Chinese house prices fell considerably in February. Is this the first leg down in what will become an epic financial catastrophe?

The Chinese government and central bankers ran a Ponzi scheme to accelerate real estate development to help China catch up to the rest of the world. Unfortunately, since it was a Ponzi scheme, they couldn’t figure out a way to unwind it without devastating their economy, so they kept putting more and more money into it, hoping desperately that it would work itself out.

At some point long ago, China developed enough housing stock and commercial properties to meet the needs of its citizens, but since they depended so heavily on continued development to sustain their economy, they kept building, and building, and building, and building. The overbuilding is so extreme that 20% or more of their housing stock sits empty, and entire cities are devoid of people.

All Ponzi schemes are unsustainable. China’s Ponzi scheme is starting to unravel, and it could have devastating effects on the world economy.

China’s Housing Crash Continues

Prices and sales volumes fall off a cliff, large developer needs bailout

By Valentin Schmid, Epoch Times | March 18, 2015

House prices in China can fall fast, especially around the Chinese New Year, just to quickly recover soon after. We saw this in 2011 and 2012. This year seems to be different though, and not in a good way.

On March 17, the National Bureau of Statistics announced prices in 70 of China’s major cities dropped 5.7 percent on average in February 2015 compared to a year earlier. This is the sixth consecutive decline on record and January was also bad with  minus 5.1 percent.

According to private surveys, units sold in 48 cities declined by 10.9 percent over the year as government revenue from land sales cratered 36.2 percent in the first two months of the year, according to Shanghai Daily.

In a nutshell, people aren’t buying from developers and developers aren’t buying more land from the government. This is a big deal in a country where real estate contributes 20 percent to GDP and houses make up the bulk of the people’s savings.

The deflation of the Chinese real estate bubble will be particularly painful for the growing middle class in China, just as it was here in the US. It will also devastate the economy because 20% of their GDP will crumble to dust. This problem will not be contained to China.

… economist Gan Li … told Bloomberg in the beginning of 2014, “Existing housing stock is sufficient for every household to own one home, and we are supplying about 15 million new units a year. The housing bubble has to burst. No one knows when.”

It seems, now we know.

Developers the Biggest Debtors

Despite the similarity of the price declines between the early subprime crisis days and the Chinese housing bust, there are stark differences. Most Chinese pay for their homes in cash and don’t borrow heavily. So they are under far less pressure to sell than their U.S. subprime counterparts who are pressured by interest and principal payments.

On the other hand, the Chinese housing bubble seems to be of a greater magnitude and not all depends on the consumer, whose debt load at the end of 2013 was only 23 percent of GDP, a big part of it mortgages. …

This is an important point. The Chinese housing bubble burst won’t be driven by distressed supply; instead, the bubble will burst due to an enormous oversupply.

Numbers by the Survey and Research Center for China Household Finance stretch the imagination: More than one in five homes in China’s urban areas is vacant, with 49 million sold but vacant units, and 3.5 million homes that remain unsold.The other problem is that most of the debt incurred building this huge bubble is on the books of property developers.

“Quite simply, China has produced and built far too much capacity, through overinvestment in steel and cement firms and in accelerated housing development. In the process, it has amassed the largest buildup of bad debt in history,” writes economist Richard Vague.

Most developed economies around the world endured deflationary forces over the last 8 years due to collapsing housing bubbles and the non-payment of debt associated with bad real estate loans. Much of this deflation was printed over by various central banks, but some argue the printing was insufficient to overcome deflation. Good evidence of this can be found in negative bond yields on European bonds and very low bond yields in the US, Japan, and other countries.

For as bad as our deflation has been, when the Chinese real estate bubble bursts and the overleveraged real estate developers and associated industries collapse, the deflation will be far worse.

Private debt now stands at 211 percent of GDP, according to Vague, similar to levels seen in Japan before the crash and a big part of that is debt backed by real estate.

“China today is likely to have an estimated $1.75 trillion to $3.5 trillion in problem loans—a figure well in excess of the $1.5 trillion of total capital in China’s banking system,” wrote Vague. …

As with Countrywide and Bank of America, Chinese banks did well to plug the hole in the sinking ship because Chinese developers and construction companies are interwoven in an obscure chain of Ponzi credit. If one doesn’t pay, the other will almost certainly default.At the end of this chain stands the Chinese banking system and by extension the Chinese regime. Both are too big to fail and too big to bail out at the same time.

So what will Chinese government officials do about the problem with all this bad debt?

I believe the Chinese will print money, buy it up, and make the central bank the repository for all the toxic waste, similar to how we ultimately resolved the problem here in the US.

China’s house price crisis is creating a perverse bailout bubble for property companies

Mike Bird, Mar. 18, 2015, 4:11 AM

China’s house prices are sinking at the fastest pace on record, but you wouldn’t know it by looking at the country’s massive property companies.

Prices tumbled 5.7% in the year to February, falling across 66 of China’s 70 biggest cities.

China’s booming economy has driven a colossal supply of houses, including the ghost cities for which the country is now infamous.

… Rabobank’s analysts suggest the crash “likely still has years to play out given the level of oversupply.”

Is China’s housing bubble and it’s associated industries too big to fail? We’re about to find out.

And you would think that would be bad for China’s big property and real-estate companies. After all, residential and commercial buildings are what they sell to make their living, so falling prices certainly seem like a bad thing.

But shares of China Vanke, the country’s largest property developer, rose by 4.04% on Wednesday.

It’s a similar story for Poly Real Estate Group, another massive developer. Shares rose 5.05% overnight and are up by more than half in the past year. In fact, both companies easily outstripped the 2.13% rise in Shanghai stocks overall on Wednesday. But why?

The answer lies in the perverse incentives on offer — and the fact China’s Evergrande Real Estate Group just got a $16 billion (£10.85 billion) lifeline from China’s state-run banks. …

Property prices falling in China means more bailout money.

Investors in China certainly believe these entities are too big to fail.

It isn’t just private industry in China that needs a bailout.

Swapping spree

The finance ministry moves to ease local governments’ money troubles

Mar 14th 2015 | SHANGHAI | From the print edition

EVER since China’s gargantuan stimulus of 2009, which was unleashed to repel the global financial crisis, people have worried about how the debts incurred would be repaid. This week the finance ministry provided a partial answer, in the form of a scheme to restructure the liabilities of local governments, the most indebted of China’s public institutions.

Local governments will be allowed to swap 1 trillion yuan ($160 billion) of their existing high-interest debts for lower-cost bonds. Such swaps could become a feature of China’s fiscal landscape over the next few years…

It will start with restructuring, but when that fails — and it will fail — then the central bank will begin buying up this debt and printing it over.

The restructuring does not reduce these vast debts, but it does make them much easier to bear. Local governments can only borrow with the explicit permission of the finance ministry, which is usually miserly. They have responded by setting up companies, which they keep off the books, to raise money (hence the uncertainty about the scale of the borrowing). Such opaque entities, naturally, borrow at higher rates.

I am astonished that the government allows this given the inherent instability it creates.

China’s other debts, alas, remain a big concern. The cabinet has ruled that only a portion of local governments’ concealed liabilities would be treated as full-fledged government debt. Swaps like this one will help show what the government stands behind and what it does not, which may lead to defaults on excluded debt.

It most certainly will lead to defaults on the excluded debt, which will contribute to the coming deflation.

The Great Reset

Many people envision the Great Reset, the ultimate culmination of Hyman Minsky’s vision. So far central banks around the world have lowered rates and printed more money to prevent this reset from happening, particularly in China. Right now, the moral hazard in China is so extreme that nobody believes the central bank will allow the Great Reset to occur — even the central bankers believe it; however, when you consider the size of the enormous bubble in real estate in China, it’s hard to believe the central bank can print enough money to save it.

If China prints enough money to paper over its bubble, it will flood the world with its currency, and its value will crash. Ultimately, the value of any currency cannot exceed the value of a countries assets and the value of goods and services produced. If China’s real estate is 90% to 95% overvalued, the actual value of property based on the income of Chinese workers will force the Great Reset to occur — and it’s not like China can raise everyone’s income by 2000% to support real estate because such high wages would ruin its export base and further destabilize the economy.

The Chinese economy is a bomb, and falling house prices light the fuse.

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