05/10/2010 05:12 am ET Updated May 25, 2011

China's New Export: Too Big To Fail

Market Defies Fear of Real Estate Bubble in China

A real estate bubble, fueled by bad loans and too much leverage, explains much of our stock market's turmoil since 2008. So today's article from The New York Times about the Chinese version, caught my attention. Here are a few of the sound bites:

Last year, a record $560 billion of residential property was sold in China, an increase of 80 percent from the year before, according to government statistics that are widely considered reliable.

Signs of exuberance are everywhere. An investor in Shanghai recently bought 54 apartments in a single day; a villa sold for $30 million last year; and in December a consortium of developers paid more than $3.5 billion for a huge tract of land in Guangzhou, one of the highest prices paid for any property, anywhere.

Prices here have risen more than 150 percent since 2003, pushing the price of a typical 1,100-square-foot apartment up to $200,000, according to real estate experts. (Shanghai residents typically earn less than $5,000 a year.)

Okay, enough already. The point is clear. Trouble is brewing. And here's why China's real estate bubble is a problem for everyone. Of the five largest banks in the world, measured by market capitalization, three are located in China.

With banks trading credit risk, through those insufferable Weapons of Money Destruction otherwise known as credit default swaps, I wonder what the world's financial exposure is to Chinese real estate. Who owns the credit risk to their developments? Have they ever been to China? Or can the creditors even spell Peking? I mean Beijing.

Norb Vonnegut