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Observations On China's Bubble, Or The "Lose-Lose" Reality Of A Financial Cocaine Addiction
Jim Quinn's has penned a good post on the "mother of all bubbles" in which he analyzes the impact of cheap credit and surging money supply on Chinese real estate, hot on the heels of recent Zero Hedge disclosure that nearly 65 million homes in China lie vacant. Using data from The Casey Report depicting the explosion in monetary aggregates, it is rather easy to see just where all the "excess" credit and easy money has gone. In many, if not all ways, the experience China is about to undergo with respect to its real estate bubble is comparable to that of the US, and simply the lack of an overlap of bubble peaks in 2007/8 is what helped China experience an all out economic rout, which due to how its socio-political structure is intertwined, may have well led to a domestic revolution and/or civil war. Yet the longer China avoids looking in the mirror, and continues to "feed the monkey" the worse off it will be when no amount of incremental cheap money can forestall the collapse. Which in itself is a very comparable predicament faced by our own administration and central bank. But before we present the Quinn article, we will take a brief detour into Michael Pettis' recent observations on the pitfalls association with a monetary heroin addiction.
From mpettis.com
The cocaine of cheap money
All this might sound like I am effectively recommending that the PBoC continue to repress interest rates, but of course repressed interest rates are what caused the problem in the first place. To continue to do so simply makes the underlying problem worse, by piling on even more non-viable debt. Rather than suggest that the PBoC must keep rates low, what I am really arguing, I guess, is that this is a very difficult trap from which to escape.
What can the authorities do? If Beijing raises interest rates quickly, debt and bankruptcy will surge and growth will collapse – although the eventual rebalancing of the economy might happen much more quickly.
If they don’t raise interest rates, they can keep growth high for a while longer, but the amount of reserves and misallocated capital will continue rising, making the eventual cost of raising interest rates even higher. The risk is a Japanese-style stalemate in which for many years the authorities are forced to keep rates too low because they simply cannot countenance the alternative, and during this time consumption growth continues to struggle.
Finally, if they raise interest rates slowly, they will slow growth while still suffering many more years of worsening imbalances, until rates are finally high enough to begin reversing the imbalances. But for this strategy to work, they would need a very, very accommodative external sector – China’s domestic imbalances require high trade surpluses until they are finally reversed.
So there’s the dilemma: they’re damned if they do and damned if they don’t. So far the authorities do not seem to be seriously considering raising interest rates, and my guess is that if the US successfully pressures them to revalue the currency, they will be even less likely to do so.
In fact they may do what they did the last time the currency revalued – engineer a reduction of real interest rates and a rapid expansion of credit. This will counteract the contractionary effect of revaluing the currency – competitiveness lost because of a higher currency will be counterbalanced by competitiveness gained by lower costs of capital.
This of course will also put more upward pressure on the trade surplus, allowing China to continue to use the external sector to absorb excess capacity. Of course it will also sharply increase the asset misallocation problem – as Japan demonstrated after 1985 when, in response to the appreciating yen, they reduced interest rates and expanded credit.
So interest rate policy has to choose between rising bankruptcies or rising misallocation of capital. Even ignoring political pressures, this isn’t an easy choice. And it will require a great deal of sympathy and cooperation from abroad.
Of course, none of this should come as a surprise to anyone. Still, that both the key developed and developing country are stuck in a regime of "extend and pretend" is very troubling, and means that it is not a question of when one drops out of exhaustion in the pursuit by the depressionary bear, but when either does so. In a world where decoupling has proven to be a myth, the failure of one is the failure of all. Which is why China and the US realize all too well that despite political theater otherwise, both are stuck in an increasingly symbiotic relationship. And in case there are any doubts as to the true size of the Chinese predicament, here is Jim Quinn with "The Mother Of All Bubbles."
In the latest issue of The Casey Report
Bud Conrad does a fantastic job analyzing the truth about Asia. Japan
is a ticking demographic time bomb. The Chinese government has created
the mother of all bubbles and when it pops, it will be felt around the
world. The China miracle is not really a miracle. It is a debt financed
bubble. Sound familiar?
I picked out 4 charts from Bud’s article that paint the picture as
clearly as possible. The chart below shows that compared to the real
estate bubble in Japan during the late 1980s and the current bubble in
China, the US housing bubble looks like a tiny speed bump. The US has
20% to 30% more downside to go. For those looking for a housing
recovery, I’d like to point out that Japan’s housing market has fallen
for 20 years with no recovery. I wonder if the National Association of
Realtors will be running an advertisement campaign in 2025 telling us it
is the best time to buy.
Take a gander at home prices in China. Since the 2008 financial
crisis, the Chinese housing market has skyrocketed 60%. There are now 65 million vacant housing units.
The question is no longer whether there is a Chinese housing bubble,
but when will it pop. There is one thing that bubbles ALWAYS do. An that
is POP!!!
The price of land in and around Beijing has gone up by a factor of 9
in the last few years. Delusion isn’t just for Americans anymore. These
two charts should be placed next to the word “bubble” in the dictionary.
This will surely end in tears for anyone who has bought a house in
China in the last two years.
As Mr. Alan Greenspan can attest, bubbles
can only form when monetary policy and/or fiscal policy is extremely
loose. The bubble king supercharged the US housing bubble with his 1%
interest rates in the early 2000s. The Chinese must have hundreds of
Paul Krugman disciples running their economic bureaucracy. There can
never be enough stimulus to satisfy a Krugmanite. The Chinese leaders
feel they must keep their GDP growing at 10%. A slowing of growth to 5%
would unleash social chaos among the hundreds of millions of peasants
who have come to the cities from the countryside for jobs. The
chart below shows that when you control the printing presses and the
banks making the loans, you can make stimulus ”work”. In the U.S., the
Federal Reserve has printed, but the banks have hoarded their cash and
have not made loans.
The Chinese authorities have printed and
instructed the banks to make loans for shopping malls, apartment
buildings, office towers, and condo towers. Average citizens have
bought as many as five condos. Every Wang, Chang, and Wong knows that
real estate only goes up. Their $585 billion stimulus package was used
to build entire cities that sit unoccupied. The 2.2 million square foot
South China Mall, with room for 2,100 stores, sits completely vacant.
The Chinese have taken the concept of “bridges to nowhere” to a new
level.
Over a 20-month period, Chinese M2 grew 47%, reflecting
the outrageous level of spending by the Chinese authorities. When you
hand out $3.5 trillion to developers, they will develop. When a
government official, who can have you executed, tells you to lend,
obedient bankers lend. The Chinese authorities can hide the truth for a
period of time, but the bad debt caused by the Chinese stimulus and
malinvested in office buildings, condos, malls, and cities will
eventually lead to a monumental collapse in the Chinese real estate
market. This will result in a stock market crash and a dramatic slowing
in economic growth.
The mother of all bubbles will Pop. Only the timing is in doubt.
Based on history, the Chinese real estate bubble is in search of a pin.
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Nice presentation.
The Chinese conundrum: How to fix the economy, or mask the pending collapse without an uprising.
Sorry kids! No can do.
We will see more worker suicides, more disruptions and a kaboom.
No way. China will just paper all of this over by forced relocation of farmers and laborers into the vacant homes and giving them sham jobs to make the mortgage payments. All is well.
This is when its good to be a fascist regime. The real test for the post Cultural Revolution government behemoths and corporate titans is will the East (Zhongguo) drink the Usury Kool-aid? All this stimulus at interest to keep people busy and otherwise create Deng Xiaoping's "a million millionaires" dream - will the government insist that the time value of all that fiat currency be carried on the books verses insane values. China has the capacity to simply wipe the slate clean and convert all those empty and defaulted housing units into something productive for the common tongzhi. Does the PBOC just emmulate the Fed and bow before the BIS and Basel III, or do they forge a real destiny with all that industry capacity and just BE the new Yang to the West's Yin? Surely there is a camp within the CSP that says forget the West economically and use those coastal cities to develop the interior. After all China gives us things and we give them ... paper.
This is the end game. When the Chinese start to make their goods for their own consumption and dump all of their worthless paper dollars and dollar bonds, it is all over. However, I don't this this instant middle class suddenly arising in the Middle Kingdom. A couple of decades more though and it's game, set, and match.
We best hope the tongzhi learn to use credit cards and fast!
The Chicoms have fine tuned Planned Obsolescence to a fine art. Imagine the jobs in China when the domestic Chinese consumer has to replace everything they purchase again the following day.
What a booming economy that will be.
Like the U.S. today, I think China is in uncharted waters.
I think it's funny that many think of China as the sure-thing wave of future when in fact they are following the same, old Keynesian playbook but on steroids. There is no way the China story ends up with a happy ending.
you think china allowing shorting was by accident!
it will take Australia, the most highly levereged chinese derivative on the planet, down with it!
Good. It will give us the kick in the butt we need instead of relying on mineral exports to have an effective economy.
While they'd certainly miss their sugardaddy, I think they could find some takers for all that mineral wealth somewhere else on the globe eventually, but whether they'd find enough to offset their own housing bubble is another matter.
In keeping w a bubble topping process, BB reports that their equiv of the VIX hit a four year low:
http://noir.bloomberg.com/apps/news?pid=20601110&sid=a9KT_m4jEbwo
From my home in mainland china I was watching CNN at lunch. There was a story about the US imposing duties on chinese steel. I got the first 10 seconds before the screen went black for a minute until the a new story was showing. I flipped over to BBC and another story came on about China and the same thing happened. Black censor screen. This stuff used to happen all the time a few years ago but this is the first for quite a while. Don't know if it means anything but thought I would share. Seems the gov't is particularly nervous now to any critical story.
Could've just been your typical sat-signal glitch, as I'd find it unusual if they monitored BBC / CNN and would bother censoring channels (which arrive via mostly hacked cards and accounts) in real-time. I find the censoring issue largely centred around media in Chinese, and the foreign English-language media is largely ignored, simply because of a lack of influence and penetration in China.
Could be wrong though and the black screens may not have been a coincidence. The problem with blacking out singular stories only on China is that it draws attention to it and can lead to an even bigger story in western media. So, it could well have been coincidence.
Just a thought.
In this case and in the past it is very clearly active and real time censoring of individual stories. They have not been at it for a while, but this was certainly the case today so something seems to have got their interest (why steel tariffs???). We do not have a bootleg satellite and I can find the stories at work via VPN to compare.
Just as an aside, a few years back Hu Jintao met the Queen of England. So the story was about the visit but also showed the "free tibet"protestors. So the screen would flick back and forth between story and black screen depending on whether the protesters were shown and trying to show the majesty that was afforded the Mr Hu. It was hilarious.
I have experienced the chinese real time censorship myself, it's true. Something 'sensitive' and black goes the box.
Ok interesting, thanks. I've never come across it, mind you I have bootleg satt, and don't watch a great deal of the box...but never seen such a temporary block of individual segments on any of the MSM shows.
Not saying it doesn't happen - and have been in China a long time, just a little surprised. Was thinking of upgrading to a legit provider for greater channel selection but, might not be worth it if this sort of thing may happen from time to time.
When in the course of one’s life one is exposed to such an odious individual...such as Jim Quinn, one is faced with a dilemma: should the offensive individual – Jim Quinn, in this case – be shown compassion?
Should he be showered with kindness? Empathy?
Alas, everyone must answer this question for themselves.
Jim Quinn is a hater. He spews malevolence with abandon; posts stupidity and ignorance all over his racist blog.
He lies with glee and impunity. Whenever on the losing side of any debate, he deletes the reply and responds to facts with obscene vulgarity and total, ignorant nonsense.
I hope Quinn will be able to pull away from doing his sister so that he can post some of his best hate spewing, 9/11 fact-denying gibberish...
{Gibberish is a generic term in English for talking that sounds like speech, but carries no actual meaning...Learn how to spell...Moron} !
Anticipate nothing but racist drivel and threat-filled attacks from Jim Quinn, complete with multiple spelling, grammatical and historical errors.
Quinn...Please provide your evidence for denying 9/11 being an inside job and we will have an original discussion.
Do not provide links or other people’s words.
I WANT TO SEE YOUR ORIGINAL ANALYSIS of 9/11 NOT being an inside job.
We await your words of wisdom.
ALL HAIL THE GREAT QUINN.
Come on... Moron...I'm calling you out.
Are you a 9/11 Denier?
Good to see you’ve expanded your vocabulary. I was expecting your usual links to other peoples sites. You need to get that anger under control. It appears that they ignore you on your own blog too. How does it feel to be such a miserable failure?
I wonder if Quinn will take up arms ...because he ran squealing like a little girl from the 9/11 debate on his blog a year ago.
It got scary back in the day for him but that doesn’t mean that he doesn’t have the courage to fight for the things that are dear to him: delete buttons, IP Blocking, Internet porn, free mental health care, free Lithium, inexpensive booze to kill the pain and freedom from prosecution for looking at the girls getting off the school bus with binoculars.
I know you can cut and paste. Of course eating paste is probably part of your problem.
Please explain to us slow people what brought down the WTC.
What was the physics involved?
I know you know. Let us in on this new science.
Quinn will again demonstrate that '9/11 truth deniers' are the sorriest, saddest, most ignorant and hateful group of losers on the planet.
We will wait for a coherent argument from you about 9/11.
Fire away.
We all await your wisdom... and no cutting and pasting. Quinn you are a worthless piece of shit who hates Truth.
You are a ignorant coward who fled truth years ago and your entire life has been a complete failure. You love the attention the internet gives to you.
You are clearly incapable of writing a complete sentence or generating an original thought.
My goal is to lure this bonehead out of his porn-infested, racist blog– to expose TBP readers and the drivel that the Quinns of the world peddle from their Mommy’s basement, the Wharton School of Business and various homeless shelters throughout the land.
.....................................................................................
If you cannot discuss alternative perspectives on 9/11 with maturity and without obscene name calling, please do not raise the issue.
Mr. Quinn, if you continue to allow this on your site, please take it down.
Sincerely,
James Lamb Hinsman
....................................................................................
Go see for yourselves...don't just take my word. dp
http://theburningplatform.com/blog/2010/07/28/ode-to-an-american-traitor/comment-page-2
Never heard of Jim Quinn before today, but you do seem to have sand in your vagina about him. Did he shag your girlfriend or something?
Your link appears to be a self-condemnation.
More than half of China's existing residential structures will be demolished and rebuilt in the coming 20 years, according to a senior researcher from the Ministry of Housing and Urban-Rural Development, a claim that has sparked fresh questions about the short lifespan of Chinese buildings. - from the china daily. Not sure if this was also the case in US - anybody know?
When land becomes much more valuable, old houses built in a less prosperous period often get torn down and replaced by bigger homes. It happens in Weston, Connecticut.
China was much less prosperous twenty years ago, and was not prosperous thirty years ago. It seems reasonable that almost all of the housing built before China changed course in 1979 will be replaced during the next twenty years.
I doubt that such "past performance" will be an indicator of future performance, especially given the decline in resources in conjuction with the increase in populations.
I like the 'Mr. Bubble' chart.
China's Inter-Company Lending Ponzi Dynamics
the income statements of many public firms, there is an item called "investment income". Those who have experience in China's A share market know that investment income is often considerably larger than regular business income. The interest rate income from these kinds of "trust loans" is classified as investment income.
The "trust loans", which are also called "custodian loans", are different from the bank trust investment products. Bank trust investment products are loans that are repackaged by the banks and sold as trust products. (Much like they American CDO's and MBS's). The issue of bank trust investment products has already received public exposure through a report by Fitch.
Although the "inter-company trust loans" phenomenon has never gotten public exposure through major news sources; this kind of borrowing is very popular among big, medium and small Chinese firms, and is used in a much larger scale than the "bank trust investment products".
China's Inter-Company Lending Ponzi Dynamics
We're all real clear on "it's gonna be worse..."
We're just not clear on "When"...
just another cracker for the increasingly crowded panda bear circle jerk?
if this is so obvious can it be right?
It look likes the Cocaine is working. Futures are green. Must be that high grade shit. It could also be the circumference of the straw. The wider, The better
They just get excited about the possibility...even sniffing huge lines of drano can be 'exhilirating'.
Quinn's article asserts that "Average citizens have bought
as many as five condos." Does that sound like a plausible
statement to anybody? Among university graduates over
forty, buying multiple condos is common, but the average
Chinese citizen is poor. Those with good jobs buy one for
their one child in high school so that he/she will have a
place to live after graduating from university and getting
a job. They buy others as investments which they consider
to be safer than stocks or bonds. They buy them intending
to leave them unfinished and empty for years. The article
argues as a lawyer does, stressing one side of an argument,
ignoring conflicting facts or contextual factors.
This article is pretty weak.
While residential real estate in major Chinese cities is clearly way over-priced, the fundmentals don't even begin to look similar to the U.S. housing bubble.
Most notably, the LTVs are completely different, as 30% or 40% downpayments are standard practice and required by law in many areas. Also, the buyers have significant cash savings in addition to these investments.
What the author fails to recognize is that bubbles "pop" when collapsing prices create negative equity and forced selling/deleveraging. The ingredients for that simply aren't in place here. The price increases are unsustainable to be sure, but the likely outcome will be a slow decline/reversion to mean without a lot of forced liquidation. The fundamentals for a crash simply don't exist here.
xPat in Hong Kong
While down payments for housing are supposed to be 30%, often the minimum down payment requirements are circumvented through borrowing outside the banking system, perhaps from groups of families who pool their assets for investment. Local government leaders get involved with supporting developers who make their money up front as units are sold before they are completed. Banks provide loans with support from the government to get the construction projects started. And decisions to build projects can be based on keeping workers busy and expanding the economy, as much as they are on market demands.
Interesting, I´ve always thougth that the Treasury bubble is the mother of all bubbles.
DOW and SP500 weekly charts update :
http://stockmarket618.wordpress.com
21st century equivalent of the Cargo Cult phenomenon?
If you build malls, Valley Girls will come?
If only. They sadly don't seem to understand rabid consumerism...perhaps we can send them some copies of mid-80s movies for reference.
While I mostly agree with the thrust of this article, I wonder how relevant a measure the price of land can be in a nation where private ownership of land is not just illegal, but UnConstitutional! Yes, some of the privileged have ways around that, but my point is that the majority of potential consumers of that land are essentially just bidding for the right to squat on it, until the goverment clears its throat.
On the other hand, perhaps the 9x bid up, in the absence of actual property rights, is an even worse sign.
Buying a condo in China, one generally has leasehold
ownership - usually for seventy-five years starting when
the construction is completed.
Jimmy Rogers used to say that China would go through a period of upheaval--a period in which this nascent capitalism would be tested and there would be blood in the streets; that would be the time to buy. Lately he has been skipping over that low in his rhetoric. I wonder if maybe he had it right the first time.
I spend a lot of time in the interior as well as along the east coast ( in China) . Although I see a lot of vacant industrial & retail space I do not see many vacant residential spaces. Certainly I've not seen anything like the entirely new & empty condo towers I've seen in Vegas. Sales of new high end units in major cities continue to be brisk.
Unfortunately, anecdotal evidence is the only data you can rely on in China because there is no data audit process, by anyone. "65 million empty housing units" Whose ass was that number pulled from?
China (obviously) controls all information streams. The difference between a massacre & "nothing happening" is the presence of a covert video camera. And no, you can not make extrapolations based on "energy consumption" or the number of panamax vessels unloading ore because these numbers are either unreliable or you have no idea of the final disposition of the ore. Unless you are at the top of the Party, you can not know. Do you think that anyone in a position to actually "be in the know" is going to risk their family and their cushy job to "spill the beans" to foreign media? Not likely
All of the folks who claim to be "in the know" but are not on the ground in China are just empty suits.
There will be rumors & rumors that "the bubble is about to pop" but there will NOT be any hard, confirm-able data (none) until after it actually pops.
place your bets.
For those who are interested, David Pierre deserted the US to Canada during the Vietnam War and hates everything about our country. He is a 9/11 Truther who spams websites with 9/11 links from his shack in the backwoods of British Columbia. I have banned him from my website, so he appears here to spew his jibberish.
huh.
makes me more inclined to read his posts then.
thanks for the information.
[caveat: all you boys would have more credibility if you didn't use your pornspeak to diss each other - so so immature]