China’s real estate bubble has popped. Rich Chinese who bought urban residential living space and are holding empty space off the market for appreciation have begun to take the inevitable bath.

Most analysts expected monetary easing to start next year when inflation had subsided further. But then most China analysts were predicting a “soft landing” for the economy. The data in recent days suggest the stagflation trend will continue and the landing may be bumpy.

Property prices have fallen for three consecutive months and the trend is accelerating. HSBC’s and the government’s own purchasers managers’ indices of corporate sentiment took a big tumble in November, falling into negative territory for the first time since early 2009. This time China can’t export its way out of its domestic problems, since external demand is shrinking.

The Austrian theory of the trade cycle applies in China, too. I have been saying this for several years. Now, the  Wall Street Journal says it.

China is a poster child for the Austrian school of economics’ theory of the business cycle. After undertaking the biggest stimulus program the world has ever seen in response to the global financial crisis, the country is drowning in unproductive investments financed with credit.

China’s economy will crash. The West is not ready for this. Keynesians did not see it coming.

This will lead to even greater price cuts in Chinese-made goods. Owners will try to keep their doors open. They will sell goods at a price that covers variable costs: raw materials and labor. That will be a low, low price.

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