There is a tendency to make important decisions on the basis of a strong narrative of events. For instance, ‘house prices only go up’ and clear evidence that house prices were increasing led to the largest build up in housing the US has seen. Eventually it led to the worst financial crisis since the great depression. Now, whole suburbs are being bulldozed in the US because there is no one to live in them. Not only can house prices fall – they can go WAY down!
Take this quiz and see what I mean from a trivial (but illuminating) perspective.
Is Western Australia going the same way? Given the role of the mining sector in the State’s economic performance, and the dominance of China, it is worth questioning some of the underlying assumptions of this view. Centre for Independent Studies Research Fellow, John Lee has an excellent article on China’s growth that is well worth considering.
Lee’s main argument is that:
- China’s demand for commodities is being driven by property speculation; and
- As a consequence, China has major ‘ghost cities’ that are being built and are sitting vacant.
The money quotes from his excellent article are:
“Let’s look at the argument that urbanisation is the primary driver of growth in Chinese demand for commodities such as iron ore. We often hear the mind-boggling figure that around 15 million rural Chinese are moving to cities every year. But the urbanisation rate is only slightly above 1 per cent each year. Yet, Chinese consumption of iron ore has increased by 80 per cent since 2003. China’s own economic and social planners estimate that they can reduce steel production by one third and still meet demand resulting from ongoing industrialisation and urbanisation.”
The reason for the gap?
“In the first half of 2010, a Chinese report revealed that 64.6 million urban electricity meters registered no electricity usage. This amounts to unused housing that could accommodate 200 million people. Andy Xie, the former chief economist for Asia at Morgan Stanley, crunched his own numbers and estimated that residential vacancies for commercial housing is around 30 per cent. Speak to Chinese middle class property investors and they will tell you that they buy property not to rent but to hoard as assets – in the same way one buys gold.”
Lee’s basic point is that investors are ‘hoarding’ property and that China’s varacious demand for commodities is a result of internal policy failings and is not viable in the long term.
I’d highly recommend looking at the entire article.
Don’t get me wrong. I believe that the Chinese industrialization is powering the HUGE build up in commodity prices. This, in turn, is spurring on business investment and the extraordinary growth of the WA economy. However, it is always worth entertaining contrary views to make valid decisions. To ensure you are not caught up with the herd, as yourself the following questions:
- What impact would a Chinese economic collapse have on your business? Your personal finances?
From expensive personal experience I’ve found it is always better to ‘measure twice and cut once’ when it comes to major financial decisions. This means, when you hear a narrative gaining traction, always look for the Jeremiah crying it is a fraud. They will generally be wrong, but it will make your decisions that much stronger.