How China’s Model of Dictated Economic Growth Blew Up

The debt-fueled property & construction bubble that drove its growth turned into a huge explosive mess with an enormous amount of debt.

By Wolf Richter. This is the transcript of my podcast of last Sunday, THE WOLF STREET REPORT.

It’s mind-boggling just how important the residential property sector is to the Chinese economy, to what extent government-dictated economic growth was achieved by building more apartment towers, and it’s even more mind-boggling how much debt residential property developers have racked up, and how much household wealth is tied up in the property sector at multiple levels.

Then there are the demographic headwinds the property sector has been facing for years, that are coming to the forefront.

So now there is a property crisis in China that is making the US mortgage crisis of 2008 look like child’s play in terms of magnitude.

The central government has been trying to deal with rampant real estate speculation and prevent it from going even more haywire and take down the financial system and the economy.

In August last year, the government introduced limits on corporate borrowing, known as the “three red lines,” which forced some overleveraged property developers to begin to deleverage. The government also put into effect other policy tools, such as curbs on mortgage lending.

Now we’re a year down the road. Numerous property developers are in the process of defaulting on their debts. The most indebted one of them, Evergrande, has turned into a total fiasco. It has over $300 billion in known liabilities, plus, according to Goldman Sachs, $156 billion in off-balance sheet debt and contingent liabilities.

Authorities are busy trying to prevent financial contagion and a financial crisis. And they have some unique controls to prevent a classic financial crisis:

The state owns the largest four banks, and it can tell them to lend, and it can tell them not to hound borrowers, and it can tell them to convert defaulted debt to equity, and move on, and it can clean up their balance sheets later.

The People’s Bank of China is part of the government, and it will do whatever it takes.

The government can also lean on large asset managers and brokers to buy shares and bonds, and why not, apartments.

The government owns much of the media and can lean on other media outlets, and it is already stifling financial commentary, and it thereby controls the message.

These are powerful controls to have. Not much is left up to the markets.

But the property sector is such a huge part of the overall economy and has been so important to economic growth, that financial contagion is the lesser problem.

China’s residential property market could be the largest in the world with a total asset value of $62 trillion, with a T, compared to $34 trillion for the US property market, according to Goldman Sachs Investment Research.

Apartments are what Chinese households invest in – not just one apartment to live in, but apartments as investment properties that remain empty, with households owning multiple apartments like American households own mutual funds or stocks, betting on continued rise in prices.

In the broadest sense, including the support industries, construction, real estate services, and supporting financial services, the property sector accounts for about 28% to 30% of GDP, according to numerous reports.

For years, when a province needed 6.5% economic growth because the central government said so, it cranked up the property sector. Building apartment towers just to increase GDP, whether anyone needs more apartments or not, and finance the whole thing with huge amounts of debt, is problematic, it turns out.

Chinese property developers, such as Evergrande, all together have $5.2 trillion with a T in debt, according to estimates by Nomura, cited by the Wall Street Journal. Of that $5.2 trillion in debt:

46% are bank loans – so that’s about $2.4 trillion in bank loans to just property developers.

10% are bonds, so that’s about $520 billion in bonds. They include $271 billion in the infamous dollar bonds that are now defaulting, and whose prices have collapsed, and whose yields have spiked to record highs. But these dollar bonds are only 5% of the total debt that the property developers owe.

One of the Evergrande dollar-bonds that stopped paying interest in September will hit the end of the 30-day grace period on October 23, and barring a miracle, will then be officially in default [update Oct 23: state-owned media reported that this bond payment will be made].

The prices of dollar bonds of many property developers have collapsed to 20 or 25 cents on the dollar. And the overall market of junk-rated dollar bonds in China has taken a massive hit, with yield spiking over the past few days to the peak levels during the financial crisis.

For years, there was the assumption among foreign investors when they bought dollar junk-bonds that the government would bail them out when the big S hits the fan. That had been figured into the risk calculus and price.

But that assumption is now out the window, and prices plunged and yields spiked to adjust to the new perception that there might not be a government bailout of the dollar-bonds.

