Large numbers
Mar. 16th, 2014 11:48 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
blatherskiteSometimes you just can't grasp the size of even terrestrial-scale large numbers, let along cosmic numbers. You just have to resort to math to have any hope of understanding what's going on.
The paper I just finished editing discusses the root causes of the huge real-estate boom that has led to an enormous excess of residential construction in China. You may have heard of this in the context of Chinese ghost towns. It's a classic example of how unsupervised free markets can run amok without anyone in the government noticing.
Short and oversimplified version: China is running its economy on some awfully shaky foundations. In a recent round of tax reforms, China's central government delegated increasing responsibility for tax revenue collection to local (e.g., provincial and municipal) governments, but simultaneously more than doubled the proportion of total tax revenues that must be returned to the central government to fund its own activities. This loss of revenues has forced the local governments to raise money to fund their own operations through what's called the "land finance model". In its simplest form, this involves expropriating land from citizens (often agricultural cooperatives on prime agricultural land), paying them next to no compensation, and then selling the land for roughly 50 times the purchase price to real-estate speculators. As a result, land prices rose roughly 600% in only 5 years between 1993 and 1998. This has already caused one real-estate bubble to form and collapse in some regions, and there are fears that a bigger and nastier bubble is about to do the same.
The author cites a couple recent studies that present some of the aforementioned numbers so large you can only grok them mathematically: First, that there were an estimated 64 million vacant apartments as of 2010 (about twice the total population of Canada) that couldn't be rented out because nobody can afford them. That doesn't even account for the fact that China's population control policy seems to have turned the corner, and the top of the population arc is now in sight. Once the population starts declining, there will be even more downward pressure on real estate prices because there will be even fewer people to fill the vacant real estate. Of course, "few" is a relative term for a country with a population that will peak well above 1.3 billion before it begins to decline.
Second, the local governments had sufficiently run themselves out of money that they have taken out 1000 billion RMB (about US$160 billion) in loans as of 2010 to support government operations that the aforementioned urban expansion is failing to subsidize. That's very approximately half of Canada's total 2013 budget just for that one line item, but on the plus side, it's only about half of the ballpark estimate of the cost of the U.S. Savings and Loan bailout of the 1980s. So maybe you shouldn't sell your China Savings (and Loan) bonds just yet.
Scary big numbers with scary big consequences.
The paper I just finished editing discusses the root causes of the huge real-estate boom that has led to an enormous excess of residential construction in China. You may have heard of this in the context of Chinese ghost towns. It's a classic example of how unsupervised free markets can run amok without anyone in the government noticing.
Short and oversimplified version: China is running its economy on some awfully shaky foundations. In a recent round of tax reforms, China's central government delegated increasing responsibility for tax revenue collection to local (e.g., provincial and municipal) governments, but simultaneously more than doubled the proportion of total tax revenues that must be returned to the central government to fund its own activities. This loss of revenues has forced the local governments to raise money to fund their own operations through what's called the "land finance model". In its simplest form, this involves expropriating land from citizens (often agricultural cooperatives on prime agricultural land), paying them next to no compensation, and then selling the land for roughly 50 times the purchase price to real-estate speculators. As a result, land prices rose roughly 600% in only 5 years between 1993 and 1998. This has already caused one real-estate bubble to form and collapse in some regions, and there are fears that a bigger and nastier bubble is about to do the same.
The author cites a couple recent studies that present some of the aforementioned numbers so large you can only grok them mathematically: First, that there were an estimated 64 million vacant apartments as of 2010 (about twice the total population of Canada) that couldn't be rented out because nobody can afford them. That doesn't even account for the fact that China's population control policy seems to have turned the corner, and the top of the population arc is now in sight. Once the population starts declining, there will be even more downward pressure on real estate prices because there will be even fewer people to fill the vacant real estate. Of course, "few" is a relative term for a country with a population that will peak well above 1.3 billion before it begins to decline.
Second, the local governments had sufficiently run themselves out of money that they have taken out 1000 billion RMB (about US$160 billion) in loans as of 2010 to support government operations that the aforementioned urban expansion is failing to subsidize. That's very approximately half of Canada's total 2013 budget just for that one line item, but on the plus side, it's only about half of the ballpark estimate of the cost of the U.S. Savings and Loan bailout of the 1980s. So maybe you shouldn't sell your China Savings (and Loan) bonds just yet.
Scary big numbers with scary big consequences.