A question I have answered frequently in recent history is why I decided to write my working paper How Badly Flawed is Chinese Economic Data? and the answer is simple. I was astounded that smart people would so readily believe the economic propaganda being announced by Beijing. Apparently, other people have been just as skeptical and and heartfelt thank you to CNBC for broadcasting this:
Now whether you agree with everything that I have said, how I calculated it, or the final conclusions I reached let me give you some new information. According to new official data (as I stress about Chinese data: do not actually believe it) in 70 major cities the price of new homes rose 7.5%. Nor was this increase limited to new homes as existing home prices jumped also. According to Bloomberg: “Existing home prices rose 15 percent in Beijing last month from a year earlier and increased 11 percent in Shanghai and Guangzhou each, according to the data”
Now to put these numbers in perspective you must bear in mind that according to the same people that released these statistics, from 2000-2011 urban areas saw housing price inflation of 8% total. It must be emphasized that the real estate asset price and the consumer price change are two very different things but they are also very related. The real estate component of CPI is not going to increase in perfect correlation with the change in real estate prices, especially when there is a bubble. However, nor are the housing CPI and real estate asset price independent and unrelated. To think that real estate asset prices go up by 7.5% annually but the housing CPI goes up by only 8% in 12 years in ludicrous.
The reason this matters is that banks are enormously stressed and continuing to lend to developers to buy land, consumers to buy apartments, and related industries to stay in business. Think the banks aren’t stressed? Chinese interbank rates are already spiking in anticipation of the end of the month capital adequacy ratio tests and the market is pushing for additional PBOC liquidity.
There are a couple of problems here. First, it should serve as a warning sign that every time there is a capital adequacy test, Chinese banks go into panic mode. That is not a good sign. Second, banks should not be this dependent on on the central for bank for ongoing liquidity. This smacks of an ongoing quiet bailout. In normal times, banks should be able to lend to each other with minimal central bank intervention to ensure smooth financial market operation.
Given the line of rights issues that have already started are continuing by banks, this sounds a lot like a government engineered bailout except under quasi-Communist Authoritarianism, you get try to dupe the private investors into putting up the capital. (Am I the only one that finds it odd that the quasi-capitalist US does a public bailout while the quasi-Communists conduct a private bailout?). Point being, the PBOC and string of new rights issues are telling you just how stressed Chinese banks are.
You definitely can’t believe the macroeconomic data any more than you can believe a set of public Chinese books.