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The China Bubble Makes Contact with A Cactus
By Wolf Richter www.testosteronepit.com
Bubbles go on much longer than a rational mind can fathom, especially equity, real estate, and credit bubbles that are supported by governments and central banks. Everyone benefits, so everyone (except for a few hapless shorts) pushes to keep them going. But when they burst, they wreak havoc on the economy. And China is no exception.
China's pre-Olympics stock market bubble burst on October 16, 2007, when the Shanghai Stock Exchange touched 6,124. Monday, it dropped to 2,456, its lowest level since March 2009, down 60% from its high. The stock-market blowup fostered, as in the U.S., a real estate and construction bubble that has become an outsized contributor to GDP growth. But for some time now, ominous signs have been amassing there too.
Housing sales took a brutal nosedive last week, Golden Week—down 32% from a year ago—though the holidays normally generate peak volumes. In September, residential property prices had suffered their first official monthly hit in a year. Local reports have already pointed at developers who were forced to dump properties at lower prices to raise cash. For years, we've seen videos of brand-new ghost cities of high-rises and shopping malls. Overbuilding, funded by an enormous Ponzi-like credit bubble, has led to vacancy rates estimated unofficially to exceed 30%.
Fissures have also appeared in luxury vehicles sales. Luxury car inventories are piling up—a scary sign. To whittle them down, BMW, Volkswagen, Audi, and Mercedes dealerships across China have started to offer previously unheard-of discounts of up to 20% off retail price. Not too long ago, buyers were paying premiums above retail, and they had to wait for weeks or months before taking delivery of their new vehicles. Now they can drive most models off the lot on the same day.
Sales volume of luxury cars exploded by 48% in 2010 and by 29% through the summer this year. But now, growth seems to be slowing, just as automakers have heavily invested to ramp up production. The overall market has already cooled. After rising 32% in 2010, it is expected to scrape by with a 5% increase in 2011, according to the China Association of Automobile Manufacturers.
China, by far the world's largest market in new vehicle sales, is immensely important to all major automakers. BMW, for example, derives 25% of its profits from China. But high inventory levels, slowing sales, and rising production capacity are a toxic mix. The shakeout, as we know from what happened in the U.S. over the last decades, will be brutal. Nevertheless, luxury automakers are still optimistic publicly. With record production for 2011 already certain, they see slowing but still healthy sales growth going forward.
Inflation is red-hot, up 6.2% from August last year. Alternative numbers are in the double digits. While many Chinese workers have received significant raises—after waves of suicides and protests—others have not. Life, particularly for the poor, is becoming increasingly difficult.
Worried about social unrest, the government has taken a variety of measures. The People's Bank of China has raised interest rates five times in the past year and has tightened monetary policy in other ways. Monday, in another measure to bring down inflation, the National Development and Reform Commission cut prices for gasoline by 3.5% and for diesel by 3.9%—incredibly, fuel prices are still set by the government.
The bursting of the China bubble has been announced many times, prematurely for most part, correctly for the stock market. China has a lot of resources to patch things back up, among them nearly $2.5 trillion in foreign exchange reserves and hefty trade surpluses. Manufacturing is hanging in there, and well-to-do consumers are still in the mood to go shopping: Golden Week retail sales were up 17.5% over last year, though inflation could be largely responsible for the increase. But, construction and real estate are on the verge of tipping over, or have already tipped over, and the automotive sector is closing in. When they let go, and when the credit bubble that supported them blows up with them, it's time to deploy multiple airbags.
Well-off Chinese are also worried about an insidious food-safety scandal that has changed ... nothing: Poisonous Blood Nests—Still A Delicacy in China.
Wolf Richter www.testosteronepit.com
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"Bubbles go on much longer than a rational mind can fathom, especially equity, real estate, and credit bubbles that are supported by governments and central banks. Everyone benefits, so everyone (except for a few hapless shorts) pushes to keep them going. But when they burst, they wreak havoc on the economy. And China is no exception."
Even Zero Hedge is amazed at how all of these obvious corpses can still be walking. I am resigned to the fact that TPTB will reach their mid-November deadline. For what? Well, Zero Hedge spells it out. The longer the wait, the bigger the fall. -- Michael C. Ruppert http://www.collapsenet.com/154.htmlThe rule is that one person may only buy one apartment, one single person or 1 person in a marriage. Many couples are getting divorced leaving the "family" apartment with one spouse and the other buys a new apartment and then they get remarried thereby skirting the law. I don't think this is happening often though.
Also most people in China cannot even afford the downpayment on a new apartment because the prices are outrageously high in most mid and top tier cities. Yes they all want an apartment most even those with decent jobs cannot afford the downpayment or monthly payment required.
Because the banks do not pay good interest rates and Chinese citizens are not allowed to invest money offshore many families choose to buy second apartments as an investment because they were the only thing increasing in value year on year. These people then rent 1 apartment out while living in the other to supplement their income. Others retain the second apartment and try to sell it later at a profit.
I know this because I've lived here since 2007 and my wife made a killing on her first 2 apartments allowing her to outright buy our house which is nearing completion. We were lucky to sell our last apartment in July at a hefty profit because the market was already getting soft.
And yes it is a big real estate bubble now bursting, I'm sitting in ground zero... Beijing.
Beijing, as with Shanghai, would probably have the strictest laws, but what is applicable to Beijing has not being rolled out universally across China; yet. Different cities/areas are at different stages and second home purchases by individuals and couples are not banned universally.
Even though many as you say can't afford the prices, on the other hand many can - hence why even with these strong measures to reign in speculation and rising prices, prices haven't plunged.
I don't know if the author really knows what's happening in China residential property market. The sales is down, big time, but it is not due to buyers' inability or unwillingness to pay. It is due to a very arbitrary rule made by government that doesn't allow residents to own more than one unit per family. Everyone who lives there knows this. The number of people who can afford to buy and are willing to pay with cash is HUGE, but they are not allowed to. I am not sure this can simply be described as a bubble.
Those multiple airbags will hit a cactus too.
No doubt there is a a property bubble in China, but typically buyers must put down 40% equity at minimum on homes in China - though many tend to buy outright. As for a second home, a minimum of 60% downpayment was statutorily required as of January (up from 50%). So the negative equity aspects will not be as severe as some other countries as prices drop, as it will take a huge drop before negative equity seeps in. Meaning, the banks are less concerned about the leverage aspects and keys being returned.
which is it -- 60% down payment on second homes or outlawed? acttang is of the latter opinion. my mandarin is rusty (really, orange) and i haven't been to china since ever.
Depends where - different municipal laws apply to different cities, but second home purchases are definitely not banned across China. In some cities though you're right, it's banned. But there's also different laws pertaining to different areas within tier 1/tier 2 cities - basically a veritable mishmash of bureaucratic tightening measures applied at city level according to how fast prices in certain areas have been rising.
The 60% downpayment decree was, however, intended to be applied nationwide.
I live in Shenzhen, and everyone I talk to says the 40 % downpayment thing can get worked around. Come on this is China
Pay a few bucks to the loan officer, and get that 40% back as a home equity loan.
These guys are every bit as leveraged as the Mexican strawberry pickers in Fresno.
Well, yep I've got no argument that China is not the land of loopholes, but given the big four banks are more or less state-owned and the long arm of the law re these tightening measures is coming down from party central in a reasonably stern fashion, I have no idea how many bank officers would be willing to bend the rules on this.
In south Florida we have seen 75% drops in the price of real estate.
It warms my heart to know the communist Chinese people individually will have pissed their hard earned down payment money away on RE investments as their epic RE bubble pops.
If prices drop that much in China, there'd be massive upheaval.
But it's worth noting that even though volume of sales has dropped as of late, average home prices in Shanghai, for example, have still risen this week given comparatively strong sales of high-end luxury homes which have skewed the figures somewhat. It seems the rich just want to park their money - personally I'd rather see that kind of liquidity flow in to physical gold, and it will be interesting to see what happens if this property bubble really does end up going for a hard landing.
Another good one Wolf, the China implode is going to be ugly whenever it breaks loose. I wonder what the spark will be this time.
Kudos to ZH for another good add to the editorial roster.
Hey TulsaTime, I seem to recognize your eyes behind the holes in the paper bag. Do we know each other from my years in Tulsa? If you’d like, contact me through my website. I’d love to shoot the breeze with you.
Their $2.5 trillion in foreign exchange reserves cannot be used in any meaningful way. Doing so would accelerate the appreciation of the yuan. The reason those reserves are there is to keep the yuan down.
In the long run there is nothing you can do to correct the inefficiencies created by a centrally planned economy. Assets must get revalued. People will get hurt.
China has the Yuan pegged to the $ artifically low. they are able to get away with this because the communists could care less if their general population has any purchasing power.
China liquidating their $ reserves would have conseqences on the $, not the Yuan.
Too simplistic. It depends how they liquidate. If they shift reserves into other assets, then the affect is dollar selling. But if they buy euros and commodities and then the dollar rallies, the yuan will depreciate.
Also, if Chinese people decide they want to swap yuan for dollars, or hot money leaves, and China is forced to sell dollars, it will be negative for the yuan because people would be selling yuan for dollars. If they decide to stop exchanging dollars for yuan, then the gig is up and currency collapses because they cannot defend the peg. Thus, it all depends how those treasuries are disposed of.
Money supply has grown much much faster in China than in the U.S. and China is still mainly a cash society. They are in a much better posiiton to have hyperinflation if the economy goes critical.
i'm not sure what part of "PEGGED" is so difficult to understand. the Yuan only increases in value vs. the $ if they change the peg.
the other side of a China liquidation of $ is the Fed, directly or indirectly. if they dump Treasuries, it's the Fed who will be purchasing them (they won't allow an open market slaughter of rates).
the world economy is one big currency bubble. depending on what they ultimately exchange for the depreciated $ just shifts the bubble to that asset class. deflation of Yuan will just be pumped up with contra-deflationary Fed like policy.
the largest potential effect of a liquidation is the undermining of the $, which ultimately does affect global fiat currencies.
LMAO, after WAVES of SUICIDES. Try after 5 suicides they raised their wages and implemented a number of plans at FOX CONN, a company who EMPLOYS 1.5 MILLION people. Ill bet 5 peple kill themselves PER DAY employed in the financial services sector here in the US!!!
I want to kill myself every time I deal with JPM Chase and Bank of America and I don't have an acct at either shitty "bank" aka scam.
This Is The Type Of Story That Makes People Freak Out About China's Underground Banking System
By Gus Lubin
http://www.businessinsider.com/tuya-ponz...
Cities with No cars and no people...Spooky!
http://www.businessinsider.com/chinese-g...
A nice voting-age Whiskey can be an excellent selection.
"Chinese are also worried about an insidious food-safety scandal that has changed ... nothing"
Delmonte fruit, all smoked mussels, and oysters, most garlic, and the list goes on and on...all made in China. If I cannot find a product or food NOT MADE IN CHINA, then I substitute or do without.
Fuck the Chicoms and the American Traitors that created the monster.
You would think they would be more worried about Goldman Sach's ruling the world.
And how Goldman drives up the price of what people need. Food, to survive. Oil, to keep warm.
Help the Chineese out.
Boycott the Stock Market. Don't Buy Stocks.
Burn the HFTs and help Occupy Wall Street.
Think about it, If the HFTs sell all the supply of stock they hold.
1. They can not manipulate prices.
2. You can invest and actually see returns.
3. Do it for yourself and mankind.
Boycott the Stock Market. Don't Buy Stocks.
i can't boycott yet, i still have worthless money.
Just
http://farm7.static.flickr.com/6174/6232971738_7a90b2edf4_o.jpg
If China has a western world like heart attack, can anyone speculate on what happens to assets and precious metals? I'm convinced asset prices dive but I am still wavering on gold. If the central banks print away, we would see gold rise even in the face of catastrophic depression, I believe. Silver I can't guess -- too much industrial use to offset the pure money substitute.
I guess Australian and Canadian currencies get whacked badly.
What is safe?
Anyone have a thesis on this?
I wrote a thesis on PM's in general last night, I will stand corrected on some acronyms but it is a working theory of mine. I worked really hard on this, but I am an amature observer.
I am heavily invested in Silver, Physical hold.
I want to open a real discussion about the "ultimate currency".. PM's. I have been doing some research lately and watching what the "Squid" is doing and saying and there is a disconnect from our reality, or I should say preception.I am looking for some open minded conversation to what the true "wealth" is in Precious metals.
It got me thinking recently that if there is no global apitite for recovery, as we are witnessing an epic downturn right now, how can TPTB supress say, Gold under $4,000.00 an oz right now? cause that's where it should be In my opinion. Why are PM's not expressed at their true worth or implied worth in direct correlation to global currency printing. The more printing, the higher Gold & PM's should rise and I'm not even including inflation... just yet.
When currencies collapse, hypotheticly speaking, PM's will be worth $20,000 an oz for a couple days? What is the staying power when "Squid" is controlling their ultimate value? Why are they not using it themselves to fix their domestic equity problems? Industrial uses? Or is it to self destruct their own Countries for the World Bank to re-allign on a global scale then using Central's PM's as the new standard?
No global growth, no appitite for PM's as a trade instrument medium? If Gold isn't being used to back any currencies or consumer based instruments, then why is it worth anything right now? True, Wall Street is allowed to settle their end of day margin calls or outstanding accounts but why do they say Gold isn't money and has no daily intrinsic use?
Look who is purchacing or warrenting all the Gold in the world, quite literally, what if some day the dollar is worthless (more than today standard) and silver and gold become the proxie medium for exchange, The Central Bank can or will then re-value all PM's, but at what rate or currency base? And based on what? See? this is the Trillion dollar question up for debate.
Here is another thing I don't get, why are some country banks failing and they don't lean on their Gold reserve to bail out the problem? Has the Central Bank confiscated all their reserves and back stabed them in their time of need? Or is it a mandate from the Central Bank to distressed countries to destroy their economies by printing FIAT based on nothing, and monetizing debt to boot!
Instead, the IMF / ECB etc.. just papers the problem over at 35/1 leverage without using a true medium of exchange to fix the problem for real? This means, for every dollar that gets printed, the IMF leins $35.00 in their Gold, real nice right? IMHO, they have no Gold, because their not demanding Gold, their demanding printing and forcing the use of austerity measures to pay them back the 35/1, If they had Gold as payment to this contrived debt, it would fix the problem right away because it would be their true source of wealth in payment (Gold) that dosen't have debt teathered to it.. See? Something stinks in Denmark.. and Belgium.
I just thought of something, maybey this is the reason why Gold isn't going up? because for every dollar printed under the IMF's control, it's subtracting from the value of Gold that's being held by them and their payments back is what put's the floor under the price? I don't know?Just a thought.
Quoting Goldwing "This is what's freezing up equity in the lending market to the point, Banks won't even lend to themselves" Now I get it! BUT, the IMF / World Bank will give the Euroland a loan based on the Gold they are holding for them in their account? Or are they using their Countries as colladeral or both? Provacative, isn't it? Just digging the hole deeper against their own Gold reserve as colladeral untill they loose all their Gold, then they are stuck selling off pieces of their Country and printing paper until they go into recievership to the IMF. Sound familiar? It should... We are Greece, just nobody has the balls to say it yet. It's like a snake eating it's own tail then spontainiously combusting.
Just let it settle in and let's see what we can deduct from some very curious moves in the PM market. I used reasonable deduction to conclude, they want to leave everyone flat broke and dependant on the "state". I don't know? I'm just going to leave this at TPTB are not instilling any faith in my investment right now and I see Billions being printed without supposed "true wealth" increasing.
Having read a number of things from people who lived through economic calamity (lots of examples: Brazil, Argentina, Mexico, Thailand, USSR....) one thing you find out is that wealth is not about "dollars" or "money" per-se; its about: what did I have when I started and what do I have when its done?
In each of these cases, individuals were able to to turn to US dollars as "harder" money as a substitute for the inevitable printing that is done by countries that borrow too much then their lenders dry up. The latin countries did fine until the oil-countries took a dip and the funds dried up.
So if you are thinking about this, the "world" including China, the US and Western Europe all have magnificient problems. Let's say China has the predicted "hard landing," Europe finally acknowledges the impact of the Greek debt and write-down (bank bail-outs galore and huge losses) and the US banks had to stop with the phoney-accounting "let's not write down our assets to book" game; we'd realize we're in for a ride.
In the short term the US dollar goes up as panic money looks for a safe haven. It will also go into gold. But as investors get creamed across the globe, eventually the US maniac spending/deficit/debt situation reverses and the funds dry up. What happens then (e.g., we get to the place where the Latin countries were in the 80s)?
The only choice that more-or-less does not cause cataclysmic system destruction is to create high inflation via printing money, but with a crappy economy the "inflation fire" doesnt' catch because there are surpluses of labor and goods. So they boys in NY think "ahh good; we can print some more" until they push inflation to a point where it becomes noticable - and the inflation spiral kicks off. Notably gold does not always do well against inflation; it tends to do quite well in conditions of uncertainty.
That all said, if things are globally bad, where do people put their money? In Argentina you could hold wealth in USD. Where do Americans go to preserve their wealth? What is the "default" global currency? I dare say I think its gold *first* as it is globally acknowledged as an alternative currency (despite major attempts by the IMF to push it aside so they can do global social engineering).
