Best of the Week
Most Popular
1.Are UK Savings Interest Rates Finally Starting to Rise? Best Cash ISA 2017 - Nadeem_Walayat
2.Inflation Tsunami - Supermarkets, Retail Sector Crisis 2017, EU Suicide and Burning Stocks - Nadeem_Walayat
3.Big Moves in the World Stock Markets - Big Bases - Rambus_Chartology
4.The Next Financial Implosion Is Not Going To Be About The Banks! - Gordon_T_Long
5.Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - Nadeem_Walayat
6.Trump Ramps Up US Military Debt Spending In Preparations for China War - Nadeem_Walayat
7.Watch What Happens When Silver Price Hits $26...  - MoneyMetals
8.Stock Market Fake Risk, Fake Return? Market Crash? - 2nd Mar 17 - Axel_Merk
9.Global Inflation Surges, Central Banks Losing Control and Triggered the Wage Price Spiral? - Nadeem_Walayat
10.Why Gold Will Boom In 2017 - James Burgess
Last 7 days
What are the Biggest Gambling Markets in the World? - 30th Mar 17
Stock Market Mixed Expectations As Technology Stocks Reach New Record Highs - 30th Mar 17
Bitcoin Price Rises Higher Than Gold… But Its Value Is a Different Story - 30th Mar 17
Critical Fibonacci Extensions May Mark End Of Trump Stock Market Rally - 29th Mar 17
Ending Syria’s Nightmare will Take Pressure From Below - 29th Mar 17
Charts That Reveal US Real Employment Status and It’s Not Good - 29th Mar 17
SNP Controlled Scottish Parliament Demands Right for Scotland to Commit Suicide - Indyref2 - 29th Mar 17
USD Gold Myriad of Signs - 28th Mar 17
Ominous Social Trends That Will Shape Our Future - 28th Mar 17
Foundation And Empire: Is Donald Trump The Mule? - 28th Mar 17
Top Ten US Dollar Risks - 27th Mar 17
The Popularity of Gambling and Investing Amongst Students - 27th Mar 17
Is Political Betting on the Rise? - 27th Mar 17
US Stock Market Consolidation Time - 27th Mar 17
Russia Crisis - Maps That Signal Growing Instability and Unrest - 27th Mar 17
Goldman Sachs Backing A Copper Boom In 2017 - 27th Mar 17
Foundation – Fall Of The American Galactic Empire - 27th Mar 17
Stock Market More Correction Ahead - 27th Mar 17
US Dollar Inflection Point - 27th Mar 17
Political Week Presurres US Stock Market - 25th Mar 17
London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - 25th Mar 17
Will Washington Risk WW3 to Block an Emerging EU-Russia Superstate - 25th Mar 17
Unaccountable Military Industrial Complex Is Destroying America and the Rest Of The World Too - 25th Mar 17
Silver Mining Stock Fundamentals - 24th Mar 17
A Walk Down the Dark Road of Bad Government - 24th Mar 17
Is Stock Market Flash Crash Postponed Until Monday? - 24th Mar 17
Stock Market Bubble and Gold - 24th Mar 17
Maps Of Past Empires That Can Tell Us About The Future - 24th Mar 17
SNP Independent Scotland's Destiny With Economic Catastrophe, the English Subsidy - IndyRef2 - 24th Mar 17
Stock Market VIX Cycles Set To Explode March/April 2017 – Part II - 23rd Mar 17
Is Now a Good Time to Invest in the US Housing Market? - 23rd Mar 17
The Stock Market Is a Present-Day Version of Pavlov’s Dog - 23rd Mar 17
US Budget - There’s Almost Nothing Left To Cut - 23rd Mar 17
Stock Market Upward Reversal Or Just Quick Rebound Before Another Leg Down? - 23rd Mar 17
Trends to Look Out For as a Modern-day Landlord - 23rd Mar 17
Here’s Why Interstate Health Insurance Won’t Fix Obamacare / Trumpcare - 23rd Mar 17
China’s Biggest Limitations Determine the Future of East Asia - 23rd Mar 17
This is About So Much More Than Trump and Brexit - 23rd Mar 17
Trump Stock Market Rally Over? 20% Bear Drop By Mid Summer? - 22nd Mar 17
Trump Added $3 Trillion in Wealth to Stock Market Participants - 22nd Mar 17
What's Next for the US Dollar, Gold and Stocks? - 22nd Mar 17
MSM Bond Market Full Nonsense Mode as ‘Trump Trades’ Unwind on Schedule - 22nd Mar 17
Peak Gold – Biggest Gold Story Not Being Reported - 22nd Mar 17
Return of Sovereign France, Europe’s Changing Landscape - 22nd Mar 17
Trump Stocks Bull Market Rolling Over? You Were Warned! - 22nd Mar 17
Stock Market Charts That Scream “This Is It” - Here’s What to Do - 22nd Mar 17
Raising the Minimum Wage Is a Jobs Killing Move - 22nd Mar 17
Potential Bottoming Patterns in Gold and Silver Precious Metals Stocks Complex... - 22nd Mar 17
UK Stagflation, Soaring Inflation CPI 2.3%, RPI 3.2%, Real 4.4% - 21st Mar 17
The Demise of the Gold and Silver Bull Run is Greatly Exaggerated - 21st Mar 17
USD Decline Continues, Pull SPX Down as well? - 21st Mar 17
Trump Watershed Budget - 21st Mar 17
How do Client Acquisition Offers Affect Businesses? - 21st Mar 17

