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The "Quite Gloomy" Chinese Housing Market Completes "Head And Shoulders" Formation

Tyler Durden's picture




 

“Self-fulfilling expectations of falling house prices, financial difficulties among developers on the back of a highly leveraged economy with huge local government debt, and a fragile financial system with a large shadow banking sector, suggest the risks of a disorderly adjustment in the Chinese economy are real and rising,”

This is what Jian Chang, Barclays’ chief China economist, said in a recent report covering the Chinese housing sector and specifically the danger of a hard landing (we will have a full post on the report shortly), and judging by the most recent housing data reported by China overnight, the likelihood that the Chinese housing sector, whose problems have been extensively covered here for the past 4 years, is finally coming unglued is higher than at any time since the Lehman collapse.

Here is what China reported overnight via SocGen: New starts contracted 15% yoy (vs. -21.9% yoy in March); property sales fell 14.3% yoy (vs. -7.5% yoy); and land sales (by area) plunged 20.5% yoy (vs. -16.9% yoy previously).

Oops.

It doesn't take an Econ PhD to conclude that "the housing market situation has undoubtedly turned quite gloomy. There has been a constant news stream of falling property prices everywhere, even in the 1-tier cities. A number of local governments, as we expected, have started to ease policy locally, especially relaxation of the home-purchase restrictions."

But nowhere is the contraction in this all important sector for China's credit-driven bubble more visible than the following chart showing a very distinct, if somewhat mutated, head and shoulder formation in the average 70-city property price index. If and when the blue line intersects the X-axis for only the third time in history, watch out below.

SocGen's take is less than rosy:

Since 2008, there have been two periods of falling housing prices across the board: H2 2008 and late 2011. Even tier 1 cities were not spared. However, the downturns were brief and shallow. In the midst of the Great Recession, price declines lasted for about six months and 14 out of the 70 cities tracked by the statistic bureau recorded cumulative price declines of over 5%. During the previous downturn between Q2 2011 and Q3 2012, property prices in most cities fell consecutively for no more than 10 months, and only 4 cities saw prices falling by more than 5%. The turning points in both cases coincided with the beginning of credit easing. The logic is simple: most Chinese households, especially first time buyers, still need to borrow to buy, despite the high savings ratio on average. And down-payments and mortgages account for 40% of developers’ investment capital.

Which brings us to the key issue - credit, and rather its sudden lack of availability.

The housing sector is very important to the Chinese economy. Its share in total output is easily 20%, if its pull on related upstream and downstream sectors in included. And its significance to the financial system is far beyond banks’ mortgages and direct lending to developers, which account for 14% (CNY 10.5tn) and 6.5% (CNY 4.9tn) of the loan book respectively. Developers’ borrowing from the shadow banking system could potentially amount to another CNY 5-7tn. Moreover, we estimate that over CNY 10tn of other types of corporate borrowing is collateralised on real estate and another CNY4-6tn borrowing by local governments for infrastructure investment is collateralised on future revenue from sales of land-use rights. Adding everything together, the aggregate exposure of China’s financial system to the property market is likely to be as much as 80% of GDP. Hence, this is not a sector that can go terribly wrong if China wants to avoid a hard landing.

 

Unfortunately, housing is one of the few sectors that the Chinese government has not mastered its control over. Although policymakers have used many sector-specific means to try to mitigate the cycles of this sector over the past 10 years, it has not been very effective. Even the harshest administrative controls – home-purchase restrictions – are subject to loopholes and implementation issues. Our observation is that the short-term cycles of China’s housing market, like housing markets in many other countries, are first and foremost a credit phenomenon.

And since it is a credit phenomenon, should China continue with its recent initiative to tighten lending and purge credit market pathways, housing is first and foremost in line for a collapse.

So what is China, suddenly facing the all too real prospect of yet another housing downturn to do? Why turn on the credit spigots again, of course. At least according to SocGen:

... we think the only effective measure to ease the housing downturn is to reaccelerate, or at least stabilise, credit growth. Reportedly, the central bank has asked commercial banks to quicken mortgage lending despite the series of defaults and near-defaults of developers. Clearly, policymakers know which lever to pull, but the question is to what extent.

 

We agree that many Chinese cities are already suffering from over-supply issues. Although further urbanisation will continue to support demand growth, the pace of urban population growth in the next decade will still slow and there is a big affordability gap for rural migrants. Hence, if the authorities decide to use another credit binge to inflate the sector again, they will merely make the structural imbalance between supply and demand worse. There could be a middle ground. Measured and targeted credit easing might avoid a nation-wide crash, but some overly stretched cities – in terms of over-supply and leverage – will still experience severe pain, just likely Wenzhou where property prices have declined non-stop for more than two years by over 20% cumulatively.

Ah yes, being caught between the proverbial rock and a hard place.

For now the market is convinced that the worse the housing data, the more likely that the PBOC will engage in yet another massive stimulus and do what western central banks are so happy to do virtually constantly - kick the can once more.

But what if it doesn't? What happens to not only China but the suppliers of its raw materials? The FT reported overnight that "In just two years, from 2011 to 2012, China produced more cement than the US did in the entire 20th century, according to historical data from the US Geological Survey and China’s National Bureau of Statistics." We showed this two years ago - little did we know that two years later the situation would be completely out of control.

Surely the suppliers of cement were happy. But should the credit, and thus housing, bubble continue to deflate, what happens then? Already we know that steel rebar prices in Shanghai crashed to record lows just last week "as Chinese mills churn out record amounts of steel while growth in the economy and the property market ease."

What happens if instead of kicking the can as the market is convined it will, China decides to bite the bullet and do what the Politburo thinks will be a controlled bubble burst?

We don't know, but if recent images of Shenzhen riot police preparing for a "working-class insurrection" are any hints, we would not be absolutely convinced that China will simply kick the can once more. Because the next time the bubble bursts, the shock will be so much worse that not even throwing countless amounts of credit money at the problem will make it go away...

 

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Tue, 05/13/2014 - 12:06 | 4755215 williambanzai7
williambanzai7's picture

It takes a tremendous amount of cronyism and outright corruption to inflate these Chinese style RE bubbles. And the corrupt are not feeling at ease in China right now.

Tue, 05/13/2014 - 12:11 | 4755237 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

The cronies are sending their wealth overseas to avoid the implosion. Average Chinamen will take it up the rear. Go commies!

Tue, 05/13/2014 - 12:26 | 4755307 williambanzai7
williambanzai7's picture

Curious, when you say "Go Commies" are you referring to the Federal Reserve System? 

Tue, 05/13/2014 - 12:35 | 4755339 spine001
spine001's picture

The Chinese government will maintain control and avoid a working class revolt, they know they can't control it if it happens, that is why they won't let it happen. Whatever it takes.
If you don't understand this, it means you don't understand how China works. Recommend some great readings by Americans living there.

Tue, 05/13/2014 - 15:55 | 4756167 elwind45
elwind45's picture

Just how many different Chinese dialectics does it take to say " we have your family and you have deeper responibilties to attend to back home"?Please return at your earliest convenience or expatriate is a western term best left behind upon your immediate return?

Tue, 05/13/2014 - 12:13 | 4755249 pods
pods's picture

Hmmm, China and Saudi Arabia are the two outliers. Seems they both figured out where to put excess FRNs that come ashore.

pods

Tue, 05/13/2014 - 12:35 | 4755319 Zirpedge
Zirpedge's picture

http://www.dailymail.co.uk/news/article-2627225/Digging-lost-treasure-Co...

Meanwhile back in the greatest nation on earth, US congressman picks his ear on C-span and eats it on camera. USA USA USA!

This was during a hearing on NSA surveilance. The congressman is oblivios to the camere in front of him and we are expecting him to protect us from the unlawful intrusion of the NSA. 

Tue, 05/13/2014 - 12:34 | 4755344 pachanguero
pachanguero's picture

I live in Thailand and it's in a HUGE RE bubble. someone call ho lee chit now!

Tue, 05/13/2014 - 17:44 | 4756570 syntaxterror
syntaxterror's picture

Thailand or China? If Thailand, what market? The BKK condo market?

Tue, 05/13/2014 - 13:21 | 4755543 NeverForgetSilver
NeverForgetSilver's picture

Not sure how to communicate with western readers. Just opposite to what western governments are doing, Chinese government wants the housing price down. It is doing a lot to cool the bubble. China got a huge population and limited land. The current bubble is eating into farmland and population is complaining. It is a threat to the government if the price keeps rising.

Get it?

Tue, 05/13/2014 - 13:36 | 4755622 Colonel Klink
Colonel Klink's picture

“Self-fulfilling expectations of falling house prices, financial difficulties among developers on the back of a highly leveraged economy with huge local government debt, and a fragile financial system with a large shadow banking sector, suggest the risks of a disorderly adjustment in the Chinese economy are real and rising,”

Same thing can be said for the USSA!

Tue, 05/13/2014 - 13:55 | 4755692 Colonel Klink
Colonel Klink's picture

Not to worry, the Chinese don't use rebar in their buildings.

http://www.telegraph.co.uk/news/worldnews/asia/china/5661549/Block-of-fl...

Apparently the worker jumped out the wrong side of the building.

 

Tue, 05/13/2014 - 17:45 | 4756576 syntaxterror
syntaxterror's picture

Thanks for the 2009 news. Seriously.

Wed, 05/14/2014 - 20:20 | 4755874 Angry Plant
Angry Plant's picture

RE is the key factor in the debt machine.

Rising RE allows banks to loan more money based upon rising value of homes they have issued morgages for.

Once RE prices drops that source of the constant injection of new money into the economy stops and can easily go into reverse.

Removal of the constant infusion of new money from RE into the system exposes the fact that privete sector and governement have been running on debt for years with no hope of ever ballancing there books.

Realestate = the main source for Business and Government debt.

This is wthy the US fed has spent 40 billion a month to buy realestate loans. Its why UK, Canada, Australia, China and others have been unwilling to pop existing RE bubles.

Tue, 05/13/2014 - 16:38 | 4756368 elwind45
elwind45's picture

Without Walmart and Fracking in 2011 the US could have been on very bottom of consumption after all!

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