Wednesday 12 October 2011

The China Bubble Makes Contact with A Cactus




By Wolf Richter   www.testosteronepit.com  via Zero Hedge

Bubbles go on much longer than a rational mind can fathom, especially equity, real estate, and credit bubbles that are supported by governments and central banks. Everyone benefits, so everyone (except for a few hapless shorts) pushes to keep them going. But when they burst, they wreak havoc on the economy. And China is no exception.

China's pre-Olympics stock market bubble burst on October 16, 2007, when the Shanghai Stock Exchange touched 6,124. Monday, it dropped to 2,456, its lowest level since March 2009, down 60% from its high. The stock-market blowup fostered, as in the U.S., a real estate and construction bubble that has become an outsized contributor to GDP growth. But for some time now, ominous signs have been amassing there too.

Housing sales took a brutal nosedive last week, Golden Week—down 32% from a year ago—though the holidays normally generate peak volumes. In September, residential property prices had suffered their first official monthly hit in a year. Local reports have already pointed at developers who were forced to dump properties at lower prices to raise cash. For years, we've seen videos of brand-new ghost cities of high-rises and shopping malls. Overbuilding, funded by an enormous Ponzi-like credit bubble, has led to vacancy rates estimated unofficially to exceed 30%.

Fissures have also appeared in luxury vehicles sales. Luxury car inventories are piling up—a scary sign. To whittle them down, BMW, Volkswagen, Audi, and Mercedes dealerships across China have started to offer previously unheard-of discounts of up to 20% off retail price. Not too long ago, buyers were paying premiums above retail, and they had to wait for weeks or months before taking delivery of their new vehicles. Now they can drive most models off the lot on the same day.

Sales volume of luxury cars exploded by 48% in 2010 and by 29% through the summer this year. But now, growth seems to be slowing, just as automakers have heavily invested to ramp up production. The overall market has already cooled. After rising 32% in 2010, it is expected to scrape by with a 5% increase in 2011, according to the China Association of Automobile Manufacturers.

China, by far the world's largest market in new vehicle sales, is immensely important to all major automakers. BMW, for example, derives 25% of its profits from China. But high inventory levels, slowing sales, and rising production capacity are a toxic mix. The shakeout, as we know from what happened in the U.S. over the last decades, will be brutal. Nevertheless, luxury automakers are still optimistic publicly. With record production for 2011 already certain, they see slowing but still healthy sales growth going forward.

Inflation is red-hot, up 6.2% from August last year. Alternative numbers are in the double digits. While many Chinese workers have received significant raises—after waves of suicides and protests—others have not. Life, particularly for the poor, is becoming increasingly difficult.

Worried about social unrest, the government has taken a variety of measures. The People's Bank of China has raised interest rates five times in the past year and has tightened monetary policy in other ways. Monday, in another measure to bring down inflation, the National Development and Reform Commission cut prices for gasoline by 3.5% and for diesel by 3.9%—incredibly, fuel prices are still set by the government.

The bursting of the China bubble has been announced many times, prematurely for most part, correctly for the stock market. China has a lot of resources to patch things back up, among them nearly $2.5 trillion in foreign exchange reserves and hefty trade surpluses. Manufacturing is hanging in there, and well-to-do consumers are still in the mood to go shopping: Golden Week retail sales were up 17.5% over last year, though inflation could be largely responsible for the increase. But, construction and real estate are on the verge of tipping over, or have already tipped over, and the automotive sector is closing in. When they let go, and when the credit bubble that supported them blows up with them, it's time to deploy multiple airbags.

Well-off Chinese are also worried about an insidious food-safety scandal that has changed ... nothing: Poisonous Blood Nests—Still A Delicacy in China.


and...




Not To Be Left Out, China Announces Its Own Bank And Stock Market Bail Out

10 October, 2011

To anyone still believing that capital markets around the world express something other than government policy, the latest news out of China may come as a surprise: "Beijing will buy more shares in China’s biggest banks, in an expression of support for the beleaguered stock market and most concrete state action to date to shore up confidence in the slowing economy." 

The FT reports further: "Central Huijin, the domestic arm of China’s sovereign wealth fund, will buy the shares to help stabilise the pillars of the country’s financial system, the official Xinhua news agency said on Monday. 

Coming as the Chinese stock market closed at a 30-month low, the move was the strongest sign that Beijing wants to engineer a restoration of confidence in share prices and the economy. It paid instant dividends with a rally in the final minutes of trading on Monday.

And there you have it: stocks are now nothing more than a means for governments to validate their "success" in something, since they have no more control left over either employment or inflation, or public expression of affection with capitalism as per #OWS. So why not ramp up the DJIA to 36,000? Granted that will happen as all global currencies get terminally davalued against gold, but so what - after all that only thing that matters now is whose stock market is the biggest.

"Although Chinese growth has so far held up well, the European debt crisis and the risk of a double-dip recession in the US have cast a shadow over the country’s economy. With inflation running near three-year highs and debt levels swollen by heavy spending, economists doubt that Beijing could launch the kind of stimulus it did when the global financial crisis struck in 2008.

Sensing vulnerability, investors have turned against China, driving down commodity prices, betting on the chances of a government default and selling shares in the banks that are the economy’s lifeblood.

The government, through Huijin, is already the majority shareholder in all of the country’s major banks. While the announcement gave no details about how much more it intends to buy, it was unabashed in declaring that it aimed to halt the roughly 30 per cent slide in bank stocks in recent months.

In a rebuff to traders who have been betting that the renminbi will weaken as the Chinese economy slows, Beijing also allowed the currency to record its biggest one-day gain in years on Monday, letting it rise 0.6 per cent against the dollar.

The motivation for that also appeared to be diplomatic, with the US Senate set to vote on Tuesday on legislation that would punish China for keeping its currency undervalued."

And so on.

We could say "we told you so" but so what - at this point only the biggest idiots don't realize that is the last ditch desperation manoeuvre to preserve social stability by keeping stock markets at a level that will prevent all out panic. Yes, someone will have to pay the piper at the end of the day because not even Keynes could have envisioned this kind of wholesale lunacy, but by then it will be "someone else's problem." For now - it is time to buy, buy, buy and, to those who listen to Berlusconi, create some market volatility.

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