And 26% of that $5.2 trillion that property developers owe, or about $1.4 trillion, are owed to apartment buyers that have bought unfinished apartments in presales. This $1.4 trillion are essentially interest-free loans by tens of millions of households to developers. If the developer collapses, those households end up with a fragment of a construction site, and their investment may be gone.

In addition, developers have borrowed from suppliers and contractors by extending the time they take to pay them.

Then there is the undisclosed off-balance sheet debt. Goldman Sachs estimated that Evergrande alone had about $156 billion in off-balance-sheet debt and contingent liabilities, such as mortgage guarantees to help people buy its apartments.

Property developers also borrowed from shadow-banks, known as trust companies, and they borrowed from individuals who bought so-called wealth-management products. Investors in Evergrande’s wealth-management products now are at risk of not getting their money back unless there are bailout arrangements from the government.

And then there are the demographic trends that started playing out years ago. They’re slow moving.

China is an immensely crowded country, and one of the cornerstones of its success in elevating hundreds of millions of people out of poverty over the course of a few decades was the one-child policy – which has now been rescinded. The side effect of this one-child policy is that the working age population began to shrink in 2012, and has continued to shrink. This means that household formation is shrinking, which means that demand for apartments to actually live in is shrinking.

But when housing becomes a financialized highly leveraged asset class, there can be nearly unlimited demand, well, until something breaks. And then what do you do with all these vacant investment properties?

In 2019, sales of new homes accounted for over three-quarters of total home sales in China, compared to just about 12% in the US, according to data cited by the Wall Street Journal.

Homeownership is already over 90% for urban households in China, among the highest in the world.

And by late 2018, 87% of home purchases were by people who already owned at least one home. They were buying to speculate in real estate.

The numbers are just gigantic. There were about 1.6 million acres of residential floor space under construction at the end of 2020, according to government data, cited by the Wall Street Journal. That would equate to tens of thousands of apartment towers.

I did a little math. The average apartment size in China is said to be 60 square meters, according to the internet. That’s 646 square feet. New construction may be larger on average, but we’ll run with that number.

So 1.6 million acres of floor space under construction, at 646 square feet per apartment on average, would mean that there are 108 million apartments under construction.

Let that sink in for a moment: 108 million apartments under construction, when urban homeownership is already 90% and when the working-age population has been declining for nearly a decade.

So this has been the business model: Build it and they will buy because apartments have become financialized investment products purchased for capital gains, and not yield, since relatively few of these apartments were rented out.

But there are carrying costs for apartments. If they’re not rented out, and if they’re dropping in prices, investors get into a very sour mood very quickly, and they’ll go demonstrating in the streets, at which point the government starts thinking about bailouts to avoid a social explosion.

But even bailouts cannot revive the old business model that led to all this. It doesn’t come at a surprise. The warnings have been sounded for years. What’s surprising is that it took so long.

Total sales among China’s 100 largest property developers plunged by 36% in September from a year earlier, according the Wall Street Journal. Sales by the 10 biggest developers, including Evergrande, collapsed by 44%.

Developers resorted to discounts to dump apartments, and those discounts hit prices in the overall market.

Home prices dropped in 16 out of 31 divisions – that’s the 23 provinces and the cities that are administered by the central government. This was the first time since March 2015 that home prices dropped in a majority of the 31 divisions, according to official data.

The situation may be even worse than the official data shows. There was online chatter, according to the Nikkei Asia, that property developers, such as Evergrande, are dumping apartments at half the original price.

Given how crucial property is to household wealth, a widespread decline in property prices is going to be a gigantic mess. Once apartment prices start declining, they’re no longer perceived as an attractive investment property, and buyers vanish, and prices drop further and sales stall.

The government can likely use its powerful controls of the system to prevent a classic financial crisis.

But it also controlled economic growth by specifying how much growth it wanted, and provinces and cities complied by producing this growth through property investments, construction projects, and the like. But it is this growth model that has led to the current debt-fueled fiasco.

