China Discusses The Bubble

Shanghaist: Chinese real estate market is the 'biggest bubble in history,' warns China's richest man Wang Jianlin

On Wednesday, in an exclusive interview with CNNMoney, Wang Jianlin said that China's treasured real estate market is spiraling out of control. The billionaire owner of the Dalian Wanda Group, China's largest real estate developer, stressed that the "biggest bubble in history" is the product of a disparity in housing prices between top-tier cities and lower-tier cities across the country.

SCMP: Growing property bubble is China economy’s biggest risk, warns Bank of China economist

Bank of China economists wrote in its quarterly economic outlook that a red-hot property market would complicate policy decisions for Beijing, which is already struggling to pursue objectives that range from defending a stable yuan exchange rate to keeping growth on track at home.

“Macro policies are in urgent need to strike a balance between stabilising growth and curbing asset bubbles,” according to the bank, the country’s largest foreign exchange dealing bank.

SCMP: Growing calls for Beijing to step in, as mainland house prices continue skyrocketing

“Home prices are going crazy, and governments should have stepped in earlier,” said Alan Jin, a property analyst at Mizuho Securities.

Jin said many local governments had “run out of cards”, adding the runaway market “was a problem that can only be solved by Beijing”.

“Liquidity must be tightened – policies may have some impact, but they will not reverse the situation.”

Fundamentally, the problem is two fold within China. First, central planning has distorted the economy. Second, there's excessive credit growth. To the extent there was still a free lunch for China, it involved supply-side reform (the real thing, not Chinese so-called supply side). Reform didn't happen.

China's economy is slowing (as is the global economy) and there is no place for credit to flow except into speculative assets. The rise in home prices over the past year is severe: the CPI is barely running at 1 percent and would be near 0 percent were it not for a one-month Chinese New Year spike in prices. Yet home prices in some cities are climbing 30 percent or more year-on-year, and many cities are seeing increases of more than 1 percent per month.

China will not choose deflation. Everything they do is inflationary, down to restricting creditors rights and keeping zombie companies in operation. As Mises put it:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

As soon as Chinese planners see the pain brought by voluntary abandonment of credit expansion, they increase credit growth.

M2 slowed to just under 10 percent annual growth in early 2015 and the government panicked. Rolling 12-month credit growth then accelerated to almost 14 percent by the start of 2016, and was down to 11.4 percent in August. The slowdown in credit growth into August was before new buying restrictions on real estate took their bite, and come simultaneously with signs of organic slowing of credit growth. They also come at the same time as Deutsche Bank circles the drain and tight liquidity in Saudi Arabia rattles markets. Where this ends is anyone's guess, but right now the trajectory is deflationary and bearish.

Bloomberg: PBOC Seen Switching to Monetary Tightening as Soon as 2017

Overnight SHIBOR:

Estimating China's Housing Bubble

There are lots of measures of China's housing bubble. One is the high price of land sales according to research from Deutsche Bank.

Bloomberg: Here's the Smoking Gun That China Has a Huge Housing Bubble

If property prices simply tread water from here, the Deutsche Bank economist reckons that buyers accounting for more than half of land sales values in these auctions would lose money.

The property bubble has been fueled by the rise in broad credit growth, according to the economist, which has recently moderated and may continue to decelerate. In addition, Zhang expects Beijing try to slow price inflation by introducing targeted measures to cool select markets.

But a moderation of the real estate market as 2017 kicks off will likely elicit a rate cut from the People's Bank of China in the second quarter of the year in order to avoid a hard landing, he believes.

There's a lot of moving pieces, but for now, rate cuts in China weaken the yuan...

Housing Leverage Double Stock Market, Local Govt Borrowing Exceeds 2015

In addition, the property market is still the heat diminished, if we compare the property and stock markets, a rough estimate is the current property market leverage ratio is close to 2 times last year's stock market high, implies a greater risk implied. Furthermore, as of the end of August, local debt issuance reached 4.8 trillion, more than the 3.8 trillion for all of 2015.

The leverage ratio is based on property values:

China's property leverage is more than 2015 stock market leverage. To observe the property market leverage, we do a simple estimation: 2015 China's urban population of 770 million people, assuming three people per household, per household housing area of ​​80 square meters per unit area of ​​commercial housing sales price of 6793 yuan / square m (in 2015 the national average), thereby calculating the market value of real estate is about 140 trillion ((770 million person / 3) × 80 sq m × 6793 yuan / square meter). The end of June, individual purchase loans 15.4 trillion, development loan balance of 5.9 trillion. It can be seen, the real estate leverage ratio of about 15.25% ((15.4 trillion +5.9 trillion) / 140 trillion). 2015 stock market leveraged funds up when 4 trillion, corresponding to the market value of about 50 trillion, the leverage ratio of about 8%. Visible, the property market has reached nearly 2-fold leverage stock market highs, so residents and mortgage rates are high growth state hard long lasting, systemic risks implied urgently resolved.

iFeng: 楼市杠杆率有多高？ 媒体：已超2015年股市高点时近2倍

Making Hay While the Sun Shines: Real Estate Trust Issuance Soars

Since August, along with the property market "burst" high fever, the sudden increase in the real estate trust. Trust with interest the latest statistics show that in August a total of 63 real estate collective trust product release, the total 23.78 billion yuan, compared with 15.81 billion yuan a year earlier, the scale rose 50.4%, compared with 19.59 billion yuan in July rose 21.4%. Meanwhile, after the "Ming shares real debt" ban has long been thrown to the winds body, the housing prices "equity investment" trust industry once again become the "meat and potatoes."

Regulators are planning to tighten the rules on debt issuance by developers. Similar to the buying surge seen ahead of buying restrictions, the potential for credit restrictions is leading to a burst of lending and credit issuance.

Caijing: 前8月房地产信托规模1549亿元 明股实债成楼市躁动推手

Baltic Breakout?

A sign the commodities rally is for real.

Official Panic on Housing Begins

On September 19, Hangzhou announced buying restrictions:

The city authorities said that, effective from Sept 19, homebuyers without household registration in the city－known in Chinese as hukou－are not allowed to buy a second home in the city's central districts, in a bid to curb rapidly rising house prices, curb speculative buying and prevent risks.

These restrictions were tightened again on September 26, with total ban on non-resident buying, touching off a housing frenzy in Hangzhou.

More buying restrictions were added today. FT: China cities move to halt housing market frenzy

Hangzhou, host of this months’s G20 summit, on Tuesday introduced rules requiring buyers at auction of high-priced land to pay the full amount within a month, a move aimed at reining in China’s infamous “land kings”, developers prepared to pay above the market rate during pricing booms.

According to iFeng, the city will also no longer issue residence permits to home buyers, as well as hike down payments to 50 percent for buyers who already own a home. 再出重拳！杭州宣布暂停购房入户政策

Caixin: Hangzhou Puts Lid on Bids for Land

Authorities in Hangzhou, the capital of Zhejiang province, said Monday that parcels of land in 10 out of the city's 12 districts cannot be sold for more than 150 percent over their initial bidding prices. Once the bids for a plot reach the maximum price, the plot will go to the developer who promises to build the most number of elderly-care facilities on the land, according to the new rule, which went into effect Tuesday.

The moves come in the wake of People's Daily editorial calling for sanity in the housing market: Commentary in China’s mouthpiece media seeks to calm property speculation, draws online derision instead

An opinion piece carried by the website of the communist party media flagship on Monday night said hard work is more meaningful than profiting from property deals.

That's an unfortunate line because it came around the same time as this article: 见证楼市疯狂：房价1年涨幅顶家庭10年收入. The headline says the past 1 year of home price increase is equivalent to 10 years of household income. It discussed people closing their factories to flip houses. It isn't a fictional story, it's a reality repeated all over China.

The source of the devaluation is not the home prices though, it is currency devaluation. Inflation has greatly reduced the value of the yuan and it is expressing itself in soaring property prices. Every credit fueled bubble is the same, with people abandoning real work in order to trade the speculative asset du jour.

“When hard work is deemed inferior to property speculation, it can lead to a wrong direction and values,” the author Li Zhen wrote. “If the public spend too much time on short-term benefits from speculating on properties, it will squeeze out the desire to fight for long-term goals.”

It's called malinvestment. The market is sending the wrong signals because central planners have completely destroyed market signals across the world. China is destroying its economy, consuming wealthy in order to produce an extra 1 to 2 percent of GDP in order to avoid the painful, but necessary, recession that will clean out the bad investments.

One popular comment that was liked by close to 1,000 readers said, “Didn’t People’s Daily get it the wrong way round? It is ridiculous that home prices make our hard work meaningless.” Another widely shared comment said, “These words sounds good to the ears, but those who say them are not good people. Most people spend their lives working hard but eventually lose their earnings to high taxes and rocketing home prices. Policymakers don’t try to reduce the tax. What’s the point of talking about all this trash? ”

The official panic has begun, as have the stringent buying restrictions and credit restrictions that will lead to the next crisis.

Market Says Hillary Won the Debate

If scoring as a traditional debate, Clinton clearly won the latter half of the debate. Trump was chasing topics of little interest to voters and failed to tee off on softball issues such as cyber security. The markets agreed, with heavier buying of Clinton pushing up her odds back above 70 percent.

Judging on the relative metrics of expectations, it appears Trump did better than many were expecting.

The final verdict will be here at the end of the week, when polling data includes the debate performance. Trump has been rising in the state polls and holding within 1 to 2 percent of Clinton in national polls. If the trend stops or reverses, Clinton clearly will have won the debate in the only way that matters. If Trump continues to climb, it signals a stronger trend is underway, one that a poor debate performance didn't affect.

Rising Home Prices Will Stall RMB Internationalization

RMB internationalization will stall due to high prices and the risk of a collapse/outflows. Chinese goods are really expensive and Chinese buy many products from overseas because the RMB is way overvalued. It isn't expressed in an excessively high exchange rate, rather bank accounts are swollen with a sea of credit money coursing through the economy. When this tidal wave of currency can freely flow overseas, the yuan will depreciate out of necessity. The fleeing yuan to this point is the front running of a much larger trade. Right now, most Chinese don't have options and so the money pours into real estate, after being chased out of real estate once before, stocks, bonds and various collectibles.

China and the world money stock, real estate, most of the water to absorb the money, the flow of new loans are also here. Since the Chinese currency is substantially closed operation, the People's Bank currency issued in circulation are circled, China's current total of broad money M2 is added together the United States and Japan.

In terms of purchasing power parity, or other indicators, the RMB was significantly overvalued, overseas shopping has become routine. Once the internationalization of the RMB, the yuan can circulate freely, with the International Monetary confluence overvalued renminbi will depreciate. As the largest carrier yuan, real estate depreciation is a constant.

The end is already in sight because the State Council has planned for Shanghai to become an international financial center in 2020, which requires a convertible currency:

March 2009 decision of the State Council executive meeting, 2020 Shanghai will become an international financial center. For Shanghai to build an international financial center, the biggest problem is the internationalization of the RMB. At the latest by 2020, more than three years time, the internationalization of the RMB is bound to happen. Whether the price inflection point for housing is before the internationalization of the RMB, after, or simultaneously, is no longer important.

iFeng: 学者：人民币国际化 高房价拐点来了