The Unique Property
Site Blog
China's Ponzi Scheme
Watch on Youtube: https://youtu.be/XoY85-mUBcg
I cant imagine for one moment that anyone
reading this will be investing in, or thinking of investing in
Chinese real estate, but the situation in China is a
fascinating example of lunacy.
I'm sure you have heard about the empty cities that have been built in China. Okay, they are empty of people, but not empty in terms of ownership. People have bought apartments in these ghost towns.
What is going on?
The general view is that Chinese people are keen savers, and they think that the best way to save is to invest in real estate. After all, why is it called real estate? Because it is real. It's basic. It's what all wealth ultimately rests on.
The joke is that although real estate in non-communist countries is real, that isn't the case in communist countries where the government owns the land, and of course this is the case in China. This means that investing in the stuff is really a matter of investing in the government. The investor owns a lease not a freehold, and we all know that a lease has a time value and therefore is a wasting asset. Hold on, why would one want to invest in a wasting asset? How on earth can that be a sensible investment?
In the West, a lease is usually set up not because someone else owns the underlying entity, but because a building may contain many owners, but there is just one building, and someone has to look after the building, and so a company is formed to nominally own that building, and be responsible for it. One therefore buys a share of that building, and that share is renewable. That is not the case when the state owns all land. The government can determine that lease, declare it null and void, or simply say it's use only lasts for the term of the lease, and can then be sold to someone else.
Buying into such a project when the lease is set at seventy years seems fine if you are thirty and want to have an income when you reach retirement age because the lease will no doubt outlive you, but then what? You now leave an inheritance to your offspring that is rapidly losing value. If you die aged eighty, which is reasonable these days, then the lease now has only twenty years left to run. That lease is unsellable, or worth just a fraction of what was originally paid for it.
Why buy into an asset class which is gradually going to get less valuable over time, and as you move into old age is going to start losing value at an increasingly rapid rate?
Let's look at this from another point of view.
Because of China's one-child policy in earlier years there is a preponderance of males in the country, and so families have become much smaller as fewer males can find wives, and the richer, urban-living citizens' prefer to have less children. This means the replacement rate of people in China is declining rapidly. It is estimated that over the next twenty-five years China will lose nearly a third of its population due to natural deaths, and low replacements. Excuse me, but under such circumstances what is the point of building more cities to house less people?
China has already reached a point where there simply aren't enough people to buy into what is essentially a ponzi scheme.
Let's try and put this all together.
You are Chinese. You dont want to invest in the stock exchange as it is too risky. You are prevented from investing abroad. You like the idea of owning something tangible, so you invest in a newly built apartment in a newly built city. You see prices rising, and so you assume you are onto a good thing. In five years you will be able to sell your apartment to some other mug and bank the profit. And because you have just made some money, you re-invest. And so the pyramid of the ponzi scheme rises ever higher.
On the other side of the equation is the plain fact that there are very few people to buy these apartments for the purpose of using them as homes, and this number decreases every year. That means 95% or more of them remain empty and start to deteriorate, and so, in real terms, become less valuable. They are, in any case, badly built to start with.
That means the investment brings in no return at all. Normally one would buy the property, and either live in it or rent it out to provide a return on investment capital, and eventually a pension. That can't be done under current circumstances. In fact the financial proposition is all negative. You dont have enough money to buy the apartment so you get a mortgage, so what is happening is that you are paying money for something that brings in no income and soon begins to degrade, and after twenty years or so begins to lose value as the lease begins to run out.
So what is going on here?
What is really happening is that the government has found a way to screw the population and keep people in work and massage the GDP figures all at the same time. It's a neat but totally fraudulent operation.
Government owns the land. It uses police and the military to throw peasants off the land (because it isn't their land to start with). They then reclassify the land as urban and give the task of building a new city to building companies. This creates work and money. Citizens borrow money, and buy into the project, which pays the wages of the builders and the financial operators, and creates a thriving business. These figures are then added into the GDP figures, and China can show how well the country is doing economically.
The trouble is, at the end of the day, the ordinary working person has borrowed money to finance a project which is no use, and is going to cost those people money for the rest of their lives. At bottom, these cities are a form of taxation. They are stealing wealth from citizens, while boosting the country's economic figures without anything to show for it.
As these empty buildings age and start to deteriorate they naturally start to lose value even faster. Eventually enough buildings become so unsafe they are knocked down as being a safety hazard. The government then takes over the land and decides that a whole area is now so bad that adjacent buildings are also knocked down, the leases terminated, and a plan is drawn up to build new apartments and the whole grisly charade starts all over again. That, of course, leaves the ordinary citizens who have paid, and are probably still paying for the apartments, with absolutely nothing to show for all those outgoings.
The whole operation is a massive fraud. Ponzi schemes always end badly, but as with all predictions these days, one cant tell when the implosion will occur. Maybe this fraud will continue for another decade, or maybe even another generation, but I cant see it running beyond that.
And what is happening to those people who then realise they have been right royally screwed? They will realise they have gone short of things all their life to save for a future they will never enjoy. They will have scrimped and saved to die in penury.
Somewhere along the line there is going to be a reckoning. The question is: what form will it take? I can't help thinking that China is a ticking bomb, nearly ready to explode.
Next week I will try and answer some questions. In the meantime have a good week.
I'm sure you have heard about the empty cities that have been built in China. Okay, they are empty of people, but not empty in terms of ownership. People have bought apartments in these ghost towns.
What is going on?
The general view is that Chinese people are keen savers, and they think that the best way to save is to invest in real estate. After all, why is it called real estate? Because it is real. It's basic. It's what all wealth ultimately rests on.
The joke is that although real estate in non-communist countries is real, that isn't the case in communist countries where the government owns the land, and of course this is the case in China. This means that investing in the stuff is really a matter of investing in the government. The investor owns a lease not a freehold, and we all know that a lease has a time value and therefore is a wasting asset. Hold on, why would one want to invest in a wasting asset? How on earth can that be a sensible investment?
In the West, a lease is usually set up not because someone else owns the underlying entity, but because a building may contain many owners, but there is just one building, and someone has to look after the building, and so a company is formed to nominally own that building, and be responsible for it. One therefore buys a share of that building, and that share is renewable. That is not the case when the state owns all land. The government can determine that lease, declare it null and void, or simply say it's use only lasts for the term of the lease, and can then be sold to someone else.
Buying into such a project when the lease is set at seventy years seems fine if you are thirty and want to have an income when you reach retirement age because the lease will no doubt outlive you, but then what? You now leave an inheritance to your offspring that is rapidly losing value. If you die aged eighty, which is reasonable these days, then the lease now has only twenty years left to run. That lease is unsellable, or worth just a fraction of what was originally paid for it.
Why buy into an asset class which is gradually going to get less valuable over time, and as you move into old age is going to start losing value at an increasingly rapid rate?
Let's look at this from another point of view.
Because of China's one-child policy in earlier years there is a preponderance of males in the country, and so families have become much smaller as fewer males can find wives, and the richer, urban-living citizens' prefer to have less children. This means the replacement rate of people in China is declining rapidly. It is estimated that over the next twenty-five years China will lose nearly a third of its population due to natural deaths, and low replacements. Excuse me, but under such circumstances what is the point of building more cities to house less people?
China has already reached a point where there simply aren't enough people to buy into what is essentially a ponzi scheme.
Let's try and put this all together.
You are Chinese. You dont want to invest in the stock exchange as it is too risky. You are prevented from investing abroad. You like the idea of owning something tangible, so you invest in a newly built apartment in a newly built city. You see prices rising, and so you assume you are onto a good thing. In five years you will be able to sell your apartment to some other mug and bank the profit. And because you have just made some money, you re-invest. And so the pyramid of the ponzi scheme rises ever higher.
On the other side of the equation is the plain fact that there are very few people to buy these apartments for the purpose of using them as homes, and this number decreases every year. That means 95% or more of them remain empty and start to deteriorate, and so, in real terms, become less valuable. They are, in any case, badly built to start with.
That means the investment brings in no return at all. Normally one would buy the property, and either live in it or rent it out to provide a return on investment capital, and eventually a pension. That can't be done under current circumstances. In fact the financial proposition is all negative. You dont have enough money to buy the apartment so you get a mortgage, so what is happening is that you are paying money for something that brings in no income and soon begins to degrade, and after twenty years or so begins to lose value as the lease begins to run out.
So what is going on here?
What is really happening is that the government has found a way to screw the population and keep people in work and massage the GDP figures all at the same time. It's a neat but totally fraudulent operation.
Government owns the land. It uses police and the military to throw peasants off the land (because it isn't their land to start with). They then reclassify the land as urban and give the task of building a new city to building companies. This creates work and money. Citizens borrow money, and buy into the project, which pays the wages of the builders and the financial operators, and creates a thriving business. These figures are then added into the GDP figures, and China can show how well the country is doing economically.
The trouble is, at the end of the day, the ordinary working person has borrowed money to finance a project which is no use, and is going to cost those people money for the rest of their lives. At bottom, these cities are a form of taxation. They are stealing wealth from citizens, while boosting the country's economic figures without anything to show for it.
As these empty buildings age and start to deteriorate they naturally start to lose value even faster. Eventually enough buildings become so unsafe they are knocked down as being a safety hazard. The government then takes over the land and decides that a whole area is now so bad that adjacent buildings are also knocked down, the leases terminated, and a plan is drawn up to build new apartments and the whole grisly charade starts all over again. That, of course, leaves the ordinary citizens who have paid, and are probably still paying for the apartments, with absolutely nothing to show for all those outgoings.
The whole operation is a massive fraud. Ponzi schemes always end badly, but as with all predictions these days, one cant tell when the implosion will occur. Maybe this fraud will continue for another decade, or maybe even another generation, but I cant see it running beyond that.
And what is happening to those people who then realise they have been right royally screwed? They will realise they have gone short of things all their life to save for a future they will never enjoy. They will have scrimped and saved to die in penury.
Somewhere along the line there is going to be a reckoning. The question is: what form will it take? I can't help thinking that China is a ticking bomb, nearly ready to explode.
Next week I will try and answer some questions. In the meantime have a good week.
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