Low taxes and less regulation..... that is how you run a communist nation.

[DOR]

Most of that seems to have gone to REAL MAKEWORK projects that put Chinese people to work, too.

A lot of the money ended up in equities and real estate, and not by design.

[kyli]

I don't see a bubble in the equity market, but the underground debt market and municipal debt vehicles will pose a challenge for the Chinese government. However, I am not sympathetic toward the corrupt officials who used tainted or public money to become loan sharks but got screwed in the end.

Eventually the housing bubble would bust, but I don't think it would be as severe as many economists have predicted. As the need for insfrastructure development is real;there are also many people who would want to move to the cities. China is not at the stage of the developement that would drag down by housing bubble for too long.

[editec]

A lot of the money ended up in equities and real estate, and not by design.

You mean in China, Dor?

I wasn't aware of that.

Can you amplify that thought a bit?

I'd like to know more about it.

Thanks

[editec]

I don't see a bubble in the equity market, but the underground debt market and municipal debt vehicles will pose a challenge for the Chinese government. However, I am not sympathetic toward the corrupt officials who used tainted or public money to become loan sharks but got screwed in the end.

Eventually the housing bubble would bust, but I don't think it would be as severe as many economists have predicted. As the need for insfrastructure development is real;there are also many people who would want to move to the cities. China is not at the stage of the developement that would drag down by housing bubble for too long.

I don't know anything about the Chinese RE market, but I believe I can tell you how to tell if RE is in a bubble for ANY nation that is even remotely capitalist.

If the median housing cost is rising at a much faster than the median incomes, then the price of RE is moving out of line with consumers abilities to pay for it.

Now the USA managed to pervert our RE markets to sustain such lopsided growth for about three decades.

When the median home price was about four times the median family income, things started to unravel.

The market began to correct itself when people who'd paid more than they could possibly afford found their adjustiable rate mortgages cranking up their payments totaly beyond their ability to pay.

Now who caused that?

Banksters who gave mortgages to people who were clearly and obviously unqualified to buy those homes.

But the banksters didn't care because they knew they weren't going to be holding those mortgages but instead were bundling them into bonds p[urchased by investors.

Meanwhile the risk assessments on those RE mortgage bundled bonds were complete FICTIONS.

The Bond boyers were buying risky bonds, but didn't know it.

Moody's and Standard and Poors either totally got it wrong (this I doubt) or simply didn't give a fig as long as the banks were willing to pay for them to FUDGE the numbers.

Washington, of course, helped, but it took the DEREGULATED BANKSTERS to really screw things up.

And then there's the whole DERIVATIVES fiasco, which is even more screwy and ALSO took the Government to ALLOW this mess to develop.

That's how the BANKSTER themselves ended up with a load of exotic debt instruments that ended up with dubious values that very nearly melted down our entire banking industry!

And it took the FED and TREASURy promising to back them up no matter WHAT! to save their sorry asses.

[astralis]

editec,

there's a huge infrastructure/real-estate bubble in china right now. ghost cities full of infrastructure with no one living in them. when that bubble bursts, things are going to get Ugly.

[DOR]

You mean in China, Dor?

I wasn't aware of that.

Can you amplify that thought a bit?

I'd like to know more about it.

Thanks

Very broadly, government stimulus money is allocated to provinces and municipalities for projects that have been approved. If the locals have to raise matching funds, and don't have the money, there is a temptation to make unauthorized investment (stocks, real estate or just loan sharking) for a quick profit, and use the winnings to pay their share of the investment. If it works, the locals are heros; if it doesn't, they run the risk of jail, or worse.

Alternatively, and particularly with emergency stimulus money that isn't clearly ear-marked for specific projects that some ministry might have to keep an eye on, the money never even gets close to the real project, and instead is gambled on the same Gang of Three: real estate, equities and loans. Some jurisdictions might do this with part of the money, or all of it, but the temptation -- and lack of oversight -- is big.

By the way, Oct 6th was the 35th anniversary of the fall of the Gang of Four, and the begining of reform in China.

[RollingWave]

editec,

there's a huge infrastructure/real-estate bubble in china right now. ghost cities full of infrastructure with no one living in them. when that bubble bursts, things are going to get Ugly.