Market Oracle FREE Newsletter

Elliott Wave Trading

Timing China's Financial Meltdown and Housing Market Crash

Stock-Markets / China Economy Dec 06, 2011 - 04:22 PM GMT

By: Janet_Tavakoli

Stock-Markets Best Financial Markets Analysis ArticleAt an October seminar of the Chicago Council on Global Affairs (CCGA), carnival economist Niall Ferguson promoted his new book, Civilization: The West and the Rest. He revealed the blindingly obvious as if it were a divine revelation: the U.S. has serious problems. He preached that the U.S. corrupted its six Ferguson-defined "killer apps": competition, science, rule of law, medicine, the consumer society, and a strong work ethic.


Ferguson claims India and China have downloaded these killer apps and compares the West with a virus infected PC and the East with a fast Mac. Never mind that competition, science, medicine, trade, and industrious workers have been in evidence in India and China for centuries. The West didn't invent these ideas, so perhaps there's more to the story than Ferguson's pat explanation. As for rule of law, that killer app seems as corrupted in the East as it is in the West. Ferguson's crowd-pleasing presentation didn't mention other "killer" apps that are prevalent in China: fraud, high debt levels, and privatizing gains while socializing risks and losses.

Ferguson claims that in 1978 citizens of the U.S. were on average 20 times richer than the citizens of China. Today, U.S. citizens are only five times richer. He apparently defines wealth as acquisition of material goods. That is important, to be sure, and the West should pay careful attention to the material economy. But Ferguson's China supremacy presentation didn't mention the negative human wealth effects of China's one-child policy on the shortage of female mates, the general disregard of public safety, and shortage of essentials like agricultural water and arable land.

Ferguson projects that China will have closed the material goods gap by 2016. This fits right in with popular group-think that China is an unstoppable growth machine. But it is this type of group-think that warned no one about the pending financial crisis in the U.S. in 2008 and now ignores serious potential problems in China.

Bailouts, Railroading, Cover-ups, and the Chinese "Miracle"

China is becoming a version of the U.S., but it's the version that builds lots of Penn Centrals in record time to connect slapped together empty cities before going bankrupt.

When Ferguson claimed China downloaded killer apps from the West, he left out one that is literally a killer in the form of reckless disregard for public safety. China's Ministry of Railroads, an entity with rapidly growing debt of 2.1 trillion yuan ($330 billion), was bailed out when the National Development and Reform Commission announced it had "government support." (See Gordon G. Chang's October 23 article in Forbes.)

