Published on YaleGlobal Online Magazine (
Home > China Bubble: Empty Mega Mall and Million Dollar Pooch

China Bubble: Empty Mega Mall and Million Dollar Pooch

China remains one of the world’s fastest growing economies, yet numerous signs point to a speculative mania underway. While investors anticipate China’s economic growth to continue apace at 8 percent – reinforcing the flurry of demand, easy money and excessive building – a slowdown to 5 percent is not outlandish, explains Vikram Mansharamani, Yale lecturer and author of a book on spotting financial bubbles before they burst. A slowdown would have global ramification, as commodity markets, finance and shipping industries, suppliers in emerging markets, multinational corporations and borrowers like the US Treasury all count on thriving business growth in China. Like the Dutch tulip dealers of the 1600s or the US mortgage bankers and property brokers of 2006, investors with a stake in China insist, “This time it’s different.” But as pointed out by investor and Yale alum John Templeton, the four words can be the most expensive in the English language. – YaleGlobal

China Bubble: Empty Mega Mall and Million Dollar Pooch

The inevitable slowdown will affect all – from commodity producers to governments issuing debt
Vikram Mansharamani
YaleGlobal, 6 April 2011
Easy money and hubris: China’s mega shopping mall built six years ago lays vacant (top); A Chinese coal baron pays 1.5 million for a red Tibetan Mastiff

NEW HAVEN: China is not only a booming country, for years it has been one of the world’s fastest growing economies. Industrialization, urbanization, modernization and entrepreneurship all appear to be on steroids in the world’s most populous nation. There’s relative consensus among global investors that China will continue growing at 8 percent for the foreseeable future, providing much needed support to the global economy.

By almost any metric, economic progress in China over the past several decades has been phenomenal: GDP per capita, literacy rates, health care, infant mortality, life expectancy and national wealth have all improved remarkably.

However, as the famous disclaimer reads on most mutual fund advertisements, “past performance is no guarantee of future performance,” and this appears to be the case with respect to China’s progress. In fact, China today exhibits many of the signs that characterize the great speculative manias throughout history.

Might China slow to a more sustainable GDP growth rate, say 5 percent, in the coming years? Significant evidence suggests that such an outcome is not as outlandish as the global investment community currently believes. A Chinese slowdown of this magnitude would have material impacts upon commodity markets, emerging markets and even the S&P 500’s business and earnings mix. In short, how China goes, so goes the world economy. Given this global economic interdependence, it’s highly imprudent for policymakers and investors not to consider the possibility of such a slowdown.

“Past performance is no guarantee of future performance” – this could be the case with respect to China’s progress.

Given the highly uncertain and probabilistic nature of booms, busts and the sustainability of growth, the application of a multidisciplinary framework seems particularly apt in determining various scenarios and their relative probabilities. Consider the approach one takes to identifying animals: You stumble upon an animal and seek to determine what type it is. You might first look at it, followed by listening, and observing its behavior. So if the animal has feathers and webbed-feet, and “quacks” while waddling, the probability of it being a duck is high. 

Likewise, the same method can be used to assess the Chinese economic boom, using multiple lenses to determine the relative likelihood of a forthcoming bust.

From a microeconomic perspective, one method of identifying an asset-price bubble is to spot self-fulfilling or reflexive dynamics underway. In China today, higher prices in many of its asset markets are generating demand more rapidly than supply. Such dynamics are rarely stable and create situations prone to rapid corrections. 

Figure 1. China’s critical demand role for various commodities. Enlarge Image

Consider property markets in which willingness to lend and prices rise together in a self-fulfilling manner. Chinese bankers have been lending money against collateral, the value of which is in part rising because of the banker’s willingness to lend. As property prices rise, banks’ collateral is worth more; the bankers feel more secure and smart, so they lend more. The cycle repeats. Unfortunately for the bankers, they’ll eventuallydiscover that they themselves created the sense of safety and intelligence that they enjoyed. As happened with the subprime collapse in the West, reality eventually sets in, bankers step back and collateral values fall.

From a macroeconomic perspective, most asset bubbles are associated with “easy” or cheap money that drives overinvestment and overconsumption. Evidence of such easy money can be found in Chinese commercial real estate, where both entire cities – like Kangbashi, in Inner Mongolia – as well as gigantic malls remain virtually empty.Time magazine profiled Kangbashi as a modern “ghost town,” and foreign newspapers have referred to the South China Mall in Dongguan as the “mall of misfortune.” Despite a 95-plus percent vacancy rate six years into its opening, the solution proposed by the mall’s management is as disturbing as its existence: an expansion of approximately 200,000 square meters. 

Evidence of easy money can be found in Chinese commercial real estate. Entire cities and gigantic malls remain virtually empty.

Turning to psychology, bubbles are usually associated with an “it’s different this time” mentality, along with a rising sense of national confidence and hubris. Evidence of such thinking can usually be found with world record prices. Consider the fact that Chinese buyers have been setting, and continue to set, world record prices in the art markets. Or the reality that Chinese thirst for Chateau Lafite seems insatiable, even at record prices. Another useful indicator is the world’s tallest skyscraper under construction. In this domain, five of the world’s ten largest towers under construction are in China today.

Chinese buyers have also set recent world records in the prices paid for a dog and a pigeon!

From a political perspective, we need to acknowledge the fact that the Chinese government remains communist in spirit, albeit increasingly less so. The party’s structure drives uneconomic activity as provincial leaders aspire to get noticed by producing more jobs and generating more GDP than the other provinces. Anecdotal reports are alarming: Perfectly usable infrastructure is destroyed and rebuilt to generate GDP. Likewise, job creation and economic activity are prioritized over sustainability and profitability.

Finally, employing an epidemic perspective and analogizing speculative manias with a fever or flu proves useful. In particular, a dwindling population of yet-to-be-infected participants highlights the later stages of a bubble. In this regard, that state-owned enterprises today are the dominant buyers in land auctions should, pardon the pun, raise red flags. If private developers are squeezed out by state-owned enterprises, financed by state-owned banks, in buying state land, we are far more likely to be entering the ninth inning of the ballgame rather the third inning. The end is likely not far.

Bubbles are usually associated with an “it’s different this time” mentality, along with a rising sense of national confidence and hubris.

The ramifications of a meaningful slowdown in Chinese economic activity are profound, ranging from the risk of domestic social instability to a collapse of several commodity markets. 

On the global economic front, China’s voracious appetite for commodities has motivated significant expansions throughout the global commodity complex, and many industrial markets, including shipping, capital goods and more, continue to be driven by Chinese demand. Consider Figure 1, which demonstrates China’s critical demand role for various commodities, representing more than 40 percent of global demand for cotton, aluminum and crude steel.

Unfortunately, the forthcoming slowdown may arrive at a particularly inopportune time. Many Australian and Brazilian mines have undertaken massive capacity expansions. Likewise, many Norwegian and Greek dry bulk shipping companies have expanded their fleets in anticipation of rising demand. To accommodate this need for more ships, many Singaporean and Korean shipyards expanded their capacities. And so the story goes… What happens if the very foundation upon which these expansion stories are built is faulty? Might the emerging-markets tale that’s been the darling of global investors be less compelling than widely believed?

And what happens to multinational companies in a slowing world? Might the demand for US treasuries drop, resulting in higher costs for capital in the United States? Is it conceivable that the consensus belief that the renminbi will appreciate is instead met by depreciation as Beijing grasps at hopes of export-led growth? How might 25 percent depreciation affect global imbalances? 

The stakes are high. Policymakers, investors and corporate boardrooms must consider the risk of a material Chinese slowdown. Despite the allure of “China is different” explanations, there is a reason well-read and seasoned investors claim the four most expensive words in the English language are “it’s different this time.”

Vikram Mansharamani, PhD, is the author of Boombustology: Spotting Financial Bubbles Before They Burst (Wiley, 2011). For the past two years, he has taught the popular undergraduate seminar “Financial Booms and Busts” at Yale University.

Rights:Copyright © 2011 Yale Center for the Study of Globalization

Comments on this Article

13 April 2011
The world should know that other than praises for our fellow men in other countries such as India, we chinese have nothing to say about other inhabitants of our shared planet. We would always find faults with ourselves for only then we can strive to improve, even if it proves to be too difficult. Certainly sticking our nose into other people's knickers is not one of our habits.
Save this world not our job! We are neck deep ourselves. But, commerce, we are most enthusiastic for. These are nice knickers indeed. I have in possession 1,000 different styles here to satisfy your most basic and exciting carnal needs. Drop a call, and we can do business, just like Lady Baroness T. said.
We have so many our own problems, if you know them yourself, your mind probably will explode. The recent riot in Urumpqi is just a handy example. Of course there is racism in China, it is only just beginning to be exposed because before we had these modest levels of prosperity, people stayed mostly in their own villages, districts, and well-holes. Now with people traveling more widely, everyone has to adjust to new realities, and hell can break open with little brawls as sometimes my spit flies off to your fragranced face and yours on mine. Because of our retardedly developed venting machines such as democracy and public inquiries, and dwarf parliaments, we usually get off by breaking your nose, or sometimes chopping a few heads off especially for some of our violent fellows and tradition seeking long-knife carriers, I sometimes wonder how the Messers like Mr. Hu and Wen can ever sleep; the jobs have to be a life expectancy killer bordering on self-assisted suicide, and so little pay, and not even a mistress or two. Saving the world will just be the last straw for the life of these gentlemen.
If you see any Young & Restless (FengQing) like our proverbial Mr. Han, just please please please, ignore him. How does he know that no one ever falls off the train in China while speeding at 200 miles per hour, and how would he know may be some people prefer to sit on the roof of the train for a more splendid view, and indeed superior air to breathe in the scorching sun at a more leisurely pace.
While their patriotism is admirable, it is not what most of us think in China. There really is nothing in the world that we want other than to get the next Bottle of White Wine (read expensive), my wife's next Guci bag (fake actually), any my kids next lessons (rote learned anyways), the next car, the next house, or the next mistress (shhiii..., don't tell my wife, my last one had really those huge ... you-know-what, for a chinese lady anyway). To claim that China will lead this or that really is just a little bit over the top; that one really got my plum in my mouth wriggling. For such mundane matters, we prefer to delegate to Uncle Sam. Nice Uncle indeed, who spend the money, resources, and man-power to trouble shoot for all us in the world. It is a good bargain, especially we also get to collect a little interests, we are already getting used to it.
-huyu , huyuhuyu
13 April 2011
A perfect article to fill that time between the closing of the aircraft doors and takeoff. As food for serious discussion, however, this ranks pari passu to the economy class meals on the old CAAC.
If Prof. Mansharamani has done any meaningful research on China the results have been cleverly concealed from this article. Barely does he engage in supporting his proposition about asset price spiraling when the platitudes start.
Mortgage lending in China is not perfectly analogous to whatever other model Prof. Mansharamani has in mind: bank credit is policy-driven and quantitatively managed. Moreover, as much as individual buyers may seek to thwart the various mortgage lending constraints on banks (e.g. rising LTVs for 2nd/3rd/nth mortgage, restrictions on non-resident purchases, limited disbursement against pre-completion developments, etc.), there are bigger problems he does not seem aware of. Bank lending to local government investment platforms has been recycled into property transactions to such an extent that China's bank regulator flagged the problem publicly in the middle of 2010 (check the CBRC web site, it's in English, too). The amounts at risk are staggering (US$1-2.5 trn depending on whose numbers you believe) yet they receive no mention. Leaning on the few sensational examples of excess aggregate supply in China that have been publicized abroad while ignoring substantive and systematic risks merely detracts from the professor's credibility.
And then there is the confused tangle of rapid-fire questions about "global imbalances". When a managed exchange rate regime whose price elasticity of export demand is 2-3 times that of its income elasticity confronts slowing external income growth, the natural response is of course to encourage currency depreciation so as to offset the income effect on export demand. And if China's current account balance has not swung into a deficit that offsets the capital account surplus, how exactly will that depreciation occur if not through the buying of US Treasuries?
Let me invoke the name of another Yale alumnus, James Tobin, who would surely have have shaken his head in dismay at the sight of cogent analysis slain on the alter of snappy prose.
-RJ Zhu , China