What Happens When the US, Europe and China Collide?
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Unfortunately for the Chinese, and possibly the world, that country’s planned consumer boom is quickly morphing into a dangerous real-estate bubble. China has caught the Dubai virus and now every city there with more than one million inhabitants (at least 160 at last count) aspires to brand itself with a Rem Koolhaas skyscraper or a destination mega-mall. The result has been an orgy of over-construction.
Despite the reassuring image of omniscient Beijing mandarins in cool control of the financial system, China actually seems to be functioning more like 160 iterations of Boardwalk Empire, where big city political bosses and allied private developers are able to forge their own backdoor deals with giant state banks.
In effect, a shadow banking system has arisen with big banks moving loans off their balance sheets into phony trust companies and thus evading official caps on total lending. Last week, Moody’s Business Service reported that the Chinese banking system was concealing one-half-trillion dollars in problematic loans, mainly for municipal vanity projects. Another rating service warned that non-performing loans could constitute as much as 30% of bank portfolios.
Real-estate speculation, meanwhile, is vacuuming up domestic savings as urban families, faced with soaring home values, rush to invest in property before they are priced out of the market. (Sound familiar?) According to Business Week, residential housing investment now accounts for 9% of the gross domestic product, up from only 3.4% in 2003.
So, will Chengdu become the next Orlando and China Construction Bank the next Lehman Brothers? Odd, the credulity of so many otherwise conservative pundits, who have bought into the idea that the Chinese Communist leadership has discovered the law of perpetual motion, creating a market economy immune to business cycles or speculative manias.
If China has a hard landing, it will also break the bones of leading suppliers like Brazil, Indonesia, and Australia. Japan, already mired in recession after triple mega-disasters, is acutely sensitive to further shocks from its principal markets. And the Arab Spring may turn to winter if new governments cannot grow employment or contain the inflation of food prices.
As the three great economic blocs accelerate toward synchronized depression, I find that I’m no longer as thrilled as I was at 14 by the prospect of a classic Felsen ending -- all tangled metal and young bodies.
Mike Davis teaches in the Creative Writing Program at the University of California, Riverside. He is the author of Planet of Slums, among many other works. He’s currently writing a book about employment, global warming, and urban reconstruction for Metropolitan Books. To listen to Timothy MacBain’s latest TomCast audio interview in which Davis discusses a possible Chinese real estate crash and other perils of the global economic system, click here, or download it to your iPod here.
Copyright 2011 Mike Davis
[Note for Readers: A sample passage from Henry Felsen’s 1950 novel Hot Rod:
"The crushed pile of twisted metal that had once been My-Son-Ralph's Chevy was on its back in the ditch, its wheels up like paws of a dead dog. Two of the wheels were smashed, and two were turning slowly. Something that looked like a limp, ripped-open bag of laundry hung halfway out of a rear window. That was Marge.
"The motor of Ralph's car had been driven back through the frame of the car, and its weight had made a fatal spear of the steering column. Somewhere in the mashed tangle of metal, wood and torn upholstery was Ralph. And deeper yet in the pile of mangled steel, wedged in between jagged sheet steel on one side, and red hot metal on the other, was what had been the shapely black head and dainty face of LaVerne.