed by Japan, United Kingdom, Germany, and China. The value of the U.S. real estate market is around $3.5 trillion, while Japan is worth less than a third of that. The UK, where everyone would love to buy a house, has a real estate market worth 800 billion dollars and Germany 700 billion dollars. China, on the other hand, is in fifth place with just over $650 billion.

The first question is this: Does Chinese banking have the power to handle a real estate bubble bursting? When we look back, we can see that Chinese banking sector has failed in terms of exhibiting prudent behaviour in complicated situations. We also know that Chinese leaders wore their national financial system out in order to claim a share from the global markets. The financial sector, which continued to grow in spite of non-performing loans, tried to survive taking advantage of soaring exports, but of course, the real estate bubble is something else.

There is not a single Chinese city in the “cities with real estate potential” rankings, in which even Moscow and Istanbul are in the last place. Investors do not see a housing future in China, perhaps because of the political regime. The constitution has changed in China, allowing China president to remain in power for life. Investors do not prefer acquiring property in autocratic countries, which is the second reason behind the burst of Chinese real estate bubble.

The second question is: Will the real estate bubble that burst in China affect the rest of the world? In fact, the real problem is not so much the bursting of real estate bubble, but the number of investments that institutions have in China, especially those who have granted lines of credits and loans. If these institutions hold the bills and bonds of developed or developing countries, or movable and immovable properties, they will need to sell them quickly. What needs to be examined in this situation is how many portfolios the banks that are in trouble and financial institutions that are about to be in trouble have abroad.

The “Japanese Dream” had similarly come to an end…

A similar crisis broke out in Japan in the 1990s, resulting in Japanese trying to cover their losses by selling their assets abroad and bringing them to their home country. When they brought the dollars that they kept abroad and converted them to the Japanese yen, they have covered their losses, but they also inflicted great damage to Japanese economy, which was growing through exports at the time. Because they caused a constant increase in the value of their national currency as they brought in dollars from abroad and converted them into yen. This is the main reason that lies behind today’s financial bottleneck in Japan and the political crises.

In the early 2000s, I predicted that such a scenario could one day become a reality, and that China’s monetary committee-managed foreign exchange market might not work in the future. If businesses in all sectors that have suffered losses due to their damaged real estate portfolios start a serious asset sale abroad, the conversion of these assets into Chinese yuan will obviously cause quite a turbulence. No matter how many times the Central Bank of China intervenes in the market, it will not be able to stop such an intense foreign currency sale and the national currency will rapidly appreciate.

I think that the important thing here is the decisions that financial institutions and investors, who are financially troubled or are about to be, will make regarding their assets outside the People’s Republic of China. The Chinese dream too can end in the most unexpected way, just like the “Japanese Dream” ended. I wonder whether the Chinese government has a plan B ready to tackle this problem. I think it has, but every plan looks good on paper. The important thing is that the plans work.