As I have said many times before online pharmacy viagra, I suspect we will see a lot of discontinuity in policymaking this year – amid lots of panicking – and recent events show just how. In the past few months Beijing seems to have become so worried about signs of overheating that online pharmacy viagra, after trying unsuccessfully many times to pare growth carefully, it has given up the scalpel and has brought out the sledgehammer.
Although the history of financial cycles is thousands of years old, it has only been in roughly the past 200 years that we have begun to think of the ups and the subsequent downs as involving the same process, rather than emerging as the consequences of exogenous shocks, like war or famine. In fact I would argue that the process that creates the expansion online pharmacy viagra, especially the credit process, is itself what inexorably causes the contraction.
The contraction, in other words, is often simply the process of resolving the distortions that goosed the boom. Online pharmacy viagra: as an aside, one of the earliest recorded acknowledgements that credit cycles are endemic to the economy may have been the entry on “Credit” in the 1838 edition of the Encyclopedia Americana: “The history of every industrious and commercial community, under a stable government, will present successive alternate periods of credit and distrust, following each other with a good deal of regularity.”
Will it ever. This is not exactly what the authors meant, of course, but it looks like we are watching China experience its own alternate periods of credit and distrust, with Beijing once again changing the pedal on which it is stomping. Given the bad global environment, China’s huge domestic imbalances, and its out-of-control monetary condition, there are precious few tools Beijing has for fine-tuning growth. Instead policymakers are going to switch back and forth throughout the year between stomping on the accelerator and stomping on the brakes.
For now, it’s the brakes on which they seem to be stomping, and the market is scared. Stocks took a big beating this past week, with the SSE Composite down 6.3% (although the whole year has been pretty bad overall) partly on fears that Beijing is very serious about overheating and may overreact (and Greece didn’t help). Real estate has also been affected. According to one report, after surging in early April, property prices in Beijing dropped a shocking 31% in the past month. I don’t know whether this is believable – I am always nervous about taking any of these numbers too seriously given the amount of manipulation that occurs – but clearly there is nervousness in the Beijing market:
The average transaction price of commercial residential properties in Beijing for the week ended May 9 fell 1,790 yuan per square meter or 9.6 percent week-on-week to 16,898 yuan per square meter, reports The Beijing News, citing statistics released by Beijing Real Estate Information Network.
Compared with the week ended April 11, the average transaction price of commercial residential properties in Beijing plunged 31.43 percent to 7,744 yuan per square meter. In the last weeks of April, the transaction volume of commercial residential properties in Beijing decreased by 10.34 percent, 11.39 percent and 30.82 percent respectively.Average transaction price was flat at between 22,000 yuan to 23,000 yuan per square meter.
But although I suspect that Beijing has no choice but to overreact, I expect that as soon as its cooling-down policies gain traction, the slowdown will alarm policymakers enough to get them stomping again on the accelerator. Managing the economy smoothly isn’t going to be very easy.
In the past several months two issues seem to have dominated worries within Beijing’s economic and monetary policy-making spheres. One is the burgeoning debt, particularly bank debt, supporting investment projects about which there is increasing evidence of economic non-viability. The other is the rising concern over real estate prices and real estate development projects.
Repressed interest disguises the cost of investment
Take the first issue. Debt levels are soaring and, if correctly counted, direct and contingent net liabilities of the government are probably over 70% of GDP, and may be significantly higher. Matters weren’t helped by the announcement Tuesday that new lending in April was RMB 774 billion – far more than RMB 600-700 billion most analysts expected, although last week I was already hearing rumors that it would easily exceed RMB 700 billion.
This compares to RMB 464 billion and RMB 591 billion in April of 2008 and 2009, respectively, and brings the total for the first four months of the year to RMB 3,375 billion, or 45% of the total quota for 2010 (in 2008 and 2009 the first four months of the year accounted for 37% and 54% of the totals for their respective years) – online pharmacy viagra. These are big numbers, and given the frenzy for lending, it is hard for me to believe that there won’t be a big jump in net contingent liabilities.
By net contingent liabilities I mean the excess of debt over the value of the investment it supports – online pharmacy viagra. Online pharmacy viagra: for example, if RMB 100 is borrowed to build a railroad, the debt is sustainable if the railroad creates net economic value to China of RMB 100 or more. If it doesn’t, the difference must be considered net debt that one way or another must be paid for by Chinese households. This will of course reduce their future consumption along with the economic growth associated with satisfying that consumption.
Note that net economic value does not mean the total profits of the railroad generated by ticket revenues less operating costs. We could begin with that number, but the value of the railroad would be increased by associated externalities – i.e.building the railroad might lower transportation costs for a number of businesses, allowing them to grow and to add economic value indirectly. It would be reduced by certain opportunity costs, for example the alternative use of the land if it had a better use, or the negative impact it might have on the existing highway and airline infrastructure.
But most importantly it would be reduced by distortions in the financing cost. For example, if the railroad were to be fully financed by 10-year bonds with interest rates 3 percentage points below the “natural” borrowing cost (a very low estimate), the economic value of the railroad would have to be reduced by RMB 19.
This amount is simply equal to the net present value of the hidden transfer from the lender to the borrower. The fact that the borrower can obtain subsidized funds at an artificially low cost must represent a transfer of wealth from the providers of the funding, and this subsidy is a loss for the rest of the economy equal to the additional value for the entity being subsidized (another way of saying that there is no free lunch*). By the way if the cost of funding is repressed by 6 percentage points, a perfectly plausible number, the net present value of the hidden subsidy is RMB 34. These are not small numbers.
Real estate frenzy
The second issue creating headaches in economic policy-making circles is, of course, the real estate market. Prices have soared in all the major cities. According to an article the People’s Daily, “China’s home prices in 70 large and medium-sized cities rose by 12.8 percent from a year earlier in April, the National Bureau of Statistics said in a statement on Tuesday
Although clearly Beijing, Shanghai, Guangzhou and the other primary cities are at the center of the frenzy, it isn’t just the primary cities driving this. Price fever is spreading to secondary cities. David Pierson of the Los Angeles Time had a very interesting article last week which starts out:
Hundreds of miles inland from the booming real estate markets of Beijing and Shanghai, an unlikely property fever is gripping this middling industrial outpost. Rows of half-completed apartment buildings rise over former farmland, each crowned with yellow construction cranes that seem to outnumber trees in parts of this dusty city of 5 million residents.
Taxi drivers boast of owning multiple flats for investment; online pharmacy viagra.Billboards hawk developments with names such as Villa Glorious and Rich Country.Frenzied crowds pack sales events with bags of cash, buying units that exist only on blueprints.Average home values in Hefei soared 50% last year.
China’s real estate rush online pharmacy viagra, once confined to a handful of leading cities, has spilled into the hinterlands with a ferocity reminiscent of American expansion into exurbs like the Inland Empire. In a country that economists say is treading dangerously close to a full-blown property bubble, Hefei represents more evidence of China’s headlong embrace of housing to power economic growth.
“The situation in Hefei is a symbol of the craziness in China’s real estate market,” said Cao Jianhai, a professor of economics at the Chinese Academy of Social Sciences, a government think tank.”Prices in second- and third-tier cities are increasing more dramatically than in the first tier.It’s very dangerous, and it puts local banks at risk.”
The two worries, of course, are inextricably linked. Real estate speculation is funded primarily by bank loans, and if the assets go bad, the loans almost certainly become contingent liabilities of the government.
The government’s response to the real estate bubble is to attempt to target speculative, as opposed to real, purchases of apartments and tighten lending conditions. They have used a number of tools, ranging from regulatory, interest rate, and lending margins, and backed them up last week with the third hike in the minimum reserve requirement this year. For example in an article today the People’s Daily lists some Shanghai property curbs:
The Shanghai municipal government may release detailed regulations for the property sector in two weeks, in line with central government policies, to curb housing speculation and soaring prices in the local market, an industry insider said on Wednesday. “A meeting will be held by the Shanghai municipal housing support and building administration bureau on Friday, and the main topic for discussion would be detailed regulations for the property sector,” said Sun Lijian, a professor with Fudan University and an adviser to the local government.
On April 16, the State Council rolled out a series of measures to curb the domestic housing market amid concerns over asset bubbles.These measures include a 30 percent down payment for first time buyers for houses larger than 90 square meters, 50 percent down payment and lifting mortgage interest rate for second home buyers; online pharmacy viagra. Online pharmacy viagra: the government has also imposed a temporary ban on mortgage applications for third or above home buys and cross-city purchases. Shanghai will be the third region after Beijing and Shenzhen to have rules governing property buys, said Sun.
Will all this work? I am not sure – I guess it depends on what you think the underlying problem is. If you believe that the real estate bubble is caused by easy loan regulations for speculators, then all these measures will almost certainly end speculation. If you believe as I do, however, that China’s real estate bubble, and asset bubbles generally, is caused by excess liquidity, credit surges, and suppressed financing costs, then the various measures are mostly cosmetic. By targeting specific forms of speculation, Beijing might be able to shift the speculative frenzy around, from one asset to another, but it won’t end it. It will simply move on.
Power tools
What really matters if we want to stop the speculative frenzy is to find ways of raising interest rates and removing domestic liquidity. But both of these are tough to do. Raising lending rates, if it is done enough to suppress real estate speculation, will put unbearable pressure on Chinese borrowers – many of who can only manage the debt because it is virtually free – and will make it impossible to revalue the currency in any serious way. The fact that it would prevent currency revaluation shouldn’t matter because, as I have pointed out many times, low interest rates may have as much or more to do with China’s trade surplus as the undervalued RMB, but unfortunately the RMB has become so politicized that a failure to move will simply fan foreign anger at China and lead to increasing trade tensions – and China is terribly vulnerable to trade war.
But putting pressure on borrowers is a real problem. After so many years of being able to invest with almost no concern for the return on investment, raising funding costs will force real financial distress onto borrowers. Either they ignore it, and government debt levels rise serenely ever higher (and remember, as I discussed in a previous post, government debt must be paid for by reducing future household consumption), or they respond by cutting borrowing. Less borrowing means that investment slows dramatically, and in an economy so dependent on increased investment for its growth, anything that slows investment slows growth.
It is even tougher to contract domestic liquidity. As long as China maintains the currency regime it is hard to control the domestic money supply, and the one powerful tool Beijing does have – too powerful to be wielded smoothly – is the lending quota. The problem here of course, to repeat, is that Chinese growth is so heavily dependent on additional investment, which is itself heavily dependent on new lending, that Beijing can’t really force down loan growth without seeing GDP growth drop sharply.
So I think we are stuck. For now, the focus is on attacking economic exuberance, but in such a manic-depressive economy the alternative to exuberance will be deep, deep gloom, and as soon as that happens it’s back to inducing ecstasy once again.
My guess? After a few weeks of official posturing, with the concomitant fear and market contraction, the markets will stabilize for a while, and then take off again. If Beijing is really successful in halting real estate speculation in the primary cities, expect the secondary cities to take off. Also after a period of stability we will probably see great action in the stock market as liquidity pours back in. Last Friday the SSE Composite closed at 2688. I bet it is much higher by the end of the summer.
* Jack Wen in a comment to my last posting quotes Bill Gross quoting Bernard Baruch as saying “Two plus two equals four and no one has ever invented a way of getting something for nothing,” which is perhaps a more memorable way of saying the same thing.
[...] Beijing’s stop-and-go measures Michael Pettis [...]
[...] This post was mentioned on Twitter by bill, William @ ?B! niubi!, MDabbles, infodiligo, Vincent Touquet and others. Vincent Touquet said: Michael Pettis on China, always interesting: http://mpettis.com/2010/05/beijing%E2%80%99s-stop-and-go-measures/ [...]
Michael, it’s been a while since I last visited your site. Hope all’s well. I have recent done some work on the PRC property market and would like to share some of my findings. I’m hoping for your honest feedback.
The common belief that there is no real estate bubble in China is due to “most people pay all cash for both real demand as well as investments.” This certainly was true prior to 2009, but it has changed.
The loan to value ratio has been between 10-20% from 2005 to 2008, it had increased to 46% in 2009 and further surged to 76% in 1Q10. (I used the incremental increase in mortgage loans from PBoC report and value of commercial residential transacted data from NBS. I further verified those numbers with sellside banking / property analysts from DB, ML and GS, but to my surprise this change in dynamics is largely unknown to those analysts.) I suspect the surge in loan in April further increases this leverage ratio.
I attribute this surge in leverage to two main reasons, 1) speculators have finally realized they can make a lot more $$ if they lever up and the common belief in China is that property prices will keep on going up, 2) real demand is finding property prices hard to cope with despite the new families formed by one-childs can source cash from 4-6 elderlys. Real demand is forced to lever to buy. To me, this is a sign of the upper bound of the affordibility.
Any inputs from you would be greatly appreciated.
Best,
Leon
Michael,
I suggest you make a change on paragraph seven line three.
simply replace “to” with “or”.
As it stands it is unclear whether current pricing is 16898 or 7744 yuan per square meter.
16898 yuan (correct number) per square meter is about US$250 per square foot. Hong Kong prices are maybe two to four times higher IMHO.
If the perceived (not my perception) problem is an over inflated property market, then why not introduce a substantial property tax? That will target real estate price escalation while protecting the business who’s margins are dependant on the subsidised interest rates.
[...] spill | NOLA.comDivorce, a way round China’s second-home restrictions – China DailyLinksChina Financial Markets – Beijing’s stop-and-go measuresSurging prices stoke inflation fears – XinhuaCristina sobre el ajuste europeo: "Hay que [...]
Well, the alternative speculative asset has already emerged: gold. Unlike stock markets or real estate markets, gold bubble is probably the least dangerous bubble for excess liquility to park, because it has the weakest link to real economy.
Michael,
Your prognosis just seems incredible. Isn’t it assuming that savers in China have an insatiable appetite for owning ever-larger portfolios of empty apartments?
I can see how easy money will always entice another round of investment by speculators, but does the cab driver with six empty apartments really see himself as short-to-medium term speculator, or merely someone looking for a safe place to put his savings? If it’s the latter, there has to be some limit to the amount of money these savers will, or can, put into real estate.
In some ways the Chinese bubble seems much more dangerous that ours. There is a lot less leverage used by the ultimate buyer, but that also means a lot more household savings will be lost when the bubble bursts.
On the subject, Bloomberg has an article up: “Shanghai May Announce 1.5% Property Tax, Herald Says.”
http://www.bloomberg.com/apps/news?pid=20601089&sid=a2ar6oMRhBtU
[...] China Financial Markets – Beijing’s stop-and-go measures [...]
Leon
Great post. THE FT had something about that this year.
http://www.ft.com/cms/s/0/cbc83612-3134-11df-8e6f-00144feabdc0.html?catid=171
There definitely exists a real estate bubble of some magnitude in the Chinese economy. But at least give the Chinese government regulators some credit for at least attempting to do something about it. Contrast that to the monetary policy of the US Federal Reserve where regulators encouraged pouring gasoline on to the fire until the housing bubble exploded in their faces. Unfortunately, the Federal Reserve regulators have been captured by Wall Street special interests especially Goldman Sachs. Greenspan and Bernanke refused to regulate the fraudulent subprime US mortgage markets. Both continue to claim that it is impossible to recognize a financial bubble before it explodes. Bernanke’s monetary policy is to attempt to inflate another bubble with “cheap money” to mitigate the capital misallocation damage from the previous bubble. There isn’t any asset class large enough to create another bubble to reinflate the maladjusted US economy. Is it any wonder why the Gold price hit a record high of $1250 per ounce in New York trading?
In reality, the Chinese real estate bubble is also a result of too much cheap money printed by the Federal Reserve under the global US Dollar hegemony regime. Backed by US military projection power across the Middle East, the US dollar and only the US Dollar can be used for the purchase of the strategic commodity of oil. Since everyone in the world especially the Chinese needs oil, everyone needs alot of US Dollars. Thus the Federal Reserve can print almost unlimited quantities of US Dollars with foreign governments de facto forced to hold the currency to purchase oil and other strategic commodities.
[...] Read more at China Financial Markets –> [...]
The goverment of China has tried to stimulate the economy by forced lending, low interst rates, and excessive liquidity, resulting in a lot of contingent (off the books) liabiliites for the government that will eventually have to be repaid one way or another. This has been (predictably) a very inefficient and difficult to control stimulus method. Perhaps they will figure out that direct spending and borrowing by the goverment is much more efficient, since they can better control where the money goes to help assure it is spent in ways that benefit the people. However, this would required that they stop hiding the added debt and show it on their balance sheet. There is apparantly a strong aversion to admitting the debt rather than hiding it.
[...] Read more at China Financial Markets –> [...]
The trouble with a property tax is it hits all those who’ve already speculated, so could trigger an uncontrolled crash.
Better to place draconian restrictions on allowable leverage for future purchases, as they are already doing but not comprehensively enough.
I have a burning question: why don’t these taxi drivers who own multiple flats rent them out? I guess some of the flats aren’t even built yet, but I’ve been reading about entire buildings sitting practically empty, too. Is it really cheaper to let them sit empty than to have tenants? Or are they being “flipped” from one taxi driver to the next so fast that there isn’t time to find tenants?
[...] The Chinese stock market is down to levels not seen since May 2009. (WSJ, Afraid to Trade also Michael Pettis) [...]
[...] Read more at China Financial Markets –> [...]
[...] lunchtime reads: 1) Making finance easy to fix, not hard to break 2) Beijing’s stop-and-go measures 3) Gold enters the “mania” stage 1 comment! Go to [...]
[...] Beijing’s stop-and-go measures (Source) [...]
Michael,
Try the following exercise: imagine an economy where one firm, highly decentralized and with entrenched managers in a position to skim, loot and tunnel (courtesy to Andrei Shleifer), shares place with many small, undercapitalized etc firms plus some very large and cautious local; establishments of MNC’s (I am not talking about an Island State here, its managers do not get the same chances). How would you think they would deal with a foot-stomping comrade who may be only number 2000 in the deserve-to-get-rich hierarchy that the Firm’s idealistic predecessor body produced when it gave up the faith. Easy, right?
[...] Beijing’s Stop and Go Measures Michael Pettis about the Chinese government’s attempt to wrestle with rampant real estate speculation and the massive debt driven boom. When the merry-go-round stops nobody knows… [...]
Mr Pettis
>another way of saying that there is no free lunch*
There is no free lunch but that shouldn’t stop you from questioning the menu , that was irresistible :p
http://www.nakedcapitalism.com/2010/05/mmt-the-accounting-of-government-budget-deficits.html#comments
says pretty much what you said previously with one difference, he states the limitations and assumptions of the model. The menu so to speak.
But let’s look back at the issue at hand; speculation has been rife for years in the firstline cities(my ex-landlord owned several properties in new developments in Beijing and Shanghai but still lived with her parents in their old house- go figure), so it’s little surprise that it’s spread to 2nd or even 3rdliners. Question is how exactly is it funded? And perhaps what is the mentality behind all that frenzy? Ironically, gold and property have always been seen as safe haven investments, that in this economic climate they have become speculative asset classes is quite funny on some level, wonder when landbanking will take off in China or perhaps there’s too much historical (and political) baggage involved. That property growth is used as a way to “grow”(or as the article you quoted puts it: embrace of housing to power economic growth)is not quite new, just a question of when it all tips in the wrong direction. Will it end in tears, probably. When? Usually when it’s most inconvenient. The same goes for the stock market. Has man found a way out of these vicious cycles, probably not, not when we all so fervently want to be the ones who beat the system.
Something missing here:
“The average transaction price of commercial residential properties in Beijing for the week ended May 9 fell 1,790 yuan per square meter or 9.6 percent week-on-week to 16,898 yuan per square meter, reports The Beijing News, citing statistics released by Beijing Real Estate Information Network.
Compared with the week ended April 11, the average transaction price of commercial residential properties in Beijing plunged 31.43 percent to 7,744 yuan per square meter. In the last weeks of April, the transaction volume of commercial residential properties in Beijing decreased by 10.34 percent, 11.39 percent and 30.82 percent respectively. Average transaction price was flat at between 22,000 yuan to 23,000 yuan per square meter.”
[...] – Chinese tightening: ‘I think we are stuck‘. [...]
I observe that the Chinese government has already implemented measures targeting the real estate sector for close to a year now. There will be some damages but it will not be an event comparable to America sub-prime given the high real savings component of real estate purchases and the relatively low ratio of per capita housing stock. If anything at least more chinese citizens will enjoy a higher standard of housing and we chinese at least understand that you need to pay for the things that you consume. My faith in the chinese government structure and embedded capacity for formulating prudent policies has been borne out over my thirty years of following this great nation’s progress.
David Stern,
“Compared with the week ended April 11, the average transaction price of commercial residential properties in Beijing plunged 31.43 percent ***OR*** 7,744 yuan per square meter. In the last weeks of April, the transaction volume of commercial residential properties in Beijing decreased by 10.34 percent, 11.39 percent and 30.82 percent respectively. Average transaction price was flat at between 22,000 yuan to 23,000 yuan per square meter.”
I think this is the solution. Just replace to with or and it makes sense.
Michael,
The issue of “if” a crash will occur is now more a case of “when”. I sense that the Chinese economy is showing similar signs evident in the Japanese economy prior to the asset bubble collapse which lead to Japan’s “Lost Decade”. Tens of trillions of Dollars were wiped out in this financial debacle and have cost Japan its once touted leadership roll in both technology and manufacturing.
Though there are enough differences between the situation in China and the former one in Japan to make the comparison an “Apples to Orange” one, I believe there is enough similitude to warrant the question; “Assuming Beijing is successful at curtailing the real estate speculation boom how successful do you think the will be in maintaining the nations export economy given that internal consumption will of necessity also be curtailed?”…
[...] China Financial Markets – Beijing’s stop-and-go measures [...]
[...] Beijing’s stop-and-go measures (Michael [...]
Does anyone know what sort of people are buying up multiple flats using cash? How did they get the cash?
Are taxi drivers paying cash, or are they using mortgages?
Judging by the way the cash buyers are throwing their money around, I’d guess it’s not exactly hard-earned money, so hopefully they won’t be too angry when the bubble bursts and they lose their money.
But how certain is it that this cash isn’t actually money borrowed from banks, where the banks either have no idea what the borrowers will do with the loans or have been told lies about it?
When the bubble bursts, who exactly will get hurt, and how angry will they be about it?
BTW, I agree with Rick that the “to” 7744 yuan/square meter should read “or.” But that still leaves the “average transaction price was flat between 22,000 yuan to 23,000 yuan per square meter” unexplained.
Rick and Karen — “to 7,744 yuan/square meter” is correct; prices dropped by that percentage to that level. Karen — “average transaction price was flat” simply gives a range for the average transaction price (from 22,000 yuan to 23,000 yuan per square meter), rather than a single discrete number.
This will be an interesting year, in any event.
[...] the coalition does, I’ve a feeling this story will determine how it ends up – on China’s property bubble, banks, and the coming blowout of the government deficit [...]
Mercantilist policies always have the same outcome. To suggest it will be any different in China is incorrect, IMO.
Ultimately, the extended downturn in the US and the downturn commencing in Europe will halt the export and hot money flows which are the endgame of all distortions.
In the first instance, the Chinese government may see it as a blessed relief, that the inflationary and speculative pressures start to come off the economy. That will change rather quickly, I suspect. There is a reason why you need to keep pumping ever greater amounts of hot air into a balloon, the higher it rises. If you run out of gas, you’d better hope that you’re not too far off the ground.
[...] – Lights. Camera. Shanghai Composite action. [...]
Prof. Pettis,
Wanted to ask you quickly what you think the chances are of China seeing a second stimulus of some sort later this year? In relation to the real estate bubble, which Andy Xie is constantly arguing has become a source of funding for local governments’ stimulus projects, will the bubble being deflated / bursting necessitate a further stimulus? (given that a switch of speculation from property to equity or commoditiy speculation will not deliver local governments economic benefits outside of narrow geographic areas).
hi there!
Professor Pettis, i was wondering if you could explain why China raising its interest rates would make it “impossible to revalue the currency in any meaningful way”? It may be late at night so my brain is not seeing the obvious here….
[...] [...]
Another good post. I agree with you more often than just about any other finance/economics blogger, but this:
“Also after a period of stability we will probably see great action in the stock market as liquidity pours back in. Last Friday the SSE Composite closed at 2688. I bet it is much higher by the end of the summer.”
I bet it will be lower.
[...] [...]
I have read more different stories about Chinese real estate it is difficult to figure out what is true and what isn’t. What I would believe to be the most accurate came from Andy Xie, who says there isn’t an inexhaustible demand for housing in China. There was a comparison of prices in China and in Hong Kong. I would surmise that incomes in Hong Kong are much higher than in China. At any rate, a 900 square foot apartment at $250 per square foot (i’m estimating a square meter at 10 square feet) is $225,000. From what I understand, average earnings in China are in the $5000 a year range or 1/45th this price. This means at 1% APR, interest only, the payment is 45% of the income of the average person. Xie says the average space per capita in China is 28 sq meters, so 90 Sq meters would be for a family of 3. This is clearly a bubble.
Michael wrote something that I have recognized from all the reading I have done on this subject, that the largest chunk of the Chinese economy is in building all this stuff. If they are forced to stop, the impact would be greater than if they shut down every dime of exports. At this would be the case on a GDP basis. It is clear that without exports, China would earn no foreign exchange and the money for needed materials wouldn’t come in, but the expansion industry is much larger than the general goods industry.
I am really kind of amazed this is still going on. I guess it is something they can’t let stop. I believe there will be a total collapse in industrial commodity prices once China is forced to recognize they have squandered a sizable amount of their national wealth on poor investments. If you have cut off one of your ears, do you cut the other one off? China may have already done so and is now headed for its nose.
I think I agree with most of what you say here, but I’m a bit dubious about this calculation of the cost of subsidised lending. There is an assumption in there about returns on capital in the absence of subsidised lending that I think doesn’t stand up. If China wasn’t lending and investing at this insane rate, would there be any possibility of 6% growth, or 6% return on investments, or a 6% lending rate anywhere? I suspect not. So this idea that there could be a 6% gap between the subsidised lending rate and some notional “real” or “market” lending rate doesn’t make a lot of sense to me. Even a 3% gap sounds like a stretch. I don’t know what rates infrastructure projects are getting, but if they’re borrowing at, say, 2%, the idea that this is 3% too low implies you think there could be 5% growth without subsidised projects. Last year Chinese growth net of investment was 0, so I don’t buy it.
[...] The slowdown is led by China, which has been slowing its torrid growth since it began its stop-and-start measures to put a lid on inflation and an overheated [...]
@Phil: I think you are right. Nobody understands what exactly is going on in China, but I believe we will witness kind of late 80′ Japan deja vu, especially in the real estate sector and infrastructure investments (‘bridges to nowhere). No demand is inexhaustible, and we can’t forget there are serious competitors growing in the region. There is place to grow, but not forever.
Posting this comment here because comment function seems to have been disabled for mpettis.com/2010/05/don’t-misread-the-trade-implications-of-the-euro-crisis-for-china/
Mr Pettis
Amused and alarmed by the response. Dismissing discrepancies just because they may point towards discrepancies in one’s theory is potentially dangerous.
Let’s look at the points of contention:
1) No one is disputing the mathematical accuracy of 200+300=500.
It is simply a+b=c, a simple equation. What is left unsaid is, by insisting that c= 500, it becomes a CONDITION that must be fulfilled for the equation to work accurately. Based upon this condition, the ranges of value for a & b are RESTRICTED to 0?a, b ?500 , this restriction of value ranges goes against the definition of identities that states that it must hold true for all ranges of values. This goes without saying that the ASSUMPTION is there are no negative values.
Every equation is based on assumptions and parameters, not acknowledging them does not mean they do not exist.
2) Discrepancies in the figures may point towards a range of problems, “leakage”, rounding up errors or margin of error. More worrying is when they may point towards elements that were not considered in the equation.
For example, using your example of a+b=c, phrased as 200+300= 500, let us look at the scenario where empirically your observations tell you that a=200 but b=330,assuming you also observe that c=500, what do you do?
Dismiss the 30 as an error or rounding off error? Automatically adjust a to 170? Contemplate that there may be an element w that is -30 where a+b+w=c ?
The former 2 courses of action is choosing theory over emprirical evidence and borders on dogmatism.
3) Double entry accounting theory leads one to the adjust a to 170, that is what is worrying because it ignores the possibility that there is something not considered or captured in the equation. Discrepancies in figures are usually the first sign of that.
Mr Pettis:
the difficulty in measuring complex transactions in no way proves that accounting identities don’t hold. It may be very difficult for me to count accurately 200 thousand grains of sand and 300 thousand grains of sand, but that in no way implies that adding 200 thousand grains of sand to 300 thousand grains would not necessarily leave a pile of 500 thousand. I really do not see why this is so difficult to understand. Perhaps I am missing something.
The question is not counting those grains of sand accurately but whether after counting would there be 200 or 300 thousand grains of sand or 230 or 330 thousand
grains of sand which would then pose problems for your final pile numbers? Do you ignore the extra 30 thousand grains of sand by pouring them in the desert or do you acknowledge there is something not quite right in the final pile number (500)?
As for what you did not understand in the first part of my comment, please see my post in my blog.
http://judyjl.livejournal.com/2027.html
[...] Beijing’s stop and go measures – China Financial Markets [...]
Judy,
The Equation can just as easily be -200 + 700 = 500. The components of the equation are implicitly related, therefore their values are confined by that relationship. It is very much like the conservation of energy.
Glen M:their values are confined by that relationship.
Confined, precisely. It’s meant only to confirm a certain value. The question is what happens when that value may be in doubt?
[...] 2556, and then bounced around for the past ten days closing yesterday at 2568. In my May 12 blog entry, I finished the piece by saying “Last Friday the SSE Composite closed at 2688. I bet it is much [...]
[...] 2556, and then bounced around for the past ten days closing yesterday at 2568. In my May 12 blog entry, I finished the piece by saying “Last Friday the SSE Composite closed at 2688. I bet it is much [...]
Judy, the relationship is confined, not the value.
[...] School of Management, expects the Chinese government to take action to cushion the slow down, see Beijing’s stop-and-go measures: As I have said many times before, I suspect we will see a lot of discontinuity in policymaking [...]
Just follow the money to determine the cause of the bubble. The
benefits flow to contractors, laborers, the developers and most
especially to the partnerships that front run the developments by
purchasing then reselling the land for the developments. As for the
cab driver with six flats, he is neither borrowing the money nor
using his own funds, he is merely putting down a small deposit.
The banks are getting hosed and the central govermment will in the end
pick up the tab. But I think Mr Wu has it right, the central government
has chosen in advance to shoulder the costs in return for the
economic activity. It’s just that $300/sf is a little high.
Glen:the relationship is confined, not the value.
depends on how you define it? besides, was just quoting your comment?
[...] School of Management, expects the Chinese government to take action to cushion the slow down, see Beijing’s stop-and-go measures: As I have said many times before, I suspect we will see a lot of discontinuity in policymaking [...]
[...] addition, Michael Pettis believes that there will be a lot discontinuity of policy making in China due to panic. In May he [...]
[...] like him seem much less concerned about overheating than about a too-sudden stop. Regular readers know that in my view for the past two years we have veered from panic to panic – stomping on the [...]
[...] him seem much less concerned about overheating than about a too-sudden stop. Regular readers know that in my view for the past two years we have veered from panic to panic – stomping on [...]
[...] like him seem much less concerned about overheating than about a too-sudden stop. Regular readers know that in my view for the past two years we have veered from panic to panic – stomping on the [...]
[...] like him seem much less concerned about overheating than about a too-sudden stop. Regular readers know that in my view for the past two years we have veered from panic to panic – stomping on the [...]
[...] better than I in his most recent post and seems to agree: Regular readers know that in my view for the past two years we have veered from panic to panic – stomping on the [...]
[...] far no big surprise. As I have said many times in the past two years, most recently in my May 12 entry, Beijing’s response to the global crisis seems to be a panicky process of stomping on the [...]
[...] far no big surprise. As I have said many times in the past two years, most recently in my May 12 entry, Beijing’s response to the global crisis seems to be a panicky process of stomping on the [...]
[...] no big surprise. As I have said many times in the past two years, most recently in my May 12 entry, Beijing’s response to the global crisis seems to be a panicky process of stomping on the [...]
[...] no big surprise. As I have said many times in the past two years, most recently in my May 12 entry, Beijing’s response to the global crisis seems to be a panicky process of stomping on the [...]
[...] far no big surprise. As I have said many times in the past two years, most recently in my May 12 entry, Beijing’s response to the global crisis seems to be a panicky process of stomping on the [...]
[...] far no big surprise. As I have said many times in the past two years, most recently in my May 12 entry, Beijing’s response to the global crisis seems to be a panicky process of stomping on the [...]
[...] far no big surprise. As I have said many times in the past two years, most recently in my May 12 entry, Beijing’s response to the global crisis seems to be a panicky process of stomping on the [...]
[...] in the mistaken belief that I can get it right again. In May, when the market was at 2688, I argued that Beijing was about to stomp again on the accelerator, and that the market would soon race up, [...]
[...] in the mistaken belief that I can get it right again. In May, when the market was at 2688, I argued that Beijing was about to stomp again on the accelerator, and that the market would soon race up, [...]
[...] in the mistaken belief that I can get it right again. In May, when the market was at 2688, I argued that Beijing was about to stomp again on the accelerator, and that the market would soon race up, [...]
[...] in the mistaken belief that I can get it right again. In May, when the market was at 2688, I argued that Beijing was about to stomp again on the accelerator, and that the market would soon race up, [...]
[...] in the mistaken belief that I can get it right again. In May, when the market was at 2688, I argued that Beijing was about to stomp again on the accelerator, and that the market would soon race up, [...]
Buyers in Toronto are always going on about how expensive it is to purchase in Toronto. Well, they should only look to real estate in China to see how affordable it really is by comparison. So much more room for growth and space potential too – No wonder there are so many real estate investors from abroad attracted to Toronto!
[...] until then the market should be strong. Last May I argued that in an effort to keep growth rates high in 2010 and 2011 we were going to see rapid credit [...]
It will take another 50 years before China becomes a true capitalistic society, The younger generation is going to make that happen and purely free markets will prevail.
[...] The post title is from a post Michael Pettis wrote last year: Beijing’s stop-and-go measures. It looks like China is back to pushing on the gas pedal [...]
[...] post title is from a post Michael Pettis wrote last year: Beijing’s stop-and-go measures. It looks like China is back to pushing on the gas pedal [...]