Wow. Must read editorial by Edward Chancellor on the parallels between China and Dubai. Here is the best part:
Dubai’s ambitions weren’t merely domestic. Dubai World and its subsidiaries, with their assumed government backing, went on a debt-fuelled global buying binge. Dubai’s economy expanded rapidly in the boom. But much of this growth came from construction projects of dubious economic merit. When the music stopped, property prices crashed. Knight Frank estimates the vacancy rate for Dubai office buildings is 40 per cent. Yet planned new construction is set to double the city’s office space over the next couple of years.
There is a country on the other side of Asia, whose currency is also pegged to the dollar. Although its economy is expanding rapidly, short-term interest rates are below 2 per cent and the money supply has grown by 30 per cent over the past year.
This country is experiencing a real estate boom. Reports tell of a newly constructed ghost city with dwellings for a million people. Speculators are reportedly snapping up luxury developments, which remain unoccupied long after completion. Despite a 20 per cent vacancy rate in the capital city, new skyscrapers are being planned.
This country’s economy is also state-directed. Its rulers are looking for 8 per cent annual GDP growth as they seek to diversify their economy away from exports. State-owned enterprises are borrowing and investing to meet this target. Construction and infrastructure are taking an ever greater share of GDP, even though many projects are likely to prove unremunerative. A mentality of “build and they will come” prevails.
In short, economic conditions in China have much in common with those that prevailed until recently in Dubai. The population of China is roughly a thousand times greater than the tiny emirate’s. For this reason alone, the lessons from Dubai should be heeded.
And here is the link (hat tip Paul Kedrosky): China and Dubai