The Reason For China's Epic 1 Trillion Yuan Deleveraging: The Biggest Housing Bubble Ever

Tyler Durden's picture

Those reading Bloomberg stories tonight may be surprised to find for the first time the mainstream media attempts to quantify the epic deleveraging that China - the economy which has only grown in the past decade due to constant and unprecedented credit injection - has decided to undergo in numeric terms in order to forcibly reallocate capital where it deserves to be allocated.

To wit: "China’s money-market cash squeeze is likely to reduce credit growth this year by 750 billion yuan ($122 billion), an amount equivalent to the size of Vietnam’s economy, according to a Bloomberg News survey. The number is the median estimate of 15 analysts, whose projections last week ranged from cuts of 20 billion yuan to 3 trillion yuan. The majority of respondents also said they approve of the government’s handling of the credit crunch and said the episode reinforces their expectations for policy reforms such as loosening controls on interest rates." We shall see how much they approve when the massive deleveraging results in a 3% GDP print as we warned previously, crushing their year end bonuses in the process.

Of course, those who read Bloomberg tonight and who read Zero Hedge two weeks ago, already know just how big the Chinese deleveraging will be (in an optimistic case). On June 23 we said:

The country is about to undergo an unprecedented deleveraging that could amount to over CNY1 trillion in order to force reallocate capital in a more efficient basis.

That's right: a massive deleveraging coming dead ahead in China just in time to shock the market still reeling from the threat of the Fed's tapering. And it is not as if China needs to be spooked any more: "The mood remained jittery at the weekend. When a technical glitch caused by a long-planned software upgrade at Industrial and Commercial Bank of China made cash withdrawals impossible for almost one hour at the bank’s ATMs, many consumers fretted that one of the biggest state lenders was in trouble." Maybe not today, but force deleverage a few hundred billion, and it sure will be.


It also means that there will be no respite for short-term funding, which while maybe not suffering from lack of money, it certainly is suffering from the lack of money in the right place: the first milestone of a failing central-planning regime.


Just as China finally admitted.

At least the mainstream curve is now just down to two weeks behind tinfoil blogs.

However, one question that Bloomberg did not answer is just why is China engaging in the kind of counter-monetarist activity, that would result in an epic market collapse were it to take place in the US, Europe, the UK, Japan, or any other "developed" country whose growth now relies exclusively on central bank generosity.

Presenting Exhibit A: China's residential real estate prices, via JPM.

So there you have it: no matter what China has attempted, no matter how much it has punished the Shanghai Composite, it has been completely unable to offset the endogenous and/or exogenous (Fed, ECB, BOJ hot money) credit from sending the Chinese housing bubble into absolutely stratospheric levels.

It is this bubble that the PBOC is doing all it can to deflate gradually and controlably, lest it pops in the biggest out of control bubble burst in developing market history.

And while we have covered all of this in depth in the past, the Telegraph's  Harry Wilson has done an admirable job of compiling the key aspects that determine the Chinese marginal economy at the moment with "Chinese banking: a Wild West in the Far East?"

 As Government ministers ponder whether to split Royal Bank of Scotland into a “good bank” and a “bad bank”, it is worth remembering that China did something similar with not one big lender, but four at the turn of the millennium.


In October 1999, a month before Fred Goodwin began his ill-fated reign as chief executive of RBS, the Chinese government created four massive “asset management companies” that would eventually take on toxic loans valued at $480bn (£320bn).


Thirteen years on, these bad banks still exist, operating out of office blocks dotted around Beijing and Hong Kong, and continue to hold non-performing loans worth Rmb1.7 trillion (£180bn), according to credit rating agency Moody’s.


Largely unknown to the outside world, they are a reminder that China’s banking system remains as prone to boom and bust as any Western economy and perhaps more so.


As the rescue showed, the “Big Four” banks were, and are, not just “too big to fail”, but the beating heart of the entire Chinese economic system, controlling nearly half the country’s $19 trillion of financial assets.


Taken together, the four largest lenders, Industrial and Commercial Bank of China (ICBC), China Construction Bank, Agricultural Bank of China and Bank of China have a combined market capitalisation of £470bn, about £200bn more than the total value of Britain’s five largest lenders.


ICBC alone has 393m individual customers, the equivalent of a single bank managing the bank accounts of every man, woman and child in western Europe, and this year became the first Chinese lender to top The Banker magazine’s annual table of the world’s biggest banks by market value, with a total capitalisation of $236bn. Ranking the world’s banks by profits made, the top four positions are now taken by China’s behemoths. Hold on everyone, the Chinese are not coming, they have arrived.


Despite paying negative savings rates — the 3.5pc base rate interest on Chinese deposit accounts is generally believed to be well below the real rate of inflation — 70pc of Chinese household wealth is held in cash and bank deposits. Just over a third of India’s private wealth is kept in its banking system.


With this largely captive market, citizens’ savings have been used to fund an infrastructure and property boom on an unprecedented scale and led to warnings of an asset bubble.


While official figures show a 113pc increase in property prices in the past eight years, research by Tsinghua University and the National University of Singapore found prices actually rose by 250pc between 2004 and 2009, a faster increase than was experienced by the US in the lead to the sub-prime crisis.


Carson Block, of Muddy Waters Research, which has laid bare several accounting scandals in Chinese companies, thinks the problems in China’s banking system are more severe than those which kick-started the global crash in 2008. “We believe that the domestic Chinese banking system is a mess, with an enormous amount of bad loans, or loans waiting to go bad. The problems of China’s lenders are greater than those of Western banks on the eve of the financial crisis,” he says.


So, as Chinese lenders take their place at the pinnacle of the world’s banking system, the warning appears to be that things could be about to go very wrong, very quickly.

Continue reading here.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
tsx500's picture


TheFourthStooge-ing's picture

Confucius say: Beware blobbing up of hot money citizenism.

Scarlett's picture

Bendover Ben will print in their general direction

Jack Burton's picture

I had my" James Cole " screen name lifted by someone on here. But it is not important as I had already switched to Jack Burton. I used Mr. Cole for a number of years though.

Scarlett must be another worshiper of female beauty. She has that exotic beauty, not the cookie cutter type you see so often in the US entertainment industry.

As for China, they have been held up as the modern version of "The Great White Hope". The world economy was said to have nothing to fear as China roared ahead dragging the world with it.

The boom in China makes sense when you consider the postion of Absolute Zero that they started from. But blogs like ZH have been on to the fishy smell coming from China since 2008. Once the communist government intervened to shock the Chinese financial sytem into continued massive growth, the after effects were bound to catch up and be bad. And China had NO correction, instead every corrupt and unwise investment was doubled down on, tripled down on, and so forth.

There are many factors that are catching up on China. The mass corruption and manipulation are out of control as the greedy do anything and everything to snatch up the wealth. The Chinese have also stressed their land, water and air to the breaking point. River systems are in collapse, some ground water systems are in collapse. The desertification of large parts on Western China, stretching all the way to Bejing is well documented.

China has bet that it's move into Africa and South America can provide new markets and resource extraction businesses that can pump new wealth into China. This was their major move for the first half of the 21st century. To go all in in Africa and to partnerships with anti US governments in South America. I am surprised China has not made a big move on Cuba, unless the USA has already warned them off.

I have read about the China housing bubble, and it looks like it is epic. I saw interviews with young people desperate to buy into these giant apartment buildings in the cities, they all said price did not matter, as their investment would rise in value every month. When Joe Chinaman on the street starts talking RE prices and valuations going forward, you know you are at peak housing. When "Price Does Not Matter" to buyers, because they are investing. One couple planned to buy and then begin the search for a higher value property right away in order to cash in on the instant equity boost they would get after the first few months. Not wanting to be left behind on the property ladder, they figured one should always be cashing in the lower price apartment to MOVE UP to the next level and cash in again. People are like sheep, fucking Sheep. They learn nothing from other nations experiences.

chubbyjjfong's picture

+1. The mentality is astonishing.  You buy a house in shitsville thinking that you can sell in 3 months and trade up to a newer, shinier house.  But the fact is, that even with the capital gain, you will still only be able to afford another exact same house in shitsville. Good luck to you if you decide to leverage up on that one.  

fijisailor's picture

Cuba at this moment is waiting for the Chinese to pour more money in developing offshore oil between Cuba and Florida.  Additionally there are Spanish language institutes in Cuba training Chinese engineers to speak Spanish before these projects kick off.  Maybe never happen though.

BoNeSxxx's picture

That will be soooo worthwhile.  If for no other reason than to hear the chinese attempt to pronounce 'Chili Relleno"


Seer's picture

The problem, IM[not so]HO, goes back well before 2008 and stems from a clear mathematical problem.  The Chinese govt was pushing for 10+% growth.  I know people get sick of hearing it from me, but perpetual growth on a finite planet is NOT possible.  And, like a druggie, once you shoot up you just don't decide to stop; what happens is external intervention, death or massive rehab.

If one were to really study these things, the "forecasts" of growth, one would see that they vary little from the guaranteed returns from Bernie Madoff's investment entity.  Sure, one can do this when starting out very small and do it for a bit of time, but we're talking about starting from something rather BIG.  Double every 7 years?  Follow that up with doubling again in another 7 years?  And another?  And...

DoChenRollingBearing's picture

@ TheFourth

I wonder if our old friend AnAn will show up to defend the homeland...

TheFourthStooge-ing's picture


I wonder if our old friend AnAn will show up to defend the homeland...

I haven't seen him around for awhile. He must have been dragged off for reindoctrination, I mean he must have enrolled in a continuing education class.

Seer's picture

Or hired by the the US Department of Propaganda?

TheFourthStooge-ing's picture


Or hired by the the US Department of Propaganda?

That would be the US 'american' Department of Propaganda.

Just tryin' to help.

akak's picture


That would be the US 'american' Department of Propaganda.

Whose offuscationary nature and inability to self-indict is eternal.

Welcome to the propagandizingistical world. 
It's an 'american' world, you'll see.


PS: My own theory is that AnAnomalous is off farming the poor and extorting the weak.  Or is is farming the weak and extorting the poor?  I always get those two mixed up.

TheFourthStooge-ing's picture

Of course, his JKC franchise (Just Killed Cat, Chinese citizenism fastfood restaurant chain) might have blobbed up its business as fast as those river pigs he fished out of the river in Shanghai and left out in the sun.

akak's picture

Alas, alas, three times 1.3 billion times alas.

Just have to eat bear gall bladder with it.

TheFourthStooge-ing's picture


Alas, alas, three times 1.3 billion times alas.

Just have to eat bear gall bladder with it.

Ah, ah, stir fried bear gall bladder combo with Shanghai kitten crispy is 2 for price of 1 luncheon special this week at JKC.

Blobbing up taste with blobbing down price - that's JKCTM

CPL's picture

Ever wonder why China has huge ghost towns that nobody lives in?  

It was a trap all along.  And there isn't an investment house on the planet that doesn't have it as a sizable part of their portfolio gathered indirectly or directly into the scheme.  Those shitty dumps people actually live in, those never 'increased' or 'decreased' in value.  They are mostly long term government squats to begin with, they don't have a value in China, they have a purpose.

Anybody really think that someone making pennies a day on the dollar was going to move in to 600sq ft half million dollar piece of bliss in the an empty ghost town none the less.  It was a really hard pitch to swallow as an offer when things were going 'well'.  Today it'll just seem like someone got drunk 15 years ago and back stopped the exported inflation by betting everything on black.  There were guys running around the planet offering 24-27% return, PER YEAR!  Housing market returns that match a good daytrader's return, not in a million years would that ever happen.

So what the obvious answer was, wrap it and sell it.  The Chinese housing market is about three layers deep in multiple ETF platforms, freedom 55 schemes, federal pensions, all of it wrapped up and sold like burgers at a fast food place.

This is about as ugly as 2007.  This shit is like cancer and it's everywhere along with US bonds.


NoDebt's picture

Wait a minute.  Are you telling me that a Communist country massively mis-allocated resources in a catastrophic and prolonged manner?

I don't believe it.

CPL's picture

As a long play trap that cost them the health, well being, history and future of their country through a diligent campaign of oversold deals and horribly mismanaged financial instrumentation based on bullshit?

Yes.  The only people on the planet outside of the PM and Commodities brokers that get to resell the same item 40000 times are Chinese real estate agents.  It's infamous for cross selling the same home four or five times across a listed market, it's so much worse when the home doesn't even exist.  Means nobody is actually looking.

And also it's the entire foundation for the entire western world's public sector and public pension funding switch over in 1996 when the old method of pension accounting stopped working.  

All these subtle little changes, a push here, a nudge there, policy change.  Individually they seem like adjustment measures when looking at how the laws have changed in equity requirements (national vs international, lots of sneaky shit going on here), union, employment and pensions over two decades.  Pull back, put all the tiny changes in perspective to the current situation.  Like a bureaucratic trojan horse built to blow up.

Antifaschistische's picture

I've been to China...looked at Real Estate, and I wouldn't even mind picking up one of those apartments once the floor falls out of the market.   But, but...they won't let American's own property (directly) so I can't even help them keep their market from falling through the floor.

My recommendation, is that they let American retiree's or people that just want a vacation home in the Orient pick up those ghost apartments.  At least it will bring in some cash.   They certainly don't have to worry about American's overpopulating them and using the democratic process to destroy their country.  Only a completely moronic country would let that happen.



Barry McBear's picture

With chinese construction standards the floor can literally fall out of those ghost apartments.

macholatte's picture



horribly mismanaged financial instrumentation based on bullshit


Hmmm ..... doesn't Goldman have an office in Bejing?

Seer's picture

Wait a dang minute there!  Are you saying that we cannot get that carrot, that it's tied to a string and held by those whipping us?  No, you're just making up shit! </sarc>

TPTB operate globally.  They have given us freedom of choice- coke or pepsi?  Now then, just one more step and that carrot is ALL MINE, Mine I tell you, Mine!

andrewp111's picture

I'm sure those empty cities will be filled up eventually - with prisoners. When China conquers countries like Australia and New Zealand, they know right where to send the previous inhabitants.

chubbyjjfong's picture

Fuck that... Kim Dot Com will virus their shitty Huawei asses!

Seer's picture

Yeah, China has always been about invading other countries...

But I have to admit, this time things are a bit different in that they've become addicted to oil/coal.  I suspect that they'll start cashing in USTs in order to fund their habit, and that, despite US outbursts of threats, Australia (New Zealand- huh? Chinese after the sheep?) will continue to sell to the Chinese (because Australia's economy will be tanked).  Support for the US and its phony money starts to unravel big time as all the "feel good" trade rules (favoring the US) will get pitched to the side of the road.

old naughty's picture

'65 million and counting'

Is there any comfort to the massive foreclosed inventory elsewhere?

Can they offer them lowly or free to citizenry or else?

CPL's picture

You wouldn't want to live in them.  Seriously, it's straight up fraud with the usual theft and corruption.  

If they could have been made from cardboard 40 stories tall to cut costs and 'book profits' they would have.  It's why everyone in China that has a warehouse, has all the building materials that should have gone into building those shit piles.  Also why COMEX won't deliver a single ounce of physical, China has been hoovering it, both from traditional sources and our industrial electronic garbage everyone has been exporting.

I know it's pretty funny now, but the 100's of tonnes of cell phones shipped (and we all paid of the privilege in dump fees somewhere) have yielded tonnes and tonnes of silver, gold and platinum for the scavenger market.


Zoran's picture

China the biggest bubble ever? I think not!

Ireland had the biggest ever bubble, followed closely by Australia.

But Australia has not popped. Yet. Steve Keen predicts they will fall 70% over the next 20 years...

Australian house prices to fall 70% over 20 years, in line with Japan crash, predicts Steve Keen

That will certainly hurt the negatively geared speculators!

Seer's picture

Biggest in terms of global impact...

As far as Keen's prediction goes, I'm thinking that he's being generous with 20 years.  As China goes down Australia is going to hemorrhage.

LetThemEatRand's picture

Krugman thinks aliens will save us, and the Chinese think ghosts will save them and inhabit their ghost cities and visit their ghost malls.  They see dead people.

Dr. Engali's picture

Do we really need saving? Do we? The world just might be a little better place with a lot less consumption and a little more reality.

LetThemEatRand's picture

As Carlin noted, humanity exists because mother earth wanted plastic.  Our job is done.

NoDebt's picture

Japan is licking their chops.  A huge contraction in China could mean they retake the #2 position in the world economy!  Cue the Snidley Whiplash music and twirl your moustachio in a "contemplating evil" kinda way.

CPL's picture

Being king of a deeply broke radioactive shit heap ain't no way to go through life son...



NoDebt's picture

That's funny as shit.  But we're all sitting on a broke-ass radioctive heap.  Nobody in power cares the state of the empire they rule, so long as they are the ones to rule it with utter control.

joego1's picture

I can here John Lee Hooker beating it out on his sears amp on the street corner.

CharlieSDT's picture

The Blues Brothers is not Animal House.

BandGap's picture

So what? Really, at this point it has to be someone, somebody, something, somewhere. Let's just like the fucking fuse and get the rave started.

LetThemEatRand's picture

No shit.  I'm running low on glow sticks and Obama smoked all my pot.  There must be some kind of way out of this.

WmMcK's picture

So let us not talk falsely now, the hour is getting late.

LetThemEatRand's picture

Has anyone seen Obama and Hendrix in the same place at the same time?  I rest my case.

Random's picture

Two riders (witnesses) are approaching...

NoDebt's picture

"There must be some kind of way out of this."

Said the Joker to the Thief.  Couldn't help myself.  It was tee'd up.

LetThemEatRand's picture

There's too much confusion.  I can't get no QElief.

Disenchanted's picture

+1 King Crimson for the win!

one of the comments @ the video:


One of the most prophetic songs written for those? with no hope, no God, and no future.


Bonus: In The Court Of The Crimson King(full album)

Handful of Dust's picture

Food, clothing, etc in China's big cities ae way more expensive then the West. My neighbor used to go there to buy curtains, clothes for her kids, her Chung King relatives fly here and buy up textiles at JCPenny's, Kohls, etc and bring it back to China.


The world is Upside Down crazy. When China's Housing Bubble Blows, the force will be felt across the globe but esp in places like Australia where they have lived off the Fat 'o the Land; namely, exports to China.