I've yammered on about this for a long long time. Highlighting empty cities to nowhere, excessive debt buildup, etc. Obviously the Chinese government's ability to extend this bubble is greater than my FinTwit credibility.
Are we hitting another decision point? Will the next US recession finally detonate the bubble? Honestly I don't know, but now ever Peter Zeihan is commenting on this.
The more China blows the debt bubble the larger the explosion when it pops and right now they are working on exceeding the Japanese bubble from decades ago.
A recent tweet by Kevin Smith of Crescat Capital (someone I've had the pleasure of meeting in person)reminded me of just how far we've come since 2008 and the Great Recession.
By how far we've come I'm not meaning in a positive sense. If you look at the selected ratios of debt to GDP for Canada, China, and Australia they've each grown tremendously since 2008/09. While this has helped goose growth in each of their respective economies (and spilled out into the greater world as well) it does not bode well for the future. The thing about debt is it need to be paid off. Somehow, someway (by default, payment or inflation) the ratios will drop when they reach such lofty heights.
Crescat capital annotated the above chart rather nicely showing you the negative events which coincided with either a rapid rise in debt to GDP (like Thailand) OR a high ratio overall (Japan, USA, Spain) Their implication is Canada, China, and Australia are heading toward a likely credit crises and I'm inclined to agree with them.
These are not the only shimmering spheres on the horizon however. Look below and you can see all three of the Scandinavian countries are above US levels before our little economic problem in 2008.
The challenge with calling the tops in a bubble is you are battling central bankers and their willingness to keep the debt flowing. Who wants to say no when the money is flowing? Even central bankers can exhibit human tendencies on occasion, they don't want to be derided for being the Grinch that stole Christmas... As such it's very hard to know when they will finally start to restrict the lending and tighten liquidity. While the US is not at the top of this rarified list it is entirely possible our current series of recent (and future?) rate hikes will be enough to tip one of these countries over the edge which could then get the dominos falling. When is unknown, but that it will happen appears quite likely.
Looks like the Chinese credit impulse may have turned negative recently. As the data presented above is nearly 6 months old this is very interesting. While it ripple through to the US markets? We shall see shortly.
It has been over a year since I last highlighted the slow decline in official lending statistics out of China. Since then not much has happened regarding the direction of Chinese lending growth; a slow decline continues.
I point you to Steve Keen's debtwatch for why the rate of growth in lending is important.
The rate of lending growth peaked in October 2009 and has been declining ever since. Compare this to the Chinese equity markets and you'll see how Chinese stocks haven't gone anywhere since October '09 either.
Unofficial lending is naturally harder to track but there are anecdotal signs of stress in this sector as well. http://historysquared.com/ and http://www.alsosprachanalyst.com/ are two good sites to follow the 'underground' lending market.
An odd way to start a post but as mentioned in my previous entry it is hard to know how much lending is truly going on in China these days. The official data shows a decline in the rate of growth in lending and the government appears to be reigning in credit growth by raising reserve ratios.
This does not tell the entire story. There is a boatload of off balance sheet lending but there are no 'official' numbers for that.
The WSJ (Sept 28,2010 ) recently commented:
A report from Standard Chartered economist Stephen Green estimates that by the end of August between 2 trillion yuan and 3 trillion yuan worth of loans (the banks don’t formally disclose the amounts) were moved off balance sheets–and outside the PBOC’s formal loan data–in this way. Over the same period, PBOC data showed the banks lending out 5.6 trillion yuan, suggesting the banking system has already passed the central bank’s 2010 target for new credit creation. It also means that the tightening signaled by the loan quota never happened.
Standard Chartered is guessing an additional 50+% of unofficial lending this year. Not a small number. If the bank regulators crack down on this unofficial lending the rate of true loan growth would fall dramatically.