Yes, that is the worry, particularly in some areas with resource booms (read inner Mongolia) from Mining and such, there's no real way to track if these are relatively isolated cases or if it's increadiblly broad though.

The main reason is that because it's hard for people within China to invest their money abroad, while interest rate is pretty high by world standards it's still generally lower then the inflation rate, which in turn means that there's a huge amount of capital running within China trying to find uses for, and for the most part property investment / development seem to be the only semi-logical thing to do. As there is only so much expansion you can do with industrial outputs. (Which is also why the biggest ghost town cases happen in region with a lot of money but not a lot of actual industurial capacity. aka resource boom towns)

Of course, if you look at this the other way around, it also means that it's kinda hard to really "burst" that bubble if you can't sell off the property and flee the capital somewhere else. since the same problem still apply, the capital have no where to run, and if there's really a bubble burst it means the Yuan will depreciate which will in turn again means it's export remains strong. and the guys that lost money will mostly not be your average Joes, the common workers usually hold little to no mortages in China, while most of the mortages can be controled by the state in the case of an emergency. so it's not exactly a doomsday sceniro for the PRC.


on the other hand, it's hard to make the argument that China as a whole is overinfrastructured, if you just take tour of any random county outside of coastal provinces.

[editec]

Thanks Astralis, Dor and, Rolling Wave for enlighteing me on the state of affairs in China.

There's so much to know now that the world's economy is so interconnected.

Basically its impossible to have a deep and broad enough understanding of events as they unfold worldwide even though something happening in China can easily effect us here .

But if I'm correctly getting the message you guys are telling me , China's so awash with capital that it cannot find good places to invest it?

I know that the Chinese people save so much (I've read its roughly 25% of their incomes) that finding someplace to put all that dough to work is a problem.

This might explain why they're having a building boom that ends up with empty buildings and buying up every foreign resource and mine they can, too, isn't it?

Remember how that overbuilding event happened in the USA's commercial RE markets?

That gave us the Savings and Loan debacle.

Another example of banking deregulation coming back to bite the taxpayers in the ass.

[kyli]

This article summed up a few facts about the problems of China's housing market. And I would add, there is Demand and there is Supply, but there is also mismatch of prices especially in the big cities.

Credit to Emperor from CD
Insight: Deflating China's housing bubble
By Emily Kaiser, Asia Economics Correspondent
Thu Oct 6, 2011 10:47pm EDT

(Reuters) - As housing bubbles go, China's looks relatively benign.

Unlike in the United States, Chinese home buyers typically put down at least 40 percent of the purchase price. That means they don't have to worry about a modest decline wiping out all their equity, and banks have little reason to fear an influx of "jingle mail" from defaulting homeowners returning the keys.

Household debt amounts to less than 20 percent of China's gross domestic product, according to the International Monetary Fund, one fifth of the U.S. ratio.

"In the United States, housing was a borrowing vehicle for households. In China, it's a savings vehicle," said Stephen Green, an economist with Standard Chartered in Hong Kong.

This is a vital distinction. It was leverage that turned the U.S. housing slump into a global financial crisis. That suggests even if China's housing market suffers a similar slide, the economic consequences would be far less severe.

That doesn't mean it would be painless.

There are a couple of trouble spots. China's new home sales have fallen sharply in some cities, putting property developers in greater danger of default. Local governments counting on land sales to help repay $1.5 trillion in loans may find the money flow slows, saddling banks with bad debts.

But Beijing appears to be ready, willing and able to limit the economic fallout. Over the past 18 months, China has clamped down on property speculators to try to cool prices.

If it stays on that course, China could become one of the few countries to successfully deflate a property bubble before it bursts. If there is a global recession, all bets are off.

THE FROTH

Nationwide data suggests China's housing affordability is not that much different from Britain's and only marginally worse than that of the United States, where house prices have fallen precipitously over the past five years.

But in major cities such as Beijing and Shanghai, it is off the charts. IMF figures show that a 70 square meter home in Beijing costs about 20 times the average annual household disposable income, quadruple the national ratio and almost seven times higher than in the United States.

Beijing, Shanghai and Hangzhou look worse than even notoriously pricey Tokyo on the affordability scale.

A People's Bank of China survey in mid-September showed 76 percent of urban residents saw property prices as too high, and 38 percent expected them to keep rising this year. Both readings were higher than in the PBOC's mid-June poll.

