Huge scale in Chinese property bubble and bust

The FT has a simple post today that captures the sheer scale of what Australia is leveraged to. China was considered unbalanced before the GFC but after, sheesh:

…To understand the scale of the resulting building boom, consider this statistic: in just two years – 2011 and 2012 – China produced more cement than the US did in the entire 20th century.

…In the past decade much of China’s construction frenzy has been driven by real demand, from people wanting to urbanise or upgrade their homes or from speculators who have almost no other options to invest their newfound wealth.

…The government itself has an enormous incentive to keep pumping the bubble up, since all land is technically owned by the state and land sales made up 60 per cent of local government’s budgetary revenues last year, according to estimates from JPMorgan.


…The turning point seems to have come because China has simply built too much.

Until 2011, the market mostly saw supply shortages but today total floor space under construction is enough to satisfy well over four years of demand at a national level.

In some of the worst affected provinces, there is enough supply for more than seven years of demand.

The central government appears to have had enough. The local government land corruption ponzi is under direct attack. From Investing in Chinese Stocks:

The anti-corruption freight train is barreling down the tracks and ahead of it is the oncoming land finance freight train.

A strict audit of ¥15 trillion in land sales is going to uncover dirt in many Chinese cities. Already, according to the article below, 9 cities have been found to have violated regulations governing land finance, including Shangluo, Hengyang, Neijiang, Xingtai, Huzhou and Suqian. Recall how land finance works:

Chinese local governments sell land to developers who build homes and commercial centers. The revenue from land sales pays for development of supporting infrastructure, everything from roads and subways to schools and parks. Land sales also finance local government debt which exploded after 2008. In the post-2008 economy, developers rushed to build property amidst a real estate bubble and when the government moved to restrict activity in first- and second-tier cities, developers poured into third- and fourth-tier cities and repeated the model. However, developers have run ahead of many local governments. In areas where there are true ghost cities, support infrastructure such as schools and hospitals have not been built. If the real estate bubble bursts and land sales fall, local governments will need to find another revenue source or they may be unable to finance the infrastructure that generates GDP growth and supports the local real estate market, and they may even face a debt crisis in some of the worst hit areas. This ignores all the potential issues with indebted developers, plus overproduction and bad debts in other sectors of the economy.

84 major Chinese cities have borrowed ¥8.7 trillion, backed by revenue from land sales. If cities have violated regulations or violated the law in their use of land finance, things could quickly come to a head in areas where the governments are borrowing to survive, which is already the case in some cities. QQ has more:

“Mortgage financing using state-owned land, borrowing money to promote urban development and stimulating economic growth, this economic growth model is not sustainable, it can very easily bring about hidden volatility in the capital markets and macroeconomic development.” Wang Jianwu told reporters, the key to solving the problem is for the local government to gradually adapt to the “new normal,” get rid of “land hormone” stimulus, while local governments also need to shift from the dominant role of economic development to servicing economic development.

Yet again, the anti-corruption probe lines up with the leaderships vision of economic reform. By squeezing local governments’ ability to borrow through land sales, the shift towards a rabalanced, market-based economy can proceed more quickly.

Excellent policy. I can only repeat, Australia is in the cross-hairs of a very big gun.

Houses and Holes
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    • Apparently his father was purged during the cultural revolution, so growing up as a clean skin true believer appears almost unbelievable.

      Time in the crosshairs as described in the article linked, seems to be the norm for anyone with real political power in the modern world.

  1. In the meantime our law firms, accountants and bankers are travelling up and down China clutching:

    SIV application forms

    FIRB management tips – i.e shush don’t wake them

    Loan application forms

    In an increasingly successful ploy to offer safe passage for those who can pay.

    Beats a leaky boat from Indonesia.

    If the so called ‘investments’ were productive one might be inclined to look the other way but many of the approved investments are nothing more than govt debt, pumping up the price of other existing assets or smoke and mirror projects that allow the ‘spirit’ of the program to be subverted.

    And that is assuming that the SIV facilitators feel under any obligation to actively monitor ongoing compliance by their ‘clients’.

    • +1 Although the SIV is a bit of a red herring. At least we know who and how many there are. Only a few hundred issued in the last year as far as I can tell. The real story is the tens of thousands of unapproved and illegal sales of existing dwellings to foreign nationals.
      These sales are completely unregulated.
      This gross regulatory failure has made Sydney a mecca for global money laundering and the most expensive Chinese city in the world.

      • Yeah, I agree – the SIVs provide a nice clear look at the lengths out own banks agencies etc will go to get high flyers in, but I reckon by far the bigger issue is FIRB not looking at all on ordinary everyday beneficiaries of corruption offshore people buying ordinary everyday houses here.

        BTW there was a spoof FIRB site doing the rounds on twitter last night when I looked.

      • Sure the numbers of SIV are low (at present – it takes a while for service providers to work out what will fly and to establish systems) but I don’t think the issues are unrelated.

        The SIV provides a wonderful legitimate pretext for our law firms, accounting firms and bankers to market to off shore investors and it is clear that they are doing so with considerable energy.

        From the perspective of local lawyers, accountants or bankers it doesn’t really matter whether the market they are targeting for SIV visas ultimately decide to pursue the visa.

        A transaction is a transaction when it comes to collecting a fee for facilitating the transaction.

        It may be that a lot of potentially interested SIV applicants soon realise that they can invest in Australia in new and existing residential property (put a child or relative into a uni course) without difficulty (snoozy FIRB) and without the complications of a SIV.

        Sure the SIV has the attraction of coming with temporary and possibly permanent residency but that may be a bridge they will choose to cross in due course once they appreciate they can effectively make an investment of their choosing right now without a SIV.

        In fact not getting a SIV may currently be preferred simply because there may be some fears that monitoring of SIV investments might be more intensive than the efforts of the FIRB.

        I speculate that the SIV program is generating a lot of the investment that the FIRB is currently ignoring and I would not be surprised if the actual SIV numbers will start to climb rapidly once people are confident that the “investment structures” will not be closely monitored – unless the government gets cold feet in the face of scrutiny.

        But considering the ALP came up with the dopey SIV program in the first place and failed to monitor the work of the FIRB one wonders where the scrutiny of the LNP will come from.

      • One thing I still can’t reconcile is how the $5m SIV sits with the CCP rule regarding max $50k USD allowed out of China per yr.

        How can $5m be legal but $51k illegal?

      • +1. This includes pursuing complicit people involved in the laundering of money – that is, family members who have had the moneys transferred to them in order to buy dwellings in their own name. Some of the most deserving people to be jailed IMO.

      • How can $5m be legal but $51k illegal?

        Both are equally illegal, but if you’re going to break the law why would you bother for a measly extra $1k? Having determined to break the law, you’re going to go the whole hog, surely.

      • TP,

        “….One thing I still can’t reconcile…”

        I don’t think it can be reconciled.

        Which of course may be a reason why a SIV may have some drawbacks for Chinese Nationals compared to just sneaking past the sleeping FIRB guard dog.

        Applying for and receiving a SIV maybe be a “red falshing light” and the sort of thing you ONLY do once you are ready to bolt out the door.

      • Surely if the Aus govt issues the SIV on the basis of a (by defn) illegal transfer it is party to an offence.

        May explain why there are so few SIVs

  2. I want to send this article to a friend, but only after unballanced is corrected to unbalanced in the second line… 🙂

      • Probably a dentist…they’re a bit strange like that… things have to be perfect, especially in inter proximal areas.

      • I had to look that one up Doc. I’d say you’re right, even from my completely ignorant POV all things dental. Come to think of it, now overdue for a check up……well overdue as usual.

  3. Good to see atleast someone has our ratio’s right. Hey hey, Sydney is beating NY, London and Toronto at something …

    • The sale of buildings, evn residential buildings, to foreigners is an export. It’s like selling a Holden Commodore to an overseas buyer but they leave it in Australia and let us use it for a price, but we don’t have to if we don’t want to.

      Even better if we sell it to them while our currency is “overvalued” compared to theirs and if our asset is in a bubble….You wouldn’t prefer to sell it to them while the asset is in a slump and our currency has crashed would you?

  4. “…To understand the scale of the resulting building boom, consider this statistic: in just two years – 2011 and 2012 – China produced more cement than the US did in the entire 20th century”

    WOW I just feel out of my chair when I read that. That is huge. Imagine if we all knew what the actual real debt of all this was and the debt that has been swept under the carpet……

  5. Supply equal to four years demand, allegedly from a position of slight undersupply suggests that they have new housing roughly equivalent to years of demand each year since 2011.

    Given that their population is highly likely to peak around 2030, if they go on without a big reduction in the construction rate, they’ll have built all the housing they will ever require by about 2019.

    Sometime between now and 2020 they will need to massively reduce their construction industry.

    Hmm – housing is out of the reach of the vast majority of the population yet there is between four and seven years of excess housing supply. Where’s Claw to tell us they need to build faster?

    • Hmm – housing is out of the reach of the vast majority of the population yet there is between four and seven years of excess housing supply. Where’s Claw to tell us they need to build faster?

      You are playing word games. If housing is out of reach of so many then I suggest there is a problem that requires a solution.
      It sounds like they have a few too many mansions but are short a few million hovels. Solution: build more hovels.

  6. reusachtigeMEMBER

    It is great to see Australian cities in that list. It just shows what a great wealth creator investing in housing in Australia is. I hope none of you have missed out!

      • Melbourne and Perth (still?) are on that list. Brisbane and Adelaide might also be.

        Three major cities out of five in a continent as large as Oz is a disgrace.

    • Check out the Demographia Survey hyperlinked below for information on the Median Multiples of the Aussie metros.

      The Chinese bubble bursting will trigger the Aussie one as well.

      There is roughly $A2.5 trillion to wipe out of the Aussie housing market.

      What is the capital base of the Aussie Banks ?

  7. China’s population and urbanisation projections from UN suggest that the end of urbanisation must come.

    United Nations, 2010 est.:[7]

    2020: 1,387,792,000
    2030: 1,393,076,000
    2040: 1,360,906,000
    2050: 1,295,604,000
    2060: 1,211,538,000
    2070: 1,125,903,000
    2080: 1,048,132,000
    2090: 984,547,000
    2100: 941,042,000

    Note that population will diminish because of the impact of the one child policy.

    By the end of 2012, the mainland of the People’s Republic of China had a total urban population of 712 million or 52.6% of the total population, rising from 26% in 1990.

    The estimate of global urbanisation is 60% (4.9 billion) by 2030 (UN).

    If China continues at the current rate of urbanisation and achieves the average it would do so in say another 9 years. (increased by 26 from 26 to 52 in 22 years therefore increase by a further 8 would take about 8 to 10 years.

    Eternal growth is not possible in a finite world and China’s will hit demographic quicksand in 10 years. That will become increasingly obvious over time leading to a gradual move to the exits, eventually turning into a stampede.

    The China collapse in growth might be 5 to 10 years away, but it isn’t 20 years away!


    • The One Child Policy is far from the only reason for China’s diminishing population – TFR was below replacement before the policy was reduced and relaxation of the policy is not so far resulting in increased births.

      Interesting to see that 10 years after the peak the population is a lot smaller (the difference is greater than the population Australia!) than 10 years before the peak – the slope on the other side seems to be a lot steeper. In fact that project has them falling below today’s population less than 10 years after the peak – hence housing capacity that is surplus now will again be surplus very quickly after 2030.

      • Education and employment of females is the other great driver of lower fertility and this is heavily in play in China with urbanisation and growth in non-agricultural employment.

        It is an urbanisation and debvelopment induced reinforcing trend.

        Thanks for noting it.

  8. “A strict audit of ¥15 trillion in land sales is going to uncover dirt in many Chinese cities”

    I should hope land sales would involve dirt. Precisely measured dirt. In every city.

    I know that’s not what the author meant, but I found it amusing.

  9. I say sell as many apartments to foreigners as we can – it’s a great export industry…but not anything below the second floor. We need to keep control of the land itself.

  10. Hugh PavletichMEMBER

    Copy of a General Email I just sent out … readrers may find of interest …


    Huge scale in Chinese property bubble and bust | | MacroBusiness Australia

    China: Big Bubble Trouble | Hugh Pavletich | Scoop News

    2014 10th Annual Demographia International Housing Affordability Survey

    New Zealand’s Bubble Economy Is Vulnerable | Hugh Pavletich | Scoop News

    … estimated 49 million vacant housing units in China …

    China’s empty nests … Angus Grigg … Australian Financial Review

    … with 8.2 million vacant housing units in Japan …

    Vacant homes in Japan reach record as outlying populations shrink … Nikkei Asian Review

    … and too …

    Planned Chaos: Ludwig Von Mises: 9780910614009: Books

    Hugh Pavletich and

    • Excellent comment on the FT article thread within H&Hs article above … by a Chinese resident …

      I am a foreigner living in a budding third tier city in China, where I own a business. It is what most would consider to be a very typical city of 2 million in China. The construction boom that has been going on has now begun to bust. What I see on my own after six years, and hear from my local friends and acquaintances, is that half the new units built are unsold, and that the current residential construction projects have even lower sales. Some projects have even been halted. All of these projects have one thing in common: the prices are way too high for the average family to afford. Housing at a price that the working families could buy are few and far between. Though the article says a high percentage of people own their own apartments, most of these are old and crumbling. May of the owners are holding on to them based on ever present rumors of the government planning to buy them out to re-develop the land.

      Only the wealthy and the successful middle class can afford these new homes. In addition to prices of well over one million rmb (this is not Shanghai), new apartments are completely unfinished. Bare cement walls, floors and ceilings, a couple of holes for plumbing, and a few wires for electrical work. This is also a burden for people who have had to scrape together a 50% down payment.

      The situation for non residential properties is even worse. Shopping malls remain unfinished as major retailers have pulled out of two recently opened malls, both of which are empty of shoppers. A major hotel and office complex was abandoned as the principal involved skipped the country after defaulting on his company’s debts to the banks and private lenders.

      China is indeed heading towards some sort of a major correction. The present situation is untenable. The big question as always here is how will the government handle it?

      • In reality, there appears to be very little known about the real estate financing that has been going on in China.

        One particular aspect of it is inter-family lending. There is simply no way many of the buyers would have had the deposits required, without hefty family support. As real estate prices decline, family will be the first to get hit. How this plays out within Chinese culture will be most interesting indeed.

        It would be most helpful if researchers / media could enlighten us on the extent of inter-family lending.

        Vacancy volumes escalate of course as a bubble deflates

    • Much of the vacant stock appears to be “shells” (as the FT commenter notes above) with just stub services and devoid of fit-out.

      So what is it really worth ?

      Completed housing should not of course exceed 3.0 times annual household incomes in normal markets.

      Uncompleted housing (such as the Chinese) much less of course.

      In normal markets too, apartments should be worth much less than detached housing, as the latest Houston Association of Realtors Monthly Report illustrates …

      Houston Real Estate Market July Report

      …median $US153,000 for apartment / condo and $US202,000 median for a detached … apartments / condos 75% the price of detached.

      The above factors need to be taken in to account when assessing the True Market Value of China’s housing stock … and the base of the Median Multiples adjusted accordingly.

      Likely the “shell stock” should not be worth any more than about 1.5 times annual household incomes.

      The adjustments required are massive.