It has been a while since I have updated you on the bank lending situation in China. This is not due to me slacking off (I'll admit to a slower pace of posts recently, but I have some good excuses, really) following this topic. The data source, People's bank of China, has suddenly been a little more reticent in publishing this data in English and as my Chinese language skills are a bit lacking this data series has languished....
Data released recently shows a continuing trend of official slowing in the rate of loan growth. I put official in italics because there appears to be some off balance tomfoolery going on. . .
Despite regulatory directives aimed at preventing banks from removing loans off their balance sheets to dodge credit restrictions, China's banks did not slow down their pace in packaging loans as wealth management products.
Banks and trusts cooperated on wealth management products, effectively allowing them to shirk their responsibilities toward credit limits imposed nationwide under the central government's macroeconomic controls.
In the first half 2010, according to trust company reports, the value of wealth management products cooperatively offered by banks and trusts rose to 2.6 trillion yuan, topping the previous year's 1.77 trillion yuan.
This amount combined with the 4.58 trillion yuan in on-the-books, new credit issued by banks in the first half brought total lending in China through June 30 to near the 7.5 trillion yuan limit set by the government for all 2010.
[The 4.58 trillion yuan number matches my data. Look at the 'wealth management products' value of 2.6 trillion. Greater than 50% of the 'on the books official' value of 4.58 trillion. Continuing . . ]
By charging fees as well as commissions of up to 2 percent, banks earn more than trusts when they jointly market bank-trust products. Moreover, by cooperating with trusts, banks keep customers otherwise unavailable due to credit controls, since off-book business doesn't require bank capital and thus avoids CBRC capital constraints.
When companies start hiding assets off balance sheet it rarely ends well.
If you are wondering where all that money is going, this blog entry by staff at the World bank is stunning. Not only for the information presented but the absolute lack of surprise. (ht Mish)
In Chenggong, there are more than a hundred-thousand new apartments with no occupants, lush tree-lined streets with no cars, enormous office buildings with no workers, and billboards advertising cold medicine and real estate services – with no one to see them.
I went to China in 2003 and I can assure you I NEVER saw a single piece of urban pavement that was not completely full of cars, trucks, bikes, scooters, etc at all times. I have mentioned empty Chinese cities before such as Ordos. How many more empty cities in China are there? Andy Xie has wrote about this before. Here is his latest article regarding the excess housing stock in China:
What distinguishes China’s property bubble from others is its unprecedented quantity dimension. China just doesn’t have any constraint limiting supply. The current debate about the quantity of empty flats is about the extent of quantity excess. The stock of empty flats measures the size of the quantity bubble. Taiwan experienced a price-cum-quantity bubble in late 1980s. At the time the market quantified the number of empty flats by obtaining data from the electricity supplier on flats without usage of electricity. The stock of empty flats measured this way was about 15% of the total households. Some analysts are trying the same tactic to quantify the volume of empty flats in China. The problem with this methodology is the complexity of China’s housing conditions. . . . While the data are not accurate, we can confidently conclude that China doesn’t have absolute housing shortage and the per capita space is above Europe and Japan’s level. Indeed, if we adopt Japan’s standard, China already has sufficient urban housing space for everyone in the country, i.e., there is housing for every person in the countryside to move into city. . . Four unique factors may explain China’s unique phenomenon.
1) Sustained negative real interest rate has led to declining demand for money and rising appetite for speculation. Greed and fear of inflation are working together to form unprecedented speculative demand for property.
2) The massive amount of gray income looks for a ‘safe’ haven. China’s gray income of various sorts could be around 10% of GDP. In an environment of rising inflation and depreciating dollar-the traditional safe haven, China’s rising property market is becoming the preferred place for this money.
3) China’s masses have no experience with property bubble. The property crash in the 1990s touched a small segment of the society. Foreigners and state-owned enterprises were involved. Geographically, it was restricted to Southern freewheeling zones like Hainan and Guangdong and Shanghai. Most people in China don’t know that the country had a property crash. Lack of fear is turbo-charging the greed.
4) Speculators believe that the government won’t let property price fall. They correctly surmise that local governments all depend on property for money and will try every effort to prop up its price. But, their faith in the government omnipotence is misplaced. In the end, market is bigger than government. Government behavior can delay, not abolish market force. Nevertheless, this faith in government is removing the fear over the downside. Hence, the speculative demand just grows with credit availability unchecked.
When this bubble goes pop you better have some popcorn and a good seat because the explosion will best any action film explosion sequence.
It's been a while since I last updated you on Chinese loan growth. Some of that was due to the problems of getting the data out of China. I was finally able to extract the data and it appears the peak in lending is finally in. March data comes out soon but considering the difficulties of updating this data I thought I'd get you up to date now.
Even with the 'record' lending in the first two months of 2010 both the trailing twelve month total of lending and year over year percent change of total loans outstanding have peaked.
As with every massive increase in lending it ends up on all sorts of places and turns out to be much more prevalent than commonly thought. Elite Chinese Politics blog (Mr. Victor Shih) has some serious allegations of hidden debt in the local government investment entities that are the analog of the Special Investment Vehicles (SIV's) of our banking bust. Here's some more reading on the matter at businessinder.com and here. Of course this is difficult to 'prove' as the Chinese accounting books are not the most transparent but Mr. Shih's work should not be discounted out of hand. I suggest you go to his blog and read the comments and rebuttals. It's good stuff. . .
One item which is becoming a pet peeve of mine is the practice of writing articles making predictions with no underlying factual data to buttress their conclusions. If you are going to predict something, at least tell me why!
A current hot topic is China and whether it is in a bubble. And if in a bubble, what kind? Well, here's some juicy data and anecdotal evidence for you to chew on.
If you notice, lending in China skyrocketed last year. As of November 30, 2009, total loans outstanding are up nearly 35% year over year. That is a huge increase in the rate of growth.
I would put to you that all that money sloshing around did not just end up in solidly performing loans made with proper underwriting standards with the full expectation they will be paid back.
Sharp eyed readers may notice the decline in lending growth from October 07 to the nadir of November 08 coincides with the dramatic decline in the Chinese equity markets almost perfectly. Once the lending spigots were turned back on the Chinese markets reversed course and charged back up again.
I have previously mentioned my suspicions that some of that lending deluge has also made its way into the commodity markets as pure speculation, but I'll leave that to a later entry.
The hedge fund manager Jim Chanos has also noticed this excess credit creation. Around time point 4:15 he starts to discuss China and their excessive lending.
When will this bubble pop? Can't tell you that. Keeping the pace of lending up at 35+% yoy may be a challenge for the Chinese government this year as the banks are running out of spare capital. There's already a lot of talk and some action trying to tamp down the speculative fires in property prices. Where and when this all goes poof is subject to speculation. If it ends in 2010 it will punch a serious hole in the current world-recovery-buy-commodities-and-all-risky-assets theme. Its a dangerous game to play right now as prices can go parabolic before they go splat but I'm watching and waiting.
Sit back and get your popcorn. The show will be very interesting to watch in 2010.
Ran across this on my daily blog troll. I posted a while ago video by Hugh Hendry showing an empty skyscraper in China. This video completely trumps such small matters as a single building, here's an entire city.... empty!
I spent some time on Google maps and found satellite photos of empty Ordos. Wow. Scroll around and you will see just how big the place really is. Notice the new construction with no cars on the road or parked at the homes. From the shadows it appears around noon time so you'd think there would be some activity, right?
I think there is a little bit of malinvestment going on in China. When the populous does not have valid and efficient uses for their capital they end up buying apartments in empty cities. Makes the chinese pig farmer hoarding copper look entirely rational, eh? Like America property prices only go up in China, right?
Here's an article by the westerner interviewed in the video.
If this isn't a blatant example of a bubble, I do not know what is. When this bubble finally bursts the world wide ramifications will be tremendous.
