In the report “No risk of hard landing for China, says Bernanke” (May 28), former Federal Reserve chairman Ben Bernanke said China’s economic slowdown should not worry markets, as there is no risk of a hard landing. I disagree.
Some of the leading indicators are flagging a hard landing caused by a real estate bubble bursting.
First, land prices rose sharply by nearly 800 per cent between 2003 and 2010, pushed up too much by land speculation. This has resulted in an unsustainable increase in home prices. Such an event — seen in United States economic history since the 1800s — has always been followed by a decline in economic activity, then a recession. Land prices have already peaked and, with construction stalling, continue to fall, affecting the wider economy.
Secondly, the price of copper, which is used extensively as a key material in the building of houses, is considered a good indicator of economic health. Copper prices peaked in 2011 and have since fallen sharply.
Third, the yield curve is an excellent predictor of recessions. All recessions in the US since 1960 have been preceded by an inverted yield curve, caused by short-term interest rates rising above the level of long-term bonds. China’s inverted yield curve has occurred.
Fourth, it is a consistent trend that the world’s tallest buildings are completed right at the top of the real estate cycle. A few of these skyscrapers are now completed or will be completed within the next couple of years in various Chinese cities.
This phenomenon is a reliable indicator of an impending economic downturn. For example, Malaysia’s Petronas Twin Towers were completed in 1996, before the Asian currency crisis.
Typically, real estate values peak one to two years before a recession: A land-related recession in China may happen in 2017.
