China has a serious problem on its hands. Its issues are starting to be heavily exposed in the media, and could have effects for investment prospects in the country. The problem lies in its real estate sector — it is a systematic problem that threatens China’s economic growth.
China has built too much infrastructure
Much like what can be compared to the United States’ housing boom and bust, China has more housing supply than there is demand. Led by China’s government, it has been on a building boom for many years. The idea has been that the huge supply of money from exports needed to be invested somewhere.
The smart place to invest is infrastructure, that’s not a doubt. But at some point, China decided to continue to invest in infrastructure without questioning its return on investment. Now there are malls and skyscrapers that are completely empty. And it’s fair to question whether tenants will ever occupy some of these structures.
The high degree of commodity purchasing for construction-based raw materials by China is slowing down. Building projects are coming to a halt. It’s slow moving, but entirely possible that the boom in construction on mainland China is drying up. This could cause serious economic problems for the country and investors. The question is what to do to avoid this risk in China’s economy.
Stay away from banks
It’s really hard to tell what is going on with China’s banks. The big problem with banking on the mainland is that it is so intertwined with the government. It’s a major risk since it could be heavily involved with the real estate problem in China. Companies like the China Life Insurance Company Ltd. (ADR) (NYSE:LFC), which is traded on the New York Stock Exchange, is an example of a U.S. publicly traded company that is fully intertwined with China’s troubling real estate problem.
China Life Insurance Company Ltd. (ADR) (NYSE:LFC)’s financial situation looks good on the outside, save for a $2 billion third-quarter loss last year. But with the company being so closely involved with Chinese banks, one has to be careful. Remember, no one thought that AIG was tangled up with the U.S. housing problem until they were completely short of hundreds of millions to continue their operations, which ultimately required a bailout.