July 21st, 2010 •
China implemented one of the world's most aggressive
economic stimulus programs to fight the recession of 2008.
And the country went on something akin to a debt binge.
Credit growth surged as much 50 percent — an unprecedented
peak. Such a policy can jump start an economy. But it lays the
groundwork for imbalances and major bubbles.
Yes, I am aware that China is said to be different … but I don't believe it!
Instead I'm fully convinced that even Chinese central planners
cannot escape economic laws. Eventually the piper will have to be paid.
And payback time may be just around the corner as …
China's Housing Bubble Continues to Inflate
Recently I discovered the following chart published by international banking giant HSBC.
It compares the housing markets of Japan, the U.S., Hong Kong, and China. And it shows total residential housing value relative to GDP, which in my opinion makes for a good economic measure.
When you look at it, you'll see a frightening picture developing …
First, there was the mother of all housing bubbles: Japan in the late 1980s. Total residential housing
values reached a high of 3.8 times GDP. It burst shortly after the Japanese stock market
Both markets subsequently fell by roughly 80 percent, and the economy has been in rough waters
ever since.
Second, came the Hong Kong housing bubble with a peak valuation of 3.1 times GDP. It burst
shortly before the Asian crisis began. Thanks to the economic ascent of mainland China, the
aftermath of its bursting was relatively benign. But still, home prices and the stock market lost
more than 50 percent before recovering.
Third, as you can see the U.S. housing bubble was rather small compared to its Asian peers.
I don't need to tell you what happened after this bubble burst. And neither the U.S. nor the
world economy is out of the woods as of yet, quite to the contrary.
Finally, let's look at what this chart is telling us about China. If this isn't a huge housing bubble
in the making, I don't know what is! For the past two years this measure of home values in China
has left its Hong Kong predecessor in the dust. Moreover, with a ratio of 3.5 it's reaching
Japanese-like stratospheric levels.
History tells us that bubbles are unsustainable — sooner or later they burst. And the bigger
the bubble … the bigger the trouble is going to be. So the way I see it, the above chart sends
a clear and loud message: China holds an unpleasant surprise for the world's economies.
Has the Chinese Stock Market Already Sniffed Out Bubble-Trouble?
The Chinese stock market can be a good leading economic indicator …
For example, as shown in the chart below, the Shanghai Composite Index was one of the first to
end the huge bear market of 2008 when it bottomed in November that year. U.S. and European
markets didn't fall to new lows until March 2009.
sideways until about three months ago when it started to decline in earnest.
This chart is convincingly bearish now. Investors are indeed worried. Combine it with a swelling
Chinese housing bubble, and you can understand why I'm convinced the aftermath could be
downright nasty for the global economy when the bubble finally pops.