Add to the complexity: There is far more "paper" gold bought and sold than there is actual gold. Just wait until everyone finds out the gold supposedly backing their system is a fraud... But this "paper" market jerks the price of gold all over the place. If we get to a place of true price discovery (and that's a big IF) then I think gold - in comparison to dollars - will be worth more. Or it might be that your dollars are worth less. The nice thing about gold: reasonably liquid and worth a lot in comparison to its size.
The only sure-fire way to win is to borrow money on a long-term basis to buy an asset that may fluctuate in value. In an inflationary scenario the guy that loaned you the money gets hosed (paid back with cheaper fiat) - and you still have the asset at the end of the day. For some good info on this see Dan Amerman's web site.
So I think we cycle down first; they print; printing eventually causes high invlation (stagflation) until the debt overhang disappears and the echo-boomers come into their economic power about 2020-2025.
If things get out of hand, both gold and silver could certainly be used as "hard" currency; but our silvery friend has a very different profile than gold and is subject to blatant manipulation in the market (thanks to the weak hands at the CTFC). If gold takes off, Silver will catch up at some point.
So that's my thesis. As much as I hate to say it, the ECB is going to print; the IMF will get the FED to print, and print print print they will do. I think this is bullish for metals; but you may see panicy leveraged selling that will bring the price down 30% from where it is now. I'd look at it as insurance... and buy on dips if you want to take a position.
That would be the ultimate tell. The game would be obviously over when a country begins eating its seed corn. Gold is the ultimate extinguisher of debt but there just isn't enough physical gold to quench the debt bubble
Good try for your admitted noobiness. Keep going and add FOFOA to your reading list.
<...why are some country banks failing and they don't lean on their Gold reserve to bail out the problem?>
Because their gold reserves don't exist?
Thanks, I'm trying to learn, I will check the link.
Clive Maund does:
October 9th, 2011
On gold's 4-month chart it is now apparent that a bear Pennant has been forming since the panic bottom, with the weak upside volume portending an imminent breakdown and steep drop. A reader pointed out to me during last week that gold's panic lows occurred in thin trading on the Hong Kong market, and for this reason we do not have to factor in the tail of the hammer candlestick when deciding where to draw the boundaries of the Pennant. The measuring implications of this Pennant call for a drop at least to the vicinity of the intraday lows of the Reversal Hammer and possibly somewhat lower towards the $1520 area - at this point the decline should have completely run its course and we will be looking to buy aggressively. If we look carefully we can see that a small "bearish engulfing pattern" has formed in gold over the past 2 trading days, implying that breakdown from the Pennant and the expected steep drop that will follow is imminent. A reason why this next drop should end the decline is that gold is already deeply oversold as shown by its MACD indicator, and it will of course be even more so after this impending decline. Those interested in going long gold investments in the near future should "keep their powder dry" but stand ready to wade in big time if gold drops into the bright green "aggressive accumulation zone" shown on our chart.It now looks like we were a little too bullish in the last update, for the way gold has acted over the past week suggests that another sharp drop is imminent before the dust finally settles on this reactive phase, that it likely to take it to or some way below its recent panic lows.
Jan 26, 2011
"According to the China Economic Weekly magazine, property prices are currently so high that the total value of land in Beijing, estimated at 130 trillion Chinese yuan (US$19.74 trillion), surpassed the United States' gross domestic product of US$14.5 trillion for 2010."
The bubble is massive in China. If only 1% of the real estate bubble goes into precious metals, it can easily double their prices.
It seems to me that there was a time when one square mile of downtown Tokyo was worth more than the State of California. Then there was an epic collapse. This sure seems similar.
Values in bubbles don't actually go anywhere when the bubble pops. Value is destroyed. if your home could have sold for $800,000 in 2007 but you just had to sell it for $500,000, that doesn't mean someone else took $300,000 and put it somewhere. That value existed only in your mind and does not exist currently.
Many smart people recognize bubbles before they pop. Most people know that there is a bubble in Chinese real estate and they should be diversifying. If only 1% of the current value of Chinese real estate finds its way into precious metals, their pricess will double.
Of course, a considerable portion of a bubble just vanishes. But a significant portion of the bubble wealth can flow elsewhere.
Some people with $800,000 homes sold them and rented. Some people bought CDS on mortgage backed securities and made a bundle. So not all wealth from a bubble vanishes
"So not all wealth from a bubble vanishes"
In a world of bubbles this is the rub. Where do I preserve my wealth?