Is The China Bubble About To Burst?

[boedicca]

Excellent read on the brewing credit and inflation crisis in China, with an interesting note about the benefits of cheap rural labor running down.

Albert Edwards from Societe General said the OECD’s leading indicators are signalling a "downturn" for Asia’s big five (Japan, Korea, China, India, and Indonesia). The China indicator composed by Beijing’s National Bureau of Statistics has fallen almost as far as it did at the onset of the 2008 crash.

"I remain convinced we are witnessing a bubble of epic proportions which will burst – catching investors as unawares as the bursting of the Asian bubbles of the mid-1990s. Ignore these indicators at your peril," he said

In a sense, inflation is a crude way of curbing China’s export surpluses and therefore of resolving a key trade imbalance that lay behind the global credit crisis.

If China continues to stoke inflation – and blaming the US Federal Reserve for its own errors help – there will no longer be any need for a yuan revaluation against the dollar, and the US Congress can shelve its sanctions law.

On a recent visit to a chemical plant in Suzhou, I was told by the English manager that wage bonuses for staff will average nine months pay this year. This is what it costs to keep skilled workers. His own contract is fixed in sterling, which has crashed against the yuan over the last two years. "It is a sobering experience," he said.

China may have hit the "Lewis turning point", named after the Nobel economist Arthur Lewis from St Lucia. It is the moment for each catch-up economy when the supply of cheap labour from the countryside dries up, leading to a surge in industrial wages. That reserve army of 120m Chinese migrants everybody was so worried about four years ago has already dwindled to 25m. ..

China's credit bubble on borrowed time as inflation bites - Telegraph



The article also notes that private credit in China is 148% of GDP - over three times that of other emerging markets; and the real estate market in major metros has run amok with prices at 18 to 22 times disposable income (the U.S. at the peak of the subprime bubble was at 6.4 times disposable income).

It's going to be an ugly mess when it bursts.

 

[william the wie]

Expected but still it is going to hurt.

 

[Toro]

There are enormous imbalances in the Chinese economy, and one day, there is going to be a tremendous crash, particularly in real estate. However whether it is imminent is debatable. Chinese stocks appear to be firming.

Albert Edwards is a mega-perma bear. I think he's been predicting The End of the World for a decade.

 

[loosecannon]

There are enormous imbalances in the Chinese economy, and one day, there is going to be a tremendous crash, particularly in real estate. However whether it is imminent is debatable. Chinese stocks appear to be firming.

Albert Edwards is a mega-perma bear. I think he's been predicting The End of the World for a decade.

I read that China's "RE bubble" is limited to a tiny share of the nation, mostly the posh sectors of a dozen cities. They do have vacancy issues. But they have a swelling population too, with a lot of upwardly mobile types.

IOW 98% of the RE is unaffected.

Most of the imbalances in China appear to be the giant class divides. Part of the nation is still herding goats and harvesting veggies while another part is more modern and advanced than the US.

 

[ekrem]

[...]private credit in China is 148% of GDP
[...]

In USA it is 270
Domestic credit provided by banking sector (% of GDP) | Data | Table

[...]and the real estate market in major metros has run amok with prices at 18 to 22 times disposable income (the U.S. at the peak of the subprime bubble was at 6.4 times disposable income).
[...]

Once real-estate prices in a Chinese town somewhere in the West or in the middle of the country increase dramatically there can be talk of a bubble.
In case of China it is class-advancement from the population. There is demand to immigrate to the industrial metropolitan regions. For 1.X billion people, the dream is to live in a shiny city like Shanghai or Beijing.
If the city does not expand and invest in infrastructure, the city can only accommodate a certain amount of people. At that point, demand for existing real-estate will sky-rocket.

 

[william the wie]

There are enormous imbalances in the Chinese economy, and one day, there is going to be a tremendous crash, particularly in real estate. However whether it is imminent is debatable. Chinese stocks appear to be firming.

Albert Edwards is a mega-perma bear. I think he's been predicting The End of the World for a decade.

Chanos thinks it is going to be soon too. I don't know how soon but China has been in bubble territory since prior to Tianamin Square. In fact one of the roots of the protest was fear of inflationary bubbles.

 

[Toro]

There are enormous imbalances in the Chinese economy, and one day, there is going to be a tremendous crash, particularly in real estate. However whether it is imminent is debatable. Chinese stocks appear to be firming.

Albert Edwards is a mega-perma bear. I think he's been predicting The End of the World for a decade.

I read that China's "RE bubble" is limited to a tiny share of the nation, mostly the posh sectors of a dozen cities. They do have vacancy issues. But they have a swelling population too, with a lot of upwardly mobile types.

IOW 98% of the RE is unaffected.

Most of the imbalances in China appear to be the giant class divides. Part of the nation is still herding goats and harvesting veggies while another part is more modern and advanced than the US.

Your observation is correct about the class divide, and your observation that most of the real estate problem is in a handful of cities is also correct. The problem is that both of those statements are related. Because most of the wealth is concentrated, most of the housing wealth is concentrated in a handful of cities, which is why it is a problem nationally, since those cities represent a disproportionate amount of wealth.

And it is a bubble that is far bigger than America's was. In Shanghai, prices to income is 15x. No city in America ever got that high. Generally, 8x-9x is considered extreme. There are several cities in China with that ratio in the mid-teens.

 

[loosecannon]

How high was the ratio in Japan in the late 80's?

 

[loosecannon]

Prices were highest in Tokyo's Ginza district in 1989, with choice properties fetching over 100 million yen (approximately $1 million US dollars) per square meter ($93,000 per square foot). Prices were only marginally less in other large business districts of Tokyo. By 2004, prime "A" property in Tokyo's financial districts had slumped to less than 1 percent of its peak, and Tokyo's residential homes were less than a tenth of their peak, but still managed to be listed as the most expensive in the world until being surpassed in the late 2000s by Moscow and other cities. Tens of trillions of dollars worth were wiped out with the combined collapse of the Tokyo stock and real estate markets. Only in 2007 had property prices begun to rise; however, they began to fall in late 2008 due to the financial crisis.

Japanese asset price bubble - Wikipedia, the free encyclopedia

I think the China RE bubble is vastly overblown, and the contraction of credit seems to be working well so far.

 

[william the wie]

LC, even scaled down China is out of control. Coal miner deaths would be more than one per day in the US if they died at the Chinese rate. Likewise deaths from pollution and that is from sanitized government figures. You are thinking in the wrong terms the key turning point in the US RE bust was probably fallout from Katrina and China is extremely prone to Katrina style catastrophes that get people thinking about staying alive instead of getting rich. (And yes Toro, I know that teasing out the data on the loss of life and utility in the most important food transshipment port in the world is a pain but the correlation does seem to hold in terms of loss of momentum.)

 

[Toro]

Prices were highest in Tokyo's Ginza district in 1989, with choice properties fetching over 100 million yen (approximately $1 million US dollars) per square meter ($93,000 per square foot). Prices were only marginally less in other large business districts of Tokyo. By 2004, prime "A" property in Tokyo's financial districts had slumped to less than 1 percent of its peak, and Tokyo's residential homes were less than a tenth of their peak, but still managed to be listed as the most expensive in the world until being surpassed in the late 2000s by Moscow and other cities. Tens of trillions of dollars worth were wiped out with the combined collapse of the Tokyo stock and real estate markets. Only in 2007 had property prices begun to rise; however, they began to fall in late 2008 due to the financial crisis.

Japanese asset price bubble - Wikipedia, the free encyclopedia

I think the China RE bubble is vastly overblown, and the contraction of credit seems to be working well so far.

Japan isn't a good example.

The boom in Japanese house prices from 1981 to 1991 was 225% ... . Then prices fell by 65% over the next 14 years

FT Alphaville A Japanese casa for Spain

I don't know anybody who doesn't think the Japanese real estate market has been anything but an unmitigated disaster over the past 20 years, including the people I know in Japan.

And given the demographics, there may be worse to come in Japan.

The demographics in China aren't good either.

 

[loosecannon]

Toro, you are good with math. I am surprised that you don't see that the scale of the Chinese RE bubble is proportionately smaller than the Japanese bubble of the late 80's.

Suppose that average housing unit in Shanghai costs 15X the average annual wage of a Chinese worker. OK, but what is the ratio between the price of that unit and the average Shanghai salary? 3:1?

And all evidence so far suggests that China is succeeding at stabalizing RE prices. And the beauty of their tactic is that the more they raise bank reserve requirements the more foreign reserve assets they can afford to buy.

It beats the hell out of the Fed's monetary policies.

 

[Toro]

The Chinese housing bubble is nowhere near as big as the Japanese bubble. However, it is symptomatic of a bigger problem, which is a cheap currency that has led to overbuilding and overcapacity in China, and massive reserves that are bleeding into asset markets and creating inflation.

I harbour great skepticism that any government can gently let down any bubble.

 

[loosecannon]

The Chinese housing bubble is nowhere near as big as the Japanese bubble. However, it is symptomatic of a bigger problem, which is a cheap currency that has led to overbuilding and overcapacity in China, and massive reserves that are bleeding into asset markets and creating inflation.

I harbour great skepticism that any government can gently let down any bubble.

Well, their plan is obviously to grow into the bubble. Whether they can do it is unknown. But as a command economy they have a lot of tools at their disposal to reduce speculation and they are using them.

I can't remember any economy ever putting the brakes on a market as concertedly. It may very likely work.

 

[william the wie]

The internal political problems in China that bleed over into the economy and foreign policy is the major trigger for future problems. Given that just about everyone that can be spared from farming has already been urbanized China has to upgrade skills and amenities quickly to stay ahead of other developing nations. It also has to keep North America and Europe as net importers of Chinese goods. Doing all of that involves a few singularities that will cause the Chinese economy to crash and burn. In this case real estate is just a convenient metric.

 

[loosecannon]

I agree, Willie. I don't think the RE bubble is much of a problem for China. But there are clearly other problems.

The two biggest of which are probably their huge population seeking to surge toward massive living standards improvements exactly as the population bomb/resource scarcity curves are intersecting.

Since all light is now shining on the developing world while the developed world seems unnervingly feckless in response I think some equivalent to world war must be the outcome.

Too many crisis points raising at once and I think even I am underestimating the gravity of these by a magnitude.

IOW beyond their population, China's biggest problems are external. Internally they seem to me to be among the soundest of the sound nations/societies/economies on earth. Compared to everybody else.

 

[william the wie]

LC, the China bubble is not a new phenomenon and Chinese leaders, if not the average Chinese, is terrified of their accumulated enemies. For example if North Korea uses a nuke, India and Russia will assume this was OKed by China. The expected response could well be brutal in the extreme. If things continue as is the drug lords of southeast Asia will flood China with Heroin and Meth. When the bubble busts the warlords will be back with a vengeance. The CCP has lasted longer than the majority of Chinese dynasties and they are the second longest lived communist regime ever, much longer than the Legalist, proto-communist, Chin dynasty (I know it is spelled differently now but it is still pronounced the same.) Such Legalist reconquest regimes do not last very long after driving out the barbarians (in this case the Japanese) and restoring security.

In light of that history I disagree totally with most views about Chinese foreign reserves.

A) I think 2 T is a gross undercount.

B) It is not a foreign policy tool but rather flight capital for party cadre.

C) Where will all of those planes land with an expected load of 20-50 people plus as much Gold, ceramics and foreign currency as possible on board? China does not have more than 1% of the planes needed to get all of the small fry party cadre out of Dodge so the local cadre are cutting their own deals now for the bad times yet to come.

