When Will China's Bubble Burst?

As Bloomberg notes, Marc Faber thinks China may crash in 9 to 12 months, and hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff are also warning of a crash.

Nouriel Roubini told Bloomberg:

In China, where property prices rose at a record pace in April and consumer prices climbed at the fastest rate in 18 months, the economy faces the risk of a “significant slowdown,” Roubini said.

“China should be tightening monetary policy, increasing interest rates and let its currency appreciate over time,” he said. “They are too slow, they are not doing it fast enough.”

On April 20th, BusinessWeek wrote:

China’s Shanghai Composite Index may drop as much as 6 percent after breaching the 250-day moving average for the first time in a year, Shenyin & Wanguo Securities Co. said.

The benchmark gauge plunged 4.8 percent to 2,980.3 yesterday, the most in eight months, on concern government measures to curb real estate speculation will slow economic growth. The index may extend losses until reaching the next support level of 2,803...

Yesterday, Calculated Risk noted that the Shanghai composite is continuing down:

Keep an eye on the Shanghai index (in red). It appears China's economy is slowing.


This graph shows the Shanghai SSE Composite Index and the S&P 500 (in blue).

The SSE Composite Index is at 2,622.67 mid-day - down about 300 points from 2 weeks ago.

[Click here for full chart]

Vincent Fernando notes that Beijing property prices are starting to fall rapidly (and that Shanghai is next), as China clamps down on the property bubble.

As MarketWatch notes:

China's economy is teetering on the edge of a major slowdown ... according to a noted China strategist.

David Roche, an economic and political analyst who manages the Hong Kong-based hedge fund Independent Strategy, says the world's third-largest economy is now on the brink, faced with the inevitable reckoning that follows an extended bank-lending binge.

"We've got the beginnings of a credit-bubble collapse in China," said Roche, predicting the economy will likely cool from its stellar double-digit growth rate to a 6% annual expansion as a result.

While that may not sound bad, Roche believes the collateral damage from the cooling will be anything but mild, as the banking sector comes under pressure from cumulative years of bad investment and mispriced capital.

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More worryingly, as bank lending dries up, there won't be the firepower to sustain new investments in infrastructure, eroding a core pillar of China's growth model, he said.

Much of the focus on potential asset bubbles in China has been on the property sector, but Roche suggested that housing-price inflation is intertwined with unsustainable gains in other areas.

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He said government efforts aimed solely at property prices will prove ineffective.

"What they are trying to do is ration the amount of credit to one sector, that won't work. Roche said. "The bubble will just burst in its own way, you don't control this."

He also said that China's rising middle class could be stung with "real panic" when leveraged purchases go sour.

As Northwestern University's Victor Shih points out, the Chinese government will slowly reveal more and more of the true ratio of bad loans to good loans, and raise its figures for local government debt. Shih says that recapitalizing Chinese banks to cover losses for the bad loans will eat up more and more of China's reserves.

On the other hand, Citigroup, William Chen and Gus Lubin point to various signs that the bubble is still in the mania phase.