China’s credit bubble has finally popped. According to The Telegraph, “the property market is swinging wildly from boom to bust, the cautionary exhibit of a BRIC’s dream that is at last coming down to earth with a thud.”

We have already cited here Albert Edwards and his “Bloody Ridiculous Investment Concept“, and how “this time is not different” and how the “decoupling” story is non-sense. So Mr. Evans-Pritchard corroborates with our ideas and offers his own 2-cent on China’s landing…
Money supply and Credit:
The growth of the M2 money supply (in China) slumped to 12.7pc in November, the lowest in 10 years. New lending fell 5pc on a month-to-month basis. The central bank has begun to reverse its tightening policy as inflation subsides, cutting the reserve requirement for lenders for the first time since 2008 to ease liquidity strains. The question is whether the People’s Bank can do any better than the US Federal Reserve or Bank of Japan at deflating a credit bubble.
Chinese stocks are flashing warning signs. The Shanghai index has fallen 30% since May. It is off 60% from its peak in 2008, almost as much in real terms as Wall Street from 1929 to 1933. 

There is so much spare capacity that they will start dumping goods, risking a deflation shock for the rest of the world. It no surprise that China has just imposed tariffs on imports of GM cars. I think it is highly likely that China will devalue the yuan next year, risking a trade war.

Falling reserves:
Hot money is flowing out of the country. “One-way capital inflow or one-way bets on a yuan rise have become history. Our foreign reserves are basically falling every day,” said Li Yang, a former central bank rate-setter. 
The reserve loss acts as a form of monetary tightening, exactly the opposite of the effect during the boom. The reserves cannot be tapped to prop up China’s internal banking system. To do so would mean repatriating the money – now in US Treasuries and European bonds – pushing up the yuan at the worst moment. 
Addicted to credit:

Fitch Ratings said China is hooked on credit, but deriving ever less punch from each dose. An extra dollar in loans increased GDP by $0.77 in 2007. It is $0.44 in 2011. 
There had been a massive build-up in leverage and there are fears of a fundamental, structural erosion in the banking system that differs from past downturns. 

This time is NOT different:
Investors had thought China was immune to a property crash because mortgage finance is just 19pc of GDP. Wealthy Chinese often buy two, three or more flats with cash to park money because they cannot invest overseas and bank deposit rates have been minus 3% in real terms this year. But with price to income levels reaching nosebleed levels of 18 in East coast cities, it is clear that appartments – often left empty – have themselves become a momentum trade. 
Shanghai developers are slashing prices 25% in November. Property sales have fallen 70% in the inland city of Changsa. Prices have reportedly dropped 70% in the “ghost city” of Ordos in Inner Mongolia. China Real Estate Index reports that prices dropped by just 0.3pc in the top 100 cities last month, but this looks like a lagging indicator.

China 2012 = Japan 1989?
The International Monetary Fund’s Zhu Min says loans have doubled to almost 200pc of GDP over the last five years, including off-books lending. This is roughly twice the intensity of credit growth in the five years preceeding Japan’s Nikkei bubble in the late 1980s or the US housing bubble from 2002 to 2007. Each of these booms saw loan growth of near 50 percentage points of GDP.

Main point: This time is not different. History merely repeats itself.

Share →