China’s Bubble Cycle Deepens with More Grand Inflation Based Projects

So China isn’t just preparing for a bailout, she has also put into the pipeline another huge stimulus program to prevent the risk of a slowdown.

Reports the Bloomberg, (bold emphasis mine)

China’s plan to rein in property prices with a record homebuilding program may worsen local debt risks even as it proves a boon to companies from domestic cement makers to Chilean copper exporters.

Premier Wen Jiabao aims to build 36 million low-cost homes by 2015, an initiative that will see 2 trillion yuan ($307 billion) added to local government borrowing by 2012, bringing it to a total 12 trillion yuan, Standard Chartered Plc estimates. The surge of loans to local authorities may spark a wave of bank bailouts that hobble economic growth.

And the symptoms of a bubble are getting visible as time passes; China has even her version of financial innovation or regulatory arbitrage or “shadow banking system”!

From the same article, (emphasis added)

Local governments have created more than 8,000 investment companies that allow them to get around regulations prohibiting direct borrowing. Fitch Ratings cites lending to the vehicles and to property developers in a worst-case scenario predicting bad loans could reach 30 percent of the total at China’s banks.

Moody’s Investors Service also built a 10 percent bad-loan ratio into its stress tests on China’s banks, which the company says probably will provide most of the social-housing funding.

So where will China get the money to finance these grand projects?

Again from the same article, (bold underscore mine)

Banks had a total of 50 trillion yuan of all loans outstanding in April. Standard & Poor’s has said the bad-loan ratio may climb next year to as high as 10 percent, from 1.1 percent now.

Social housing projects have “a pretty thin profit,” said Zhang Yi, senior analyst at Moody’s in Beijing. “It’s not like you are lending to highly profitable companies.”

Chris Ruffle, who helps manage $19 billion for Martin Currie Inc. in Shanghai, said, “it’s not a great situation and I wouldn’t want to be an investor in banks” after the record boom in lending.

The government hasn’t spelled out how construction of low- income housing will be financed over the full five years or how local governments will recoup their costs.

The central and local governments combined will provide 500 billion yuan of a total of at least 1.3 trillion yuan to build 10 million homes this year, Vice Minister of Housing and Urban- Rural Development Qi Ji said March 9, without saying how they will come up with the money. The central government will provide about 121 billion yuan.

While officials have pressed banks not to expand lending to local government financing vehicles, China Banking Regulatory Commission Chairman Liu Mingkang said that credit dedicated to affordable-housing developments with “repayment capability” was exempted from the push, the China Securities Journal reported March 7.

By building cheaper homes, either for rent or sale below market prices, Wen seeks to prevent social unrest caused by record property prices. He’s also countering rising prices in major cities with curbs on lending and mortgages, and a trial property tax in some cities. The risk is a slowdown in land sales that contribute about a third of local government revenue...

The program is front-loaded, with 10 million units planned for this year, a 170 percent surge from the 2010 total. Vice Premier Li Keqiang said Feb. 24 that the 2011 target is “mandatory” and local governments must increase funding for the plan.

A “financing hole” of between 817 billion yuan and 1.4 trillion yuan this year alone means most of the construction will probably be funded through bank loans, said Stephen Green, head of China research at Standard Chartered in Shanghai. He estimates that construction this year may cost as much as 1.9 trillion yuan.

Well like all bubbles, financing will emanate from inflationism and financial repression or via the diversion of private sector savings through money printing and expansion of circulation credit from the banking system to fund government pet projects.

China’s government looks desperate to avert a slowdown by attempting to maintain the current price levels, so as to maintain the profitability of sectors benefiting from the stimulus programs. The government, as shown above, does this by applying more inflation. So on one hand the government facetiously pretends to prevent a bubble by applying preventive tightening on some sectors. On the other hand, she inflates more. The left hand does not know what the right hand is doing.

As the great Murray Rothbard explained, (bold emphasis added)

First it pumps in a great deal of new money because, in the depth of recession, prices go up very little in response. Emboldened by this "economic miracle," it pumps more and more new money into the system. Then, when prices finally start accelerating, it tries to prolong the inevitable and thereby only succeeds in delaying market adjustments.

The policy of quasi booms eventually will end up with a bust. China is playing well into the Austrian Business Cycle script.

As I have been saying, the phase of China’s inflation cycle have been more advanced compared to her major counterparts, as exhibited by this chart from Pragmatic Capitalist

And the above development represents as more signs that the next financial crisis will likely emanate from China.