Do you feel everything is progressing in China? Or rather China is like a fast car without a reverse gear, destined to crash?
Watch this interesting video analysis, featuring Michael Pettis.
(video courtesy of Journeymanpictures)
Ordos, the little known prairie city in China’s inner-Mongolia autonomous region, now has become the extreme example of China’s housing bubble. Due to extreme housing speculations and land sale (mostly grassland), loads of local farmers became instant millionaires: its GDP per capita recently surpassed Hong Kong; people with assets of 1 million Yuan (or $150,000) are actually considered “poor”; in 2010, 90% sale of Land Rovers (the symbol for power and masculinity in Chinese taste) in mainland China found its buyers in Ordos…and imagine a cleaning lady driving a Toyota Land Cruiser to work?
I am shocked by this video news from SOHU (in Chinese):
You may also watch a similar Youtube video in English, but with less drama:
All this can’t be due to China’s fast economic growth. This is simply not sustainable. I see a classic asset bubble forming, reminiscent of many bubbles in history. It will burst eventually no matter what.
America’s financial sector is still undergoing the deleveraging process – Big banks are busy in repairing their balance sheets, gradually writing off their losses in housing bubble era.
But with Fed’s super easy monetary policy and easy access to the dirt cheap credit, there seems to be a divergence in terms of attitude toward credit. The main street corporate America now is the one who carries the credit torch forward. With interest rate expected only to rise (not fall), America’s corporations are borrowing like there is no tomorrow. This is being reflected in the junk bond market, where yields again fell close to the 2007-level low.
Is another credit bubble in the making? Are we going to see a flurry of corporate defaults in coming years? Is the Fed just delaying the inevitable?
This FT video may offer you some insights to the issue.
(click to play the video)
Housing market tends to be local. It’s rare to see a nationwide price decline. The recent US housing bubble is an exception and often considered a black swan.
People have been talking about China’s housing bubble for a few years now (see my previous post on China’s housing bubble debate), but where exactly is the bubble located?
The recent NBER research sheds some light on the issue. The graph below shows the price-to-income ratio of China’s eight major cities, from 1999 to Q1 of 2010.
(click to enlarge, source: NBER w16189)
Beijing and Shenzhen are clearly in bubble-shape — the typical and familiar parabolic surge in price, and they are followed by Shanghai and Hangzhou.
Now, let’s have some comparative perspective. How the same ratio compares to the major cities in the United States.
The graph below (courtesy of Infectious Greed) shows the price-to-income ratio of US cities. San Francisco, Los Angeles, Seattle were among the highest.
(click to enlarge)
At the peak of the housing bubble between 2006-07, the same ratio for San Francisco, the highest among all US cities, was around 11. In contrast, Beijing has a ratio of 18, and Shenzhen at astonishing 22.
Interview of Jim Grant:
