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It Doesn't Take a Genius to Figure Out How This Will End
For all of those who feel China is going to take over the free
world, just remember that when you blow a bubble (particularly a
balance sheet bubble) it is bound to pop. The damage from the pop
invariably does more harm than the boost from the bubble. It has always
been the case, particularly when leverage is involved - which makes the
impact that much more devastating. If anybody can attest to this, it
should be us Americans (British, Spanish, Irish, those from Dubai,
Japanese...).
Methinks that before China gets a chance to
become a preeminent world power, their profusely blown asset bubble (by
way of a most accomadating fiscal policy) will blow up in their face
and they will go through what the US, Japan and UK just (is still) went
through, exacerbated by the fact that they are still a net export
reliant economy when the bubble blowing is removed. With the developed
world in sluggish mode, they will have very little to fall back on as
their asset prices collapse to equilibrium and debt from their
steriodal lending system is left under or uncollateralized and unable
to be serviced.
Why does everybody confuse bubbles with economic progress?
From Bloomberg:
Dec. 31 (Bloomberg) -- Li Nan has real estate fever. A 27- year-old
steel trader at China Minmetals, a state-owned commodities company, Li
lives with his parents in a cramped 700- square-foot apartment in west Beijing.Li originally planned to buy his own place when he got married, but after watching Beijing real estate prices soar,
he has been spending all his free time searching for an apartment. If
he finds the right place -- preferably a two-bedroom in the historic
Dongcheng quarter, near the city center -- he hopes to buy immediately.
Act now, he figures, or live with Mom and Dad forever. In the last 12
months such apartments have doubled or tripled in price, to about $400
per square foot.“This year they’ll be even higher,” says Li in the Jan. 11 issue of Bloomberg BusinessWeek.Does this scenario sound even remotely familiar???
Millions
of Chinese are pursuing property with a zeal once typical of
house-happy Americans. Some Chinese are plunking down wads of cash for
homes. Others are taking out mortgages at record levels. Developers are
snapping up land for luxury high- rises and villas, and the banks are
eagerly funding them. Some local officials are even building towns from
scratch in the desert, certain that demand won’t flag. Straight out of the Dubai make money now and pay for it later handbook of bubblistic speculation! And if families can swing it, they buy two apartments: one to live in, one to flip when prices jump further. Imported speculators from Miami, LA and downtown Brooklyn!And jump they have. In Shanghai, prices
for high-end real estate were up 54 percent through September, to $500
per square foot. In November alone, housing prices in 70 major cities
rose 5.7 percent, while housing starts nationwide rose a staggering 194
percent. The real estate rush is fueling fears of a bubble that could
burst later in 2010, devastating homeowners, banks, developers, stock markets, and local governments.
Let's get this straight. "Fears of a bubble"!!! A 54% gain in 9 months
does not confirm a bubble???!! What is the long term historical average
in China. Probably 2% to 4% annually, or on pace with inflation, give
or take. So, if pundits are not sure a 25x increase is a bubble, what
would it take to convince them?High-End Bubble
“Once the bubble pops, our economic growth will stop,” warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences’ Finance Research Center. On Dec. 27, China Premier Wen Jiabao told news agency Xinhua that “property prices have risen too quickly.” He pledged a crackdown on speculators.
Actually, once the bubble pops, their economic growth will collapse,
and trend in reverse. That's what happens when bubbles pop. If the
growth just stopped, then it would make sense to encourage bubbles,
wouldn't it? You can just reignite another bubble when the previous one
pops and start the cycle over again. It appears as if this is the
playbook some of our central bankers are following. Unfortunately, they
are called boom/bust cycles, not boom/stop cycles. Bubbles are not
indicative or true organic growth, they are a sign of growth borrowed
from future time periods that MUST be paid back with hard money
interest. The bigger the bubble, the bigger the "vig".Although
parallels with other bubble markets, the China bubble is not quite so
easy to understand. In some places, demand for upper middle class
housing is so hot it can’t be satisfied. In others, speculators keep
driving up prices for land, luxury apartments, and villas even though
local rents are actually dropping because tenants are scarce. What’s
clear is that the bubble is inflating at the rich end, while little
low- cost housing gets built for middle and low-income Chinese.This is not hard to parallel. This is exactly what happened in NYC, particularly Manhattan and Downtown Brooklyn. See "Who are ya gonna believe, the pundits or your lying eyes?" (for pictures) and "Who are you going to believe, the pundits or your lying eyes, part 2" (for numbers and a very shaky video),
I illustrated a trip from Chelsea Piers in Manhattan to Prospect Park
in Brooklyn, capturing the rampant supply of residential, office and
commercial space that is STILL being put up despite the extreme glut
currently in this rapidly declining market. As you look through all of
this visual material, remember banks have supplied the capital for
building all of these empty edifices, at no less than 10x leverage.
None of this inventory was targeted at the middle and lower classes. As
ironic as it may sound, this activity ultimately ends up causing
downward social mobility as asset values collapse under mounting debt.
See Super Brokers form to push Super Broken products to make those with High Net Worth Super Broke for my take on social mobility, downwards style).In
Beijing’s Chaoyang district, which represents a third of all
residential property deals in the capital, homes now sell for an
average of almost $300 per square foot. That means a typical 1,000-square-foot apartment costs about 80 times the average annual income of the city’s residents. I'll give this until the end of 2010 to blow up!Table Talk
Koyo Ozeki,
an analyst at U.S. investment manager Pimco, estimates that only 10
percent of residential sales in China are for the mass market.
Developers find the margins in high-end housing much fatter than
returns from building ordinary homes.How did this
bubble get going? Low interest rates, official encouragement of bank
lending, and then Beijing’s half-trillion- dollar stimulus plan all
made funds readily available. City and provincial governments have been
gladly cooperating with developers: Economists estimate that half of
all local government revenue comes from selling state-owned land. "Nuff said!Chinese consumers, fearing inflation
will return and outstrip the tiny interest they earn on their savings,
have pursued property ever more aggressively. Companies in the
chemical, steel, textile, and shoe industries have started up property
divisions too: The chance of a quick return is much higher than in
their primary business. Oh my!Built on Sand
“When you sit down with a table of businessmen, the story is usually how they got lucky from a piece of land,” says Andy Xie,
an independent economist who once worked in Hong Kong as Morgan
Stanley’s top Asia analyst. “No one talks about their factories making
money these days.”I am leaving out significant
parts of the article, so as not to excerpt too much. I suggest you
follow the link to read it in its entirety. The following portions do
support my suspicions of where all of the alleged consumer activity in
China is coming from, though:Key to Growth
...
The government is reluctant to crack down too hard because
construction, steel, cement, furniture, and other sectors are directly
tied to growth in real estate. In November, for example, retail sales
of furniture and construction materials jumped more than 40 percent. At
the December Central Economic Work Conference, an annual policy-setting
confab, officials said real estate would continue to be a key driver of
growth.The worst scenario is that the central
authorities let the party go on too long, then suddenly ramp up
interest rates to stop the inflationary spiral. Without cheap credit,
developers won’t be able to refinance their loans, consumers will no
longer take out mortgages, local banks’ property portfolios will sour,
and industrial companies that relied on real estate for a chunk of
profits will suffer. Nahhh! Really!...
One difficulty in handicapping the likelihood of a nasty pullback is
the opacity of the data. As long as property prices stay high, the
balance sheets of the developers look strong. And no one knows for sure
how much of the more than $1.3 trillion in last year’s bank loans
funded real estate ventures....
Analysts figure
a substantial portion of that sum went into property, much of it
indirectly. Banks often lend to state-owned companies for industrial
purposes. But the state companies can then divert the funds to their
own real estate businesses or relend the money to an outside developer. Enter the domino/daisy chain effect in case of collapse...Meanwhile,
the big banks may be cutting back on their real estate risk by selling
loans to smaller local banks and credit co-ops...
I explored these possibilities about a year and a half ago. See China Macro Update, (also of interest is the HSBC opinion and 2H08 update).Then My view of the China hype bears additional fruit and All of my warnings about China are starting to look rather prescient.
- advertisements -


Actually....let's do complete the bubble spectrum....
USA
Europe
Russia
Brazil
India
China
ME
Japan
First ....let's speak about valuation categories....
Real Estate
Commodities
Stocks
Bonds
The USA and Europe
Asset calamity: Real Estate
Banks levered 30:1....mostly RE
Banks insolvent when RE assets decline only 3%....
Are insolvent now....
A 0% govt. imposed policy....assures the overpricing
of all asset risk....
Russia, Brazil
Asset bubble....commodities
Low costs of money....overprice commodities
ME...Middle East
Low cost of money....overprices all assets
India China Japan
Low cost of money....overprices all assets
and even with the low rate govt. policies....
Exports down....and still overpriced....
All assets no matter which country....are overpriced....
One reason....low cost of money....
Asset prices cannot correct with a 0% interest rate policy....
If there is no asset price correction....with the removal of all govt. interventions....Then there will be nothing but a downward muddling economic mess.....riddled with govt. econmic disease....about as exciting as AMTRACK....
....................................
The turning point....would be the allowance of the destruction of debt ....and the govt. stepping aside....and lowering the level of govt. interference....
Otherwise prices will never correct....thus how can there be a recovery....if no correction ????
China cannot and will not emerge as a global power until they have a deflationary bust IMO. As an aside that bust can and will come from their property market. Industrial overcapacity has always been an issue with China but its never been enough to spark an uncontrollable spiral down in prices. Any deflationary bust that starts in China will decimate economies all over the world. But China will retain much of the considerable assets they've accumulated over the decades and will be best positioned in the aftermath.
In the US, the Great Depression marked our transition from an economy based on savings to an economy based on consumption. This occurred as families were forced to draw down savings, but they had savings to draw down. The same is likely to occur in China as their savings rate is currently astronomical for even Asian countries. If deflation hits them hard, their people have the savings to pull through.
The logical progression would be Chinese deflationary bust, global conflict stemming from collapsed economies/governments, China emerging strongest of the large countries from the rubble positioned to make the 21st century fully theirs. Either way the ascendancy of China has a ways to go from here.
+10
And Happy New Year to you steak - I've enjoyed your posts.
And I gotta get off now ... got all of the U-96 folks over here at the house and the party's going good..
Hey Barb, gimme my jagermeister ... I'm replying to a post on Zero Hedge and I'll be there in a minute..
Oh what is that? 'Nother Keg of Bud for the tap? and Bring up the champagne and ice for New Years? Ok OK I'll get to it...
Happy New Year Everyone from The Swordfish...
KptLt laughing swordfish
9er Unterseeboote Flotille
When we reduced our savings in the GD, the age of our population was young and falling, and our population was rising. China is the most rapidly ageing country in the world with a stable population. Their grrowth will hit the wall and will collapse once the money/credit stops flowing.
Because most economists are of the Keynesian school. Just above me, Mr. Kolivakis writes, "China is running on all cylinders..." We could pull up all sorts of glowing old newspaper headlines about Stalin's 5 Year Plans. How'd that work out for them? Still, most "economists" love that crap.
Cursive,
US economy, the global economic engine, is recovering. Pay attention to the next few employment reports. And what's good for the US is good for Chimerica!
It is not. It is a government spending result and has nothing to do with a normal productive recovery. I give it 2, maybe 3 quarters, after that it is over. Of course Obama and Bernanke will pile up the next round of stimulus if that happens, adding to the parabolic debt that already has gone way out of control. There is no normal way for the U.S. to service its debt anymore, so there only remains the printing machine. If you call that a sustainable recovery, be my guest. I don't.
In the end deflation will win, as Von Mises rightly predicted. No government spending can avoid it. They will not only be too late, but the contraction will be so huge, that even 48 hours a day will not be enough for the printing presses. I think it is time to stop the Great Denying, it is over.
PS Just read a nice book on the 2002 crash: in 350 weeks there were 341 weeks of bullish calls by the overoptimistic U.S. media. In that period the Nasdaq lost over 70%. Time to learn from this experience.
Deflation will eventually win because of the Black Sloth event in the making. But for now Bubble Ben and the rest of the world banksters will let this bubble blow.
Agreed, but it will burst and make 2002 and 2008 look like a tiny correction. Besides, measured in the price of gold we already have severe deflation since 2001.
Leo, I enjoy reading your posts, most of which are very good. But I just don't get the "America is recovering" argument.
There is absolutely NO evidence of this. I live in the USA, travel around the country, have lived in many countries, and I can tell you this place is really going down, and hard.
Employment is not picking up yet jobs are still being lost, credit is contracting, small businesses are getting CRUSHED (I work with them daily, there income statements and balance sheets have not recovered one iota), prices of everything except gasoline and stocks are still declining, people don't have savings.....
The USA is at the top of the big waterslide, as I would have put it in my youth. Show me signs of recovery and I'll buy it, but until then......
@SteveNYC
This is the most frustrating thing when corresponding with Mr. Kolivakis. He refuses to buttress his position with any supporting data. I understand his argument that liquidity will keep asset prices bubbling, but he has yet to explain his belief for the recovery. To do so, one has to ignore the continuing job losses, the continuing contraction of credit, the continuing fall in sales tax receipts, the continuing fall in income tax receipts, the continuing bankruptcies or near bankruptcies of companies (YRC anyone?), the continuing bankruptcies or near bankruptcies of state (CA and NY) and local municipalities, the continuing slump in shipping, railcar and trucking traffic, etc.
I also take issue with the liquidity argument. Exchange volumes are at lows while stock prices are at highs. In addition, stocks were collapsing for a year while the Fed was pumping liquidity. I rememberin 2007, BCA was preaching the reflation trade, and I just couldn't agree with it. It doesn't take two years for liquidity to flow through to risky assets. These things just don't support the liquidity argument, which is the staple argument of the macro trader. Let's look at real estate, whose values are plummeting - both commercial and residential.
The bond commodity markets look to have been direct beneficiaries, but that seems to be it.
You are all wrong and here is why. First, an economic recovery doesn't just happen, it follows a recovery in financial conditions. EASING FINANCIAL CONDITIONS LEAD RECOVERIES. What we saw is spreads coming in, the USD depreciating, interest rates at an all-time low. The US economy is recovering but from depressed levels....BUT...it is recovering. Look at NIPA profits, ISM New Orders surging above 60, business investment picking up. I nailed the last US employment report and warned all of you of more upside surprises. Going forward, you will see better than expected payrolls WITH huge revisions to previous reports. The US economy is still the most important economy in the world.
As far as small business lending, now that the banksters made a killing in trading profits, they'll open up the credit to those small businesses. CREDIT ALWAYS LAGS A RECOVERY. The banksters don't want to lend beyond three years because they're too scared and they prefer trading in the capital markets. Large businesses, with access to bond markets, had a lot less difficulties obtaining the financing they needed.
On the liquidity front, I can't measure it but I do track hedge fund flows and what is going on at sovereign wealth, pension funds and investment banks. Importantly, financial liquidity is understated by most models and analysts who do not attempt to track it do so at their own peril. I listen a bunch of skeptics saying "fundamentals don't justify current prices", and I feel like screaming "wake up and realize this isn't grandma's stock market!!!"
"On the liquidity front, I can't measure it"
"financial liquidity is understated by most models"
If you can't measure it how can you assert whether "most models" understate financial liquidity? Who tries to track "liquidity" with a model?
Stick to the broad platitudes, when you try to explain yourself you come across as an even bigger idiot.
Leo, the only people that are feeling a recovery are management and staff at large Wall St. firms. Small busines is getting crushed, and they are pissed. And this will only persist as long as the American people keep taking it like they are in a prison cell with Bubba.
Bubble Ben and his Merry Men can do what? Sure, they can pump liquidity until the dollar caves in. You saw what Greenspan did after the tech bust, where that got us, and where it has landed. 4 years and they blew it up, with MASSIVE credit expansion, securitization markets humming, China emerging etc.Now, we have credit contraction, the only securitization that gets done is being bought by the Fed (the market has NOTHING to do with current mortgage rates and yields on MBS). Our markets are completely dislocated, and will most certainly blow again in short order should this keep up.
The financial system BLEW UP. Like any system, if you set it on the same course, and just drive it harder, it will simply BLOW UP quicker this time around. Meeting our government financing "needs" in 2010 is going to be hard enough, let alone Bubble Ben keeping this charade going.
Less jobs, less credit = less money in circulation. Prices MUST come down, or we will further the dislocation until people take action into their own hands.
I wish I could believe your argument, but you are focusing so short term here it is inconsequential.
Oh, how I love those overoptimistic guys! Face it Leo: the big crunch of 2008 has made the total financial system insolvent. Freddie, Fannie, AIG, you name it. All the big banks are broke, with a lot more of write offs to come. The whole U.S. middle class is slashed, unemployment is way over 20%, 1 out of 7 lives on food stamps (yeah, the U.S. is improving!) and the most important: social mood is PESSIMISTIC. You can come up with a lot of cooked data that show some green shoots here and there, but people living out there see the opposite: that it is getting WORSE every day. Not better. I can show you tons of charts that show depression levels, still deteriorating. Just look at hotels.
At last: enormous debt and spending has led to the crash of 2008. So how are we going to mend it? More debt, more spending. You are in a hole and instead of stop digging, you are creating an even bigger hole. Good for 2 or 3 nice quarters, after that you'll find out that you cannot prop an economy by flooding more and more paper. You need jobs and start producing again.
Nout,
LMAO! All the big banks are broke? Please get your hands on the OCC's quarterly banking reports to see the huge profits banksters made in their capital markets divisions over the last two quarters! There is enough liquidity in the world to gobble up Fannie, Freddie, AIG, Dubai, etc. The liquidity steamroller is forging ahead and fundamentals will improve, albeit at a snail's pace, especially in the second half of 2010. Expect a second stumulus package then.
Leo wrote: "LMAO! All the big banks are broke? Please get your hands on the OCC's quarterly banking reports to see the huge profits banksters made in their capital markets divisions over the last two quarters"
Leo's ability to understand bank balance sheets (let alone business models) particularly as influenced by FASB FAS 157 modifications is painfully obvious.
I also add that Leo has insisted (and confirmed upon my specific request) that he sees no major events on the horizon. I'm forced to say, once again, that his statement about not seeing major events on the horizon is one of the silliest I've seen on ZH.
What is called Liquidity, in Leo the Parasite's world, is fiat/counterfeit currency to others.
When the revolution comes, I want to deal with Leo first, then all the others like him.
The banks are hedge funds, nothing more nothing less. They are using mark-to-myth to hide huge losses and probably they are hiding a lot of garbage in the derivatives market as well (just read Frank Partnoy's 'F.I.A.S.C.O.'). So these 'profits' are having zero meaning to me. You can fool 99% of the people, but not the smart ones.
Leo,
I have one simple question for you: did you see the 2008 crash coming?
Absolutely and it cost me my job!
Leo,
I like and respect your work, but I wanted to provide you with some prospective from the front line.
My day job is in the Welfare Office. I determine eligibility for Food Stamps, Cash Aid and Medicaid.
Its getting worse from the human point of view.
Last year my county's Food Stamps application rate went up 98%. I live in San Bernardino County California. Our Medi-Cal application are up 50+%. Our CalWORKs applications are only up 23% but that is because most levels of unemployment benefits will make people financially ineligible to CalWORKs. If Unemployment Insurance Benefits ever get a stopping point I expect our CalWORKs applications to match that of our Medi-Cal applications.
Our official unemployment here is 12+%. However, I can tell you it is actually MUCH higher. My office is right by a Home Depot, so I get to see all the day laborers standing out front each morning. Their numbers have quadrupled - at least.
From 2004 to 2008 it was extremely rare to see a male applicant for benefits. 99% of our applicants were female. Over the last few months our male applicant pool has swollen to 20+% of applicants.
Real estate prices here are still falling, after having already lost 75% of their value from the peak. Forclosures are still out there, however, after a family is kicked out of a home, no for sale sign goes up in the yard. There are 4 empty houses on my street. All of them foreclosed upon within the last 6 months, none of them have a for sale or rent sign up, and none of them are listed on Zillow. But I live in a lower middle class section of my city. My mom, who lives in a much higher end area of the same town has watched the appraised value of her house plummet from $750,000 at the peak to $254,000 when she just tried to refinance 3 months ago.
The job market has gotten so bad here that the Welfare to Work program in our state is creating ways to exempt persons from having to look for work in order to not have their Welfare benefits cut.
And please understand Leo, Food Stamps is the modern soup kitchen, and welfare is the modern begging.
Lonewar,
I understand that it's very bad in the US, but it will get better. A lot of people are hurting but they have to keep the faith and do whatever it takes to survive and get through this storm. Thanks for sharing and Happy New year.
C'mon, you actually think a guy like Leo could give a FUCK about regular people? Leo is a parasite, burrowing into the body of humanity, gorging himself on the soft parts and hollowing it all out in his happy gluttony. If Leo can only figure out how to invest in a starvation-and-death ETF, his life will be complete.
Oh yeah, it's tough hopping in and out of my private jet, managing my multi-billion dollar hedge fund as I tour the world. Why do I even bother replying to retards like you?!?
You were working at... Moody's!? ;-)
Oh not you didn't! You just dropped the nuclear bomb of conversation!
Leo, why it isn't the other way around; prices returning to uninflated levels?
You're right about the stockmarket - if gravity is suspended buy, buy, buy! Accept that gift for what it is and don't look a gift horse in the mouth.
WW,
If the stock market dips again in 2010, I would be buying that dip. I don't know what you mean by "uninflated" levels because I could use the same argument to say the levels were "depressed" last March when irrational pessimism ruled the day. I do not see irrational exuberance, at least not yet!
Oops. I dropped the bottle again. I hear ya man. Sometimes I just want to watch more of those Greek vacation videos and order in. Until someone start dissin' the Constitution!
Ah, you still believe in the American Dream:
Very appropriate. I'm a non-voter until we get a reset. Even writing in a candidate is a consent to be governed. George puts it right in everyone's face. I wonder, really, if he was getting under 'the owners' skin. I do believe in the primacy of the Constitution: as long as I don't steal, commit fraud, or initiate force against someone I can go where I want, say what I want, and buy and sell whatever I want. Any imposition on that is tryanny.
http://www.youtube.com/watch?v=xIraCchPDhk
Leo, I've asked you before to point to the data that shows the imminent economic recovery. You demurred twice before. Maybe a third time is the charm?
Leo, surely you can find some report issued by the Ministry of Truth that will 'prove' the economy is double-plus good, regardless what our own experiences are telling us. C'mon, lie to us like you mean it. Or just STFU.
There you go:
http://www.springerlink.com/content/w74l73m13385v055/
You are welcome.
Now, not to defend Stalin or Russian communist leaders in general, but they did tranform a mostly agrarian backwater into one of the two superpowers for most of the 20th century. The human cost, of course, was absolutely horrible.
superpower status requires economic, technological,
political, military, and cultural might.....the
ussr had one of those....in all other respects
it remained an agrarian or urban backwater...
in no real sense was the ussr a superpower...it
was just another regime established and sustained
by the some villanous wall street powers
which established nazi germany, fascist italy,
and orwell amerika....
Glad to know the avatar of the founder of the "Church of Satan" is not defending Stalin. :-)
Yeah, and they couldn't deliver bread to market. Command economies always fail because of misallocation of resources. America is experiencing that now, too.
Hey, Anton's just enlightened. Right, Lucie? You Son of the Morning you. You should see the stuff these guys can do with hot wax.
Jealous a bit, aren't you?
I'll send you an invitation to our latest Walpurgis Night Party and Initiation Ceremony. or not.
China is running on all cylinders but before you jump on that "China bubble bandwagon", remember this: what Westerners perceive as over-investment might really just be China better preparing itself investing for their future infrastructure needs.
And one other thing, if China does bust in 2010, world deflation is sealed for decades. The power elite will do everything they can to stop this from happening. Mark my words on that.
you have absolutely no idea what china is running
on - could be cylinders, laughing gas, intestinal
gas, moon dust.....and no one else knows either -
at least from an official perspective....
the chicoms are as big liars as the usa is - with
much more controlled information...they measure
gdp in fundamentally different ways than the
usa does...anyone's analysis which does not account
for methodology and data source is horse crap....
their statistics are what they want them to be...
china's collapse is not a guarantee of deflation
in any way shape or form....
see a first hand reporter's analysis much
further down in the these postings....
it's preposterous that anyone could accept 300-800%
growth in real estate prices in a 3-5 year time
period as anything but the most preposterous
market dysfunction since tulip mania...
I wouldn't mark your words if you said, "The sun will come up tomorrow," Leo. You're the biggest tool in the belt.
Leo said..."The power elite will do everything they can to stop this from happening."
This implies that nothing in the world matters except the wishes and designs of the "power elite". Which would also imply that the "power elite" always work their plans to perfection, implying also that nothing ever goes wrong.
With what we've witnessed globally over the past two years it's surprsing that anyone could hold that opinion. Suit yourself.
Housing exceeding anything over 3-5 times normal, realistic average incomes is an unsustainable mess waiting to happen no matter what society on this planet you are talking about. If you want to perceive that as Chinese Governmental central planning genius, go ahead.
"Leo said"
Leo is on the kool aid, the power elite filled his punch bowl.
I find it hard to beleive that pouring around 90% of the building resources into housing for around 5% to 10% of the populace while driving real estate prices up by nearly triple digits annually amounts "China better preparing itself investing for their future infrastructure needs".
Honestly, it sounds like an old fashion, easy credit bubble to me. Time will tell though. Maybe their bankers, investors and economists are just that much smarter than the ones in Japan, the US, the UK, the Eurozone, Dubai, etc...
First off, $400/sqft in Beijing is a bubble? I was selling residential condos in Vancouver BC in the early 90's - that's 20 years ago - for over $400/sqft, and that was in 1990 dollars. Hardly seems like a bubble to me.
Second, I think there's a world of difference between someone trying to get out of a 700 sqft apartment he shares with Mom and Dad, and people moving into McMansions with 3 car garages and 4 bedrooms when they're making $30k/year with a NINA mortgage. It all depends on China's lending standards, of which your rant mentions not a word. How much down do you have to pay? What are the amortization periods? Is the rate fixed or adjustable? Is the allowable mortgage payment a percentage of your net income?
Here in Toronto - and Leo should know this - we're experiencing price appreciation even in this worst of years. But Canada's banks are notoriously conservative: dual verification of income, stringent limits of payment to income, very few floating rates, and most important, they hold on to their paper. Prices may keep going up, but I'm not going to call the Toronto housing market a "bubble".
Uh, maybe the relative average salaries between China and Canada have something to do with one's a bubble, the other is not. I know these places aren't being marketed to mooks working the line at a Ramen factory for a buck a day, but 3-400/sq ft still a lot of dough in China.
That's a good point, so let me approach it another way:
A bubble is a misallocation of funds, or more easily put, too many funds flood into a single sector. We saw this in the American railroads in the 19th century, in automobiles in the early 20th century (think of all the brands that went bankrupt - Stutz, Studebaker, Packard, Nash, etc.), in airlines, in telecoms (I worked through that one - everyone upgraded in 1999-2000 because they were afraid of Y2K, but the telecom firms thought this increased demand was the new normal, and built new capacity for demand that vanished in a couple of months), and lastly housing. The investment exceeds the demand and the bubble pops.
Now, in a country where the "mooks" as you so delicately put it are living in dorms, with 12 to a room, I fail to see how allocating funds to increased housing (which again, typically isn't single family dwellings but apartment blocks) creates a "bubble". The demand for housing, while not insatiable, is certainly nowhere near being sated. Therefore, I do not think the classical conditions for a bubble are being met - the investment flow into the sector doesn't exceed demand, people are not rushing blindly in to buy, and it is not being financed by a "wing on a prayer", as was the case with WorldCom, CountryWide, and residential housing.
You must not have read the article, KevinB. The housing that's being thrown up across Beijing and Shanghai isn't low-cost accomodation for first-time entry-level homebuyers fresh from their crowded dorms. It's upper-middle-class to luxury-class housing.
So we're not talking about a surplus of housing that the Chinese worker class can squeeze into with a little overtime. We're talking about WAY TOO MUCH high-end housing.
Again, the article cited rising vacancies and empty cities, so we DO have investment exceeding demand, people ARE rushing blindly in to buy because "it will only be twice as expensive next year", and a great deal of it is being financed by Chinese banks who (a) have no accounting standards, (b) have been encouraged to lend into overcapacity for years without regard for underwriting standards.
The average Beijing worker earns US$6,547 a year according to People's Daily Online. The Vancouver Sun says the average annual wage in Canada is $40,237, six times higher.
It's a bubble.
As a general observation, whenever China comes up in ZH the discussion seems less well informed than it does about matters U.S. Shanghai and Beijing property may be in a bubble but while these are two of the major cities in the country they do not equal "China". Unlike the U.S., moves have been taken to try to take the heat out of this. Some of the things proposed or implemented include - 50% deposit for second or multiple multiple homes, taxation on homes flipped for a quick profit - from memory owners will have to hold for either 2 or 5 years. To discourage developers holding on to land in anticipation of price increases in future years developers have to front with the cash within one year of signing a contract or pay a 50% deposit and pay within 2 years.
Mainland property stocks listed on the Hang Seng tumbled in December as a result of the policy tightening.
Mainland banks have also suffered a price drop on the Hang Seng as they are looking at raising equity in order to meet capital requirements in 2010.
Urbanisation is a theme in China for the foreseeable future. Marc Faber recently put the numbers at about 20 million a year moving to the cities (see http://www.youtube.com/watch?v=hGIDCMtu-04, about part 6 of this series). There is no bubble in tier 2 and tier 3 cities at the moment.