The World’s Next Great Bust: China and Commodities

China’s booming economy has been one of the main drivers of the market. However, has the market become too dependent on China? From the Atlantic:

Today, the world is dancing to a new song with a potentially devastating ending, says Vikram Mansharamani, an equity investor, Yale lecturer, and author of the book Boombustology. That song is called “Commodities.”

“I’m a China bear,” Mansharamani says. “China is exhibiting all the signs you would expect from an unsustainable boom.” He first points to the housing market, where investment hit the inauspicious market of 6% of GDP — the same mark the U.S. hit in 2006 as the bubble was bursting. What’s more, outstanding loans for developers and residential mortgages in China have increased by a factor of FIVE in the last decade. Loan balances have nearly doubled in the last three years alone.

Even worse, Mansharamani says, the Chinese government has spent lavishly to create demand that never materialized. He points to ghost towns like Qungbashi, in Inner Mongolia, a city designed for 1.5 million residents, but drew only 20,000 — hardly one percent. He points to the New South China Mall, not far from Guangzhou, which was built to handle 1,500 tenants. Instead, it houses a few dozen — hardly one percent. This sort of one-percent success rate creates ludicrous overcapacity that is eerily reminiscent of the empty homes and strip malls lining recession ghost exurbs in Arizona and Nevada. Mansharamani sees it as the prelude to a dramatic slowdown in government spending on buildings and infrastructure.

But as China goes, commodities go. China’s share of world demand for leading metals like aluminium, copper, zinc, lead, nickel, and crude steel is about 40 percent, according to research obtained from Goldman Sachs. For steel, China commands nearly half the global market. (In 2000, its share of global demand for those metals was between 6 and 16%.)

If China slows down even to 5% growth a year, that will take a booming commodities market down with it.

March 19, 2011, 12:53 AM
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