Skip to content

Economy on the Edge of a Nervous Breakdown

October 3, 2011

I just returned from a trip to New York, where earlier last week I gave a talk at the Council on Foreign Relations.  The topic was the question on everyone’s mind these days:  the outlook for China’s economy.

Over the past several weeks, a number of news reports and market figures have caught my attention, which appear to indicate that China’s economy may be approaching a crisis.  I use the word “crisis” in the traditional (or medical) sense, meaning a critical turning point when tensions or contradictions are resolved, for better or worse — sometimes in unexpected ways.  One potential interpretation of this crisis is that China is entering the terminal stage of a bubble, and that what we are seeing are the early signs of a much broader collapse.  But it may not be that simple.  I have been saying since the year began that China is due for a correction, and just last week I told the Globe and Mail that such a correction could be a lot worse than most people expect.  How exactly the situation will unfold, though, and whether we’ve already reached a tipping point or not, remains to be seen.  For the moment, I’m reminded of that song:  Something’s happening here; what it is ain’t exactly clear.  But — and this is the real point — something is happening, and people both inside and outside of China are right to be nervous.

Let’s start with real estate.  For the past several months, China’s official media have been touting official data indicating that while most Chinese cities are still seeing housing prices rise, a growing number of cities are starting to see a plateau or even decline in prices — evidence, they say, that the central government’s cooling measures are finally working.  More significant, in my eyes, are reports — which began emerging in late August — that in several cities across China, prices in primary housing markets (developers selling to homeowners) have begun falling away from those in secondary markets (homeowners selling to other homeowners).  The effected markets include not only 1st tier metropolises (Beijing, Shanghai, Guangzhou, and Shenzhen) , but also 2nd tier (Chongqing, Wuhan, Tianjin, Zhenghou) and 3rd tier (Ningbo, Foshan, Wuxi) ones as well.  In late August, reports had secondary market prices for many downtown properties in Chongqing at 4-10% higher than primary prices.  Last week, another report put the price gap in 1st tier cities like Beijing and Shanghai much higher, at 20%.

What could explain the growing price gap?  Back in April 2010, when the central government first announced its intention to “cool” the real estate market, property developers were skeptical.  They’d seen this movie before:  the market, they figured, might stall for a while, but as soon as policymakers saw the negative impact on investment-led GDP growth, they’d rush back in to support the sector.  Six months, tops, they would be right back to business as usual.  In the meantime, savvy developers better get ready for the next round by continuing to borrow and build.  That’s precisely what they did, which is why, despite jittery buyers and slumping transaction volumes, investment in real estate (in yuan) rose 33% and new construction (in square meters) climbed 26% in the first eight months of 2011, compared to the same period last year — data that China’s National Statistics Bureau touts, by the way, as proof that the Chinese economy is still going strong.

All of this continued building was predicated on the assumption that China’s cooling policies could not last.  In fact, since developers kept building, there was no negative impact on GDP, and no reason for policymakers to pull back.  To the contrary, inflation rose, and the cooling measures targeted at real estate were broadened into a more general credit tightening policy aimed at reining in lending.  As developers piled up more and more inventory — the primary market inventory in Shanghai, for instance, now starts at an all-time high, 12.5% higher than in December 2008 — they had to borrow to stay in business.  With credit conditions tightening, they systematically ran through the credit lines available:  first the banks, then high-yield bonds in Hong Kong, then the private wealth management vehicles that have been popping up all over China, then the loan sharks.  Finally, they ran out of options, and had no choice but to start selling some of their inventory at whatever price they could get.

That’s why primary prices are dropping:  hard-pressed developers offering steep discounts on property they’ve been holding out on, in order to get cash.  Investors who already purchased homes, often as a place to stash large amounts of cash, don’t face the same pressure and so you don’t see the same price drop in secondary markets.  However, it’s important to note how small and illiquid those secondary markets are.  In the U.S. and Europe, the ratio of existing homes to new homes sold (in normal, non-crisis times) is something like 13 to 1.  In China, it’s more like 1:1, or 2:1 at most.  The price gap may be less of a real “gap” than a “lag.”

