Chinese government bails out real estate markets in 6 cities; Growing Signs of Panic?

The Chinese government appears to be conducting a stealth bailout of localities affected by the rapidly unfolding periphery (rural areas) to the core (large cities) dynamic of the boom-bust cycle.

Writes Sovereign Man’s Simon Black (bold mine)

According to the Chinese financial publication Securities Daily, emergency real estate rescue packages have been launched in large cities such as Wuxi, Nanning, Hangzhou, Tianjin, Tongling and Zhengzhou in the last month alone. 

“Zhengzhou created a mortgage guarantee policy to win back banks’ confidence” according to the story.

Further, “if a borrower does not fulfill the loan repayment obligations as agreed in the contract, the guarantee institutions will have to repay the housing loans…”

What a surprise– a government guarantee.

The market is imploding and defaults are going through the roof. Property vacancy rates in Zhengzhou are an astounding 23%. So the government is putting taxpayers on the hook.

The article goes on: “A legislative affairs official of Zhengzhou revealed to the media that this was the first time for Zhengzhou to carry out such individual housing loans guarantee policy.”

In other words, the government is panicking.

Home sales in China fell last month by 18%, in no small part due to tightening credit conditions.

Developers have tried to pick up the slack and liquidate inventory by offering no money down deals… their own desperation tactic.

But it’s not working.

Over the May 1-3 holiday weekend, new home sales across China’s 54 largest cities were 47% lower than last year.

The national government in China has all but capitulated, and they’ve turned the reins over to local governments to ‘fix’ the problem.

This has been a long time in the making.

According to data from the US Geological Survey and China’s National Bureau of Statistics that was compiled by the Financial Times, in just two years (2011 and 2012), China produced more cement than the United States produced in the entire 20th century.

Much of this development came from centrally planned monster infrastructure projects– bridges to nowhere, zombie train stations, and infamous ghost cities.

So much excess inventory has built up, a major slowdown was inevitable.

This is a huge issue for China given that housing sales comprised nearly 12% of GDP last year.

Even President Xi Jinping recently stated that his nation must adapt to a ‘new normal’ of slower economic growth.

And like the butterfly that flaps its wings, a slowdown in China has substantial effects on the rest of the world.

Please read the rest here.

Some comments

1. So in addition to the PBoC’s implicit stimulus, I wrote why these bailouts aimed at “kicking the can” will buy only limited time yesterday. (bold original)

What they are really doing is to buy time from a devastating meltdown. Yet by doing so, they will increase the magnitude of a disorderly market clearing as resources continue to flow into speculative capital consuming ventures.

The decline in property prices has been manifested by a slowdown credit expansion. This simply means that the diversion of something for nothing bubble activities will materially decline. And a lot of the unproductive bubble projects will continue to surface as debt delinquent entities.

And demand that has emerged from the bubble boom will equally subside which should aggravate the surpluses.

And as the property sector slows, all other industries attached or that has emerged out of the bubble will also be significantly affected. There will be a contagion.

And feedback loop between problematic debt and the rapidly slowing economy enhances the risk of a credit event—a Black Swan moment.

If China’s bubbles has overwhelmed her residual real savings (which have been sunk into capital consuming speculative projects as embodied by vacant properties and ghost projects), then the policies to “kick the can down the road” will buy limited time.

This also means that throwing money into the system will extrapolate to the law of diminishing marginal returns—more debt produces lesser growth, but on the other hand, amplifies systemic risks.

2. I previously dealt with the illusion or the myth of infrastructure spending or “centrally planned monster infrastructure projects”. Here is a slice. 

The fundamental reason why Bastiat argued against the age old economic myth is that resources used by the government will always have to be taken away from somewhere: particularly resources (savings) or output (income) of non-political economic agents. The result will be a NET transfer of resources from productive agents to unproductive agents. Costs are not benefits.

Public choice theorists would further expand on Bastiat’s opposition, noting that “costs are diffused, while benefits are concentrated”. 

Bridges to nowhere have been the same infrastructure problem bugging the US.

3. More and more bailouts will mean more and more resources being transferred in support of unproductive activities. This also means goodbye reform agenda. Thus President Xi is correct when he says that the world should expect a ‘new normal’ of slower economic growth. 

4. “Substantial effects” extrapolates to transmission mechanism via economic and financial markets. This implies a short-lived EM stock market rally which will likewise affect US and Europe as global economic growth declines. This also posits rising risks of a global Black Swan moment.

Oh, substantial effects may also postulate into amplified tensions over territorial disputes. 

Anti Chinese riots in Vietnam claimed 1 life with 90 injured yesterday.  The riots has not been exclusive to Chinese companies but was anti-Asian in nature. From the CNN: “the arson was indiscriminate, with Korean-, Taiwanese- and Japanese-owned properties also torched by the angry mob.”

This implies the rise of protectionism which means decreased economic activities, deterioration in social order or peace and stability and greater risks of violence and an outbreak of military conflict.

Yet for the don’t worry be happy crowd, stock markets will keep roarin’.