Summary
Commentators on Dubai have not connected the dots to China. The similarities are striking. Massive overbuilding of commercial, residential and resort (hotel & retail) properties. Massive stimulus spending on grandiose government projects (Olympic venues to Mag-Lev trains and airports) and infrastructure parallel those of Dubai.
State Owned Enterprises like Dubai World may not have the financial guarantee that is implied by being an arm of the state.
China investors should hear the clarion call.
Analysis
Commercial property vacancy rates in China approach 50% in major cities.
Asking rents have declined by as much as 60% from 2007 with free rent concessions.
However, Chinese property values have not declined at all.
Moody's cited values may be down 45-55% from 2007 peak around the world, but not in China. How can Chinese banks with nearly 40% loan exposure to real estate not
be impacted by the massive oversupply of virtually all property types?
Abu Dhabi government has no obligation to repay Dubai World debt.
Chinese government just rolled over for ten years AMC bonds in China Construction
Bank when the ten year debt came due last month. CCB investors relied on an implicit guarantee to support the AMC debt. Is a ten year below market extension the same as repaying the bonds when they came due?
No one questions how Chinese bank nonperforming loans have declined to only 1.6% of total lending when they've doubled and tripled loan growth since listing in 2003-2004. The issue is not a future asset bubble based on the massive $1.27 trillion lent thru September 2009 but the huge unreported NPL which manifests itself throughout China in empty office buildings, luxury malls without customers, luxury hotels operating at 30% occupancy and thousands of closed factories in the Pearl River Delta.
We've allowed China to suspend traditional economic fundamentals of supply-demand, cash flow and present value and accept without much skepticism government released economic data that most smart China hands cannot reconcile with empirical evidence when you live and work in China.
If Dubai does not get your attention then you only need to look at Japan from 1986 to 1989 to draw similar conclusions. The China miracle is fundamentally flawed with over-investment and massive liquidity with an implicit government guarantee which may or may not be honored when the music stops.
