Yes Virginia...It's a Bubble...

[GRG55]

Re: Yes Virginia...It's a Bubble...

I’ll Tell You When Chinese Bubble Is About to Burst: Andy Xie

April 26 (Bloomberg) -- “My maid just asked for leave,” a friend in Beijing told me recently. “She’s rushing home to buy property. I suggested she borrow 70 percent, so she could cap the loss.”

It wasn’t the first time I had heard such a story in China. Some friends in Shanghai have told me similar ones. It seems all the housemaids are rushing into the market at the same time.

There are benefits to housekeeping for fund managers. China’s housemaids may be Asia’s answer to the shoeshine boy whose stock tips prompted Joseph Kennedy to sell his shares before the Wall Street Crash of 1929.

Another friend recently vacationed in the southern island- resort city of Sanya in Hainan province and felt compelled to visit a development sales office. Everyone she knew had bought there already. It’s either buy or be unsocial.

“You should buy two,” the sharp sales girl suggested. “In three years, the price will have doubled. You could sell one and get one free.”
How could anyone resist an offer like that?...

[Sharky]

Re: Yes Virginia...It's a Bubble...

For example if one was to extraplolate China's recent steel making capacity additions, very quickly one comes to the ridiculous result that within a few more years China will have all of the steel making capacity in the entire world. That just won't happen, because there will be retaliatory actions by other countries...and we've already seen the early signs of this by the USA applying tariffs to certain Chinese made steel pipe goods.

Another wild card here is the price of oil. Cheap production costs in China only makes sense for the rest of the world as long as transportation costs are low.

[touchring]

Re: Yes Virginia...It's a Bubble...

For example if one was to extraplolate China's recent steel making capacity additions, very quickly one comes to the ridiculous result that within a few more years China will have all of the steel making capacity in the entire world. That just won't happen, because there will be retaliatory actions by other countries...and we've already seen the early signs of this by the USA applying tariffs to certain Chinese made steel pipe goods.

Even if retaliation does comes, Chinese manufacturers can still send the goods to another country, have it stamped made in that country.

And retaliation only works if the Europeans work with the Americans, otherwise American manufacturers will be at the disadvantage of having a higher material cost.

And besides, once the steel has gone into cars, will the US custom strip open the cars and check where the steel comes from? If US manufacturers can't use cheap Chinese steel, they can get around this by getting their products assembled across the border, perhaps in Mexico which can import cheap Chinese steel, or perhaps even move their factories to China, as what most companies have done for electronics as China produces almost all the world's rare metals and restrict exports.

Retaliation is more easily said than done.

Any businessman in the shoes of the Chinese will do the same, flood the world market with cheap steel to wipe out competition, while at the same time delay retaliatory action by offering the honey pot of opportunities in the Chinese domestic market. Once competition has been neutralized, after that, jack up prices, like they have done with rare metals.

This is business 101.

Except for the case of China, the businessman is China itself. It's the country that is doing business. A country can do many things that an individual and a company can't - it can print money, it can offers its domestic markets as an incentive, it can tax its people by building a real estate bubble and leasing land at great profit. The money collected goes back into subsidies for the steel makers.

China has the upper hand, if you consider all this, the realization that China will have all of the steel making capacity in the entire world in a few year's time wouldn't look so crazy. They will probably need it as they will be producing for the whole world. ;)

[GRG55]

Re: Yes Virginia...It's a Bubble...

http://www.google.com/hostednews/ap/...RrwZQD9EDOF7G0

China is going to bid on a high speed rail contract in the U.S. I do not think J6P is ready for that. It is a big wake-up call.

America becomes the "New Africa"?

In sub-Saharan Africa the Chinese not only build all the infrastructure...they finance it too. The driver there, of course, is access to resources and raw materials. Given the sorry state of US State and national finances, I wonder if the Chinese end up doing the same with high speed rail...in this case the driver being to create market for their manufacturing capacity. I simply cannot see how the USA public sector can afford to finance high speed rail in any significant way otherwise.

Maybe we should remember that this wouldn't be the first time the Chinese built railways across North America...;)

[GRG55]

Re: Yes Virginia...It's a Bubble...

Have you considered the alternative scenario that by delaying currency appreciation for "many years away from ending", let's assume 15 years, so we may suddenly wake up one day realizing China has become the world's economy superpower, all the important industries have moved to China by then, and the next thing you know is China declares reviving the gold standard and then demands gold and commodities for its exports and refuses paper?

There's a saying - There ain't no such thing as a free lunch http://en.wikipedia.org/wiki/There_a...s_a_free_lunch

I must admit, this is wild speculation, but who knows?

A straight line extrapolation of China's recent trends continuing into the indefinite future is a popular exercise among some "analysts", but is an exercise in fantasy imo.

For example if one was to extraplolate China's recent steel making capacity additions, very quickly one comes to the ridiculous result that within a few more years China will have all of the steel making capacity in the entire world. That just won't happen, because there will be retaliatory actions by other countries...and we've already seen the early signs of this by the USA applying tariffs to certain Chinese made steel pipe goods.

My view is that the insanity underway in the China property sector is partly due to the realization that endless manufacturing capacity additions predicated on capturing an ever larger share of world markets is not achievable, and the money is now going to increasingly prominent "domestic consumption" stories...housing 1 Billion soon-to-be-middle-class Chinese people being the most repeated of these [followed immediately by "we are going to lace the whole of China with a net of high speed rails"].

Maybe I am completely wrong about this, but I have great trouble with the thesis that an economy that was dependent on exports for 40% of GDP can instantly transform itself into a domestic consumption powerhouse on command from Beijing.

[touchring]

Re: Yes Virginia...It's a Bubble...

Have you considered the alternative scenario that by delaying currency appreciation for "many years away from ending", let's assume 15 years, so we may suddenly wake up one day realizing China has become the world's economy superpower, all the important industries have moved to China by then, and the next thing you know is China declares reviving the gold standard and then demands gold and commodities for its exports and refuses paper?

There's a saying - There ain't no such thing as a free lunch http://en.wikipedia.org/wiki/There_a...s_a_free_lunch

I must admit, this is wild speculation, but who knows?

How so? Are Chinese bubbles [if they are indeed bubbles in the first place] immune from collapse for some reason?

Frankly, if I understand your argument correctly, I think it makes the Chinese [and other surplus economy] bubbles more dangerous than the ones in the "UK, or USA or Spain or Dubai"...because as long as those governments pursue a mercantile policy at all costs, including the attendant and mandatory requirement to keep sterilizing the incoming foreign earnings to hold down the exchange rate of their currency, there would appear to be no effective current or pending restriction on the air supply feeding the balloon. My expectation, therefore, is that the surplus economy domestic bubbles have the potential to reach gargantuan proportions that exceed what we've experienced elsewhere to date - and may be years away from ending*

[Sharky]

Re: Yes Virginia...It's a Bubble...

Here's a link to an article about the China bubble, including a few stats and photos:

http://www.minyanville.com/businessm...6852?page=full

[GRG55]

Re: Yes Virginia...It's a Bubble...

More from Andy on China property...

By Andy Xie
03.22.2010 17:54
Frayed String for China's Property Balloon

Don't expect China's property bubble to shrink as long as Beijing tinkers with rules but neglects credible reform...

A picture may be worth a thousand words. Here's 14 interesting pictures...

[ht to Tim Iacono at The Mess That Greenspan Made]

[GRG55]

Re: In Search of Goldilocks...

China May Face ‘Massive’ Bank Bailouts After Stimulus Program

March 13 (Bloomberg) -- China may be forced to bail out banks that made loans for local-government projects under the unprecedented stimulus program unleashed in 2008, according to Citigroup Inc. and Northwestern University’s Victor Shih.

In a “worst-case scenario,” the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan ($350 billion) by 2011, Shen Minggao, Citigroup’s Hong Kong-based chief economist for greater China, said yesterday.

“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said Shih, a professor who spent months researching borrowing by about 8,000 local government entities...

...Citigroup’s Shen said officials may keep monetary policy loose for longer than they should, boosting asset prices and building up overcapacity, to avoid the “squeeze” on investment vehicles that would trigger bad loans and bailouts...

...Su Ning, a deputy governor at China’s central bank, said March 8 that a “fairly high proportion” of total lending last year went to the funding vehicles. Chinese banks extended a record 9.59 trillion yuan of new loans in 2009. Su sees “a big risk” from local-government guarantees for money borrowed to fund infrastructure projects that may not generate returns, he said in Beijing...

Still inflating...

Independent Strategy is a research outfit headquartered in London, UK.

From the Naked Capitalism blog:

"...Independent Strategy’s latest report, “China’s credit bubble: the missing piece in the jigsaw” makes a persuasive case that China’s debt fueled growth model is due for a hard landing, but the timing is uncertain, since the debt is funded internally...

...This piece does a concise job of recapping some of the troubling conditions undergriding the seemingly robust Chinese economy. A particularly striking one is the dramatic fall in the productivity of borrowing. In 2000, it took only 1.5 RMB of credit growth to produce an additional RMB of GDP growth. It now takes 6 RMB of credit to produce 1 RMB of GDP growth. It has become conventional to decry borrowing in the US because it has supported consumption, but debt that supports unproductive investment (factory overcapacity, overbuilding of high end housing, land speculation) is no better...

"...We now know that much of the credit explosion in 2009 that boosted economic growth went into local government entities where it was wasted on unproductive real estate and infrastructure projects. These entities are mostly insolvent and will create huge bad debts for the banks as credit is tightened this year….

China is an economy where bank credit equals 130% of GDP — twice the penetration of peer emerging markets and where credit grew by one-third last year, adding money to the system equal to nearly 40% of GDP…."

[GRG55]

Re: Yes Virginia...It's a Bubble...

Looks like he may not believe his original 2012 date now?

China Property Market ‘Bubble’ Set to Burst, Xie Says

Feb. 2 (Bloomberg) -- China’s property market “bubble” is set to burst as the government curbs credit growth and clamps down on speculation, according to independent economist Andy Xie.

As bank lending slows, “it’s very difficult to see this demand continuing,” Xie, formerly Morgan Stanley’s chief Asian economist, told Bloomberg Television in Hong Kong today...

...“We’re seeing some significant measures that have been introduced in the last couple of weeks,” Xie said. “If these changes are implemented, the demand from third-flat buyers is going to dry up and it’s going to have a major impact.”

Many properties bought for investment are now left vacant and rental yields are low, pointing to a “bubble,” Xie said...

More from Andy on China property...

By Andy Xie
03.22.2010 17:54
Frayed String for China's Property Balloon

Don't expect China's property bubble to shrink as long as Beijing tinkers with rules but neglects credible reform

(Caixin Online) Beijing has unleashed another round of property market tightening measures, and this time it's tightening mortgage loan terms considerably: The mortgage interest discount has been reduced for first-time homebuyers; the discount has been abolished and down payment requirement raised to 40 percent for second-time homebuyers; and rates are at banker discretion while the required down payment has been raised to 60 percent for third-time buyers.

Predictably, sales volumes in the primary and secondary markets have collapsed. But no one is panicking, not even those who live off the property bubble. Why? Aren't they supposed to be terrified when Beijing cracks down?

It seems we have seen this movie before. Beijing launched property tightening measures several times in the past but then relaxed as soon as the market felt the bite. The bottom line is that local governments, and Beijing through them, depend very much on property for fiscal revenues. And now, the market does not believe the government will cut off the hand that feeds it.

Local governments and developers are sitting on massive amounts of liquidity they raised last year through land and property sales and borrowings while taking advantage of an "anything goes" window open during the economic stimulus period. They seem to think Beijing will change its mind before their liquidity runs dry, so they are comfortably waiting without cutting prices...

...Contrary to Beijing's policy intent, local governments are readying for another round of property inflation. Local governments have been using bank loans to resettle residents, and resettlement costs have skyrocketed since those being moved need enough compensation to buy properties at today's prices. Unless property prices rise considerably, local governments will end up losing money, which they cannot afford.

Such resettlements played an important role in supporting demand for property last year. The overwhelming majority of end-user purchases probably came from resettled residents who used their compensation cash for down payments.

Resettlement compensation is the biggest transfer of wealth from the government to the household sector since the privatization of low-cost public housing a decade ago. It is probably the most important government action supporting today's economy.

The positive elements of resettlement compensation come with two major negatives. First, it uses a form of leverage to support demand. Local governments borrow to pay compensation packages, using land as collateral. Resettled residents use compensation cash as down payments for mortgages. In this way, government debt becomes equity for mortgage debt; there is no real equity in the financing chain.

Second, although high compensation payments benefit resettled residents, they make local governments a player in further inflating property prices. Ultimately, the costs will be borne by China's nascent middle class...

[aaron]

Re: Yes Virginia...It's a Bubble...

http://www.google.com/hostednews/ap/...RrwZQD9EDOF7G0

China is going to bid on a high speed rail contract in the U.S. I do not think J6P is ready for that. It is a big wake-up call.

[jk]

Re: Yes Virginia...It's a Bubble...

i have read that chinese capital inflows exceed their trade surplus. some of this may fdi, but some is hot money moving into real estate as a way to play the currency. [i.e. how do you invest in a currently non-convertible currency? buy real estate there.] so one question is: given the big downpayments, how much of the downpayments in aggregate were borrowed abroad in another currency? if the yuan becomes convertible, it might go down instead of up, as foreigners repatriate capital, and locals seek to diversify.

[Southernguy]

Re: Yes Virginia...It's a Bubble...

I am trying, as probably most of Itulipers, to asess future economic develpments.
To that effect predicting the course of China´s is essential. Well, that´s certainly not a brilliant or original deduction.
The difficulty is that there seem not to be reliable, on time, and detailed economic information about China.
There are, no doubt, signs of a real estate bubble inflating.
There is, as well, (or at least so is declared officialy) an awareness of the Chinese authorities of the former.
And, as they are not elected, or at least not so by Occidental standards, they have more alternatives to put such bubble to an end, or at least to slow it.
On the other hand there is a real and productive economy developing in China.
All said does not imply that: such bubble or bubbles do not burst or that their bursting is not damaging to world economy.
China is on the way of creating a local market for at least some of the goods it produces.
Both they have to because of the protectionist measures other countries are naturally implementing, they want it or not. Europe and the USA are on the way of reducing their consumption standards if only just for the enormous debt they carry on.
But also because of a natural development of their population apetites. It´s sheer nonsense that the Chinese people live in poverty, most of them, so as to finance the absurd occidental way of life.
They have to make, then a gigantic shift.
The image coming to my mind is braking a very hign speed train, with little distance to go.
Shall the Chinese Comunist Party be able to do it?
And of course, if they cannot achieve it there is going to be an economic earthquake all over the world.
And, also, other Damocles swords are hanging up there, such as, oil prices and the European indebted nations.
If China has some kind of economic seismic movement, commodities are going to have a big shake down.
And that has, of course big investment implications.

[GRG55]

Re: Yes Virginia...It's a Bubble...

Something to think about: Wherever you go in the world, from Shangai to Miami, in any supermarket or store, most of whats being sold is Made in China.
That´s not the case of UK, or USA or Spain or Dubai. There´s a big difference.
Clearly, there surely may be some kind of bubble or even bubbles inflating in China, but if there are, they´re significantly different.

How so? Are Chinese bubbles [if they are indeed bubbles in the first place] immune from collapse for some reason?

Frankly, if I understand your argument correctly, I think it makes the Chinese [and other surplus economy] bubbles more dangerous than the ones in the "UK, or USA or Spain or Dubai"...because as long as those governments pursue a mercantile policy at all costs, including the attendant and mandatory requirement to keep sterilizing the incoming foreign earnings to hold down the exchange rate of their currency, there would appear to be no effective current or pending restriction on the air supply feeding the balloon. My expectation, therefore, is that the surplus economy domestic bubbles have the potential to reach gargantuan proportions that exceed what we've experienced elsewhere to date - and may be years away from ending*

But like all bubbles, end they will.

* [I am mindful of calls, which may come later this year, that the current real estate "bubble" has been successfully "managed" by the Chinese authorities, thus sending an unmistakable "all clear" signal to Chinese speculators to get the game back in high gear].

[Southernguy]

Re: Yes Virginia...It's a Bubble...

Something to think about: Wherever you go in the world, from Shangai to Miami, in any supermarket or store, most of whats being sold is Made in China.
That´s not the case of UK, or USA or Spain or Dubai. There´s a big difference.
Clearly, there surely may be some kind of bubble or even bubbles inflating in China, but if there are, they´re significantly different.

The Americans still do not understand that China's economy is real; it's based upon EXPORTS and SAVINGS and PRODUCTION and MANUFACTURING. That economy is growing at 8% per year, and compounding too. So, there is plenty of room for China's real estate to go up in price.

It is very difficult to communicate with Americans to-day because they just don't face the facts around them. With a few exceptions like GE and Siemens, American companies know very little about the power of manufacturing, producing, exporting, and saving money for the future.

Contrast China's real estate mania to the bubble in California real estate. When you can drive thru Silicon Valley during rush hour at 105 kph ( 65 mph ), where are the jobs that are needed to support the over-priced housing market there?

Instead of pointing fingers abroad, Americans had better reflect inward about their own bubbles and the inflationary policies of their U.S. Federal Reserve Bank.