Frustrated by their inability to cool the property market, China’s bank regulators say they are intentionally trying to squeeze developers to force a correction.  The thing is, they may get more than they bargained for.  Consider what might happen if a lot of developers hit the wall at the same time, and start dumping their inventories.  Sizeable discounts would have to be offered, and prices in the primary market would crater.  True, investors who have already bought — in many cases — multiple properties might not face the same cash pressures, but absent a liquid secondary market they have been marking their investment to primary market prices, and looking to them for assurance that their properties are a reliable “store of value.”  If primary prices collapse, that assurance is gone.  And if they decide to cash out, even in part, they will find — as they might have known all along, had they cared — that there is no secondary market to cash into.  The result could be a panicked rush to the exits.  Even if just the primary market crashes, the rationale for the supposed solvency of a whole host of Local Government Financing Vehicle (LGFV) bank loans and bonds — that local authorities can always sell land to pay them back — falls apart.

To be clear, this chain of events has not unfolded — yet.  But there’s mounting evidence that it could, that the fabric of China’s investment-led growth is starting to fray and unravel.  In Shanghai, primary market property sales for Sept. 1-18 were down more than 50% year-on-year (contrasted with the all-time high inventories I mentioned earlier).  In Beijing, nearly 5% of the city’s property agents have shut down in the past two months.  The global price of copper, 40% of which is driven by Chinese demand, including wiring for all those new homes and office buildings, is down almost 25% since the beginning of August.  But more dramatic, and worrisome, is what is happening in Wenzhou.

Wenzhou is a city on the southeast coast that is well-known as the center of free-wheeling entrepreneurship in China.  Plenty of those entrepreneurs operate businesses and factories in Wenzhou itself, but others scatter themselves far and wide across China, forming networks of trade and commerce.   With a reputation for getting by on their wits and the skin of their teeth, Wenzhou merchants have long relied on — and sponsored — informal methods of financing.  So it’s no surprise that, as formal credit conditions tightened this year, they were front and center in providing alternatives.  The fact that credit tightening has fallen disproportionately on China’s private sector presented them with both opportunity and risk.

For a while, I’m sure the opportunity was highly rewarding, with informal interest charges soaring to monthly rates of 4-10%.  But eventually the risk caught up.  Shanghai Daily reported on Sept. 23 that, in the previous ten days, at least seven local Wenzhou business owners had fled after defaulting on millions of yuan they had borrowed from banks and private creditors, which they in turn lent or invested in real estate and other speculative ventures.  Take one example:

Hu Fulin, whose Zhejiang Center Group was one of China’s biggest eyeglasses maker, is one of the runaway bosses. He said he was unable to bankroll this company’s operation any more, the newspaper said.

Hu ran a company with 3,000 employees in Wenzhou and used to be one of the city’s high-profile gurus. His company owns the best-selling sunglass brand in China and produces 20 million pairs a year, according to the company’s website.

Hu also expanded into the real estate and solar energy industries. Sources close to him said Hu called them on Wednesday morning, admitting he is now broke.

The news of Hu’s disappearance triggered a panic among his suppliers who gathered in his factory demanding payments. National Business Daily said Hu also owed about 10 million yuan of salary to his employees for the months of August and September.

On Sept. 25, three more entrepreneurs — the owners of copper, steel, and shoe manufacturing firms — disappeared.  On Sept. 27, the owner of another Wenzhou shoe company killed himself by jumping from his 22-story apartment.

The meltdown is not limited to Wenzhou.  Malcolm Moore of the Telegraph relates the fascinating tale of Shiji, a small crab-fishing village which suddenly saw itself transformed, overnight, into a speculative boom town:

“It all began when a man named Shi Guobao returned to Shiji after working in Beijing,” said Zhu Yi, the head official in the village.

“He became a property developer, but he wanted to make a bigger fortune so he decided to also become a loan shark.” Together with 17 of his friends, Shi began tapping the villagers for their savings, promising to pay them 10 per cent interest each month.

The gang quickly raised 350million yuan, (£35.5million) which they then lent out at rates of 30 per cent or more each month to borrowers including local property developers. Shi became known as “King Claw”, the man at the head of the pyramid.

For a while, the scheme worked well. Other property developers borrowed from Shi in order to begin construction and the local government, which earned income from every acre sold to the developers, also prospered.

During the boom, the villagers reported fireworks being lit in celebration almost every night.

And for good reason:

“We have become a BMW town!” wrote one shocked villager on a local internet forum. “In our county, there are now 800 BMWs and 600 Mercedes, 500 Audis, 50 Porsches, 30 Jaguars, one Ferrari, one Lamborghini and one Maserati,” he added.

A forest of cranes had also sprung up around the village, constructing large apartment blocks which advertised themselves with pictures of English butlers and sumptuous, chandelier–lit dining rooms.

Then suddenly, in early September, the whole thing came crashing to the ground:

But there was little demand in the end for the huge apartment blocks, which today stand empty and half–finished. And when the borrowers started defaulting on King Claw’s loans, the pyramid collapsed. Around 1,700 villagers have complained to the police, some having lost their entire life savings. Two villagers were killed in a mysterious car crash after trying to reclaim their money from one of the loan sharks.

As one junior official who intercepted Malcolm cautioned as he was hustling the reporter into the back of a black sedan, “It is not worth looking into too deeply.”  Maybe not, but it’s certainly worth paying attention to.

What’s happening in Wenzhou and Shiji is not an isolated exception.   With CPI rising at 6.2-6.5%, and the regulated deposit rate at banks at 3.5%, China’s banks have recently seen a rush of withdrawals by savers seeking higher yields elsewhere.  According to China Securities Journal, outstanding deposits at China’s “big four” banks fell by RMB 420 billion (US$ 65.7 billion) in the first 15 days of September.  Most of that money, it reports, is being channeled straight into speculative assets, either directly or via “shadow” lending arrangements.  I was asked by a reporter the other day what I thought about a Hong Kong-listed baby formula producer that was loading up on loans and relending the money to non-ferrous metals, tungsten, and highway companies.  I replied:

When companies neglect their core business and start speculating in “hot” sectors they know nothing about, especially with borrowed money, it’s a sure sign the market is out of whack.  Sometimes it’s because companies themselves are caught up in the “irrational exuberance” of a speculative bubble.  Other times, it’s because inflation, price controls, credit controls, or other factors are distorting normal incentives.  In any case, it’s a big red flag that something is seriously wrong.

I have a hard time believing, though, that the underlying credit quality of these “shadow” loans is substantially worse than the loans that the formal Chinese banking system has been making.  The only differences, in my eyes, are that (a) the borrowers, being politically marginal, are more exposed to disruptions in credit availability and therefore more likely to encounter immediate cash flow problems, and (b) the lenders, being entrepreneurs, are less likely to have the financial resources to be able to roll over bad loans indefinitely, without running out of cash themselves.  They’re less liquid, but not necessarily any less solvent, than the banks.

Nevertheless, it’s starting to become clear, to private investors at least, that the actual yields being generated in China are not living up to what was promised.  The high-yield debt issued in Hong Kong by Chinese developers is now trading at a steep discount.  Mainland banks, despite reporting record earnings, are seeing their stocks valued in Hong Kong at price-to-book ratios that imply looming large-scale losses and recapitalization.  Neither of these developments actually threatens China’s domestic financial stability, although they do close off valuable options.

In recent days, however, something else has happened that potentially has far more serious implications.  For the past decade, China has run surpluses on both its current and capital account.  When it comes to both trade and investment, China is a net importer of foreign currency, which places pressure on its own currency to appreciate in order to resolve the imbalance.  China has prevented the RMB from appreciating more rapidly than it desires by fixing a price at which it buys dollars (and other foreign currency) and stockpiles them as official reserves.  Because that price has always been fixed below the market equilibrium point (the RMB has been kept undervalued), whatever limited trading band was set, the RMB tended to bump up against the upper limit.  In other words, the RMB was a one-way bet, always under pressure to appreciate against the dollar.

Until this week, that is, when it started to bump up against the bottom of the trading band, implying that the RMB wanted to depreciate against the dollar.  Why?  Presumably because the capital account had flipped, and speculators were now rushing to turn their RMB into dollars in order to take their money out of China.  It’s important to clarify what this does and does not mean.  It does not mean that the RMB is now suddenly going to collapse in value.  China holds US$3 trillion in currency reserves, and can deploy those reserves to support any exchange rate it wishes.  Even if China were tempted to devalue (at the cost, it should be noted, of fanning inflation), the mounting political pressure in the U.S. Senate to take action against China for its undervalued currency would pose an obstacle to pursuing that path.

What the new downward market pressure on the RMB does indicate, however, is that China — for so long a no-brainer destination for investment — has turned into a big question mark.  And it suggests that at least some domestic Chinese investors who have been inclined to sock their money into empty villas and condos — or big stockpiles of raw materials — are now looking for a way out.

The easiest solution to all of this — and one that Chinese policymakers will be sorely tempted to try — would be simply to relax the “tightening” policy on money and lending.  Let the money keep flowing and, for the moment at least, developers and speculators will have ready cash to pay their bills without selling off properties or jumping out windows.  But China’s latest PMI (Purchasing Manager Index) numbers, released on Friday, indicate why that would be a mistake.  According to Reuters, “factory inflation in China quickened markedly in September, with the sub-index for input prices climbing to a four-month high of 59.5 in September from 55.9 in August.”  Despite the risk of a slowdown, all the money that has been pumped into the Chinese economy — expanding M2 by 2/3 since the start of the global financing crisis — in order to engineer an investment boom is still putting upward pressure on prices.  China’s central bank knows that what might be good for speculators and developers — more money — could be disastrous for economic and social stability.

Most economists saw the latest headline PMI numbers as good news, indicating that China is on the path for a “soft landing” and strong continuing growth.  The HSBC index came in at 49.9 (implying a very very slight contraction) and the official figure came in at 51.2 (implying fairly resilient growth).

“This implies that although the lagged effects of credit tightening will continue to cool industrial activity in the months ahead, there is little need to worry about a sharp slowdown,” said Qu Hongbin, China economist at HSBC.

To me, the PMI numbers provoke two thoughts.  First, I’m told that HSBC’s survey has a higher SME weighting, while the official index has a higher SOE weighting.  It’s interesting to consider whether the “gap” between them reflects what I was mentioning earlier, the fact that tightening is falling disproportionately on the private sector, while SOEs are being given a freer ride.  If so, it would offer a vivid example of “guo jin min tui” (the state advances, the private sector retreats). 

Second, the latest PMI figures suggest that, whatever cracks may be emerging — and I’ve pointed out several — China’s economy has not yet turned any corners or entered a “crisis” moment.  The Chinese economy is still circling, sustained by a combination of formal and informal credit, and has not yet come in for a landing, hard or soft.  The tensions and contradictions remain unresolved.

But they lurk below the surface, and are more and more visible to those who look.  On Thursday, Bloomberg published a poll it took of global investors, gauging their attitudes towards China’s economy:

Fifty-nine percent of respondents said China’s gross domestic product, which rose 9.5 percent last quarter, will gain less than 5 percent annually by 2016. Twelve percent see such a slowdown within a year, and 47 percent said it will occur in two to five years . . . Investors labeled the Chinese economy as “deteriorating” rather than “improving” by a nearly three-to-one margin, 38 percent to 13 percent. A plurality of 47 percent called it “stable.”

The placid PMI and other economic data coming out of China clearly mask some rather serious market concerns.  My experience, talking to numerous investors and economists, is as follows:  the closer you are to running an econometric model, the better you feel about the Chinese economy; sure, there may be bumps along the road, the models tell us, but fundamentally the momentum is so strong that growth will stay on track.  The more you go out and look around, and listen to your gut, the more worried you become.  Something’s happening here, what it is ain’t exactly clear … but it feels bad, very bad.  The problem with models, and the reason I’m inclined to stick with my eyes and my gut, is that models work very well when prior patterns of perception and behavior remain constant, but are very poor at noticing inflection points where the way people think and act undergo a shift.  In other words, they are very poor at identifying moments of crisis.

One last thought I’d like to leave.  Notice that, throughout the above discussion, I never once mentioned the impact of a renewed global downturn on the Chinese economy.  That seems to be the focus of much media discussion these days, but from my perspective, it is only a complicating factor.  China’s economy is still based on an export-led growth model, and therefore ultimately derives much of its growth from external demand.  But China’s accumulation and sterilization of foreign currency reserves, over the past decade, meant that when that external demand evaporated in late 2008, it could inject previous export earnings into its economy in order to finance a purely domestic investment boom.  When it did so, China — for a time at least — was able to de-couple its fate from the rest of the global economy, tracing a story arc involving high levels of growth, bad debt, and inflation that has followed its own separate logic to their resolution — not unlike how Japan’s response to the Plaza Accord propelled it along a similar “bubble” trajectory in the 1980s.  External factors, like a fall-off in exports, the fate of the dollar, or the volatile attitudes of foreign investors, may either intensify the forces at work or mitigate them, may accelerate or delay the moment of truth, but the primary forces at work and the primary choices to be made rest with the Chinese and the structure of their own economy, not with factors that have been imposed on China from outside.

47 Comments leave one →
  1. October 3, 2011 8:07 pm

    Another delightful example of top-down control, this time from the Railway Ministry:

    “Our cadres should be leading the work, changing their style, going to the grass-roots level and trying to solve problems.”

    Not the job of the bosses, of course.

  2. October 3, 2011 9:13 pm

    A perspicacious and well-informed piece as usual, which makes for interesting reading, despite the choice of long-dash punctuation instead of commas, parentheses or semi-colons.

    China is enormously wealthy, even though its stash is being steadily eroded by Bernanke. This gives the puppet masters in the Central Committee a huge cushion to rely upon when they make a bad bet. But they still have to deal with the social fallout of such misjudgments and the resultant erosion of trust in government that ensues.

    Command economies have invariably failed to perform according to the arithmetical or social metrics, and that is because demand economics and human venality play a far greater rôle than the philosopher from Trier ever allowed for in his theses. Increasingly we see what are commonly accepted as democratic governments allowing unelected interventionists (from the Federal Reserve to the ECB) to regulate commerce and fiscal policy to the detriment of the common good. Too many nation states fail to grasp the difference between regulation and imposition.

    A free market tends to balance itself more rapidly than the “centre” is able to do by intervention with “other peoples’ money”, i.e. tax levies. Wherever that has happened recently forecasts the same downfall that awaits any command economy. USA, EU, Japan, Russia, Greece, and of course, China.

    China, along with all other major economies, must recognise that it is not possible to transfer wealth from a borrower to a lender forever.

    Sooner or later, the cost of being who you think you are will catch up with you.

    A free-for-all would leave the weakest of us in the dirt, and burden the winners with an impossible obligation to make amends for their success, because it cannot be sustained without interdependence.

    Why is history such a difficult subject from which to learn?

  3. FrParlentAuxFr permalink
    October 3, 2011 9:49 pm

    Dear Professor, It is not even gut feeling, I think one needs to come back to the basics of Adam Smith. Intervention prevents the free-hand of the market to operate, but eventually the free hand of the market can not be tied endlessly. The econometrics model is one thing, but a fundamental question is: Is there mis-allocation of resources in property and fixed assets investment. THere is plently of evidence of that from SOEs profitability (adjusted to manipulated cost of capital, cost of land, cost of water, cost of electricity, which are all distorted into China) to ratio of fixed assets investement to GDP, etc… Adam Smith is going to win … (again). The beauty of Adam Smith´s book is that it has been written by a philosopher, so it makes sense, econometrics model can ignore common sense (for a while)… Econometics model have run into theories which can run into absurd results, but the readings of Adam Smith should be on bed table of every economist.

  4. Hua Qiao permalink
    October 3, 2011 10:22 pm


    Great post. I’ve been also trying to figure out what would ignite a big sell off in real estate and your thoughts are very close to mine. I would also add that the amount of money in the shadow banking sector large enough to be a force. If the lending in this sector is secured by property, could this sector cause a downturn by their more agressive collection efforts, i.e. foreclosures? In other words, banks may be liquid enough to extend and pretend but curbside lenders don’t have this luxury. Could this also create a problem in real estate?
    Also, you talk about residential in your post. Do you see the same in commercial property? It’s harder to mask problems in this area (no one buys commercial space as a store of value, do they. (I suppose developers and banks could play games with
    Leaseup periods.)

  5. Anna permalink
    October 3, 2011 10:44 pm

    I have been reading your posts for many months and think it’s time to say big thank you for keeping me well informed about what’s happening in China. I find the current situation with all three economic centres of US, Europe and China completely amazing (if that’s the right word for the fragility of present times)and we all need quality sources of facts and arguments as opposed to extreme emotions expressed elsewhere

  6. HSTAD permalink
    October 4, 2011 3:43 am

    Patric, great article enjoyed reading it! I think you are a bit too conservative in the final outcome of this disaster of misapplication of resources! Don’t understand where you get this figure of $3 trillion in foreign reserves? How – they’ve been spending trillions on empty cities, empty roads and empty railroads. What reserves have they left? The banks are insolvent, but will be recapitalized by the government – with these supposed reserves! Like the U.S. with their certificates backing up social security. Not in my lifetime!

  7. Michael Downs permalink
    October 4, 2011 7:15 am

    Mr. Chovanec,

    Thanks for your thoughtful, valuable post. You’ve tied together a number of stories I’ve seen of late.

    While the fall in the price of copper may be seem ominous, time will tell. Global investors sent gold up 15% in August, just to sell it down 15% in September. They’ve now resumed buying in October.

    You’re points regarding real estate are more telling. Can you help me understand the supply-side a bit more as it seems to be critical to your hypothesis that prices may fall in a disorderly fashion (I note that property prices declined or stayed flat in 46 of 70 major Chinese cities in August):

    1. Steven Roach suggests, “an average of roughly 15 million citizens a year slated to move from the countryside to newly urbanized areas… [therefore] demand should rise to meet supply”. Won’t this tend to put a floor under home prices? Or, has all the development been at premium price points in accessible to this demand?

