Sign #1: Recently, a large Chinese property developer decided, for the first time, to discount condos by 40% when sales stalled.
The thing is, this is a shocking step to take in China. It's just not done.
The affluent Chinese line up to buy overbuilt, empty condos at insanely overpriced levels. They don't rent them out because there is no rental culture in the country. Ninety percent of homes are owned. They simply buy the property and let it stand empty… so when a developer cuts prices and thus devalues their investment, they get bitterly angry.
But this discounting trend is likely to spread rapidly now as more developers are forced to discount prices just to raise cash and avoid bankruptcy.
This means that there is finally some sanity in the property markets as prices are way out of wack. That property prices are coming down is a good thing but it does mean that some developers will have to go bust. This is the free market at work. Its going to be painful but by no means a crash as there are many people in China that still wants to buy houses but is unable to get into the market because of the current prices and as prices fall (as they should in my opinion) it will attract a new kind of buyer in China.
Sign #2: The richest man in China, with $31.9 billion, is Li Ka-shing. He and his son, Richard, have sold $3 billion of prime commercial properties in the last nine months. That tells me the smart money is leaving before the bubble bursts!
He is right that prices will fall in commercial real estate as well but that too will be good as it means that prices are correcting in the markets. Overvalued assets in a economy is never good.
Sign #3: A Bain & Company/Chinese bank survey of affluent households showed that 60% of the rich are considering moving overseas because they don't trust government or the bubble, pollution levels are getting intolerable, and they want to get their kids an English-speaking education.
This is nothing new the rich always go to the places with the best living or tax conditions. On average the rich in the West and in Russia have more of their wealth and assets abroad then the rich in China.
Sign #4: A number of major developers have gone bankrupt. These developers are highly leveraged and pose the greatest threat to the banking system, which has grown more through shadow banking and sub-prime lending in the last few years than anything sustainable. The worst new statistic, as developers pull back, is that housing starts in floor space dropped 37% in the first four months of 2013.
Its much better to let them go bankrupt then to keep these zombie companies going at the expense of the rest of the economy like the banks in America. Floor space construction slowing down means that less money is being poured into potentially money losing investments.
Sign #5: Bad loans are rising fast in China. The country's private debt is now higher than that of the U.S. or Europe, as you can see in the chart below. At 190% and rising, it's higher than emerging countries in Asia in 1998, when private debt peaked at 160% before a five-year currency and financial crisis.
Private debt in China 190% of GDP ? What is this guy smoking ? Debt in China from all the figures that i have seen is about 226% in 2013 total and about 140% of GDP is corporate debt, government debt is about 50% and the rest is private debt which is only about 36% of GDP. Mind you these are very bad figures and China will see a wave of defaults and bankruptcies in the coming years but is nowhere near the catastrophe that this guy is making it out to be.
Sign #6: A major agricultural co-op closed its doors and investors couldn't withdraw their deposits.
Sign #7: A major Chinese solar company defaulted on its bonds - the first to occur in China.
Capitalism without bankruptcy is like religion without sin. China over the years has made a lot of bad economic decisions and will have to pay a price for it in the future. The fact that bankruptcies and defaults are beginning to come in means that the system is cleansing itself.
Thus far, the government has quietly bailed out or covered over the defaults and cracks. But they're now hinting that they're going to let more defaults happen to "slowly let the air out of the balloon."
This is unfortunately true that local governments in China are quietly bailing out local companies at the expense of the public balance sheet.
but its also true that the central government are more willing to let them go bust.
China has a persistent high savings rate, persistent trade surplusses and state controlled financial institutions means that a Lehman like moment is very unlikely. But none the less China will have to slowdown in the future and pay the price for its transgressions of the last 6 years. The current economic model in China needs 2 to 3 dollars of credit to generate 1 dollars of growth. This needs to change and China is far from the only one in this situation. Other countries like the US needs 5 to 6 dollars of credits to generate 1 dollar of GDP growth. This is a global trend! Which is even more scary! And the recent easing policies of the government is concerning to me.
me posting this article, which is by the way a superb analysis, won't save you from the doom that is waiting you. Fraud, cooking the books, cheating in the widest sense of the word will prolong the Chinese paper tiger for so long.
