How do you say “too big to fail?”
Well, we can see just how big real soon as China slides into deflation.
China Land Sales Collapse, Deflation Cometh
I outlined China’s credit trouble here: The Quick and Dirty Summary of China’s Credit Bubble yesterday. It’s a quick overview touching some of the major points. Short summary: Evergrande may or may not be a big deal, but the housing market and credit bubble are a huge deal. If they’re gonne blow, it will show up in the currency markets.
With that in mind, this report on ZeroHedge is flashing a warning signal: Goldman Issues A Dire Warning On China’s Property Sector
So before we go further, a quick reminder of the sharp deterioration observed in the past few months which has been a direct (if reflexive) contributor to Evergrande’s downfall and which we touched on last week in “Chinese Data Dump Confirms Hard Landing Imminent” in which we noted something stunning: according to WIND, growth in land sales in value terms in the 100-city sample, a proxy for land purchases by property developers, slumped to -90.4% Y/Y during 1-12 September form -65.0% in August. In volume (floor space) terms, it also dropped sharply to -38.3% y-o-y from -21.9%.
Local governments fuel investment with land sales. If land sales stall, they cannot repay existing debt. They either cut investment or they inflate with unbacked credit. Local government debt was described, along with the housing market, as a time bomb. It goes without saying that the CCP will not allow a deflationary collapse and will instead opt for an rescue, but they’ve been intentionally squeezing the property sector because more printing always flows straight into housing, not unlike how the Fed’s efforts get funneled right into stocks. China also doesn’t have a clean balance sheet to park bad assets on. It could easily refinance the banking system in 2000, but if it did the same now, it could end up with a higher debt-to-GDP than the United States.
Even if the numbers all square, the illusion of Chinese economic invincibility will burst. In the immediate present, China is in worse shape that the United States. It doesn’t have the political or legal flexibility to handle a crisis. Everyone thinks authoritarianism benefits the system, but really it benefits the CCP. They can control how events play out to a degree, but they cannot control how foriegn and domestic investors perceive a crisis.
Finally, the cycles! China’s housing market is rapidly slowing as it did in wjen QE 2 ended in 2011, and when QE3 was tapered in 2014.
Speaking of things that could blow, there’s La Palma which blew and things a picking up: