'The Chinese Bubble is again at the precipice. The last comparable episode, back in late-2015/early-2016, unfolded in a different global backdrop. China implemented additional stimulus measures, while the ECB and BOJ boosted QE and the Fed postponed "normalization". For the most part, rates were near zero globally and bond yields were declining. Pricing pressures were still leaning disinflationary. Global risk markets were neither as inflated nor as fragile as now.''Keep in mind that these are China's inaugural mortgage and housing Bubbles. Borrowers have never experienced a nationwide downturn. Neither have bankers; same for regulators. A housing bust would pose risk to social stability, not to mention the banking system and economy. Chinese officials over the years have tried about everything to rein in the Bubble. They were just never willing to inflict the degree of pain necessary to break inflationary psychology. They mistakenly cultivated the perception apartment prices only rise, and Beijing will always act to support the market. Now they face a gargantuan Bubble with limited options.
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When I ponder China's incredibly bloated banking sector, its historic apartment Bubble, its local government debt issues, massive future national government borrowings - and likely one of the most maladjusted economies ever - unfortunately I don't see a stable currency in China's future.
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The Chinese Bubble is again at the precipice. The last comparable episode, back in late-2015/early-2016, unfolded in a different global backdrop. China implemented additional stimulus measures, while the ECB and BOJ boosted QE and the Fed postponed "normalization". For the most part, rates were near zero globally and bond yields were declining. Pricing pressures were still leaning disinflationary. Global risk markets were neither as inflated nor as fragile as now.
That crisis episode saw the PBOC employ $100s of billions of reserves to stabilize the Chinese currency, in a global backdrop approaching $2.0 TN of annualized central bank liquidity injections. Back then, China was facing a relatively stronger economy and a booming apartment Bubble inclined for "Terminal Phase" excess.
The Chinese have considerably less flexibility today. The burst EM Bubble poses major financial and economic risks for a much more fragile Chinese system. At about $3.0 TN, China's international reserves are down a (mere) trillion from 2014 highs. And pushing more Credit, investment and speculation into Chinese housing at this "Terminal Phase" is a perilous proposition.
For too long China needed to rein in Credit growth. They made an attempt. Not surprisingly, the results have been unsatisfying. The risk of Bubble implosion has now incited yet another round of stimulus measures. But Bubble risk is indomitable, risk that expands parabolically during the "Terminal Phase." I believe there are a number of important factors - domestic and international, economic and financial - working against Beijing's current stabilization efforts. Chinese officials might be at the cusp of finally losing control. The Trump administration provides a most convenient scapegoat.'
- Doug Noland,
Moscovici and the National Team, October 20, 2018
Context'I have posited that the global Bubble has been pierced at the "Periphery,"..''When the next recession arrives, they’re not going to know what hit them.''..valuations like 1929, 2000, and today .. Very deep market losses are likely, even in the absence of a recession.''..a process of transition toward the only world financial order..' - Jesús Huerta de Soto