December 19, 2011

China's Bubble!

Just about all experts believed real estate was exempt from bubbles. Invest in real estate and nothing can go wrong. The theory relied on banks to make rational decisions about who they would lend too and they would be properly regulated. The secondary market and cooperative rating agencies allowed banks to unload risky loans; so they thought. When the loans stopped performing so did real estate

China now appears to have an over supply of real estate, relative to its price, given the fact that the world has slowed down its purchases of goods and services produced in that country. The result is an asset not providing a reasonable return or no return at all.

China will probably weather this storm because of its high level of reserves. It can either sell foreign debt or not renew it when it comes due. Either way, this spells more trouble for the U.S. and Europe.

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