Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

[Polish_Silver]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

it is nearly impossible to buy an apartment on a 120K a year combined income since just the interest alone for a 1.2 million Yuan is 84K yuan a year.

Touchring

How did the prices get pumped up so high, and who owns that stuff? Aren't they afraid of a massive sell off?

Is there a way I can short it?

[Polish_Silver]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

The other point is that individualism in China is very extreme.

--touchring.
Very interesting! We need another word, for it though, instead of "individualism". Perhaps "familyism".

Inspite of decades or propoganda, you say there is very little national feeling--fascinating. That calms my nerves that they won't start a shooting war with anybody. One of my Illinois friends grew up in china. He told me that in the fourth grade, they had all the students climb up a tall tower and jump off wearing a parachute! (maybe it was just the boys.) The rip cord was teathered to the tower, to increase the probability of success.

That is what I call being prepared.

[aaron]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

Yeah, go long

[touchring]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

Touchring

How did the prices get pumped up so high, and who owns that stuff? Aren't they afraid of a massive sell off?

Is there a way I can short it?

One sentence - corruption and corrupted local officials are behind it.

[Polish_Silver]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

Touchring,

I really like reading your posts about China.

I have been to Taiwan, but not China. And I cannot speak Mandarin, so I almost feel like China is on another planet.

I wonder if you have been able to visit or live in China, and whether you can speak Mandarin or Cantonese, and whether you read books about China.
My cousin lived in China for many years, and could speak Mandarin. He also mentioned occasionally that the country had profound divisions.

[flintlock]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

"That's what she said!"

[c1ue]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

I mean, China may indeed be buying stuff everywhere, but why the Caribbean?

Markets. The Caribbean countries are a small but reasonably potent market for Chinese goods. A few of the larger islands also have exploitable resources like Jamaican aluminum.

My conclusion? What I call "China's Great Wall of Money," a FIRE Economy that does not depend on foreign investment flows the way the US FIRE Economy does.

Fair enough. If I understand it correctly, you are basically saying that China has a command economy only via FIRE - as compared to the Soviet Union's 'labor' based command economy - and furthermore that since China started later, that the final reckoning will not happen until well after the US and Europe have struggled through their own reckonings.

My advice -- go long Chinese hookers; they will be busy

I'd say you might reconsider 'investing' until after you've looked at the overseas Chinese population, plus the populations of the nations around China.

Between SE Asia, the Phillippines, and so forth, there are a lot of potential brides out there. It is definitely an issue, but not one without alternatives.

[ST]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

China Crash 2011 - Part I: The repetition compulsion of central bankers accurately forecast the impact of the Bank of China's effort to pop the property bubble. It crashed right on schedule nine months later, but then the BOC quickly reflated it before the macro-economy followed the property market down the tubes. It was back to the drawing board to figure out why.

Do you have any hard data / charts you can point us to demonstrating the Chinese property crash? Many people seem to think it didn't take place.

[Polish_Silver]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

Do you have any hard data / charts you can point us to demonstrating the Chinese property crash? Many people seem to think it didn't take place.

I would also like to see this data !

[raja]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

I would also like to see this data !

Real Estate Crash in China Underway: Foreign Funding Down 80%, Land Sales Down 57%, Starts Down 27%; Expect Chinese GDP to Plunge

Inquiring minds are reading an excellent report China Real Estate Unravels by Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing, China.

The report confirms many of the things I said would happen in regards to the Chinese real estate bubble and GDP.

Here are a few items of note.

Developers, burdened by 70% leverage ratios and loans threatening to come due, rushed to complete projects already in their pipeline, to put those units onto the market and raise cash.

That rush to complete inflated real estate investments, allegedly up 23.5% in the first quarter. Other statistics from the report tell the real story.

• Year-on-year sales in Q1, for all real estate, was down 14.6%.
• Residential property sales were down 17.5%
• Office sales were down -10.2%
• Sales in January-February were a disaster, falling 20.9% overall, compared to the first two months of 2011, -24.7% for residential.
• Total amount of floor space “for sale” was up 35.5%, compared to the same date last year
• Floor space of residential units “for sale” grew 47.4%.
• At the end of 2011, total floor space “under construction” was roughly 4.6 times the floor space sold
• A year and a half worth of excess inventory is hidden somewhere in the pipeline
• New starts in April fell 14.6% year-on-year and 27.0% month-on-month, for property as a whole
• Housing starts fell -14.4% year-on-year and -23.4% month-on-month
• Office starts fell -21.0% year-on-year in April, and -45.1% compared to March
• Retail property starts fell -18.7% year-on-year, and -36.8% compared to March
• Land sale revenues in April (RMB 27 billion) were down -54.7% compared to April last year
• Foreign funding for property development was down -91.4% in March and -80.8% in April, compared to the same months last year.

Clearly a crash is underway. The above stats also show the soft-landing thesis is written on toilet paper.

GDP Analysis

I like the analysis by Chovanec on GDP implications and the highly-overrated "soft landing" theory.

The “resilient” growth in real estate investment that seemed to promise a “soft landing” is not very resilient at all. It’s more like the last gasp of a market that’s running out of steam. Once the surge in completions plays out, the declining number of new starts will become the pipeline, and growth in property investment will flatten or go negative.

Property investment accounts for roughly a quarter of gross Fixed Asset Investment (FAI), and net FAI accounts for over half of China’s GDP growth. As I noted in January, in a back-of-the-envelope thought exercise, if property investment plateaus (growth falls to zero), it could shave as much as 2.6 percentage points off of real GDP growth. If it fell 10% (in real, not nominal terms) it could bring GDP growth down to 5.3%.

At the time I first saw this dynamic in the data, when the Q1 numbers came out, I figured it would take several months to begin playing out. But the April numbers suggest it is already happening.

Chovanec notes if real estate investment drops by 10%, GDP will come in at 5.3%. What if real estate investment falls by 20% or 25%? Moreover, why shouldn't it?

Nails in the Hard Landing Coffin?

One of the sillier stories making the rounds earlier last month was China currency move nails hard landing risk coffin

I responded at the time with ...

The longer China puts off rebalancing its economy, the bigger the crash later on. Moreover, widening the band on its currency is a needed part of that rebalancing, and does not preclude in any way a huge slowdown in growth.

The structural imbalances in China are large and for now, still growing. However, huge cracks have appeared in real estate, and changes are coming up with a regime change. Finally, peak oil alone makes many of the growth estimates we have seen for China outright impossible.

The real estate crash has arrived. The GDP crash will follow. For details, please see 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?

Mike "Mish" Shedlock

[Polish_Silver]

EJ Typo: falling inflation rates?

That interest rate decline was due to markets responding to falling interest rates.

--EJ

Shouldn't it say "markets responding to falling inflation rates." ??

[bart]

Re: Ka-Poom Theory Update Two – Part I: Bang or a whimper - Eric Janszen

Real Estate Crash in China Underway: Foreign Funding Down 80%, Land Sales Down 57%, Starts Down 27%; Expect Chinese GDP to Plunge



Inquiring minds are reading an excellent report China Real Estate Unravels by Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing, China.

The report confirms many of the things I said would happen in regards to the Chinese real estate bubble and GDP.
...

Mish gives zero attention or credence to this, out of that Chanovec report:

Getting an accurate view of the property sector is complicated by the fact that neither the official price index, nor the Soufun price index, nor the average price/square meter that can be calculated from the investment numbers seem to track very well with each other or with point-of-sale impressions of steep developer discounts over the past eight months. Developers and local governments also enjoy a great deal of discretion in deciding what to count as a “start” or a “completion.” Monthly data releases are never revised, which often gives rise to huge corrections that are simply lumped into the end-year December data release, giving a distorted impression of how trends are unfolding (so, for instance, the 19% drop in property starts in December 2011 probably wasn’t as sudden as it appears, and more likely reflected an unreported decline spread over several preceding months).

(emphasis mine)