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China's Fragile Economy, Its Housing Bubble, and What It Means To Us: Part II
From The Daily Capitalist
We think that China is an indestructible economic juggernaut but its economy is very fragile and it is sitting on a property bubble which will burst. What China does in response has major implications for their economy and the rest of the world. This is the second part of a three-part series on this topic.
China's Government Tightens Credit
The government is very worried about this bubble and in November they announced new rules to reign in developers:
The new rules ... include a minimum down payment of 50% on land purchases from the government. Local-level governments previously asked developers to put down 20%-30% of the value of the land in such deals, analysts said.
The new policy also requires developers to completely pay off land purchases from the government within one year of a sale agreement, with a one-year extension allowed for certain "special projects."
Developers won't be permitted to buy new land if they fail to pay off a land purchase in time, according to the statement, which was jointly issued by the Ministry of Finance, the People's Bank of China, the Ministry of Land and Resources, the National Audit Office, and the Ministry of Supervision.
The new rules also require local governments to fully reflect the proceeds of land sales in their budgets and forbid them from giving discounts to developers or allowing developers to delay payments. ...
"Land auctions by local governments will be conducted in a more strict manner than before to meet the central government's new rules," said Johnson Hu, an analyst at UOB Kay Hian. "It may not have a direct impact on housing prices, but it sets a tone that shows the government wants to rein in the property market to deter speculation."
And these moves will hit the economy hard, especially developers:
At the end of August [2009], liabilities exceeded 90 percent of assets at more than 160 developers that have borrowed at least 50 million yuan ($7.3 million) each from banks, the person said. New loans for real-estate development surged 121 percent from a year earlier in the first half to 403.9 billion yuan, according to the People’s Bank of China’s latest quarterly report.
The housing market is starting to cool, but in Chinese proportions:
Property prices are still going up: They were 10.7% higher than a year earlier in February, the National Bureau of Statistics said, even as prices of food and other daily necessities are also rising. ...
However, sales of residential properties are now easing from growth rates of more than 50% late last year, with the data showing an increase of 37% in the first two months of 2010. Figures compiled by real-estate consultancy Soufun, which counts transactions in 30 major cities, show an even sharper slowdown at the beginning of the year: Housing-sales volume was down 49% in February from January, which in turn was down 46% from December. ...
The Government's Dilemma
What to do? This is a serious problem because real estate activity was one of the main drivers of China's economy last year when exports dropped off a cliff. But any tightening runs a serious risk, in their eyes, that the economy will crash.
Premier Wen Jiabao announced to the National People's Congress meeting held last week, that "the launching of new projects must be strictly controlled" this year. They are turning the spigot maybe an eighth turn:
The People's Bank of China, which has said it will work to gradually normalize monetary conditions this year, reported that banks extended 700.1 billion yuan ($102.6 billion) in new local-currency loans in February, around half the 1.39 trillion yuan in January and well below the 1.07 trillion yuan in the same month last year. Growth in outstanding loans eased to 27.2% at the end of February from 29.3% in January, also the slowest growth rate in a year.
Commentators like Nouriel Roubini don't think the tightening is enough:
A credit-fueled investment boom successfully boosted China’s growth to 8.7% in 2009, but cheap money drove up asset prices as well, especially in property markets. As China’s output gap closes, loose money is now set to become inflationary, particularly if China’s potential growth rate has come down slightly, as RGE thinks it has. The People’s Bank of China (PBoC) has twice hiked banks’ required reserve ratios (RRR) in 2010, following a return to net liquidity reductions through open-market operations in October 2009, but RGE suspects that the tightening moves have had little effect. ...
China has not yet started to tighten liquidity significantly, nor has it laid out a clear path for its exit from the extraordinarily loose monetary conditions put in place at the end of 2008. ...
The political will to tighten monetary conditions looks weak in China, particularly concerning any appreciation of the RMB.
And Roubini is right about political will. Here's what Premier Wen Jiabao said at the National People's Congress:
Mr. Wen reiterated in his annual report at the opening of the National People's Congress that the government will continue its "active" fiscal policy and "moderately loose" monetary policy. It will also maintain the "basic stability" of the yuan exchange rate, he said.
Mr. Wen cautioned that "there is insufficient internal impetus driving economic growth," and reiterated the government needs to "consolidate the momentum of the economic turnaround," while restructuring the economy. ...
It will also seek to slow growth in broad money supply, or M2, to around 17% this year from nearly 28% in 2009. ...
Still, Mr. Wen said the government plans to run a fiscal deficit of 1.05 trillion yuan this year, or 2.8% of GDP. The budget suggests continued fiscal stimulus this year given earlier data showed the 2009 deficit at 2.2% of GDP, though the finance ministry said last year's deficit was higher, at 950 billion yuan, because of an accounting move.
"The fiscal deficit in 2010 still needs to be of an appropriate size. At the same time, in order to promote the sustainable development of public finances, actively prevent fiscal risk, and leave some leeway to gradually reduce the deficit in future years, we must keep the deficit under 3% of GDP," said the Ministry of Finance.
This doesn't sound like they are serious about cutting back fiscal or monetary stimulus.
What Will Drive China's Economy?
The backbone of China's economy is exports. When the recession hit, exports fell YoY 20% during the first half of 2009. While exports reported to have jumped 45.7% YoY in February and 21% in January,
... the jump was mainly due to a low comparison base, as exports in February last year fell at their fastest rate during the international financial crisis. Seasonally adjusted exports last month fell 2.2% from January, suggesting lingering weakness in external demand--a recurring theme in recent remarks by officials.
What is going to help China's exports? I don't mean this to be an obvious question, but if, contrary to what many economists predict (but not me), the U.S. and European economies don't recover in H2 2010, then the Chinese are in trouble. Already they have massive unemployment and admittedly poor internal demand for goods. If the housing market is on a bubble, and they are trying to talk it off of the ledge to avoid a crash by tightening money and credit, they are in trouble.
Tomorrow in Part III — Inflation on the rise and the bubble's consequences to us and China.
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let the fireworks begin...dammmn cant wait to see that massive financial destruction occur!
China generates activity. I am not so sure they generate profits. Chinese companies have been pouring into resource rich countries over the last few years, paying whatever it takes to secure mining contracts and exploration rights. In one particular SEAsian country in which the Chinese are the major investors, sources tell me that they do not know of a single Chinese company that has made a profit. Not one. They do not bother themselves with such esoteric concepts as feasibility studies; they merely pay whatever it takes to secure whatever it is they want.
Clearly this style of business has its limits. My guess is domestic Chinese companies behave in a similar manner. Certainly real estate speculators do.
China's bubble will not end well. Yes, really out on a limb saying that!
Agreed. It appears there is little, if any, profit made across the board. However, since the government and private enterprise cannot be separated, there is no need to have a "Western" form of profit. The government will always control the "private" sector, not the reverse as it is in the West.
But what does "profit" really mean if you have gross sales; revenue is beating out overhead and you are busy making a great wage? That seems to describe most businesses in the West & East.
A bubble pops when the indebted can no long pay installments on the debt. But the Chinese controlled banks say "Okay, you failed at that business. You cannot pay back the debt so we forgive the loan. Let's try again." Who looses in this scenario? Nobody? The key is that the loans are for production as opposed to gambling.
Maintaining control is better than profit.
The Economic Wall of China
There are two additional points to China's "debt problem" that has not been discussed. Namely, its government controlled banks and the non-floating currency. This mans the Yuan (renminbe) is a unit of value unto itself, immune to foreign exchange market pressure.
Government controlled debt (government-issued money) versus private debt (private bank issued money) is the difference between day and night. With government debt, the expanded money supply is directed towards tangible economic activity rather than the almost exlcusive gambling that we see in the West. Yes, wealthly chinese are gambling with realestate, but unlike America, government banks can keep inflating the money supply without worry of run-away price increases. History has demonstrated that run-away
price increases only occur when there are money-generation-for-nothing inflation schemes which are used to pay off private debt such as what America just did with its $trillion dollar TARP.
With deference to Mr. Hugh Hendry, Nouriel Roubini, and others that feel China is way too over-capitalized, the massive spending on infrastructure does not carry the interest burden that it would in the West; plus there is an infinite supply of money. Again, the key to direct new money into goods and services that in-turn generate more economic activity. The "efficiency" of these operations are less important.
Equally important, the Chinese have insulated the Yuan from international currency speculation making the Yuan (renminbe) is a *domestic* constantvalue unit.
It is these two simple constructs that have created a new "Economic Wall of China" that will permit China to prosper while the Western world suffers, under a private debt load, through the Great Depression of 2011-2015.
What good is building housing that no one can afford? I read that the price of an average new apartment in China's cities is roughly 800 times the yearly earnings of the average worker. What are they gonna do with all that housing... give it away?
Some say China is like America circa 1920. I think they may be America, circa 1890... a guilded age built on export-only steroids... without a rise in the living standards of most of their nation.
This will be entertaining....
I like trouble.
I like trouble.
We are all in trouble.
The backbone of China's economy is....
Labor...cheap and plentiful labor used not only in export-oriented industries but primarily in construction. China's migrant labor population--estimated as high as 300 million--will, if unable to find work from a burst bubble, take to the streets; since they're non-union, the riots will not be organized. This is the CCP's greatest fear: chaos.
The Chinese are in trouble.
Think about this: If China wants the political/social stability necessary to advance to the first world, they will need a middle class of roughly 800 million people. I don't think they'll get there before their demographic crunch catches up with them.
If China has a bubble Brasil has a Balloon.
...and australia is in outer orbit.
+1 You better believe it. Colleague at work was telling me this week that her real estate agent told her that property prices in her area are going to DOUBLE in the next five years. This is in Melbourne, which currently has the third highest (and still rising) median property price on the planet, behind Vancouver and Sydney.
Having some degree of intelligence and open eyes, obviously I don't believe predictions like this for a second, but make no mistake, the Aussie property bubble is still inflating rapidly on ridiculously misguided naievete and optimism.
No idea when government efforts and initiatives to keep the housing market inflated will fail, but when it collapses, boy is it going to be spectacular.
China's bubble is going to be felt around the world, you can bet on that.
Absent from your commentary is any mention of cars and how many chinese are buying them. I understand they are also improving infrastructure. To me that speaks volumes.
Love of the car moved our country as did the housing boom. With the huge population they have, there's a lot of growing wanting to get done. Some may lose money in their sector of investment but its a huge economy.
My 2 cents
How is it possible that car sales increased 70% while fuel cunsumption increased 3%? The only explanation is that booming car sales are as much of a lie as the rest of the bullshit statistics coming from chinese potemkin miracle.
Jan YOY gas consumption up 28% in China.
It stands to reason that prior months were up significantly too
http://news.bbc.co.uk/2/hi/business/8563985.stm
Fuel consumption doesn't necessarily rise linearly with car sales. If you don't trust the gov't numbers then look at what companies are reporting. GM for example is having a hell of a time in China.
Also consider that 1) CNG use in vehicles is rising in China which could explain some of the discrepancy, 2) on newer car models avg. fleet fuel consumption is 38mpg, much better than on older models, 3) a lot of heavier fuels such as bunkers and distillates probably form a base for overall fuel demand which makes any increase in gasoline consumption look smaller on a percentage basis, 4) in some cities there are restrictions on when you can drive your car because there isn't the infrastructure to support huge amounts of traffic. So, people end up buying two smaller cars, one to drive on MWF and one for the other days of the week (or however it is they divide it).
I'm sure there's some fudging going on as anywhere, but believing that the Chinese gov't is massively inflating sales figures means they think we must be really, really stupid... and that doesn't pass the giggle test.
It is a wonder that they produce these statistics, does anyone actually believe them or do we all laugh?
Then again they may have the upper hand if all the vehicles are electric o_O*
*Doubtful