For China, expensive housing may pose a bigger threat to social stability than financial. When the average city resident is priced out of the property market, the risk of unrest rises, and that sounds alarms in the ruling Communist Party.

That helps explain why Beijing was quick to try to stamp out speculation while other countries have left it up to market forces to squeeze out the excess -- sometimes with catastrophic economic consequences, as the United States can attest.

In July, China extended the list of cities where it limits the number of homes a family can buy. There are now 40 cities with such restrictions in place, including Beijing and Shanghai.

In January, it raised the minimum down-payment for second homes to 60 percent from 50 percent.

Compare that with the United States, where at the height of the housing boom speculators could buy with no money down. Some even obtained mortgages for more than the purchase price.

Now, 22.5 percent of U.S. homeowners owe more on their mortgages than their homes were worth, according to data analysis company CoreLogic. These "underwater" borrowers are more likely to default than those with positive equity.

In China, it would take a house price drop in the 40 percent range before negative equity became a serious concern, said Barend Janssens, head of wealth management for emerging markets at Royal Bank of Canada.

"There is a lot of fat, and people will lose some of that," Janssens said at the Reuters Global Wealth Management Summit in Singapore this week.

Rising wages also play in China's favor. The U.S. housing bust coincided with a severe spike in unemployment, and wages stagnated. In China, double-digit annual wage increases are the norm, so income should rise faster than housing costs.

WHAT HAPPENS NEXT?

China has a built-in propensity toward property over-investment because there are few other options available to most citizens. The stock market has been extraordinarily volatile, capital markets are underdeveloped, and bank deposit rates are too low to compensate for rising inflation.

"The problem with China is that it tells people it doesn't want them to invest in housing, but it doesn't tell people what else to invest in," said John Woods, chief Asian strategist at Citi Private Bank.

The IMF's housing policy recommendations to Beijing earlier this year were to raise interest rates, develop financial markets, and introduce a broad-based property tax.

There is little reason to expect movement on the first two anytime soon. As for the property tax, a pilot program in Chongqing has been credited with helping to cool price rises, and the mayor told Reuters last week it may eventually be rolled out across the country.

That change will come too late to address the current situation, but there is cause for optimism that Beijing's housing restrictions are working. Property prices have begun to ease in some of the frothiest cities, including Beijing.

Barclays Capital economist Jian Chang expects a 10 percent decline from the 2011 peak by the end of this year.

"I don't see a sudden bursting of the bubble near term," she said. "I see a gradual deflating."

The property sector makes up about 12 percent of China's GDP, but its impact spreads wider. Housing construction is an important source of demand for steel, cement, copper and other commodities. Real estate -- both mortgages and loans to developers -- accounts for about 18 percent of banks' credit portfolios, according to the IMF.

That implies a 10 percent decline in house prices could potentially shave 1.2 percentage points off of China's GDP. Many economists have already factored a weaker housing market into their 2012 forecasts, which show China's growth easing to around 8.5 percent from the current pace of 9.5 percent.

But even as commercial housing construction falls, China is ramping up development of so-called "social housing" for lower-income households. It has targeted 10 million units for this year alone, and 36 million by 2015. That will take up some of the slack from slowing private-sector development.

A steeper price drop -- say, 20 or 30 percent -- would be a different story. Ratings agency Standard & Poor's said in September that a decline of 30 percent may be the breaking point for many property developers.

That would become a significant risk for creditors, both banks and the informal lenders who have provided an increasingly large fraction of China's credit as Beijing cracks down on traditional forms of lending.

Already, developers are hesitating over buying parcels of land from local governments as the pace of new home sales slows.

Barclays' Chang recently visited northern China to gauge the degree of the housing slowdown there and found property developers and agents growing increasingly pessimistic about sales prospects in the coming months.

"They all wanted to complete projects and sell as fast as possible because expectations changed," she said.

Well-known China bear Marc Faber, publisher of the Gloom, Boom and Doom report, paints an even darker scenario.

"Some real estate markets will blow up, and massively so, where prices could easily drop 40 to 50 percent," he said in a Reuters Insider interview on September 27.

If there is a global recession, China's housing troubles become more significant. Barclays thinks a worldwide downturn would push China's GDP growth down to 7 percent, a level considered a "hard landing" because it is too weak to generate sufficient jobs to keep up with urban migration.

Such a sharp slowdown could set off a negative feedback loop, where spooked investors sell everything -- property included. Panic selling would drive down housing prices even more, taking a deeper bite out of economic growth.

But because of China's relatively low household leverage, the risk of forced sales is limited. The bigger financial stability risk comes from the corporate side. If hundreds or thousands of property developers go bust, banks might grow more reluctant to lend, which would feed the downward spiral.

WHAT WOULD BEIJING DO?

The predominant view among China economists is that Beijing would step in well before conditions got that bad. It could relax some of the home buying restrictions it placed over the past 18 months, or cut banks' reserve requirements, which stand at a record high of 21.5 percent for large banks.

"China is trying to cause real estate prices to go sideways," said Paul Schulte, head of financial strategy at the investment banking arm of CCB, China's biggest mortgage lender. "It is not trying to kill the market."

Standard Chartered's Green said Beijing is aware that it needs to hold the line on property controls a little while longer to ensure that prices don't keep climbing.

"Maybe Beijing needs to see some pain in the sector before it considers loosening," he said, adding that there will no doubt be failures and consolidation among property developers.

A sharp downturn in the global economy would send a strong signal to Beijing to ease up on credit conditions for the entire economy, not just housing.

The trigger could be a reading below 50 in the government's monthly purchasing managers' index, Green said. The index rose to 51.2 in September, suggesting China's economy is still growing solidly.

That, in turn, bodes well for China's ability to gradually let the air out of the housing bubble.

"It is hard to see problems in China's housing market unraveling in a manner that sets off a major crisis," said Eswar Prasad, a former head of the IMF's China division who now teaches trade policy at Cornell University in New York.

(Reporting by Emily Kaiser in Singapore; Additional reporting by Cerelia Lim; Editing by Vidya Ranganathan)

[editec]

Thanks Kyli, that was enormously informative.

Don't we find it somewhat ironic that China's problem is their citizens are too frugal and ours our mired in debt?

What this really is showing us is that economies need to find some balance between SUPPLY and DEMAND and imbalances in either direction are the problem.

Note how China seems to be poised for economic problems because their people and their governments are doing nealy exactly what many in the WEST think we ought to have been doing all along?


What this is really telling us is that macro-economies do not have a single FORMULA for how to make them function properly.

We can suffer from INflation or DEflation and BOTH are pathological statuses for a healthy macro-economy.

(After-thought....)

Perhaps China's insistence that they keep their currency artificallly low is exascerbating the problem?

Since by doing that, they prevent imports from reaching their consuming public, they encourage their people to SAVE DSAVE SAVE, which then forces hose savers to search for investment opportunities.

When too much saving is trying to find investments, what happens is INFALTION of ivnvestments prices.

Too much money chasing too few profits.

And that is part of what has happened to our economy because we gave tBIG CAPITAL so much extra money via enormous tax breaks.

They too have been searching for investments and caused BUBBLES that inevitably blow up in the economy's face.

[RollingWave]

Thanks Kyli, that was enormously informative.

Don't we find it somewhat ironic that China's problem is their citizens are too frugal and ours our mired in debt?

What this really is showing us is that economies need to find some balance between SUPPLY and DEMAND and imbalances in either direction are the problem.

Note how China seems to be poised for economic problems because their people and their governments are doing nealy exactly what many in the WEST think we ought to have been doing all along?


What this is really telling us is that macro-economies do not have a single FORMULA for how to make them function properly.

We can suffer from INflation or DEflation and BOTH are pathological statuses for a healthy macro-economy.

(After-thought....)

Perhaps China's insistence that they keep their currency artificallly low is exascerbating the problem?

Since by doing that, they prevent imports from reaching their consuming public, they encourage their people to SAVE DSAVE SAVE, which then forces hose savers to search for investment opportunities.

When too much saving is trying to find investments, what happens is INFALTION of ivnvestments prices.

Too much money chasing too few profits.

And that is part of what has happened to our economy because we gave tBIG CAPITAL so much extra money via enormous tax breaks.

They too have been searching for investments and caused BUBBLES that inevitably blow up in the economy's face.

Well the problem isn't that there's too few profit in China, it's that the capital flow is too restricted that even if you see the profit you can't get there most of the time. the items you can invest in is too limited. forcing most of the capital into the property market.

For the West, the problem is more than anything else over leverage. its not just banks over leverging, it's the ENTIRE system, Banks, Government, Corperations AND JUST ABOUT 99% of the households overleveraging well beyond their income level that the entire country basically have 0 tolerance for even stagnations (they are leveraged to the point where they assume there must be growth). let alone declines.

Still, comperatively the western problem is far more serious, since for China the worst that could happen basically leave them with losing most of their capital, but unlikely to see a lot of companies / banks being forclosed as a result, where as the west's problem essentially see a ridiculas chain reaction where if one aspect of the enemy sees problem it'll pull everything down withit, the chain is far too entrenched with each other that when one area goes bad everything goes bad all at onces, causing the problem you see now, where a financial crash destroy everyone's job AND ruin the governments ability to do anything at the same time.

[DOR]

wrong device for a longer response, but the article kyli posted was quoting people with an unhealthy respect for the quality of Chinese data, not to mention a very strange notion that affordability can (a) be measured in China; and ( b) should in some cosmic way have any relationship whatsoever to ratios in developed, debt-oriented economies.

[editec]

Well the problem isn't that there's too few profit in China, it's that the capital flow is too restricted that even if you see the profit you can't get there most of the time. the items you can invest in is too limited. forcing most of the capital into the property market.

Too few investment opportunities? Why is that? With all the manufacturing done in China, one would think there are plenty of companies to invest in.

Is this some overhang from China's Communist past? Does the state still own these industries or something?

For the West, the problem is more than anything else over leverage. its not just banks over leverging, it's the ENTIRE system, Banks, Government, Corperations AND JUST ABOUT 99% of the households overleveraging well beyond their income level that the entire country basically have 0 tolerance for even stagnations (they are leveraged to the point where they assume there must be growth). let alone declines.

Still, comperatively the western problem is far more serious, since for China the worst that could happen basically leave them with losing most of their capital, but unlikely to see a lot of companies / banks being forclosed as a result, where as the west's problem essentially see a ridiculas chain reaction where if one aspect of the enemy sees problem it'll pull everything down withit, the chain is far too entrenched with each other that when one area goes bad everything goes bad all at onces, causing the problem you see now, where a financial crash destroy everyone's job AND ruin the governments ability to do anything at the same time.

I'm 100% with you on the problems facing the west, of course.

Richard Koo calls our current economy a balance sheet recession. Pretty good description far as I can tell.

Stagnating wages for the working class coupled with our own government essantially lying to us about inflation over the last nearly 40 years finally caught up with us. The working class finally ran out of coping mechanisms to deal with the problem. We put our women to work, and that ereally only fueled inflation. We went into revolving debts, again exacerbating the real inflation rates we faced. Finally, as the housing price bubble expanded many of us dipped into our"equity" to keep afloat.

When the housing market began correcting (what a nice euphemism for collapsed, eh?) the house party was over.

I'm informed that US homeowners lost a combined $ 4 Trillion in home equity in the last few years.

Families' debt to equity rations are now totally out of line.

Throw in their losses in their 401ks, retirement funds ect, and you've got a working class that went from over-leveraged to mired in terrifying debt in the worst job market since anyone can remember.


Add to all those negatives, we have the continued decline in employability for millions of workers thanks to outsourcing and efficiencies in manufacturing, both leading to employer redundancy.

So the consuming class can't revitalize this economy; the banking class finds itself overleveraged and totally unsure how badly they really are, too; finally we have the manufacturing giants unwilling to maximise profits (even though they do have money to do so) because they realize demand isn't there to justify the investment.

These are the kind of problems that come from nearly four decades of giving capital every advantage while we stuck it to the working classes at nearly every turn.

We are reaping the bitter harvest of almost two generations of stupid stupid economic, trade and taxation policies.



.

[DOR]

The lack of good investment opportunities in China is a development market issue, not a post-communist one. At their income levels, the housing and stock markets are just too expensive for the lower billion.

= = =

Household debt service-to-disposable income ratios, which is a much more useful measure than debt:equity, were 11.09% in Q-2 2011. To put it in perspective, the average in the 1980s was 11.40%, in the 1990s 11.56% and in the 2000s 13.26%.

[snapper]

DOR: are you suggesting that China is economicaly 'post communist'? That capitalism comes after communism???