    2. Given that the government clamped down on multiple property purchases a year and a half ago by raising down payments to 50% for second homes and to 100% for third homes, Your point seems to be that a significant, even damaging, portion of homes are still concentrated in the hands of speculators. Do you have any numbers for what portion of the housing stock this represents?

    3. In March Gu Yunchang, at the Ministry of Housing and Urban-Rural Development said 89% of urban residents own their own home, and 99% of rural residents are homeowners, how does this reconcile with your assertion “In China, [the ratio of new homes to existing homes sold] is more like 1:1, or 2:1 at most”? Are you two talking about different classes of homes? If so, what portion of the total housing stock does your class represent?

    Thank you for your insights,
    Michael Downs

  8. TheDigitMan permalink
    October 4, 2011 8:45 am

    This reminds me too of another song … “There’s a lady who’s sure, all that glitters is gold,
    And she’s buying the stairway to heaven … When she gets there she knows, if the stores are all closed, With a word she can get what she came for”. … I feel sorry for all the little players who’s short memories of the Hainan Real Estate Bust will destroy their net worth in less than 6 – 9 months (at best). You can’t tell me the Party will be able to let the air out of the property bubble tires competently such that a hard landing will be averted. Cash is King.

    • October 8, 2011 4:23 pm

      “Cash is King”

      Cash is King in a country where the general populace own nothing. yea, I guess so. Unless China goes back to the barter system in which rice and fresh milk is king:

      “Aha! What say you Old Ping? Take Mine Eggplants for a swig of that good brew, and a bowl of your hottest slop?”

  9. Rommel permalink
    October 4, 2011 10:09 am


    Masterful as always.

  10. October 4, 2011 7:50 pm

    The interaction between the shadow-banking system and the cadres “leading the work, changing their style, going to the grass-roots level and trying to solve problems” is clearly going to be critical. After all they could either be putting out the hard word to keep lending, to go easy on particular borrowers or sectors, or to knock it off. I presume this also means that we’re at a moment when the interaction between the Party and organised crime is going to have a significant influence on history.

    Actually the shadow bank issue is very worrying as it creates a direct transmission mechanism from the property market to the industrial economy, and one that doesn’t pass through the key control mechanisms.

  11. October 5, 2011 5:55 am

    Am I the only one for whom the CCP’s words carry a dark foreshadowing of a new Cultural Revolution if the crisis hits hard? Perhaps a kindler, gentler version adapted to the 21st century, one that doesn’t involve sending all the brains to the countryside, but merely seizing all these empty apartments, foreign factories, and other concentrated wealth, and redistributing them to the masses or state.

  12. October 5, 2011 5:18 pm

    You are being way to positive. China and the rest of the world are not heading for a correction, but a depression. Whether it will be bigger than the 30’s depression remains to be seen, but it is expected, as the credit bubble is an order of magnitude greater than in the 30’s.

  13. October 6, 2011 1:12 am

    And this nervous breakdown could have wider implications in other housing markets and local economies. Vancouver’s housing market has been propelled by buyers from Mainland China. Many vacant held investment properties with ghost neighborhoods dominate Vancouver West.

  14. October 6, 2011 1:13 am

    PS. Your article is referenced in The Straight (local newspaper); the comments are worth reading. Lots of anger here regarding foreign ownership of property (as part of speculative mania rather than legitimate buying of family homes).

    • dengzhi permalink
      October 7, 2011 10:04 am

      Vancouver housing is too expensive anyway, it needs to come down to realistic levels.

  15. Wang Xi permalink
    October 6, 2011 3:57 am

    A strange and misleading post, as with many here.

    The material on Wenzhou is from Wall Street Journal article, but not noted. Not your work, but that of others.

    “Official media in China”? Really? Do you read Chinese? English language media is not official media, is propaganda.

    As with many posts, simply summarizing material from other places and presenting it as your own. Not an analysis but just cutting and pasting and rewording.

    • prchovanec permalink*
      October 6, 2011 4:12 am

      1) My sources on Wenzhou are the articles noted and the links provided. The WSJ may have written about this, as I suspect have many others, but I did not read that article or use it as a source. I suspect any similarity in content is due to the fact that the underlying facts are the same. I never claimed to be doing original reporting, in any event.

      2) “official media” — yes, I have seen several Chinese-language articles and TV news reports on this precise subject. The data I refer to is the standard official data for housing prices in Chinese cities and the trends I noted have been widely reported over the last two months as proof that government cooling measures are having an impact. I don’t think this statement on my part is even remotely controversial.

