China Stock Market Crisis Spreads to the Property Sector!

I’ve been saying here that there will be linkages between the Chinese stock market crash and the real economy.

The recent stock market crash has begun to show signs of diffusion to the property sector. This has mostly been transmitted through market sentiment (for now)

Reports the Nikkei Asia Review: (bold mine)

Turbulence on China's equity market is starting to rock the country's property market. Investors are quickly pulling their cash out of housing they purchased to cover losses incurred by stock investments. Some have begun offering discounts on property due to difficulties with finding buyers. Continued turmoil on the stock market looks as though it will have a heavy impact on the country's real estate market…

Until recently, the property market showed signs of picking up in major cities and some regions, thanks in part to lower interest rates, eased home purchase restrictions and other measures taken by authorities. According to data released by the National Bureau of Statistics, prices for new houses, excluding those for low-income earners, in 70 major cities for May rose an average of 0.7% from the previous month. China Index Academy, a Chinese private think tank, said that house prices in 100 major cities rose for the second straight month in June on a month-on-month basis. In the first half of the year, China's home sales picked up 12.9% on the year, from the 5.1% increase for the five months through May…

Investors who suffered big losses on the stock market were forced to sell property and cancel real estate purchase agreements. The Hong Kong Economic Times said that consumers are increasingly asking real estate firms for grace periods on down payments for mortgage loans, as they run out of cash because of weak stocks.

Some canceled home purchase contracts, while others canceled mortgage loans, according to China's largest property developer China Vanke, which has a strong foothold in Shenzhen. Local media reported that an official at China Vanke is concerned about massive numbers of cancellations in the future.

Given the degree of leverage used during the stock market ramp, if Chinese stocks continue to flounder or stagnate, then the next phase of transmission will likely be through the debt channel. As I previously wrote

Moreover, to satisfy debt liabilities, in the face of inadequate income, one of these assets will have to be unloaded.

If stock market selling has been prohibited, then selling will be on other assets. Considering that property has widely owned, then selling of properties should be the next logical option.

Thus, China’s dual bubble will implode!

Of course, I forgot include that since that about a third of the listed issues still remain suspended, coupled with the prohibitions on major investors to sell, then “liquidity” can also be a significant factor that could incite further downside price pressures on the property sector, as well as, on prices of other (non real estate household or business) assets.

Besides, the recent stock market boom supposedly puffed up China’s GDP. From Bloomberg:

China’s frenzied stock market boom -- which soured in the second half of June -- helped drive a surge in financial sector growth that underpinned the economy’s better-than-expected gross domestic product result.

Financial services surged 17.4 percent in the first six months from a year earlier, according to China’s statistics authority, as exchanges and brokerages registered surging revenue amid record trading volume. It was the stand out industry as real estate languished and agriculture grew at about half the overall economy’s pace of 7 percent.

As a side note, Western media have cast a leery eye on China’s statistical GDP.

But of course Chinese government will do everything to contain the damage. 

So here are the latest additions to the Xi Jinping Put.

Early this week, a Chinese government agency, China Securities Finance Corp, the country's state margin lender has subscribed to two mutual funds, where the former will also provide “ample liquidity” to support the stock buying program by the latter two. (Reuters)

Today, South China Morning Post editor George Chen tweeted that...

..commercial banks may be given brokerage licenses…

Also more credit money may have been extended by banks to one of the government agencies responsible for sustaining the unsustainable…

Oh by the way, the Bloomberg reports of the deepening addiction by the Chinese economy on debt. (bold mine)

While China's economic expansion beat analysts' forecasts in the second quarter, the country's debt levels increased at an even faster pace.

Outstanding loans for companies and households stood at a record 207 percent of gross domestic product at the end of June, up from 125 percent in 2008, data compiled by Bloomberg show.

China's stimulus, including interest rate and reserve-ratio cuts to shore up growth, threatens to delay the country's efforts to reduce its debt, posing risks to the financial stability of the world's second-largest economy. Nonperforming loans had already climbed by a record 140 billion yuan ($23 billion) in the first quarter as the expansion in gross domestic product slowed.

Hyman Minsky’s Ponzi financing dynamics --the dependence on the appreciation of value of assets as the main instrument to refinance debt--looks increasingly the economic-financial model adapted by the Chinese political authorities

Yet history tell us that stock market crashes usually comes with adverse economic and or financial consequences, thus, if history should rhyme then China’s stock market crash heightens the risks of the Global Financial Crisis 2.0

Cracks in the Xi Jinping Put? Despite Government Support, Chinese Stocks Tumble Hard (July 15); Second Straight Loss

The Chinese government has been DESPERATELY trying to rescue and revive her vulnerable stock market market. 

This I call the Xi Jinping Put.

But unlike the relatively more “moderate” interventions or PUTs implemented by the other developed economy peers, the Xi Put includes several draconian capital controls and price controls measures. Pls read the list here.

And the Xi government’s panic to save her stock markets looks increasingly more like the accounts of the early Middle Age King Gnut or popularly known as King Canute in dealing with political power. According to historical accounts, King Canute famously ordered sea waves to stop. The King wanted to show his sycophants the limits of his power. To the contrary, the Chinese version has been designed to exhibit the dominance of politics over markets. In short, the modern day version would fit what the great Austrian economist F. A. Hayek called as the 'fatal conceit'

So for three days the political ‘spell’ seemed to have worked. However, such magic seem to be fading as selling pressures have resurfaced. 

Today’s 3% loss by the Shanghai Composite has been compounded by yesterday’s 1.16% drop.

From the Bloomberg: China’s stocks fell for a second day after better-than-expected economic data failed to boost investor confidence in the world’s worst-performing equity market over the past month. The Shanghai Composite Index slid 3 percent to 3,805.70 at the close, paring earlier declines of 4.7 percent as the nation’s largest companies climbed. With 701 stocks halted on mainland exchanges and at least another 1,240 falling by the 10 percent daily limit, sellers were locked out of about 67 percent of the Chinese market. The two-day losses pared the gauge’s rebound from its July 8 low to 8.5 percent. (bold mine)

Why the difference between the muted losses of the indices relative to the broad market performance?

 

As tweet of the South China Morning Post Editor George Chen reveals, the government and her networks pumped up the index heavyweights, while this reduced index losses, such actions failed to prevent a broad based meltdown

The broad based carnage can be seen in the above, as most indices suffered 3%+ losses.

Curiously the government’s announcement of improved economic numbers: 2q 7% GDP, June’s 10.6% growth in retail sales 6.8% growth in industrial production and 11.4% growth in fixed asset investment failed to stop today's rout.

Will today's session lead to the second leg of China's stock market crisis?

I previously shown how the Bloomberg compared the Chinese stock market crash to the Wall Street Collapse during the Great Depression.

 

Fathom Consulting at the Thomson Reuter’s Alpha Now says that Chinese stocks resemble the bursting dotcom bubble. 

Whether 1929 or 2000 the outcome of the crash has been a recession. Will the same hold true for China?  

Morgan Stanley says that China's next export to the world will be recession. I believe it will be more than a recession, it will be a crisis.

I wonder what the Chinese government will do next? Will they announce an open ended buying on stocks by the PBOC? Or will they just close stock market?