

China's real-estate bubble is the largest in human history, and despite years of warning signs, it has grown and grown, spilling over into the rest of the world.

It's hard to overstate just how crazy China's real-estate market is: 25% of the country's GDP comes from construction, and 80% of the nation's wealth is in domestic property holdings. That's $65T, nearly double the size of the economies of every G7 nation combined.





The market has been kept afloat through China's massive "shadow banking" system, itself such a systemic risk that the Chinese government has been forced to crack down on it. Now, China's massive, blue-chip property developers have had their debt downrated to CCC and are struggling to issue new bonds — Moody's rates the debt of 51 out of 61 Chinese property companies as "junk."





China has 65 million vacant residences, but prices remain stubbornly high, even in "tier-two" cities like Jinan, where a 1000sqft apartment costs RMB2M, while a worker may only earn RMB6,000/month.





This has tanked sales volume (down 44% year-on-year in the first week of 2019), but developers are not able to lower their prices in the face of popular uprisings from people who have overleveraged themselves to buy into the tier-one city markets. In one case, a cut to the price of unsold units sent Shanghainese property owners into the streets chanting and holding up signs reading "Give us our hard-earned blood-and-sweat money back!"

The nation is staggering under massive real-estate debt, $3.4 trillion worth of it, and 47.1% of that is tied up in vacant properties, and the people who borrowed that money are not receiving rental income, nor are they living in those properties. The banks that lent that money could face a massive wave of defaults.





Renmin University professor Xiang Songzuo, has called this a "Minsky moment," a phenomenon coined by Hyman Minsky to describe how an asset class can rise steadily in value before suddenly collapsing.

In response to the property slowdown, some local governments have been quietly removing some restrictions on home purchases, including by scrapping price caps for new units and relaxing the requirements for non-local buyers. In early January, China's central bank also moved to lower the amount of cash that banks must hold as reserves by 100 basis points, freeing up a net of 800 billion yuan, or $117 billion, for new lending.



But economists and analysts are skeptical about the effect of these easing measures. "The broad attempt to reduce risks in the financial sector has been the main reason for the slowdown," said Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings. "Deleveraging is considered to be the critical battle … policymakers are easing, but only carefully," he said in an interview. Alan Jin, head of non-Japan Asia property research at Mizuho Securities, said the easing measures are "fairly trivial" and not likely to stimulate much new homebuying. "The most draconian period on the [debt] policy front may be over, but this by no means indicates that developers can look forward to rosy days ahead in 2019," he said in a Jan. 10 research note.



China's housing glut casts pall over the economy [Kenji Kawase/Nikkei]

(via Naked Captialism)