A housing bust in China

A noteworthy article from the LA Times today about the slumping housing economy in Shanghai.

Once one of the hottest markets in the world, sales of homes have virtually halted in some areas of Shanghai, prompting developers to slash prices and real estate brokerages to shutter thousands of offices.
....
Shanghai's housing slump is only going to worsen and imperil a significant part of the Chinese economy, says Andy Xie, Morgan Stanley's chief Asia economist in Hong Kong.

James Waterton has some sobering thoughts on China's banking sector that if true, could signal some serious challanges down the road.

I believe that the Chinese banking sector's dire straits constitute the gravest threat to global stability in the coming years. The Chinese government is always harping on about its "deepening" banking and state-owned industrial enterprise reforms, and this is a mantra is being repeated across the world. Unfortunately, the Chinese state is so opaque that it's impossible to verify the veracity of such claims, and the unrealistic numbers being thrown at us by the Communist party (like the drop of NPLs from 25% to 12% in less than five years) and the shonky juggling of bad debt from one insolvent bank to another woefully undercapitalised holding company do not inspire much confidence in the nature of the reforms. Frankly, I believe the banking sector is too far gone to reform without collapse. In international terms, the crisis in the Chinese banks and SOEs is an elephant that stands in the middle of the room, but everyone is either perceiving it as a mouse or trying to pass it off as a mouse. I believe the Australian government is in the latter category, as are a great many others around the world.

I speculate that governments like Australia's are acting as they are because they realise the Chinese state is very brittle and unlikely to withstand economic collapse. The massively stimulating US$50 billion or thereabouts annual injection of foreign direct investment is holding the Chinese state together for the time being. Thus, a number of states such as Australia have an interest in talking up Chinese economic reforms - and concealing the parlous nature of the Chinese economy - in the hope that investor confidence will not flag and the Chinese will trade and consume their way out of their problems. Our current economic health is due to huge demand in booming and resource-hungry China. Thus we see documents like this (pdf) that echo the "deepening reforms" mantra consistently spouted by the Chinese administration. Puff pieces like this create and sustain the irrational exuberance that swirls around the legend of the Chinese economic miracle, and inevitably amplifies economic pain when the collapse eventuates. The strategy of our governments may work, but it is an extremely high-risk gamble. The more investment in and commercial intertwinement with China increases, the more outsiders will suffer if the system unravels.

And perhaps the cracks are already becoming evident even to the man on the street. When I was in China in late 2005, ATMs were frequently out of order. I work in the banking sector in Australia, and when an ATM is out of order this nearly always means the machine has dispensed all its money. This was not a problem in late 2004 during my previous Chinese visit - ATM operations at that time were indiscernible to those in Australia. I am speculating here, because I'm not really an expert on this kind of money velocity issue, but perhaps the sudden patchiness of the ATM network is a sentinel of a solvency crisis.

And the collapse could come sooner than we think. In 2007, as per the agreement China entered into upon joining the WTO, it must open up its retail banking sector to foreign banks. This is a potential tripwire. Even if only a small number of Chinese are concerned about the health of their local banks (and thus their savings), when Citibank opens up next door the run on Chinese banks could easily spin out of control. I am assuming that the government is trying to spread the notion of confidence and stability in the retail banking sector. If the Chinese do not panic come 2007 or any time in the subsequent 20 years or so, the banks should be able to reduce their NPL rate to a "more manageable 5%". It wouldn't be the first time that people have left their money in a bank that is essentially insolvent because they believe the government will cover any losses incurred. This is a questionable assumption, however, and if I was Chinese I probably would not run the risk.