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

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