Whatever the government will do with Evergrande and other developers, it will likely try to avoid a messy collapse of them. Some creditors, especially foreign creditors, may be taking big losses. Other creditors, such as households that invested in pre-sale apartments and wealth management products, may get bailed out. The biggest property developers may get unwound methodically, as the government has been doing with its big conglomerates starting a few years ago.

But that growth model of debt-fueled property speculation is finished. The model created the biggest real estate bubble ever, bogged down by an enormous amount of debt. That bubble is now deflating. The government is trying to make sure that it doesn’t implode uncontrollably.

They have their hands full defusing the risks, and some things they’ll be able to defuse, and other things will blow up. But the debt-fueled real estate speculation that was the biggest driver of economic growth is out the window. What’s left is a huge China-size mess for years to come.

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  178 comments for “How China’s Model of Dictated Economic Growth Blew Up

  1. Ron says:

    Also many companies leaving China after years of fraud deception and COVID the real story

    • CJH says:

      According to economist Michael Hudson, 80% of all US bank loans are for property acquisition.

      • Nick Kelly says:

        No doubt. As in most places. Where else can joe with a job and 5% down borrow hundreds of thousands? The reason is the collateral. The entity borrowing or standing behind the loan is really the RE.

        • Joe Saba says:

          we’re selling RE now and will do 1031 into another
          of course we own F&C
          selling overpriced and buying overpriced
          if price collapses – WE DON’T CARE SINCE it’s the income we’re after

  2. 2banana says:

    So…logic would say not a good investment.

    But cheap and easy money has a say in that.

    “Let that sink in for a moment: 108 million apartments under construction, when urban homeownership is already 90% and when the working-age population has been declining for nearly a decade”

    • MCH says:

      Yeah… it seems reasonable. Population in China current = 1.4B, projected population in 2080, 1.3B; so, let’s do some simple math…

      We assume worst case; 90% country wide home ownership. 10% without own homes. So, that’s roughly 140 M people without home ownership.

      140M – 108M = 32M; looks like we’re short 32M apartments from achieving the apartments for everyonel. Let’s get constructing. See the math all works out. There is a runway for another 32 M apartments to be built.

      Yes, I am well aware of how silly it sounds considering how many of those people are kids and elderly. But we have a dream, and it must be achieved.

      • Jack says:


        “Yes, I am well aware of how silly it sounds considering how many of those people are kids and elderly. But we have a dream, and it must be achieved.”

        You’re silly and your grasp of planning in this particular subject is even more ridiculous indeed.

        Please leave this subject and entertain yourself with something more aligned with your qualifications!

        and don’t force me to explain further all other factors that relate to residence and:

        The central government Economic policy

        Employment .
        Family .
        Economic outlook (individuals).
        Change in personal circumstances.

        Aye,?china is Not paradise and the Chinese have largely limited personal freedoms , but there are traditions that have many levers on policies as well.

        • Steven Smith says:

          I don’t think you quite got what MCH was implying.

        • MCH says:


          Wolf is going to hate me for this but…

          “ entertain yourself with something more aligned with your qualifications!”

          I am…. And you’re proof. 😱

        • COWG says:


          You might try shredded wheat for that fiber problem…

      • Thomas Roberts says:

        The actual population of China is estimated at about 1.26 Billion (150 million smaller than claimed) at the end of 2020; Yi Fuxian of the University of Wisconsin-Madison is one such source for this number. Alot of people, think the actual population is smaller than claimed. Various estimates put china’s population at between 100 million and 200 million smaller, than the claimed 1.412 billion. There are actual disparities in the released censuses released by the CCP.

        It’s important to know that prior to 1970, the CCP actively encouraged, making as many babies as possible and blocked all forms of family planning; and the population grew rapidly. Starting in about 1970 they decided there was too many people, so they began to encourage people to have less babies. By 1979, the one child policy was in effect. Now there is not enough babies, so there is talk of once again, blocking all forms of family planning.

        Even if it successfully boosts birth rates. It takes nearly 20 years for higher births to result in new unskilled factory workers and upto nearly 30 years for new births to add to highly skilled labor force (19 years including pregnancy to get an adult + 4 to 8 years of college and grad school + upto several more years to become significantly good at the job), by then increased birthrates, could be counterproductive.

        • Thomas Roberts says:

          A big thing to add is that all residential housing is built on land with 70 year leases, most housing will probably fall, well short of surviving the 70 years. The 70 year date is from when the land is first leased by the developer. Quality of construction, fell greatly in China in about 2009ish.

          Commercial land has 50 year leases.
          Government buildings are not subject to leases, but ironically, have the lowest quality of all construction (corruption).

        • MiTurn says:

          “By 1979, the one child policy was in effect. Now there is not enough babies, so there is talk of once again, blocking all forms of family planning.”

          But a lot of married you people in China are professionals and do not want kids — just like in the west.

        • james wordsworth says:

          China’s big population move has been moving peasants to the cities. This is part of what has fed the housing increase. 250 million plus moved .. that’s a lot.

          But now China is trying to bring prosperity to the villages because it turns out just bringing people to the city does not solve problems and if things go bad there is no land to go back to.

          So it does look like the past “need” for a housing boom has passed, but the builders are left satisfying an investment boom instead.

          Not a great position to be in going forward.

      • Ron Davis says:

        Have you considered that more than one person usually inhabit a home?

  3. Briny says:

    It seems Evergrande made it just under the wire.

    • Petunia says:

      They need to raise cash before the entire sector gets downgraded to junk, then nobody will be able to raise money outside of China. I still think their only option will be to sell everything they own outside of China. It’s surprising how little is written on their foreign holdings. I know they have projects in the UK and Australia, and probably in the US as well.

      • Thomas Roberts says:

        The only thing that everybody analyzing China, has agreed on, is that the CCP will not bail out foreign investors/bond holders (of Evergrande). There is a chance the CCP will partially bail out Evergrande or average Chinese citizens, but foreigners are screwed.

        I think any domestic bailouts will be very limited, if any.

        • Trailer Trash says:

          “foreigners are screwed”

          Wall Street parasites act surprised that making China safe and profitable for Western capitalists is not the government’s highest priority (like it is in US).

          Do the parasites really believe that the Chinese have forgotten the many decades of humiliation and exploitation imposed by the West?

        • Thomas Roberts says:


          The trash is back.

          If foreign investors are always going to be thrown under the bus, at some point, they will stop investing in China, cutting off a source of money. This is on top of many other negative effects.

          The century of humiliation was also caused by Japan (the east).

          Only a couple of western countries were involved in the century of humiliation. America, who is one the main countries who built up China after the CCP destroyed the country (the other being the Soviet union); had nothing to do with it. Also, america was the one who freed China from Japan, ending the century of humiliation.

          Despite any nonsense, you Wumao and shills believe, the CCP avoided fighting Japan as greatly as possible during the war and after the war ended. The actual Chinese soldiers who fought against the Japanese (the nationalists) were weakened, allowing the CCP/PLA to continue and win the Civil War.

          Mao also famously thanked the Japanese for invading China on many occasions.

          Here is a quote from one of Mao’s personal physicians

          Prime Minister Tanaka was accorded the same diplomatic courtesies as Nixon, and the outcome of his visit was a joint communiqué announcing the establishment of formal diplomatic relations between China and Japan. Mao thought his talks with Tanaka had been warmer and more intimate than his meeting with Nixon. When Tanaka tried to apologize for his country’s invasion of China, Mao assured him that it was the “help” of the Japanese invasion that made the communist victory and this visit between communist and Japanese leaders possible.

          Li, Zhisui. ‘The Private Life Of Chairman Mao’, pg. 568, par. 2, 1994 Chatto and Windus.

        • Trailer Trash says:

          “America … had nothing to do with it”

          Two words: Gunboat Diplomacy

          One example: Yangtze River Patrol Force, was a prolonged naval operation from 1854–1949 to protect American interests in the Yangtze River’s treaty ports. [from wikipedia]

          Denying historical events doesn’t make them disappear, especially for the victims.

        • Thomas Roberts says:

          Okay you got me, I forget some of the things America did.

          However, it’s important to remember that immediately after taking over, the CCP caused 30 to 55 million deaths (The great leap forward). That’s not exactly an improvement. Mao devastated the country to such an extent, it probably wouldn’t have survived, had the Soviet union not bailed them out. Mao wanted total control though, when being bailed out, you lose some control. Mao repaid the Soviets, by switching to an alliance with America. America is the one, above anyone else, who enabled China to get as far as it did (after the split with the Soviets), far more so than the CCP. Xi has ended the progress. Xi and the CCP, rewarded America and the rest of the world, with a pandemic, which Xi is attempting to blame on America.

          For all the talk of humiliation, one should look at all the imperialism, the CCP is committing against Africa, Asia, and everywhere else. The CCP has done nothing since it’s inception, that benefits the world. China would have been better off, without the CCP. The Xi virus pandemic, has cost every country involved, more than the Belt and Road initiative has ever “invested” in them.

        • NBay says:

          Just curious who “you Wumao and shills” are, and what “nonsense” it is that “they” believe.

          If it’s just a sloppy notion in your own rather uneducated head, then forget it.

        • Thomas Roberts says:


          Who are you to question anyone?

          It’s a fact, that the CCP pays people to troll online to make China look good and everybody else look bad.

          They are called Wumao’s, there are many many thousands of them, commenting across the internet (they are allowed to use VPN’s). The CCP also encourages Chinese citizens to promote the nonsense, these are called shills. There are also non Chinese who either fall for the nonsense or who just don’t like the west, who repeat the nonsense, these are also called shills.

      • Djreef says:

        Including US Bonds. I’m wondering if some of the weird volatility we’re experiencing in Treasurys might have something to do with this.


      • richard saler says:

        That’s a great point Petunia!

    • Wolf Richter says:

      One interest payment, a small one. One of many to come, plus big principal payments coming due.

    • Nick Kelly says:


      They are done. They’ve missed the final deadline for bond payment and are in default. A deal to sell their property management co for 2.9 billion has collapsed with acrimony. They have months of unpaid wages and are cut off by suppliers. The problem now is that the underlying issue, massive oversupply built on debt has cut the entire sector off from bond or stock issuance. All that’s left is bank loans, which will have to be ordered at (figurative) gunpoint by the CCP. The priority of the CCP will be the large down payments given to EG by over a million buyers of unfinished units.

      EG will not exist when the dust settles. The CCP will want the name to be forgotten. It wouldn’t surprise me if someone ends up in jail as the CCP looks to deflect blame.

  4. enough says:

    So why are the Asian markets so ‘relatively’ unaffected?

    • Catxman says:

      Good question. As near as I can tell, China is not completely integrated into the Far Eastern sphere, with countries such as Japan and Korea. That is why Wolf says that Japan’s debt implosion won’t be a world factor, because the Japs aren’t integrated on that level with the rest of the world. China is an insular nation in a way that America is not. All roads lead to New York, but only a few dirt tributaries lead to Shanghai or Beijing.

      • Djreef says:

        They’re also deficient on information. Modern Asian cultures are all about appearances, so a great deal is still unknown.

  5. Xavier Caveat says:

    The problem with buying a Chinese apartment, is 20 minutes later you’re hungry for another.

  6. Jack says:

    I have to take issues with some premises of this article,

    Firstly, this quagmire of housing bubble in China is Not exclusive to China albeit the size and repercussions for their domestic and international market will be tremendous.

    Canada’s domestic residential market stands roughly at $13-15 TRILLION for a population of 45 million!

    Australian market is around $9 trillion if you believe core logic’s estimates!!! That’s for a population of 25 million people!!!

    I don’t want to imagine the current market cap for the US!

    Secondly, China while lurching from deranged and unsustainable policies throughout the cccp rule have Not lost control entirely of their economic rudders as say the totally inept residents of the swamp in the DC have .

    The pain that the Chinese will be going through will be visible and visited on other markets for years to come.

    As I referred to the size of the Chinese residential property troubles in previous comments in other article on this great site , the length and breadth of this cancer are yet to be determined and will likely be in the order of 3-5 trillion dollars in total.

