China Has Been Covertly Funding A Housing Bubble Five Times Larger Than That Of The US: 65 Million Vacant Homes Uncovered

Tyler Durden's picture

China just announced that its Q2 GDP came in at 10.3%, just below a consensus estimate of 10.5%. Surprisingly, for some odd reason the market seems to believe this "data." Although in retrospect, based on China's bottom up GDP goalseeking, the number, which we will show in a second is completely irrelevant, could very easily be true, based on two just announced stunners about the Chinese economy. The first comes from Fitch, which in a report released today titled Informal Securitisation Increasingly Distorting Credit Data, uncovers that China has in fact been massively underrepresenting the actual amount of new loans in the first half of 2010, courtesy of precisely the kinds of securitization deals that blew up half of our own banking system: "Adjusted for informal securitisation activity, Fitch estimates that the net amount of new CNY loans extended in H110 was closer to CNY5.9trn, or 28% above the official figure of CNY4.6trn...on a flow basis the volume of credit being shifted off balance sheets in recent times has been large and rising. Activity also is largely concentrated among just a few dozen banks, and institution?specific exposure is often much higher." And some are wondering why China's AgBank was scrambling to raise $20 billion via a hurried IPO... Yet this data pales in comparison with disclosure from a recent article in South China Morning Post, in which an economist at the Chinese Academy of Social Sciences noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country! This number is five times larger than the roughly 12 million in total US public (3.89 million) and shadow (8 million as estimated by Morgan Stanley) home inventory available currently. Forget Stephen Roach - China is covertly funding and creating a housing bubble that is at least 5 times as big as that of the United States. We leave it up to you to imagine the consequences of that particular bubble's bursting...

The Fitch report is pretty self-explanatory (presented below) but here is a section that highlights that China's banks are increasingly becoming more opaque in data presentation, which one can assume is due to their unwillingness to reveal the true state of affairs. Of course the same tactic worked very well for our own subprime sector... until virtually every company in the space went bankrupt in the span of 3 weeks in 2007.

Already Weak Disclosure is Getting Even Worse

Data on the sale and re-packaging of loans into CWMPs has always been sparse, but, historically, observers have been able to track activity by the number of CWMPs issued each month using information collected by small third-party data providers. However, as public scrutiny of informal securitisation has risen, Fitch has observed a noticeable worsening of Chinese banks’ already poor disclosure of this activity.

Some banks very actively engaged in transactions last year are showing up in 2010 data as minimally involved, yet the bank’s own salespeople (responding to Fitch’s enquiries) state that business remains as strong as ever. Meanwhile, private placements of products to institutional investors are becoming more commonplace, most of which are never disclosed to any entity but the CBRC. Because of this worsening in disclosure, data from third-party providers is capturing less and less transaction flow, with as much as 40% of deals in H110 going uncaptured, versus less than 10% prior to end?2009.

As for actual issuance metrics, as Fitch says, the "volume of credit being re?packaged on the rise."

Data on the number of outstanding CWMPs and CTPs shows net issuance accelerating in H209 as credit conditions tightened, followed by a flattening out in H110 (Chart 3). While the recent moderation in part reflects the looser credit environment in H110, the significant worsening in disclosure in 2010 also has been a major factor distorting recent data. Indeed, when historical figures are adjusted to strip out the entity that most conspicuously dropped out of issuance figures in 2010, net product issuance swings from −7% to +1% in H110.

There is much more in the full report, presented below.

Yet the real shocker of the day comes from the following article in the South China Morning Post, presented below in its entirety, and without comments. None are needed.

64.5 million mainland houses lying vacant: economist

Mainland’s property market remains dangerously overheated and failing to tame the speculative bubble could threaten financial and social stability, a prominent economist said in an official newspaper on Friday.

Yi Xianrong, an economist at the Chinese Academy of Social Sciences, a government think tank in Beijing, noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country, many of them bought up by people wagering on a constantly rising property market.

In the overseas edition of the People’s Daily, Yi said the ”shocking” level of empty housing showed the dangers brought by the country’s property boom, which the central government has been trying to cool.

“If this outsized property bubble does not burst, it will hurt residents’ well-being, and also affect national financial security and co-ordinated national economic development,” wrote Yi.

He wrote that the overheated property market was creating ”misallocation of resources, price distortions, squandering of wealth … and is magnifying national financial risks, so that the economic structure cannot be adjusted, ultimately leading to overall social instability.

The People’s Daily’s overseas edition is a small-circulation offshoot that tends to be more forthright than the main, domestic edition. While the paper is not an unerring mirror of official policy, Yi’s commentary suggests that the real estate market remains a worry for policy-makers.

Beijing announced a slew of measures in past months to cool the property market, including raising down-payments and mortgage rates, and that has already caused deal volumes to drop and property inflation to slow in many cities.

Nationwide, property prices rose 0.2 per cent in May from a month earlier, and were 12.4 per cent higher than a year earlier. The increases were smaller than in April.

Property prices will fall within a few months as government steps to cool the real estate market bite deeper, Xu Shaoshi, the minister of land and resources, said on Sunday.

Yi suggested that more robust steps are needed to beat back property price rises fuelled by speculation.

“The problem now is that investment in the domestic property market has completely overturned China’s traditional concepts of wealth management and investment and its price formation system,” he wrote.

Full Fitch report:

 

h/t Cheeky

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Muir's picture

Now that's a bubble!

"noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country, many of them bought up by people wagering on a constantly rising property market."

A misallocation of resources, yea, I'd think so.

AssFire's picture

YES!, Whatever you said maa'm.

Sudden Debt's picture

It was not the oversupply that killed the American housing market. It was the Mcmansion behavior that did it. Some people have 2 or 3 houses. No problem there.

The chinese bubble will not explode as fast as you think. The hedging loans like in America don't exist there.

When your sitting to your neck in shit, I don't think you need to search for other that seem to stuck in the shit like you. You'd better concentrate on getting out of the shit.

dnarby's picture

You mean China will explode at a mere 4000 m/s as opposed to 6000 m/s?

Sudden Debt's picture

No, I say China won't explode because their planned economy works a heck of a lot better then ours.

kaiten's picture

China may have 5 times as many unsold houses than US, but China also have 4 times as much population. (1,3 billion vs 300 million) And most importantly: China´s urbanisation rate is 46%, western is above 80%. All in all, China´s housing "buble" is manageable, imho.

Winston Smith 2009's picture

No, I've seen several articles that descibe how apartments that are beyond the means of the vast majority of Chinese are being built and purchased simply as an investment in a market where property prices (not values) are rapidly rising.  That should sound familiar.

dnarby's picture

Oh, now you'll start going on about how there's enough commercial real estate space to provide a 5x5 cubicle for every man, woman and child in all of China...

http://www.businessinsider.com/interview-with-chinese-commercial-real-es...

 

steve from virginia's picture

I'm wondering whether there is a misallocation of resources or a misreading of electric meters?

El Hosel's picture

Great,

US credit and housing bubble appears isolated and contained... sovern debt crisis appears isolated and contained... chinese realestate bubble appears isolated  and contained... worldwide unfunded liabilities and multi trillion dollar shortfalls appear isolated and contained... BP gulf oil gusher appears isolated and contained...

   Its all good.

trav7777's picture

works better at WHAT, blowing even HUGER bubbles?

This evidence, which is corroborated by other sources, seems to suggest that China's magical centrally planned economy run by slanty-eyed chinese men who are just smarter than roundeyes because China is 1000s of years old, is complete and utter bullshit, a ponzi.

Nevermind the black lung and people selling their kidneys to make interest payments

gmak's picture

Did you read the article? Have you done any research on the topic? There is an issue because the ownership is concentrated. Apparently owning 2 - 4 vacant apartments or houses is the norm. True that there is a higher down paymet required - but that does not obliviate the fact that there is more inventory than demand for productive use of these houses. All of that capital is tied up in non-productive assets.

Secondly, read the article carefully and you will notice that your "hedging loans" [sic] do exist in China - that there has been the same securitization of those loans as happened in the Western World.

As to the Chinese economy being better managed = wait until all is said and one. Every decade has seen one region of the world or another touted as the new economic giant with a new model / paradigm that will take over the world. We are still waiting.

gringo28's picture

china bears also conveniently omit the fact that spec housing is one fo the few alternatives mainlanders have to store wealth. in other words, if you think your currency is going to rally, owning RE makes sense. as it stands, the yuan has rallied 80bps against the USD since they relaxed benchmarking. today's action is almost humorous: FX markets are undeniably in favor of a rally in equities here, but b/c of options expiration, you have a bunch of selling going on. once the put writers get done, they'll run it up into tomorrow. betting on a housing implosion in china is kind of like running in Pamplona: thrilling to be sure, but why risk getting gored?

Caviar Emptor's picture

Where did all the chuppies go? 

Johnny Bravo's picture

Tomorrow, they're gonna buy 

V-X-X... ride or die... arf arf... whatcha'll niggaz want... arf arf... VXX.
(sung to the DMX song)

By the way, if the SPX breaks 1088, initiate long VXX position and short FAS or long FAZ position.

Stops at 1102.

CPL's picture

Yup yup.

 

Buggers went and did a reverse split on the Direxion shares.  I liked buying FAZ and TZA under 10 bucks in 10k blocks.  I'lll have to rework all my spreadsheets now too to determine the spread pattern relative to the RIFIN.X.  Grrrrrr

Takes a day to rejig them.

Boilermaker's picture

If anybody wants a great laugh, check out cnbc.com...

Headline..."China economic growth slows, as Beijing intended".

I don't care who you are, that's some funny shit right there!

NOTW777's picture

they just turned the dial down to 10.3 - no problem.  just like a thermostat

drwells's picture

Yep. Just like the nimrods who told us in 2005 that Bernokio's rate increases had brought the economy to a perfect three-point landing.

I look at my cat and think, "if your species was this stupid, you'd be extinct".

poopdeville's picture

Is China planning on building nice things on our dime, and then nationalizing them after Chinese capitalism "fails"?  People are running to invest in China, with little idea that it is nominally a socialist country...

reader2010's picture

China is not *socialistic* country. China is a Fascist country where big money sleeps with the state.

poopdeville's picture

Unfortunately, this minor quibble does not negate my suggestion of impending nationalization and reform to Maoist ideals.  "Big money" can go pound sand against a large, powerful state.  Especially if their money and labor are already stolen.  And there is already little difference between public and private ownership of industry in a fascist state, as fascism is a means of state control over industry.

 

fajensen's picture

Yes, Why Not?

There exists probably both maoist and capitalist factions within the government. It could be a plan by the maoists to lend the capitalists all the rope they need to hang themselves with, at fixed low rates and no downpayment, then, when the whole thing goes tits-up, the maoists can step in save the people from the chaos created by the foreign influences and demonstrate that western-style capitalism is wrong.

The Chinese can play political and power games for decades, generations even ... not like here, where everyone gets impatient when they are not rich or president after six months.

The losing faction will then go to a 10 year re-education trip in the rice paddies to repent and recant before they are accepted back (something we should absolutely do to everyone associated with Wall Street ;-)

As an aside, the Chinese want to pay the Americans back in kind for all those great investments they got stuck with - in China you NEVER advise a friend - and they saw the US as friends up to that point - to invest in somthing that loses him money; that is a major, major loss of "face". 

Cigarette Smoking Man's picture

I'm sure they've thought about it! Even if the government doesn't, "private" companies now are. 

The west came in and "expoited" China for years. Those dumb Chinese, letting us have all their cheap labor while we pour money into factories, training, technology, and R&D for them.

Oh, you mean now they all know how to build the same stuff and want to cut out the businesses that started them? How can this be?

You mean they don't need HQ to do all the R&D for them now? They can do it themselves? All they need in the USA is a sales force? Wow, how did that happen?

 

Not to be too snide, but I see this happening all the time now. Lenovo is a great example. The Chinese saved up their money, learned everything they could, and invested in productive assets. Now they don't need some USA HQ to tell them how to do things anymore. Even if they just leave and start their own company doing the same thing, the end result will be the same. Game over for multi-nationals.

I'm sure the profits were great while it lasted!

LePetomane's picture

Wow. I feel small.

NOTW777's picture

hope Yi gets out of the country safely

Caviar Emptor's picture

64.5 million mainland houses lying vacant:

An alternative interpretation: US planning to outsource retirement. China provides vacant homes to US retirees in return for direct payment of entitlement program liabilities into PBOC. It's a win-win. 

 

Spitzer's picture

good idea man.

seriously. They could get cheaper drugs and healthcare there too.

sullymandias's picture

more likely its the chinese buying vacant homes in america

RobotTrader's picture

China just foisted off the biggest IPO in history to it's millions of sheeple investors.

And just to think that bank was INSOLVENT just 3 years ago....

http://noir.bloomberg.com/apps/news?pid=20601087&sid=ap_ZMOUoqB_Y&pos=3

 

drwells's picture

Thank God insolvency is illegal now, along with inflation, deflation, failure, corruption, and incompetence.

The Rock's picture

Speaking of INSOLVENT, does anyone here remember that during the height of the banking "crisis" (aka "taxpayer wealth transfer scam"), Shittybank, Bank of America, and JP Morgan were shipping our FUCKING TARP money overseas?

Citigroup: 8 BILLION U.S. dollars (our TARP money!) to Dubai

Bank of America: 7 BILLION U.S. dollars (our TARP money!) to China Construction Bank (largest residential mortgage lender in China)

JPM: 1 BILLION U.S. dollars (our TARP money!) to India to expand operations there!

Of course our fucking sheeple probably have no memory of that!!

The Rock's picture

Meanwhile, back at the ranch, wealthy Chinese families have been buying up residential properties in the Pasadena/Arcadia ("Arcasia") area for the past decade or two. I suspect "laundering" (no, not the dry cleaning kind) is rampant. How many fucking bridal shops in a row are really necessary?

reader2010's picture

Asian Times reported more serious problems in China's credit boom.

http://www.atimes.com/atimes/China_Business/LG14Cb02.html

Renfield's picture

With so many empty cities and empty houses in China, why are there not enormous populations of squatters taking them over?

I know this: if I were jobless and couldn't afford rent, I'd break in and move into an empty house (or commercial space) and just stay in it, especially if it were surrounded by an empty city. Grow a small kitchen garden outside...pick one near a stream or brook or fountain if possible.

How tight can the security possibly be in such a gargantuan wasteland?

I'll be honest, I think we're moving back to the days of 'squatters' anyway. And more power to them. I used to have deep convictions about property theft but let's just say, in a lawless country, why the hell should our Lordships reap all the benefits of crime and we just acquiesce to having our livelihoods stolen, to waste like this? Where are the lines separating crime, from civil disobedience, from survival?

My husband is very honourable and would never think of such a thing. He won't even listen to my musings along these lines. I can't decide which of us is the 'crazy' one in these terms, especially when I read stuff like this story.

Sudden Debt's picture

Somehow, I don't think it's a good idea to squat a house in the democracy of China where you become a volunteering organ donor for spitting on the ground in 1,2,3 seconds :)

BoeingSpaceliner797's picture

Renfield,

I agree with SuddenDebt that squatting in the PRC doesn't sound like such a good idea.  With regard to you and your husband, you are the sane one.

Renfield's picture

797

I am sort of the 'survivor' of the two of us. :-) But it's difficult for me to draw the line between pragmatism, necessity, and integrity. I was really wondering this so it's good to hear there's someone else who sees it my way out there.

I hate even thinking about that kind of thing, but that's the downside of living through a Depression. I wonder how many other people, back in the '30s, wondered what moral standards they could afford to hold onto. And I wonder how many of the criminals of that time were that way out of compulsion rather than personal choice. (And I'm not talking about the white-collar criminals at the top.)

Timmay-Jimmay's picture

Renfield:

When you’re a single dad with three young children and no meaningful work for the last two years, YES, pulling a squat is a damn good idea.

I’ve been doing it with a bank owned (Deutsche) house for a year now. The neighbors love me. I’ve had to do some fancy dancing to keep the charade up, but I can tell you that I’m not losing any sleep over the moral issue of living rent free on the banks dime.

The house is also in a high-brow area of Orange County CA. There is also an empty bank-owned (former Countrywide – you know the rest) McMansion across the street from me that went back to them for 1.4 million. Point is, you can do this in just about any neighborhood.

Renfield's picture

TJ

Well, good for you taking care of your family.

Morality is not the simplistic standard that we are 'used to', in a Depression.

- Conventional morality: pay your debts, fulfil your contract, be upfront, disclose, don't take what's not yours.

This makes you a walking talking patsy for the banksters these days, or your family is living on a shoestring and if you screw up on the debt thing, you and yours are on the street. Good luck going to the government or banks for help, regardless of what the 'contract' was.

- Conventional morality: preventing 'illegal immigration' is artificial bureaucratic and selfish, and our grandparents were 'illegals'.

Wreaks havoc in an era of high unemployment and wages falling past the cost of living due to 'globalisation', as well as exploited illegals further eroding domestic wage/working standards.

And so on.

I'm glad you and your family are doing well. Survival comes first. I'm double-minded about this since it is not so easy for me to figure out 'right' and 'wrong' these days. I think we should start being more selective with our moral principles and give careful thought to them now, since we may not be able to afford as many of them as we used to.

Cathartes Aura's picture

good for you Timmay-Jimmay!  ++ resilience & creativity points!

it's heartening to hear that amrkns can overcome their aversion to usefully occupying vacant properties. . . if they're bank owned, and sitting vacant - then put them to use!!

Renfield, (you "sound" familiar, I'm sure I've read your posts ages ago, Guardian Cif? *wink*) I moved to London late 70's to be a part of the music punk-DIY scene, and squatted some amazing properties in Notting Hill, Bayswater & Camden. . . there were certain "rules" to follow as to access & occupation, but nothing all that hard to learn. . . certainly a valid response to Thatcher's unleashing the "move every 6 months" nonsense. . . she was on the side of the landlords, who, faced with sitting tenant's rights, could not raise rents substantially until the current tenant was displaced. . . by making rentals (and we're talking mostly "rooms" here, amrkn readers - weekly rents) 6 month maximum tenancy (or tenant rights kick in), landlords were able to rent to the "highest bidder" as queues for rooms advertised were often over 30+ people long. . . and the rents went up with every tenancy vacated, rinse, repeat. . . I lived in some nightmares when I first landed, luckily I was in my early 20's, so it seemed "adventurous" - but when I finally hooked up with the people squatting, well, never looked back, hehe. . .

if there are people homeless, and empty properties waiting for market rates to go up - well, it's not rocket science. . .

Renfield's picture

Cathartes

You may have seen me here & there, I've been around the 'net since the '90s (you might remember the usenet days...?)

LAWL at the punk squat story, why does this make me think of Sid & Nancy? We have week-to-week here in Sydney, too, home of the tenant serf.

It was indeed the empty properties that made me start thinking about squatting in a whole new light. (I hate people messing with my stuff so before I have not been much of a squat fan until lately.) But this is not the same issue as some wrecker moving into your vacation house and changing the locks on you.

These bank-owned properties, sitting empty, many not even on the market, these 'shadow inventory' houses, are in effect abandoned. So why shouldn't the homeless live in and take care of abandoned property. It's better than the alternative, both ways, it's not hurting anyone and it's actually making things better. It's not much different from taking couches etc left on the street or eating discarded food. And when it comes to the people in question, it's a big big difference when it's about their survival....

Oh regional Indian's picture

The Chinese enigma, the Indian Enigma, the Japanese enigma.

The east is just so enigmatic. Look look, we come from a tradition of truth speaking! Hah! We learnt our lessons all too well it seems?

Believing Chinese official stats is almost as stupid as believing official US .gov stats.

By the way, Bangalore, where I live is having it's own, under-reported property bubble. Apartment buildings coming up like warts on the landscape.

To house a "booming" IT workforce.

Whose jobs are totally dependent on a healthy US/Europe.

I smell something starting to burn.
And it does not smell good.

ORI

http://aadivaahan.wordpress.com

Sudden Debt's picture

That might be your cooking, maybe you should set asside the laptop and check the grill ;)

Oh regional Indian's picture

:-)

Nope, it's the smell of mort gauges burning!

ori

http://aadivaahan.wordpress.com

GoldBricker's picture

Yo Oh,

Lovely blog.

I went to grad school in CompSci in the 90s with a clutch of Indians, all from Hyderabad, who suggested that I try Bangalore after leaving school. I felt that I was too old (being already over 40 at the time), but the romance of the idea (plus a love of south-Indian cuisine) was strong. Your blog helps me to put things into a realistic perspective.

Oh regional Indian's picture

Hi Goldbricker,

Nice to hear the Hyderabad connect. And you know what, back then Bangalore was still an awesome city. Not anymore. It is a mess, all capital letters.

Have you visited yet? Still lot's of magic, but it's fading back into the mix.

Thanks for the Blompliment! ;-)

ORI

http://aadivaahan.wordpress.com

dhussey's picture

This is the least surprising news I have heard in a while!

BOC raising 20b, now this... and boom goes the dynamite...