Topic: Is China's economic bubble about to pop?

[rickl]

From Belmont Club:

How strong is China’s economy? CNN Money says Jim Chanos believes it is about to go into meltdown.  Chanos has warned in the past that China was pumping billions into a property bubble that would ultimately burst, but now he may now be proven right. “China’s top auditor said that loose lending standards and a sharp rise in local government borrowing (for building projects, of course) may have created a mountain of debt that cannot be repaid … All it will take is a fall in housing, or some sort of economic slowdown, to reveal an untold number of bad loans.”

The New York Times says “Liu Jiayi, the top auditor in China, said on Monday that at the end of last year local government debt had reached $1.7 trillion, or about 27 percent of the nation’s gross domestic product. He said better regulation was needed to manage the debt risks.” The prosperity was built on a mountain of government debt, acquired by the Chinese government itself.

The auditor’s report on Monday was similar to a warning earlier this month by the Chinese central bank. The bank said that at the end of last year, local government liabilities were as high as 30 percent of gross domestic product, or about $2.2 trillion — far higher than previous estimates.

That survey said local governments had created 10,000 investment companies to borrow money from banks, mostly to finance ambitious infrastructure projects. (China does not allow local governments to issue bonds to finance projects.) …

Mr. Shih and other analysts say local governments create their own investment companies to borrow from state banks to finance infrastructure projects. And because much of that borrowing is done off official balance sheets, often using government land or assets as collateral, the debt can be hard to track and assess.

And often the projects, which include roads, bridges, tunnels and subway systems, do not generate enough earnings to repay the loans.

In its report Monday, the national audit office said it had found many irregular activities. For instance, many local governments were using “unreal” or illegal collateral to secure the loans, the report said, and some of the money they borrowed was funneled into the stock and property markets. At other times, the auditor said, the local governments were “overestimating the value of the collateral” — which was often tied to land values.

Now that Chinese property prices are beginning to decline, leading analysts to worry that the meltdown has started. Experts who were once bullish on China are now very much afraid. The Wall Street Journal asks, “what changed? A growing realization that much of China’s massive stimulus spending and lending of 2009 and 2010 ended up in land purchases, driving up prices in an unsustainable fashion.” Because the Chinese people used savings, rather than debt to invest in some of these schemes analysts expect the effects will not be as bad as the subprime mortgage meltdown in the West. All the same, a bursting bubble would wipe out an enormous amount of wealth.

The government keeps bank deposit rates well below the rate of inflation to benefit state-owned banks and other firms, which have the political power to defend the status quo. With few financial alternatives to beat inflation, Chinese savers buy real estate, even if supply soars ahead of demand.

Chinese savings wound up in these black holes, which recycled rising consumer incomes and may now have wasted them.

It’s no secret that China and its people have done an amazing job stimulating its economy by investing and attempting to drive the wealth machine, encouraging its citizens to save, save, save! From 1982 to 2007, China and its citizens jumped aboard the savings bandwagon as national savings as a percentage of gross domestic product jumped from approximately 34% to 54%. This period also witnessed one of the most precipitous drops in personal consumption ever witnessed. In 1982, personal consumption as a percentage of GDP stood at 52%; by 2007 this figure would drop to just 35%.

Under normal circumstances, in a healthy economy, we would expect the personal consumption to rise along with GDP, but we simply aren’t seeing that with China. One reason could be that the wealth effect seen in China is simply artificial. Investment rather than consumption is what’s driving growth, and this usually proves to be unsustainable in the long term. Real wealth appears to be tied up in the banking system and not with the general public. Personal consumption’s disconnect with GDP is a major red flag that Chinese consumers may not be able to sustain this economy any longer.

If the population’s savings are wiped out in a crash, there will be a great deal of anger in the population to go with sudden bankruptcy. If the China bubble is real and actually bursts, it could wipe out the Recovery Summer that the President hoped his stimulus would provide. All over the world the efficacy of public-sector led stimuli is being tested. The global results so far don’t look all that good.

[Libertas]

And it's not like they can ask for early repayment from us, we got zip...

Could be a couple billion pissed off peasants going apesh*t in China...

I find it ironic than many of the shady practices they do around the globe they also do at home...

But in the end the Politburo will steady the ship by exhausting the one resource they have in abundance...people!

[ToddF]

Chinese propery values are higher, per income amounts, than Japan's ever were.

http://www.hongkonghomes.com/

Let's see...1,100 sq ft. for $2 million, or rent 442 sq ft for $3,700 per month

Yep, that be a bubble alright.

[Libertas]

Japan tried to get around the burden on earners by offering multigenerational loans.

Not a solution to the bubble, but it helped kick the can down the road.

But as a banker would you really want to have that much high-priced paper on your books for 1 day or 1 century?

 

 

[Weisshaupt]

Political Calculations Weighs in:

http://politicalcalculations.blogspot.com/2011/06/chinese-us-economies-both-decelerating.html

A special concern now is that the rate of growth of U.S. imports from China is slowing, which indicates that economic growth in the U.S. is comparatively weaker than it is in China.

We confirm that outlook in examining our doubling rate chart showing the level of U.S. imports from China from January 1985 through April 2011.

Here, we see that it has been more than five years since the U.S. doubled the amount that it imports from China, which is significantly more than the 3 to 4 years that these imports doubled in the twenty years from 1985 through 2005.
By contrast, see that the value of U.S. exports to China has almost doubled since January 2009, which is putting the period since that time on a pace to potentially beat the shortest doubling time recorded for the value of U.S. exports to China of 32 months, which was set between January 2001 and July 2003.

We suspect that this extremely rapid rate of growth for U.S. exports to China is being largely driven by the China's massive economic bubble, so we would anticipate that U.S. exports may drop considerably once that bubble enters into its deflation phase.

Which like all economic bubbles, will happen. It's only a matter of when and how.

[charlesoakwood]

That's a cliff hanger.

[AlanS]

Japan tried to get around the burden on earners by offering multigenerational loans.

WTF??? How ANY person (other than a politician) could consider a loan against his childeren and grandchildren is beyond me.