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China’s policy makers are facing a real challenge to deal with the fast and furious debt buidup. The comparison below is alarming.
(graph courtesy of WSJ)
Now, it looks as if China’s stimulus plan enacted during 2008-09 period may have just postponed the crisis, not killed it. As we say, there is no free lunch.
A recent report from Goldman Sachs shows that most debt, more than 70%, is concentrated in the corporate sector. My hunch is that most of the leverage in the corporates came from large state-owned enterprises (SOEs), or investment vehicles created by local governments, the so-called LGFVs. See the chart below (courteys of GS).
This was an interview in last December from PBS.
Bob Shiller: The whole idea that the stock market reflects fundamentals is, I think, wrong. It really reflects psychology. The aggregate stock market reflects psychology more than fundamentals.
Shiller also pointed out why economists at the Fed will not call it a bubble even when they see it – This has something to do with group think and self-censorship.
The latest Jeremy Gratham interview, with Charlie Rose. In this 50-min video interview, Jeremy talks about China and world’s energy price; his interesting experience with asset bubbles in the past (a frequent topic, but still refreshing), and his forecast of the US economic growth and stock market.
My favorite part is he analogized Fed’s monetary policy as whipping a donkey, trying to make the economy run faster like a race horse. 🙂 Quite accurate.
While the rest of the world is going through a deleveraging process, China has been leveraging up. Its economy is getting bubbly.
According to research by Standard Chartered Bank, China’s overall leverage ratio (the sum of the leverage of government, corporate and household) now reached 210% of GDP, rising from a rather high level 150% of GDP in early 2000s.
Dividing the overall leverage ratio in into three sub-components, we see the biggest increase came from the corporate sector: the ratio in that sector has increased from 80% of GDP at the beginning of the Great Recession to around 130% of GDP today.
Most of the leveraged-up corporations are SOEs. They are the natural candidates to respond quickly to government’s call for stimulus spending in the aftermath of the financial crisis during 2007-2009.
Besides SOEs, local governments also created all sorts of firms outside of government’s (and bank’s) balance sheet, the so-called local-government-investment-vehicles, or LGIVs. This is Chinese version of shadow banking system. My sense is that they have contributed a great deal to China’s housing bubble.
’60 minutes’ investigates the recent development of Chinese housing bubble in the following video.
Following my previous posts (here, here, here, here and here) on China’s housing bubble, I am now re-organizing my thoughts, and starting to work out a formal economic analysis on China’s housing bubble.
Specifically, I will address the question if the current housing price in China can be justified by the story of China’s fast economic growth coupled with her fast industrialization and urbanization. My initial analysis clearly says no. I call this a ‘fools-and-greater-fools’ theory. In history, great bubbles always came with even greater stories. China is no exception.
Will keep you guys posted.
Ordos, the little known prairie city in China’s inner-Mongolia autonomous region, now has become the extreme example of China’s housing bubble. Due to extreme housing speculations and land sale (mostly grassland), loads of local farmers became instant millionaires: its GDP per capita recently surpassed Hong Kong; people with assets of 1 million Yuan (or $150,000) are actually considered “poor”; in 2010, 90% sale of Land Rovers (the symbol for power and masculinity in Chinese taste) in mainland China found its buyers in Ordos…and imagine a cleaning lady driving a Toyota Land Cruiser to work?
I am shocked by this video news from SOHU (in Chinese):
You may also watch a similar Youtube video in English, but with less drama:
All this can’t be due to China’s fast economic growth. This is simply not sustainable. I see a classic asset bubble forming, reminiscent of many bubbles in history. It will burst eventually no matter what.
America’s financial sector is still undergoing the deleveraging process – Big banks are busy in repairing their balance sheets, gradually writing off their losses in housing bubble era.
But with Fed’s super easy monetary policy and easy access to the dirt cheap credit, there seems to be a divergence in terms of attitude toward credit. The main street corporate America now is the one who carries the credit torch forward. With interest rate expected only to rise (not fall), America’s corporations are borrowing like there is no tomorrow. This is being reflected in the junk bond market, where yields again fell close to the 2007-level low.
Is another credit bubble in the making? Are we going to see a flurry of corporate defaults in coming years? Is the Fed just delaying the inevitable?
This FT video may offer you some insights to the issue.
(click to play the video)
When you see the gold promotion video come out that is geared toward the mass audience, such as the one below, you know gold bubble has entered another stage.
Until the Fed dramatically reverses its easy monetary policy (i.e., when the real interest rate turns positive and rising), gold price still has several legs to go. But be head clear that the gold bubble will eventually crash, just like every asset bubble. Timing in investment is utterly important.
Housing market tends to be local. It’s rare to see a nationwide price decline. The recent US housing bubble is an exception and often considered a black swan.
People have been talking about China’s housing bubble for a few years now (see my previous post on China’s housing bubble debate), but where exactly is the bubble located?
The recent NBER research sheds some light on the issue. The graph below shows the price-to-income ratio of China’s eight major cities, from 1999 to Q1 of 2010.
(click to enlarge, source: NBER w16189)
Beijing and Shenzhen are clearly in bubble-shape — the typical and familiar parabolic surge in price, and they are followed by Shanghai and Hangzhou.
Now, let’s have some comparative perspective. How the same ratio compares to the major cities in the United States.
The graph below (courtesy of Infectious Greed) shows the price-to-income ratio of US cities. San Francisco, Los Angeles, Seattle were among the highest.
(click to enlarge)
At the peak of the housing bubble between 2006-07, the same ratio for San Francisco, the highest among all US cities, was around 11. In contrast, Beijing has a ratio of 18, and Shenzhen at astonishing 22.