Real Estate Investor Magazine South Africa February 2016 | Page 17

I

n 2008 the world fell into a Recession so
deep and widespread that it rivaled the Great
Depression of the 1920’s and 30’s. A lot of
the apparent growth in the following years
has been fueled by government bailouts,
loose monetary policy and huge injections
of capital in the form of quantitative easing. In an
attempt to stabilize global markets following the last
recession, borrowing has been made extremely cheap in
developed economies like the United States.
This cheap debt is now spread all around the
world, in companies, private investors and world
governments. Many of the nations involved are socalled “developing” economies, which have been using
this cheap borrowing to fund expansion. 2016 has
already started on a traumatic note, with the price of
oil sinking to an 11-year low, plunging shares and the
halting of the Chinese stock market not once but twice.
This could be the signal that we are on the verge of
another global recession, similar to that of 2008, with
the following signs seeming to confirm what many
experts fear.

“China has a major adjustment
problem. I would say it amounts to
a crisis. When I look at the financial
markets there is a serious challenge,
which reminds me of the crisis we
had in 2008”
- George Soros
Chinese slowdown

The Chinese economy has grown by an extraordinary
amount over the past few decades. Chinese GDP is
second in the world only to the United States, and
many economists believe that it is only a matter of time
before China will overtake the United States.
China was the great savior of the world economy in
2008. The launching of an unprecedented stimulus
package sparked an infrastructure investment boom.
The voracious demand for commodities to fuel its
construction boom dragged along oil and resource-rich
emerging markets.
The Chinese economy has now hit a brick wall.
Economic growth has dipped below seven per cent for
the first time in a quarter of a century, according to
official data. That probably means the real economy is
far weaker.
www.reimag.co.za

The People’s Bank of China has pursued several
measures to boost the flagging economy. The rate of
borrowing has been slashed during the past 12 months
from six per cent to 4.85 per cent. Opting to devalue
the currency was a last resort and signaled that the
great era of Chinese growth is rapidly approaching its
endgame.
The Chinese housing market is also in a perilous
state. House prices have fallen sharply after decades
of steady growth. China’s government imposes capital
controls in order to keep its money within its borders.
Therefore, as the Chinese middle class has grown, they
have few options when it comes to investing their new
wealth. As a result, Chinese stocks and real estate, two
of the places where Chinese people can invest, have
become increasingly expensive, with the hallmarks of
a bubble forming
Meanwhile, the real estate boom has led to
overproduction of building resulting in so-called ghost
cities, entire urban landscapes where nobody lives.
When the market sees that the oversupply cannot meet
demand, prices may collapse in the Chinese housing
market.
If the Chinese economy slips into recession, it is likely
to drag down the rest of the world as well.

Commodity collapse and Resource Crisis

The China slowdown has sent shock waves through
commodity markets, with The Bloomberg Global
Commodity Index falling to some of its lowest levels
in decades.
After briefly rallying early in 2015, Brent crude,
the global benchmark for oil, has begun to fall again,
currently at around US$50 per barrel. Iron ore is an
essential raw material needed to feed China’s steel
mills, and as such is a good gauge of the construction
boom. The benchmark iron ore price has fallen to
US$56 per tonne, less than half its US$140 per tonne
level in January 2014.
While the billions of dollars in loans raised on global
capital markets to fund new mines and oil exploration
that was only ever profitable at previous elevated prices.
With oil and metals prices having collapsed, many of
these projects are now loss-making. The loans raised
to back the projects are now under water and investors
may never see any returns.

The European Markets are at an all time Low

The sovereign debt crisis that followed the Great
Recession in Europe has been a persistent issue, and
Europe represents a significant part of the world
economy. The European Central Bank (ECB) has
begun to implement quantitative easing in the
FEBRUARY 2016 SA Real Estate Investor

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