China is the next place to watch for a financial crisis after the eurozone
Posted on 12 October 2011 with 3 comments from readers
Jim Chanos, the hedge fund billionaire who bet against US subprime loans has been warning on China for a couple of years now but he will likely be proven right in the end.
Over the past week China has stepped in three times to prop up its banking system. The eurozone is not alone in having a very big problem.
On Monday a state investment vehicle bought stakes in the top four Chinese banks to prop up their share prices. At the same time the $300 billion Chinese railway bubble is bursting with the finance ministry offering a 50 per cent tax break on the latest debt auction as funding dries up.
Wenzhou crash
Then there is the $15 billion bailout of Wenzhou real estate crash, reminiscent of Abu Dhabi’s $20 billion rescue of Dubai two years ago. Indeed, Wenzhou real estate investors were among the first to visit Dubai after that crash to look for investment opportunities. Perhaps some Dubai realtors should be getting on a plane to Wenzhou this week.
Wenzhou real estate’s Ponzi-scheme financing is eerily reminiscent of Dubai’s off-plan developments. They clearly learnt nothing from their visit two years ago, or possibly they did.
Chinese house prices have shown ominous signs of weakness in September. Sales of apartments in Shanghai are down by 75 per cent. Is this another real estate bubble going pop?
Three years ago there were people who said it could not happen in Dubai. Now they say the same about China but the price-to-income ratio for housing is 14 in Shanghai, way above anything seen in the Dubai boom.
Soft landing?
The Chinese authorities are clearly going to throw money at this problem to try to engineer a soft landing. But their room for manoeuvre is much smaller than in the last global financial crisis with the US Senate particularly sensitive at the moment on trade and currency manipulation.
Caught between a rock and a hard place the Chinese economy is the next one to watch for a financial crisis as its debt mountain implodes. There has been a lot of stockpiling of commodities in the Middle Kingdom over the past few years – one reason for high prices while the world has been in recession – and an end to that buying will be bound to have dramatic consequences.
For those who remember how Japan was supposed to overtake us all in the late 1980s this denouement for China is simply history showing once again that it is never different this time. Jim Chanos is right on China.
3 Comments posted by readers:
What does Tony Sagami, the perma China bull from Money and Markets and Uncommon Wisdom, have to say about this?
It was not so long ago that Italy turned to China for help in debt crisis and now it has to face the risks of default itself. Inflation is uncomfortably high, household consumption in China is already growing slightly faster than GDP growth in 2011 so far, government consumption continues to grow rapidly, real wages continue to rise faster than GDP, etc. Fortunately, China might still use a portion of its enormous reserves to strengthen the capital base of major banks in Europe, which could help solve the euro conundrum and would be a win-win solution for all concerned.
I would like to update that things in China have started to change as orders have dropped from overseas. In the past the wholesale leather markets in Guangzhou could not keep up with orders and had snobby attitudes where now if any item is not correct they will tell you to take it without paying for it and ask you to try and sell it. They will tell you to pay for it after you sell it. This means that they are now becoming more desperate. Things are changing for sure here in Asia. Retail sales in Taiwan are down big time this year.