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Thursday, June 2, 2016

China is The Biggest Short...Ever

China, it's a simple story...a story of a massive population and population growth.  As the adult population growth began to wane, debt was substituted for the waning growth.  Population growth turned to massive outright depopulation among the young while all remaining population growth was among the "pig through the python" elderly.  But as the Chinese gained wealth, (particularly among the wealthy of the tier 1 & tier 2 cities) the wealthy, soon to be elderly didn't trust banks or the stock market...instead they piled their savings primarily into real estate.  The top quintile of Chinese purchased the bulk of the new, speculative inventory of high end housing typically buying multiple apartments and condos.  The vacancy rate among the housing segment in these cities is supposedly in excess of 20% (compared to a peak of 3% during the US subprime crisis).  There are roughly 500 million households in China and best guestimates suggest that there are 50 million or so vacant housing units...or 10% of the national housing stock.

To put this in perspective, I'll compare it to the US subprime crisis...a crisis that was caused by the demographic deceleration of population growth.  But still, despite decelerating in the US, there was and still is some growth (see below).  The Fed was determined to use interest rate policy cuts as a substitute for declining population growth among adults.  The chart below outlines the decelerating 20-64yr/old annual population growth through 2025 (this includes all permanent or otherwise). 

And on a percentage basis (below), the declining growth among the adult population correlated to the Federal Funds rate and federal debt.  The introduction of nothing down, NINJA and liar loans was simply because there was a collapsing number of potential buyers to support a speculative bubble, particularly in the "tier 1" US cities and locations.

And the changing nature of net new job creation vs. new home creation (below).  A 2.5 to 1 ratio has inverted since '00 with more houses being created than full time jobs to support them.  Further evidence that US subprime crisis was triggered by a demographic collapse...HERE.

So, back to the biggest bubble leading to the biggest short (ever?).  The chart below highlights China's annual adult population change, the Bank of China discount lending rate, and China's moonshot of total debt.  The decelerating population growth offset by declining lending rates leading to excessive debt and asset bubbles.  Pretty standard central bank stuff.

And just in case you didn't quite catch why China is the biggest bubble and China's housing market is the biggest excessive, vacant inventory the earth has ever seen...a population boom followed by bust...and the bust concurrent with interest rate cuts to substitute debt for decelerating organic growth.

Below, China population and debt change from '80-->'08.  And $5 trillion of the $7 trillion increase in debt has been incurred since '00...just as the population deceleration became very noticeable.

And below, the substation of debt for the absence of any population growth among the 0-55yr/old Chinese population since '08.

Below, over the next 20 years, China's 0-55yr/old population is set to collapse.  A 20%+ fall of the next two decades.  And the 55+yr/old population is set to more than double this same time with the vast majority among the 65+yr/old population.  This in a nation with net emigration.

So, to summarize, China's retirement age is 60 (50 to 55 for women)...and the wealthy 55+yr/olds (especially the 65+yr/olds) hold huge numbers of speculative, vacant apartments across China's cities.  These apartments / condos are intended to supply the wealthy elderly Chinese with rental income and/or be sold to fund China's later years.  But the fly in the ointment is the whole collapsing population of buyers vs. a swelling quantity of elderly sellers.  And funny thing, according to the World Bank, the declining employment ratio divided by the 15+yr/old Chinese population yields the below annual job growth in China.  A 70% deceleration in annual job creation since 1990.  This probably matters.

And finally below, the mismatch of 0-55yr/olds vs. 55+yr/olds from 1990 through 2050 and for jiggles, I include the Chinese M2 monetary supply.  From '98 through '15, the M2 has increased 1400%...and that was while the population of 0-55yr/olds was only decelerating.  Now that the 0-55yr/old population begins its rapid decline, my estimates for China's M2 and China's debt are likely to be hit decades early.

So, ok, where's the short?  Well, it probably isn't housing or construction or even commodity suppliers.  If China follows the same path as every other quasi-capitalist (er-communist?)
state, we can expect a flood of money like the world has never seen.  Bailouts across industry and state buyouts of investors.  And the Yuan, swallowing all this debt and spewing all this bailout cash, is probably the short of a lifetime.


  1. Hmmm, may be it is a good contribution to your research: the article highlights top five countries for Chinese property investments: the USA, Australia, New Zealand, the UK, and Canada,new_zealand,australia,united-kingdom,usa/analytics/top_five_countries_for_chinese_property_investments_5131/

    1. Thanks Anna - good stuff and appreciate the link. Good info. I also see some of this first hand here in Portland, OR and in general up and down the US West Coast. I still have a lot of contacts in Asia from my days as an expat and interesting to hear the motivations of the wealthy in China to move some assets out and "diversify" geographically.


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