      3) If you can locate someone whose analysis I “copied and pasted,” please post the link here. Argue with my conclusions, by all means, but if you accuse me of dishonesty, you better be prepared to back it up.

      • George H permalink
        October 10, 2011 9:36 am


        You have done an outstanding job. Wang Xi is a troll. Not a single thing from him is constructive.

  16. Wang Xi permalink
    October 6, 2011 9:58 pm

    No original reporting is correct. This is just combination of what has appeared in sources of news that anyone can find on web. So there is just a repeating of presentations. Your comment on “even remotely controversial” is very correct that way.

    Your conclusion is like other noted Chinese economists are saying. I have never seen Chinese sources in your posts. So no reader should feel that you read Chinese fluently.

    You are very honest about your interviews, visits, talks, trips and other news of yourselve. That is what this blog is–what you said to others. You never miss an opportunity there to tell others who interviewed you.

    Thank you for interesting reading of another Westerner becoming an expert on China immediately after a few years.

    • Lucane permalink
      October 6, 2011 11:04 pm

      Uh oh, looks like we have a worthless WMD trolling for pennies.

      Apparently according to Wang Xi, all second hand reporting is worthless. Perhaps we should get rid of all global news organizations because they are only reporting the stories they learned on the ground by the people who were actually there – hence it is now second hand and thus unremarkable.

    • chris hauser permalink
      October 27, 2011 6:44 am

      wang xi —-

      why don’t you tell us what the truth is?

  17. china watch permalink
    October 7, 2011 4:42 am

    if new home sales to existing ratio sales is 1:1 ( usa is 1: 13 )

    then this implies there is no property bubble in china but not enough property in china !!

    they should be building more properties !!

    Maybe even let chinese into USA to take up oversurplus of property as china properties are not enought to satisfy their needs.

    • prchovanec permalink*
      October 7, 2011 8:19 pm

      What it implies, in my view, is that people are buying an ever-growing number of new properties and stockpiling them off-market.

  18. Wang Xi permalink
    October 7, 2011 10:00 am

    Second hand reporting being presented as original analysis or insights are unremarkable.

    Mr. Chovanec writes very well about what others have already said. This is an excellent compiling–nothing new or innovative or inventive.

    If Mr. Chovanec read Chinese economic journals and commentary in Chinese language, then he might be providing help. What he has done is provide capsule summary of what is in Western media.

    The blog says more about what Mr. Chovanec does (“I was just interviewed”) then it tells the reader anything an internet searching about China would also produce.

    Thank you.

    • dengzhi permalink
      October 7, 2011 10:08 am

      what Chinese economic journals or websites (中文的)do you read that you believe are of value?

    • Carlitos permalink
      October 7, 2011 2:43 pm

      He says he viewed Chinese language articles and news reports, didn’t he? Have a look around, see if you can find a little fragment or something around on the floor, I think it might just have fallen off your shoulder.

      If what you say is true, how did Patrick pioneer the idea of Chinese holding apartments as a store of value, an idea which appeared first on this blog, becoming mainstream much later on?

      Patrick also recommended some time ago that we watch a Chinese-language serial called 蜗居, although he couldn’t point us to a subtitled version at the time. Why would he do that if he didn’t know Chinese?

      If you read this blog regularly, you’ll know from such facts that his Chinese language skills are excellent, but he doesn’t blow a trumpet about it.

      It’s Pettis who doesn’t speak Chinese, not Chovanec. You’re confusing them, I think.

      Anyway, back on subject, yet another excellent post from Chovanec. He has been one of the few people writing anything sane about the Chinese economy for a while now, and not tainted with the usual mindless hype like “Don’t short a country with $3 trillion in reserves.” I was wondering why he hadn’t posted for a few days but this latest post was really worth the wait.

      I saw Jim Chanos say that the RMB might be overvalued if people were more aware of the vulnerabilities of the Chinese financial system, so it’s interesting what you say about RMB trading hitting the bottom of the band.

      What I’m worried about is whether they’ll try to divert attention away from internal problems by stoking xenophobia.

      • TheDigitMan permalink
        October 7, 2011 2:50 pm

        Carlitos, its quite telling from the above responses, is it not, that the truth is beginning to hurt those who are most vulnerable, eg. those who are leveraged in to the ‘house of cards’, otherwise known as the Chinese capital markets framework (not exported for good reason)..

      • prchovanec permalink*
        October 7, 2011 8:15 pm

        Carlitos, thank you for your spirited defense. I must admit, though, that I have always struggled with foreign languages, and after 25 years traveling and working in China, I would still describe my Chinese as “passable,” and certainly not “excellent.” I also must add that I’ve never found Michael Pettis’ highly perceptive analysis of the Chinese economy to be hobbled by his language abilities, or lack thereof. He could certainly put my Spanish to shame.

        The simple reason I do not, as a rule, provide Chinese-language links is because I am writing an English-language blog. I want to provide interesting and informative links that my English-language readers can actually access and benefit from. In fact, I think it would be rather pretentious of me to offer links in another language in order to “prove” something.

        As far as I can figure, Wang Xi’s reasoning goes as follows: I should not refer to other people, because that is not original. I should not refer to myself, because that is self-promoting. I do not think I can win at this game, nor do I think I am meant to. So instead, I will wish Wang Xi good luck in finding what he is looking for elsewhere on the Internet, and hope that he tells us all about it when he does.

  19. October 8, 2011 10:51 am

    Prof. Chovanec,

    Thanks for the outstanding analysis. Good information out of China, at least to a lay-investor such as myself, is lacking to say the least.

    I wonder about the timing of events you outline above. China appears to have policy tools to address issues, at least in the short-term. The pattern seems to be invervene with stimulus, then install price controls as needed to keep a lid on inflation.

    If you don’t mind my asking, in your experience, how do you see this playing out short, medium, and long-term? The Chinese people seem to have a stoic culture; do you think there will be uncontrollable social unrest, despite police-state-level social controls in your most probably scenario?

    I worry for China, and the world. Do you have and prescriptions to help China (and thus the region and the world) navigate through the coming crisis?

    Many thanks. I came to your blog via econometrics, this is the first article I’ve read here. But I have the feeling I will be a big fan.

  20. October 8, 2011 6:37 pm

    An excellent article. You and Michael Pettis are two of the finest commentators on China and the world economy.

  21. Duff Samoa permalink
    October 10, 2011 8:58 am

    Hi Patrick, another great article.

    This is beyond stupid:

    “He became a property developer, but he wanted to make a bigger fortune so he decided to also become a loan shark.” Together with 17 of his friends, Shi began tapping the villagers for their savings, promising to pay them 10 per cent interest each month.”

  22. October 10, 2011 5:56 pm

    One of the best resources (free or otherwise) out there at the moment. Always come away from this blog a little worried but also exhilarated by feeling like I really know what is going on.

    Thanks a lot Patrick.

  23. vsmumbai permalink
    October 17, 2011 6:47 pm

    Good article, but few instances of traders jumping off building, going bankrupt and housing prices collapsing is not going to bring China down.

    you need more than that, i feel the global slowdown and thus exports will slow china down.

    Credit losses are part and parcel of lending, thats why you charge a spread and ensure that you can manage one’s losses within the spread. please take a look at the banking profits in the last twelve months and you will see that it is more than 0.5 trillion. total loans outstanding are around 5 trillion. banks are not going to go away very soon and please dont forget just like the us, china will come up with a TARP if needed. But i dont believe it will be necessary.

    i have always believed and still believe chinese are one of the most shrewdest people around and they will figure it out. they have come this far without any one’s support and will continue to do so in the future. there sure are to be bumps along the way but the general direction has been found and aint going to change just because some hedge fund china shorts want it so purely for personal profit.

  24. October 25, 2011 6:26 pm


    Great read and thanks.

    It ain’t exactly clear. Did you cop a line from Buffalo Springfield here?

  25. October 27, 2011 11:49 am

    patrick rchovanec

    Thank you for your insightful analysis. I respect your integrity and forthrightness in evaluating the economic trends and tremors playing out in China. I do feel the winds of change in China’s “miraculous growth machine” – and the headwinds are not positive!


  1. Be afraid, very afraid, of what’s happening in China… | Firstpost
  2. Warning: China MAY be near an economic crisis | Contrarian Investors’ Journal
  3. MARKETS HAMMERED: no shelter at present, gold moving upward again | World Disaster Report
  4. Fler varningstecken från Kina | Finansliv
  5. Change is coming in China « Rage on Omnipotent
  6. AIGroup PCI index…dismal | i finally found the gumption
  7. Bloomberg: Trust Me « Patrick Chovanec
  8. Readings… « Coplans in China
  9. If you’re not scared, you’ve not been properly briefed | afoe | A Fistful of Euros | European Opinion
  10. Hao Hao Report

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: