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China's Three Bubbles And What Could Cause Them To Burst
It’s not always easy being a rising superpower, and the delicate task of returning the world to a bipolarity unseen since the height of the Cold War while managing to maintain some semblance of diplomacy with a dying hegemon that doesn’t realize its glory days are behind it is made all the more difficult when the future of global growth and trade depends on the trajectory of your economy. That’s the monumental geopolitical and economic task facing China and its leader Xi Jinping (or, "Big Uncle Xi", as he’s affectionately known).
China’s economy and financial markets have both experienced explosive growth, but are now plagued by a kind of policy schizophrenia, in which the government is at pains to live up to China’s responsibilities as the driver of the global recovery and shepherd of a new economic world order (both of which necessitate some base level of transparency and market liberalization) while preserving enough of the command economy to ensure that the Party and everything it stands for isn’t swallowed up by capitalism. This is made all the more difficult by the fact that Beijing must now manage a transition from an investment-led economy to a consumer and services-driven model.
The conflicting nature of the country’s economic and financial imperatives is everywhere apparent in China. Capital markets are being liberalized, but a stock market bubble necessitated heavy handed government intervention to preserve social stability. The world is still mired in a demand hangover from the crisis, but thanks to tremendous pressure for China to make the transition to a consumer-driven economy, it’s in no position to step up to the plate. Local governments struggling under a debt pile worth 35% of GDP must deleverage, but that means cutting off shadow financing (LGFV loans) and thus stymies credit growth. And on, and on.
Clearly, balancing all of this is well nigh impossible and China now finds itself staring down multiple bubbles which need to be perpetuated in order to maintain domestic stability and avert the “made in China” recession Morgan Stanley warned about last week, but which also need to be slowly deflated in order to avoid a sudden collapse. In short, China needs to de-leverage and releverage at the same time.
Here with more on China’s bubbles is Credit Suisse.
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From Credit Suisse
The critical issue: China and China plays
A Chinese hard landing still remains the biggest long-term macro risk that we see globally
We have the following main concerns on China:
1. Growing credit bubble
China has had the third biggest credit bubble over a 5-year period of any country in our database. Moreover, private sector debt is now 40% above trend and it is more extended than was the case even in the US at the peak of its credit bubble (and the BIS points out that historically, a financial crisis has been preceded by credit being more than 10% above trend).
2. A record investment bubble
We continue to see the investment share of GDP being higher than any other country in modern history has ever had, even those that went through rapid industrialisation.
Typically a move from investment to consumption-led growth leads to a halving of the growth rate. While investment is a flow concept, the stock of investment is also high in some areas. According to the US Geological Survey, China has consumed more cement in the past three years than the US did in the entire 20th century. Moreover, China has a higher density of motorways per capita than both the UK and Japan.
3. A housing bubble
Finally, we think that there is a clear cut housing bubble. Almost by the nature of a bubble, the participants are reluctant to acknowledge that it is one. But three factors indicate that it is a bubble:
- The size of real estate as a share of GDP: This is now triple that of the US at its peak and similar to peak levels in Spain and Ireland (Moody's claim that real estate is around 23% of GDP, directly and indirectly);
- Overbuild: Housing starts are 12% above housing sales, and vacancy rates, according to the SHFO are 15% to 23%. Inventories in third and fourth-tier cities are now equivalent to 5 years' worth of demand, and 18% of completed homes have become vacant.
We believe the time to be worried about bubbles bursting is when (i) excess investment leads to deflation (China has close to record deflation), (ii) house prices fall (they are currently down by a record amount), (iii) we see FX outflows (which are now close to record highs), (iv) deposit growth slows down sharply (they are close to a record low), and (v) the labour market shows signs of full capacity (the job offer to application ratio is at an all-time time high). Furthermore, nominal GDP growth has fallen to 5.8%, only a third of average levels.
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We believe the time to be worried about bubbles bursting is when:
vi) you're in warren buffet's bathtub.
(and on so many levels...)
It's OK....they've been buying gold.....sneaky bastards.
Everyone seemed shocked yesterday......I wasn't.
I hear all about the wonderful long term planning of the Chinese and they seem amazingly short sited to me. Sure there has been amazing growth but that was just a shift from communism, which simply doesn't work, to a form of fascism, which has just enough capitalism to work. They may make some moves that appear to make sense but so to did the Soviets. The past weeks have shown that their rise should not be taken for granted.
What about the Gold bubble?
China is hoarding gold...China will be the next reserve currency...China will be a Super Power...China heads the new IMF...LOL...FAIL< FAIL< FAIL<FAIL
China is a cheap knockoff of the USA in every respect...and just like their junk products, the entire nation will break "unexpectedly".
When the shit hits the fan...it's already started...China will sell that gold...$900 (or less) gold is dead ahead...it's in the charts...has been for years...ignore it if you want, but I listen to what the charts say...rarely stear my wrong.
Word is they're about to reprice gold.....much higher.
You'll pay it...........or no gold for you.
How much gold do you have? I'm betting none.
$0 in gold.
7 figures in farmland...that generates income...AND...has a better history of STORING WEALTH than gold.
During an "economic/political/financial" crisis, farmers are RARELY the "problem"....Gold hoarders on the other hand are an easy target....NOT MY OPINION...that is history folks...
They will come for your gold before they come for my farmland!
Politicians are smart enough to know that thier heads have a better chance of staying on if the people are fed.
Tell me Pepe....do you have the first freakin clue how to farm?
Before you ask.....I grew up on one.
At least you'll have someplace where they can bury you.
One more thing....have you every tried to transport farmland? Trust me...it's a real bitch.
"One more thing....have you every tried to transport farmland? Trust me...it's a real bitch."
Yeah, I'd like to see how far you get with a suitcase full of gold...
No way will you be allowed to leave the country with it..and even if you make it out, you have to get in somewhere else...keep dreaming.
PS> Dificulty in transporting farmland is it's best feature..mobs just run across the top of it..government can "take it on paper", but it's still there...look back through history..invading armies generally diddn't kill the farmers...enslaved them yes, but at least your alive to fight another day.
Those Jews who fled Nazi Germany had a hard time carrying their house on their backs. The ones who carried gold did pretty well.
Same with the ones who fled Pol Pot. It's always good to have a stash of tenth oz coins for bribes, border guards, etc when you need to escape a brutal oncoming force.
The are plenty of pictures online of PILES of gold/valuables taken from Jews living in and trying to leave Germany...early on, you could leave...but they stripped you of whatever they could.
I'm NOT arguing that land is the 100% safe bet...nothing is...but it's better than gold up to this point and from my perspective it will continue to be well into the future for citizens of the USA.
Early buyers of gold have seen price appreciation..but not as much as my land...PLUS...my land generates substantial income day after day after day.
i think the point you should take from this, is that you shouldn't have 0% in gold. Why not at least hedge yourself with 5% of networth in gold? Betting the farm on land seems unwise, unless 7 figures in farmland is less than 50% of NW.
Bottomlne only guys like Kyle Bass, who know whats coming and have the wherewithal can be 99% protected.
Or taxed so much you lose it to government. A slave to .government so you can be a good earner. I think you need to have both just in case
i'd have to agree, farmland is prob the safer bet versus gold.
The bottom line is though, no one knows when the great reset happens and what happens after.
Could it happen within a year or last another decade or two?
When it happens does it cause WW3? Does the government make the exchange of gold as currency illegal?
Since majority of people will have zero, will government force farmers to sell at fixed prices?
Does the US split up? Do we have complete anarchy or a milder 70's style economy?
Just way too many variables to predict what happens.
Unless your a .01%, you wlll have no way to fully protect against all circumstances.
You people assume after the 'great reset' takes place, that deflated 'markets' return to normal, with the exception that YOU come out smelling like a rose because you have $greenbacks and farmland...? Everything else - all normal, right...? No martial law. No restrictions. No changes. No confiscations. No valuable farmland expropriations by the State. No quota's under duress. No 'forced' anything, right...?
If the entire financial system shut down and no one could get any of their money, how could every bank, the irs or lenders get any money from anyone? They couldn't. So what's the ONE thing i would be most concerned with? EATING and drinking water. If I have land where I can grow my own food and am armed to the teeth, at least I don't have to worry about startving to death. That would be the first thing to worry about. My dad has a small farm in the north Georgia mountains. I'd go there immediately.
"You'll pay it...........or no gold for you."
The world is BROKE!
In the USA, and I'm sure the rest of the world, the majority of the population has to borrow money to buy a fucken $500 couch...and you think they're going to buy gold?
Price = Demand + ABILITY TO PAY!
INFINITE DEMAND + ZERO ABILITY TO PAY = ZERO PRICE
Your precious farmland (PF's...?), can and will be taken at the drop of hat FB, it's only a matter of whether what you have registers valuable enough for the federal government to do so. In fact, look at how the definition of 'expropriate' is spelled out:
ex·pro·pri·ate ?eks?pr?pr???t/ verbdistrain "legislation to expropriate land from absentee landlords"
http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
That's looks exactly like what happened right before Weimar Germany.
Sooo......how much gold do you have?
Did you buy it at $273 like I did? Have you got a chart of the US debt chartjockey?
"Did you buy it at $273 like I did?"
LOL! Who'd you buy it from? Gordon Brown?
Too bad you didn't buy AAPL around the same time.
"China is a cheap knockoff of the USA in every respect...and just like their junk products, the entire nation will break "unexpectedly".
Say Bert, are you typing on a computer made - uh, somewhere in the U.S....?
Imitation is the sincerest form of flatery.
Now let's see them come up with Unix or C++
It's you on your avatar ? Sad that she doesn't show more...
At least your post will start to be interesting...
I was trying to come up with a scathing comment but living in Cali,as we build high speed rail to nowhere, made me pause. Perhaps if they keep buying our real estate we can continue to have funding for our follies.
Miffed
What do you mean "nowhere?"
It goes directly from the border to Jerry Borwn's LA Safe Zone.
I live in a glass house too, but it's still fun throwing stones!
20% housing vacancy in a country of over a billion. Ouch.
When you buy a new apartment in China you are basically buying an empty shell - no interior finishing, no appliances, no plumbing - you do that all yourself before you move in.
So, post a financial collapse, when the govt. is the receiver for all those bad loans and takes possession in lieu of payment, China emerges with a ready stock of affordable housing and almost instant demand for the manufactured goods that go into it.
Concrete buildings last a long time IF they're well constructed. So the real question here is, how well were they built?
If they weren't built well, or aren't needed, they'll come down a lot faster than they went up.
"Fitch and Moody's say China's stock-drop won't affect 'Economy'"
http://atimes.com/2015/07/fitch-moodys-say-china-stock-drop-wont-affect-economy/
Justify[?] a fast forward'd 'era' from (1966-1976) 1976 to present (~40Yrs. 2+/+ generations,...*enough tyme to forget?) 2015 and the people must be reeducated in the dangers of a 'USSA `1929' Depression Redux' , and, that money must be earned the old fashion way via 'Compound Interest'.
In the USSA and Europe non-existent?!?
But, in China... it is never to late. The stock-market has always been a tool of the wealthy, however if individuals invest portions of earned-income into pension plans/ annuities run by sophisticated professionals the chances of getting cleaned-out have diminished at minimum three-fold!
http://www.iun.edu/~hisdcl/g387/cr.htm
'The Great Reeducation in Hegemon and it's Risk & Rewards' Remember this regarding the USSA stock market. It was an exact replica of the British. In fact it was the British monies that actually made it work....{?}
jmo
ZH - did you really say .... "and what could cause them to burst?"
YOU MEAN
- besides the fact that every 5-year old kid in the world knows that China is in a massive bubble and its debt is overblown
- besides the fact that it's easier to sell spoiled milk than it is to SELL a Chinese stock?
wouldn't these two reasons be good enough?
just sayin' :-)
"The reports of my death have been Greatly exaggerated..."
Life is a banquet where you start out as the guest of honor and leave as the main course.
Some say gold is dead going forward.I don't buy gold to speculate,I buy it for only one reason,that's an insurance reason.Would you plunk down hundreds of thousands of hard earned Dollars buying a new home without first purchasing fire insurance on that house?Look at charts all you want but economics can change very rapidly with rapidly changing world events called "randomness".If you read history,events can spin out of control in many ways.Risk will always morf or manifest itself into different parts of the Market.Whenever I take profits and save,a portion of it always goes to gold.Never,never put gold and silver or American Dollars into a safety deposit box.During a "bank holiday" the box can be ceased and is inaccessible.Look at what's happened in Greece and learn.In a"bail-in" the contents of a safety deposit box can be confiscated and revalued into a cheap,new paper currency that might be worthless.Your bank account can be ceased and given what is comminly called "a haircut".The legislation now exists in all major western economies.Ask yourself why your Government would want to do this to ordinary working people if they have to.Worse yet and in order for Officials to appear to be nice to you,you might be given a useless Government Bond that promises to pay you back in 30 years in devalued and worthless paper currency.That's where gold comes in.You see,gold has no counterparty risk,it just "is".That is why it pays no interest.It is not part of a corrupt system based on usury.Don't forget that the hard metal gold isn't what moves in price,it's the debauched,never ending printed paper,fiat currency that fluctuates along with a manipulated,completely artificial paper electronic gold market.That's the scam used to always bad mouth gold and is used in order to encourage and stop people from buying."Who wants a trinket or a relic or a sparkly object from another era" that's what bankers always say about gold.But,in an emergency(like the Greek situation),I can always barter with gold and silver because it is the ultimate in insurance because it is a universal world currency.Just look at what happens to any country that goes bust.Anybody with gold and silver can easily trade for whatever you want,whether it's exchanging for American Dollars or a car or truck,gold is easily excepted unlike foreign paper currencies.Gold is one of the most liquid Markets in existance.It actually boils down to whether or not you have faith in any of your politicians and ultimately your Government.Quite frankly,nobody I know trusts a bunch of fuckin' godamn crooked basturds.I don't trust low-life scum,never have.
""Who wants a trinket or a relic or a sparkly object from another era" that's what bankers always say about gold."
When you consider where the bulk of old coins come from (hoards that the owners never returned to) they may have a point.
Traditionally the Chinese are avid savers. However, the frenzy of their leaders to stimulate their economy with a QE 4x their GDP has caused serious malinvesment and imbalances including massive private sector debt which historically is almost unheard of for them.
However, I do not think they will let thier stawk market or RE drop much. In a playbook copy from the USA they will print and flood their economy with money to prop everything up similar to Ben and Janet. In fact, my bet is their RE will continue to rise b/c of this perhaps not as fast as before but still rise. Look at merika; sales and prices still friggin rising in many locations despite the dismal economy for 90% of the people.
As far as gold sales there, the Chinese are still eagerly grabbing all the gold they can afford since many cannot afford the high housing prices but they want a solid hard asset to preserve their wealth long term.
jmho
A notable portion of US housing appreciation comes from Chinese trying to get their money out of China!
..and the Chinese government isn't happy about it...time to execute some folks?
Deals planned to recover illegal assets from abroadhttp://usa.chinadaily.com.cn/us/2014-12/29/content_19196310.htm
Several years ago at the height of the RE frenzy here in Vancouver, I had a conversation with a nice banking lady in charge of her RE loan dept. The conversation went thusly:
Me: most of the current buyers are coming from China, no?
Her: yes.
Me: and most of them are paying cash, correct?
Her: yes.
Me: and most of that's in the form of cashier's checks or bearer bonds drawn on banks in the Sechelles or Caymen Islands, right?
At that point she clammed up and quickly changed the subject.
"...time to execute some folks?"
Which is why the smart ones come to Canada. No extradition treaty for capital offences since Canada abolished the death penalty in 1976.
Same for australia and the Kiwis, I have Chinese friends and they point out that one way they get money out untraced is load up a stack of prepaid Visa's up to $100k each and walk out with them, the money is then used to buy property in Aussie, US etc and is virtually untraceable once loaded back into a foreign bank account.