China’s Deflating and ‘Eerily Similar’ Housing Bubble

Wow!  Check out this.

In January we compared the U.S. and China stimulus,

In the U.S., the central bank printed and created money through the expansion of its balance sheet.  In China, the government pressured the  banks to create money through expanding and directing credit to specific sectors.

The chart illustrates as nominal GDP growth was collapsing in 2009, the broad money supply in China was growing close to 30 percent by the end of 2009.    This helped the Shanghai Composite recover a bit, but inflated other bubbles, including and mainly in the real estate markets.   We hear rumors of,  and see pictures of empty Chinese shopping malls and cities pinging around the internet, which is the result of the easy and nonmarket credit included in the latest round of China’s monetary expansion.

Doesn’t this sound a little familiar?  First a stock bubble, then a monetary driven real estate and construction bubble to stimulate  growth?

Now listen to David Pierson of the Los Angeles Times reporting from Beijing,

Home prices nationwide declined in November for the third straight month, according to an index of values in 100 major cities compiled by the China Index Academy, an independent real estate firm. Average prices in the Shanghai area are down about 40% from their peak in mid-2009, to about $176,000 for a 1,000-square-foot home.

Sales have plummeted. In Beijing, nearly two years’ worth of inventory is clogging the market, and more than 1,000 real estate agencies have closed this year. Developers who once pre-sold housing projects within hours are growing desperate. A real estate company in the eastern city of Wenzhou is offering to throw in a new BMW with a home purchase.

The swift turnaround has stunned buyers such as Shanghai resident Mark Li, who thought prices had nowhere to go but up. The software engineer closed on a $250,000, three-bedroom apartment in August, only to watch weeks later as the developer slashed prices 25% on identical units to attract buyers in a slowing market.

Outraged, Li and hundreds of others who paid full price trashed the sales office, scuffled with employees and protested for three days before police broke up the demonstration. Walking away now would mean losing the $75,000 down payment that he borrowed from his working-class parents.

“I still haven’t told them,” Li, 29, said of his home’s plummeting value. “It will just make them worry, and it’s already too late.”

It’s all eerily similar to the early stages of the U.S. housing crash. The big difference is that the Chinese government intentionally slammed on the brakes.

Stunningly familiar.  It now looks like China was a few years and one bubble behind the United States.

The problem is that this sort of credit driven/fake wealth consumption led demand has created so much leverage and excess capacity in certain sectors it’s going to take time to work off.   Policymakers can try and cushion the blow with more fake or replacement demand through expansionary fiscal policy, but even they are running out of cushion as markets revolt against large budget deficits.

Not enough demand and too much capacity.

This entry was posted in Black Swan Watch, China, Commodities, Credit, Sovereign Debt, Sovereign Risk and tagged . Bookmark the permalink.

2 Responses to China’s Deflating and ‘Eerily Similar’ Housing Bubble

  1. Tharr43 says:

    great article, a friend of Macromon anticipating this scenario five years ago.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.