Most people paying attention know that China has a major real estate bubble. I should clarify that most people outside of China know this.
I am not sure if the Chinese know it. That is part of being in a bubble. There is irrational exuberance. Most of the people in the bubble do not realize it. If they did realize it, then it would pop, unless everyone is just pretending to not know it and waiting for the next sucker to buy a property.
It is easier to see a bubble from the outside. You can call it objectivity. When you see ghost cities that could house a million people, you know there is something wrong. You know there has been a severe misallocation of resources.
The most surprising thing for me is just how long it has gone on. The Chinese central bank won’t relent on its money creation. Instead of a property bust in China, we are first getting a second boom. This one is in the stock market.
The Shanghai Composite Index closed above the 4,500 mark today. As of today, its 52-week low is 2,011. When something goes up well over 100% in less than a year – especially in a loose money environment – you know it isn’t going to end well.
I am writing on this topic more frequently because it is going to be big news when it happens. We should all expect it, yet we generally ignore it. Maybe the stock bubble will go on for years like the real estate bubble, but I highly doubt it.
I don’t know where this thing will end. It is in a parabolic move right now. The Chinese stock market is going up faster than the Nasdaq did in the late 1990s.
When things come crashing down, I am not sure to what extent it will impact the U.S. economy. We can be certain that there will be some impact. You might not expect it to have too big of an impact because Americans mostly import from China. In other words, the Chinese would suffer a lot more from a U.S. recession than the other way around.
But there are two colossal bubbles in China and if they both come crashing down hard, it may spook investors globally. I would be surprised if it didn’t. And we have our own bubble problems in the U.S., particularly with stocks, although not near to the same extent as China.
We’ll keep watching what happens in China. When the bubbles burst, it is going to impact investors in the U.S. and elsewhere.