The bigger problem is the shoddy construction of China's high speed railroad system, and cover-ups by railroad management. It turns out that railway bridges were constructed by untrained unskilled migrant workers and rocks and gravel were tossed into pier foundations instead of concrete. Unqualified workers also built tunnels. When tunnel problems manifest themselves, they usually involve suffocation of passengers. If you ever wondered how the Chinese can slap together an infrastructure so fast, here's your answer. It literally slaps it together. Fixing the construction problem may ultimately be more costly than having done it properly in the first place. But the social issues are an even bigger disaster for Chinese government.

In July 2011, two bullet trains on the Wenzhou Line crashed. Officials claimed a lightning strike caused the accident, and tried to suppress reports.

After officials claimed everyone was removed from the carriages, bulldozers buried the rubble and onlookers screamed as bodies fell out of the windows of the about-to-be-buried carriages. Then after it was formally announced that all of the bodies in the carriages had been removed, a four-year-old girl was found alive in the wreckage. A spokesman for China's Railway ministry told the reporters shouting at him that it was a "miracle."

Tens of Millions of Mate-less Men

China's population comprises more than 1.3 billion people. According to Unnatural Selection, China has 121 male births for every 100 females, whereas the highest natural ratio is around 106 males per every 100 females. Wikipedia's 2008 figures show that in the under 15 age group, there were already 113 males for every 100 females. I'm sure young men and women have given this ratio at least a passing thought, and it's getting much worse.

Putting aside the issues of selective abortion of female fetuses, female infanticide, and the implications of household formation, this means a growth in the tens of millions of frustrated men dispersed throughout China.

The apparent euphoria of western pundits like Ferguson when discussing China makes me wonder if they downloaded an app for a peculiar kind of dementia. Everything we want or need in life comes to us through our relationships with other people. The quality of our relationships, or human wealth, defines the quality of our lives. Ignoring this is a socio-economic hand job. China is fundamentally impoverished in a way that is irreparable in the short run.

China's Housing Price Crash

There's a myth that low leverage makes a housing price crash immaterial. Many Chinese home buyers pay cash, but others make high down payments. Some reported down payments are as low as 30%; high by U.S. "standards," but still painful when housing prices drop 30%. Some investors have bought multiple properties. Even if one pays upfront in full, a housing price decline has a huge impact on how wealthy investors feel.

Here's the most benign case. Suppose a buyer pays cash for an empty investment property. The buyer still has to maintain the property. If housing prices remain stagnant (or go down), and food prices and other prices escalate (as they have), will that buyer feel richer or poorer? Will he have a higher appetite for liquidity or a lower one? Will other potential investors observe this and want to buy real estate so they can enjoy the same delightful experience?

The critical problem is that home prices in China are sliding fast. Some analysts say the "tipping point" started in September and they expect it to get much worse. Chinese newspapers reported riots in Shanghai after developers slashed prices to dump inventory. Contracted home buyers saw prices cut 25%. Some property developments in Beijing have had price cuts of 20-30 percent. China's empty "ghost cities" are seeing price discounts of 30 percent for upfront cash payments. Mainstream U.S. financial media is now reporting possible housing price declines of 20-30 percent for major Chinese cities next year.

China's Debt and Coming Hard Landing

Nothing creates a hard landing better than a housing collapse. Property construction accounts for more than 13% of China's GDP up from around 3% of GDP in 1999 according to the China National Bureau of Statistics.

Local Chinese governments have mounting debt to fund infrastructure projects of 10.7 trillion yuan ($1.7 trillion) and depend on land sales to fund payments. According to investment management company GMO debt in Local Government Funding Vehicles amounts to around 1/3 of China's GDP. The projected slowdown in land sales will pose a huge problem, no matter whose numbers one uses.

A huge problem in analyzing China's debt problems are off-balance sheet obligations. No one knows the size of local government debt obscured by off-balance sheet vehicles. Hidden national government debt includes "support" such as for the railroad and a variety of other guarantees have ballooned China's real debt.

Then there are the obvious problems with undercapitalized banks. When most people think of "Jim" and "China" they think of China advocate Jim Rogers or China skeptic Jim Chanos. Many people haven't heard of Jim Antos, an analyst at Mizuho Securities in Asia. According to Antos, loan growth has slowed to 15% from 30%, but the unsustainable current level of bank loans stands at $6,500 per capital in 2010. Gross domestic product per capital is $4,400. On a scale of one to ten, he rates China's debt problem an eight and Greece's debt problem a ten.

GMO reports that Fitch estimates that 35% of bank loans are directly or indirectly tied to the Chinese property market, and UBS estimates it at 40-50% of outstanding loans. No matter which is correct, a pullback will be brutal. ("Between Errors of Optimism and Pessimism," by Edward Chancellor, GMO, September 2011, and "China Real Estate--Final Destination," UBS, August 25, 2011.)

These loans don't count active private lending frauds that fleece entire towns and enrich local bureaucrats, accomplices of "property developers" turned con artists.

Swindles have become so commonplace that James Grant, of the Grant's Interest Rate Observer, calls China "The People's Republic of Madoff." Research firm Muddy Waters gives foreign investors ample reasons to be wary. It's been documenting suspicious numbers reported by a plethora of small cap Chinese reverse merger companies listed on foreign exchanges. Muddy Waters' skepticism about a larger company, Sino Forest, caused its stock price to plummet.

If that weren't enough to make investors nervous, Jim Chanos, President and founder of Kynikos, told Bloomberg that many large cap shareholders don't realize that all they have is an operating agreement with mainland companies, not control of hard assets.

China has loaded itself up with debt. Unfortunately for Chinese citizens, China also down-loaded the "killer app" of socializing credit risk. Bank deposits are low yielding and the borrowing rate is either very low or negative which encourages explosive loan growth, also known as a debt bubble. ("China Financial Markets: Time to relax credit?" by Michael Pettis, Guanghua School of Management, Peking University, October 31, 2011.)

As for China's official growth figures, one has to be suspicious of government numbers when ministers have already shown they will try to bulldoze over horrific facts. Discovery of the truth takes a miracle.

When Will Strain Lead to a Crash?

China is on track for making as much of a muddle of its economy as many countries in the West have done. While being a fast-growing creditor country helps mitigate the consequences of its folly, the consequences are catching up with China. Are these problems overstated? That's impossible to tell without reliable numbers. The question to answer is how quickly and to what degree will China's problems affect its economy? After all, one wants to be able to get in a good short trade just before it all falls apart, if that is where this is headed.

Dylan Grice points out that anecdotal evidence can be misleading and China may "keep the plates spinning for a few more years." ("Popular Delusions: On China's swindles: how big is the bezzle?" by Dylan Grice, Societe Generale Cross Asset Research, November 4, 2011.)

It would be useful to come up with a measurement that indicates when things are just about to fall apart. Based on my own anecdotal experience in Iran, one cannot predict the timing of a collapse with certainty, but a good leading indicator is when rats start leaving the sinking ship in droves.

Chanos ("China Chaos") Derivatives

Grice provides a clue for the timing of China's collapse. Since 1990 around 18,000 officials have fled taking an average of around $7 million per flight. Special purpose credit derivatives (perhaps you prefer the term "discredited" derivatives) are a leading indicator for China's hard landing. I call these 'China chaos" derivatives, or "Chanos" derivatives.

If the rate of change of public officials fleeing the country, df/dt > x, where x is yet to be defined, or the acceleration in fleers, d2f/dt2 > y, where y has yet to be defined, or the rate of change of the average amount of loot dl/dt > z, where z is yet to be defined, then conditions of the Chanos Equilibrium have been violated and destabilization will occur.

Stated differently, when you see the absolute amount of embezzled wealth fleeing the country suddenly increase, or when you see a sudden increase in the absolute number of Chinese officials leaving the country on "holiday," or when you see an acceleration in the number of officials leaving the country in a stealthier way, you'll know China is sinking.

To read the original pdf by Janet Tavakoli with links click here.

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2011 Copyright Janet Tavakoli- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife