Hangzhou, We Have A Problem: "Over 71% Of New Chinese Loans Went To Fund Mortgages"

As Evercore ISI notes in its latest China weekly summary, the "biggest China policy development last week, was multiple cities establishing new rules to slow the spreading housing mania," adding that this was "surely at Beijing’s behest", it now indeed appears that China is once again trying to cushion a soft landing for a housing market that even Beijing is worried has gone too far.

While news that China's housing bubble - especially in Tier 1 cities - is fully back, are not new, documented several weeks ago in shown in our post "Chinese Home Prices Jump Most On Record: "The Numbers Are Hard To Believe", and shown in the following charts...

... discussed most recently by Bloomberg in an article titled "China’s Housing Boom Looks Like Last Year’s Equities Bubble," it was news that, as Caixin reported today, the head of China's central bank said the country will put in place "certain controls over credit growth," signaling a squeeze on liquidity that has been blamed for the property sizzle in dozens of major cities across the country. Zhou Xiaochuan made the comments at a meeting of the IMF board — the International Monetary and Financial Committee — on Saturday.

As the Chinese publication further adds, "investors armed with cheap credit have flocked to China's property market in recent months, and home prices in 70 major cities rose 7.5% in August compared with a year earlier, according to China's National Bureau of Statistics."

The debt-fueled binge behind the latest housing bubble is also not news to our readers: new loans in August reached 948 billion yuan ($142 billion), more than double the figure a month before, according to the latest PBOC data. However, as Caixin notes, "over 71 percent of the loans went to households, mainly to fund mortgages." We showed this unprecedented debt-funded house buying spree a month ago courtesy of the following Capital Economic chart, which revealed that a record 20% of all new loans are now being used to fund mortgages.

It now appears that China has been confronted by global powers to address this bubble before it becomes systemic. As Zhou told the IMF in a written statement this weekend, "China will use various policy instruments to keep banking liquidity at an adequate level and allow credit and total social financing to grow at a steady and moderate pace."

Zhou had warned earlier against the emergence of housing bubbles. Speaking at the G20 meeting of finance ministers and central bank governors in Washington on Thursday, Zhou said the government has already enacted policies to develop "a healthy property market."

And now that the IMF has officially warned that the country's growing debt "posed risks to financial stability", China has shifted from mere words to actions.

In what may be the first indication that China's tremendous home-price surge is about to hit a brick wall, about 20 Chinese cities tightened home purchasing requirements in late September to cool an overheated market, with some prohibiting property developers from selling homes to residents who don't have a local hukou, or residency registration, and to those who already own more than one home. Other cities have raised the minimum down payment required.

Zhou also proposed controlling credit growth to corporations by "lowering corporate leverage and dealing with piling debt through market-based approaches, such as debt restructuring, debt-to-equity swaps, securitization, and liquidation."

To be sure, China is desperate to address its soaring debt problem: its gap of credit to gross domestic product, taking into account loans to the private sector excluding financial institutions, was 30.1 as of March. China's gap was highest among all 43 economies monitored by the financial watchdog. A debt level above 10 signals a potential crisis, according to the agency.

However, while it is now forced to admit, and address, the debt-fueled housing bubble, China has even bigger debt-related problems.

As Caixin wrote, the economic downturn and overcapacity in certain heavy industries have resulted in a group of "zombie companies" that are struggling to survive and repay debt. We wrote about this last week in "A Quarter Of All Companies Can't Pay The Interest On Their Debt." It remains to be seen just how China will resolve its massive debt overhang, which according to the latest IIF estimates accounts for roughly 300% of GDP:

Zhou tried to placate fears by saying that although the bad-loan ratio in the banking system has risen, the overall risks are "controllable" because banks have sufficient reserves to deal with them. Needless to say many hedge fund managers disagree, warning that China's NPLs continue to rise, and as the latest Chinese reserve data showed, capital continues to flow out of the country. Last week, the PBOC reported that China’s currency reserves fell by $18.79 billion in September to $3.17 trillion, the lwoest since April 2011. The drop was larger than the $11 billion estimated, and followed a drop of $15.89 billion in August. It was was the largest monthly decline since May, suggesting that while some complacency may have returned to the Chinese market, few if any of the deteriorating trends that the market was so concerned about a year ago and in the start of 2016, have been resolved.

* * *

Putting it all in context is the following must see documentary from Al Jazeera's 101 East titled "The End Of China, Inc." In it 101 East explains that "there's a magic formula to becoming a millionaire in China - borrow big to earn big." For years, individuals, state-owned companies and municipalities have taken massive loans to chase the Chinese dream. Now it's payback time, but a severe economic slowdown means many are struggling to pay their debts. Entire neighbourhoods have become "ghost towns", industrial companies sit idle and the unemployed are growing desperate. Government economists claim China has enough in its coffers to cover the bad loans, but defaulting on it could send the world's economy into a tailspin.

101 East asks, is this the end of China Inc?