D) The warlord alliances are almost certainly in place now and at the first misstep China will come apart.

 

[Samson]

Excellent read on the brewing credit and inflation crisis in China, with an interesting note about the benefits of cheap rural labor running down.

Albert Edwards from Societe General said the OECD’s leading indicators are signalling a "downturn" for Asia’s big five (Japan, Korea, China, India, and Indonesia). The China indicator composed by Beijing’s National Bureau of Statistics has fallen almost as far as it did at the onset of the 2008 crash.

"I remain convinced we are witnessing a bubble of epic proportions which will burst – catching investors as unawares as the bursting of the Asian bubbles of the mid-1990s. Ignore these indicators at your peril," he said

In a sense, inflation is a crude way of curbing China’s export surpluses and therefore of resolving a key trade imbalance that lay behind the global credit crisis.

If China continues to stoke inflation – and blaming the US Federal Reserve for its own errors help – there will no longer be any need for a yuan revaluation against the dollar, and the US Congress can shelve its sanctions law.

On a recent visit to a chemical plant in Suzhou, I was told by the English manager that wage bonuses for staff will average nine months pay this year. This is what it costs to keep skilled workers. His own contract is fixed in sterling, which has crashed against the yuan over the last two years. "It is a sobering experience," he said.

China may have hit the "Lewis turning point", named after the Nobel economist Arthur Lewis from St Lucia. It is the moment for each catch-up economy when the supply of cheap labour from the countryside dries up, leading to a surge in industrial wages. That reserve army of 120m Chinese migrants everybody was so worried about four years ago has already dwindled to 25m. ..

China's credit bubble on borrowed time as inflation bites - Telegraph



The article also notes that private credit in China is 148% of GDP - over three times that of other emerging markets; and the real estate market in major metros has run amok with prices at 18 to 22 times disposable income (the U.S. at the peak of the subprime bubble was at 6.4 times disposable income).

It's going to be an ugly mess when it bursts.

So, you think I ought hold off a couple of years to get my Chinese Mail-Order Brides moved into my single-wide/goat ranch outside Rawlins, WY?

 

[loosecannon]

LC, the China bubble is not a new phenomenon and Chinese leaders, if not the average Chinese, is terrified of their accumulated enemies. For example if North Korea uses a nuke, India and Russia will assume this was OKed by China. The expected response could well be brutal in the extreme. If things continue as is the drug lords of southeast Asia will flood China with Heroin and Meth. When the bubble busts the warlords will be back with a vengeance. The CCP has lasted longer than the majority of Chinese dynasties and they are the second longest lived communist regime ever, much longer than the Legalist, proto-communist, Chin dynasty (I know it is spelled differently now but it is still pronounced the same.) Such Legalist reconquest regimes do not last very long after driving out the barbarians (in this case the Japanese) and restoring security.

In light of that history I disagree totally with most views about Chinese foreign reserves.

A) I think 2 T is a gross undercount.

B) It is not a foreign policy tool but rather flight capital for party cadre.

C) Where will all of those planes land with an expected load of 20-50 people plus as much Gold, ceramics and foreign currency as possible on board? China does not have more than 1% of the planes needed to get all of the small fry party cadre out of Dodge so the local cadre are cutting their own deals now for the bad times yet to come.

D) The warlord alliances are almost certainly in place now and at the first misstep China will come apart.

It is a dangerous world. But China is hardly acting terrified. WE should be terrified! They own us!

And it IS a foreign policy/command economy tool.

The penalty in the US for trashing the world's economy is a bailout.

The penalty in China for trashing a single company is often death.

 

[loosecannon]

So, you think I ought hold off a couple of years to get my Chinese Mail-Order Brides moved into my single-wide/goat ranch outside Rawlins, WY?

No you should move fast while you can afford them. IF you can afford them now.