Following the latest liquidity injections by the PBOC (set to make 2014 the biggest credit creation year since Lehman [7]), countless bailouts of insolvent companies by Beijing and local governments despite promises there would be no bailouts, and what some have dubbed is an actual Chinese QE [8], all making it quite clear that China was clearly not serious when it threatened to burst the housing bubble (it hoped it could do a "controlled landing"; it failed which means full steam ahead onto the inevitable NPL collapse), Chinese stocks have clearly responded by jumping higher with the Shanghai Composite spiking to its highest in 7 months.
This in turn has brought the permabullish Chinese penguins out of hiding, who, having been wrong on the Shanghai Composite for 6 years, now see a sudden resurgence in the Chinese stock market. Their thinking is predictable: like the US stock market is to the Fed's "wealth effect", so China's would be to the PBOC, right?
Wrong.
The reason: while in the US the bulk of America's $67 trillion in household wealth is in financial assets, read the S&P 500, with only 28% of wealth invested in real estate (according to the latest Flow of Funds reports [9]), in China the wealth distribution is a mirror image, with a negligible amount of wealth invested in stocks and the bulk of household wealth invested in real estate. By bulk we mean a whopping 75%!
From Xinhua [10]:
About one percent of Chinese households own one-third of the nation's wealth, raising concerns about income inequality in the world's most populous country, according to a study by Peking University.
Chinese households on average had a net worth of 439,000 yuan (about 71,000 U.S. dollars) in 2012, up 17 percent from the 2010 level, the university's Institute of Social Science Survey said Friday in its latest report on China's livelihood development.
However, income inequality rose rapidly during the period, the report said, as the top one percent of Chinese households held more than one-third of the nation's wealth, while 25 percent of households at the bottom owned only 10 percent of the country's property value.
The researchers based their main analysis on 2012 data from the China Family Panel Studies, a large-scale survey project conducted by the institute.
The report showed about 74.7 percent of Chinese household wealth came from owning real estate.
Which confirms what we have been saying for years [11]namely that "to China housing is like the stock market to the US: both mission-critical bubbles designed to give a sense of comfort and boost the "wealth effect"."
The allocation of household wealth to real estate is shown in the chart below, but the message is clear: when it comes to chasing China's latest and greatest bubble reflation, focus on real estate; nobody cares about Chinese stocks.
[12]
