Makes for very fun writing, I'd say.
"American Housing Collapse Fails to Bring Down Obama---
But China's Housing Downturn Succeeds!"
There has been an unmistakable swelling in the Chinese housing market in the course of the past decade, and it is causing worries both among Chinese economists and at S&P and the World Bank. Actually, it's provincial and municipal banks in China that have been relying on real estate investment and fueling more demand for construction in recent years. But measures have been taken to tighten that up in order to mitigate the possibility of a crisis in the past several years. The national government has responded to World Bank calls to raise interest rates, which they've done three times in the past year (so now the World Bank is worried about to too-precipitous planned downturn--go figure). They've shut down home buying deductions and raised deposit requirements for second-home buyers, and even introduced property taxes in some cities. They've raised bank-reserve requirements to slow down lending. Plus, lending practices in China require substantially larger deposits from buyers than the often do here. Even in the event that construction experiences a slowdown, we don't seem to be looking at a scenario that will cause massive defaults in home ownership. In addition, the growth in construction may very well prove to be a boon in the coming years, as recent reports forecast dramatic increases to urban populations as well as rising income levels during the next decade. In any event, I don't see cause for that much worry yet; in the past year, the Chinese economy has slowed from 10% annual growth to 9% annual growth; construction slowdowns might create a drag in the near-term, but that economy still has a lot of game.
If it's Obama's presidency coming to an end next year we're worried about, domestic economic conditions are already bad enough to accomplish that, provided the GOP nominates a decent candidate.
Trust me those moves by the Chinese government slowed down new development a little bit, but it still continued because a central bank rate still way to low given its current inflation rate. The Chinese government didn't ease the economy off of this mess, a huge crash is coming and its coming soon. These development companies have gone from prime bank lending, to subprime bank lending, to the international bond market, to trust companies, and now to underground banks. Interest rates from some of these trust companies are usually 36-90% a year. Underground banks charge at least 10% a month. Apparently even these crazy sources of funding are disappearing.
Over the last week several of China's largest property developers had their bonds fall to only 70 cents on the dollar, essentially pricing in likely default. Real estate sales fell flat this summer according to many sources. For the first time discounting properties is becoming widespread and we are looking at a large fall off in sales starting next year.
You're talking about an industry that together with its inputs of cement, steel, construction, banking, etc. represents almost 50% of all fixed investment in China. And you're talking about a country that more than 60% of all of GDP is fixed investment. So under a moderate assumption of a 1/3 of those developer inputs going bankrupt then you're looking at about at least 10% of the Chinese economy being obliterated because of this crash. And that discounts the fact that their is a similar bubble in Chinese manufacturing.
Also keep in mind that China has huge amounts of implicit government debt just like Dubai was. In the case of Dubai, the Emirate just said that Dubai World wasn't technically the government and let it default even though Dubai World is owned by the government. In the case of China the Chinese government has near 0% debt on their balance sheet, but they have implicitly backed up the banks(state owned enterprises), the provincial municipalities, state owned cement, etc. All of these businesses are hugely in debt. It is now estimated that the Chinese government has potentially 200% of GDP in implicit government debt laying around. Now they'll choose what to rescue and what to allow to default, but the fact is that the Chinese government is not in a position to sweep this crisis under the mattress and bail it out. China's going down and we're going to take a hit from hit.