I write about China because the financial world relies on two pillars these days. The US and China. One is broke. So it behoves us to take some careful note of the other.
Last week the Chinese government outlawed lending for THIRD homes. And from this weird fact comes a train of thought.
To have to legislate against lending for third homes tells us there is a problem. And one big enough and recalcitrant enough to require actual legislation. Property speculation in China is a verruca of a problem. The government has tried to dig it out, burn it out and now freeze it out – its still there.
Property is vastly expensive. It is being bought, as it was in 04 in the US, not by people who want to live in it, but by people who want to’ flip’ it. That is they expect the prices to keep rising so that no matter what they pay for it , they expect to be able to sell it for an immediate profit. The Chinese also appear to be buying and holding. Content to buy up properties and watch the value accumulate, on paper at least, as a kind of savings. And property prices have gone up so fast a great many buyers don’t even try to rent. Thus there are tens of million of million of square meters of empty unused property space.
China has, for the third time, raised capital holding requirements for its banks in an effort to yank back on the reigns. The first two times had zero effect. Maybe this one will. What is clear is that China’s second tier banks, – the joint stock banks – are now officially short of capital. They’re not in any trouble but they will have to raise 20-30 billion pounds worth of capital this year. Which, in China, is a lot!
At the same time the evidence of what I have been talking about for a while – the diversion of funds into property speculation – is now showing up in the press. For example in ’08 it turns out that Agricultural Bank of China (ABC) ‘diverted’ about 21 billion yuan (£2B ) in loans intended for rural development into among other things property speculation. I am quite sure this was not a one off. The diverting will have continued and increased since then.
This is the money that has fuelled the bubble both in CHina and in Oz.
But now the Chinese central authorities are trying in earnest to shut it off. They want and need to have sustainable investment in production. Speculation makes paper profits but paper catches fire and turns to ash. As we know. Investors are now worried. Some of the largest are worried we will get a slow down and even a crash in China. I agree.
Here’s why. Up to 60% of China’s economy is building. Since 2004 China has produced over 40% of the entire world’s concrete! In 2007 (the most recent year for which I have figures) it rose to 50%. (These figures are from the USGS). That means miners made a fortune digging up the raw materials. Coal miners made a fortune mining the coal and power companies made a fortune burning it to meet the gargantuan appetite concrete production has for power. All this grinds down if speculation on property slows or crashes.
If speculation is reigned in, then building will follow. Even in China construction will have to stop once the tide of money ebbs away. When it does bubble profits all along the chain disappear or at least decline.
Indebted and leveraged builders will feel the pain. Buyers swill tart to find there is less rise in prices. Not for a while, because markets are stubborn. But eventually people with three or twenty three properties which they believe are ‘better than money in the bank’ will find the paper worth starting to evaporate.
There are those who think that, while it is true that there is a property bubble, growth elsewhere will off-set any loses. I think they will be proved wrong. China has a bubble and it’s going to burst. When it does it will take the property speculators large and small with it. Their ‘money’ will be gone. Along with them the whole chain of profit from miner to energy companies will feel the pain.
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