Why China won't bail out the West

(COMMENTARY) Don't expect China to come to the rescue of anyone else's financial woes. Its economy is getting worse fast, thanks to its real estate bubble bursting and the continuing worldwide drop in demand for its exports.

Last week, home owners in Shanghai attacked a developer's office when they found out he was cutting prices on homes in the development they lived in. Property prices in China rose like rockets -- in June, Shanghai and Beijing home prices rose by nearly 22 percent. Then they did what rockets always do.There are many reports of real estate prices being cut by as much as 25 percent. Vanke, one of the nation's leading developers, says sales are down 33 percent from last year. This has huge implications for a nation where real estate investment accounted for 12 percent of GDP and 25 percent of total fixed asset investment last year.

Commercial markets hit hard

In major cities such as Beijing and Shanghai, commercial properties are now generating annual gross rental returns below China's official one-year lending rate of 6.56 percent. So developers are having trouble just keeping up with mortgages.

In addition to that, the nation has its own enormous government debt problems.

China's town and cities have borrowed billions of dollars using collateral that is overvalued, may be hard to sell and, in some cases, doesn't exist. (Sound familiar?) Bloomberg points to a 30,000 seat sports complex being built in one city.

Loudi, home to 4 million people in Chairman Mao Zedong's home province of Hunan, is paying for the project with 1.2 billion yuan ($185 million) in bonds, guaranteed by land valued at $1.5 million an acre. That's about the same as prices in Winnetka, a Chicago suburb that is one of the richest U.S. towns, where the average household earns more than $250,000 a year. In Loudi, people take home $2,323 annually.

Beijing officials work hard to reassure

While outsiders like Jan du Plessis, chairman of Rio Tinto, say  the economy is "slowing visibly," officials are going out of their way to say just the opposite:

B) "The so-called real-estate collapse as some people expect is an exaggeration," said Jiang Jianqing, chair of Industrial & Commercial Bank of China, the country's largest lender.

C) "These figures suggest a downward trend for the nation's economic growth, but I don't think the economy is heading for a hard landing," said Yao Jingyuan, former chief economist with the National Bureau of Statistics, in an article from the official Chinese news agency.

The Fitch rating agency expects China's credit to be downgraded within the next two years. Nomura says the odds are 3:1 at the economy having a hard landing. Any downturn will be made far worse because of what's ironically referred to as the Chinese legal system. Legal cases are frequently determined by the needs of the state and/or who has the most pull with the judge.

Because China is the world's largest creditor nation it's more than likely to be able to afford these losses - fiscally. Nomura's definition of a hard landing there - four quarters of GDP growth at 5 percent or less - is everyone else's financial miracle.

The social cost won't be absorbed as easily. There's no economic safety net to speak of and it has an enormous unemployment problem. There are frequent protests about everything from economic issues to construction safety to pollution. Should things get really bad it will hit the middle class very hard and those people are unlikely to be quiet about their disappointment. Remember, China's middle class is at least as large as the entire U.S. population.

Beijing has great need for its own resources and little interest in helping out the West. No one in China has forgotten the several centuries of abuse, occupation and exploitation the nation suffered at the hands (and troops) of the countries who are now asking for help.