    There is a reason why the Chinese have curtailed the influence of many of their billionaires and clipped their wings, there are even more reasons now to expect a destabilization inside the central command!

    If the issue facing China are Not sorted quickly ( in the form of summary justice, or the mutually beneficial nature), in the next 6 months. We’re going to be “entertained “ to a huge brinkmanship between the US and communist China, a diversionary event if not catastrophic one which is the last thing a world economy hammered by fake pandemic will need now.

    • Up north says:

      A bit off topic, but still:
      It’s become clear to me that the rise in home prices in Toronta (not a misspell) and Vancouver and Montreal and the subsequent rise across Canada etc must be due to money from overseas, ie China. To me that really is clear now: in Canada, with low rates, it’s leveraged money from outside of the country that is leveraging home prices inside the country. Only now there seems to have just happened a sort of ratchet effect: prices are not going down in the short medium term it seems…

    • Djreef says:



    • Old School says:

      I agree. Fiat has created bubbles everywhere. USA system funnels bubbles into financial markets. Hussman’s latest article does the math on US stock market.

      US stock market would need to fall 70% to get to long term trend. Doesn’t matter if Fed policy decision results in inflation or deflation, the results are still going to be dismal real return in stock market for stock market until excess valuations are worked off. Could be worked off in 6 months or 25 years, but excess valuations will be worked off.

      • Wut says:

        Hussman has a wildly and deeply flawed investing approach, as proven by their poor returns for at least a decade now.

        I would spend time finding opportunities rather than slamming everything in a basket. Do it this way and you’ll find yourself holding seriously devalued currency.

    • kam says:

      Canadian cities’ entire housing price growth in the past 20 years came from China.
      As the Poverty Effect grows in China, it will come to all Western countries who encouraged foreigners to stiff-arm locals from affordable, domestic, free-market housing.
      Money Printing is not Economic Growth – in full Marxist or Quasi-Marxist states.

      • char says:

        Greater China. HK should not be overlooked. But claiming that Canadian home prices is to blame on the Chinese is a bit shortsighted. Home prices have exploded for the last 30 years almost everywhere in the World. I blame politicians for a policy of anti public housing and their addiction to the fake wealth created by increasing home prices.

        “Money Printing is not Economic Growth – in full Marxist or Quasi-Marxist states.”

        What do you mean with this? Are this how capitalistic state operate according to Marx. States that follow Marx advise on how to operate or is Marx just used as a four letter word.

    • Paulo says:

      Terrific comment, Jack.

      These dare increasingly dangerous times, imho.

  7. J-Pow!!! says:

    I will bail them out!!!!! No one can fail!!!!! Hahahahahahahahahahahajaja!!!!!!!

    • MCH says:

      nyaaa nyaaaa…. You won’t be bailing anyone out, JP. With all of your illegal trading, you will be on the streets begging for change by this time next year.

      You know the rest of the J team hates you…. It’s not personal… and no amount of your bailout is going to change how they feel.

      I love hyperboles.

      • MonkeyBusiness says:

        In fact it’s all his illegal trading that makes him a lock for next year. The government is corrupt, why would they want to hire anyone honest?

        • MCH says:

          Cause the rest of the J team need a fall guy when the mob demands justice. You can’t throw the elected one to the shark. The Trump appointee is perfect for that role.

          And we can always find someone more corrupt and virtue signal the individual into sainthood.

        • p coyle says:

          he can always be replaced by fauci. that guy seems to have a knack for failing upward.

  8. Petunia says:

    At least the Chinese govt is owning the mess they have on their hands. Can’t say that about the US, letting mega landlords price out families and letting commercial real estate extend and pretend those spaces will eventually fill up with workers again.

    • RH says:

      Watch “Billionaire MOCKS Biden For Not Raising His Taxes | Breaking Points with Krystal and Saagar.”

  9. Breta says:

    China’s biggest mistake is the banning of Bitcoin.
    I suppose they can always “un-ban” it again, but for now it’s huge screw-up.

  10. Martok says:


    1) How much are US companies are involved financially, stocks, loans, etc
    2) Can the CCP advert a collapse by itself
    3) The likely hood of economic disaster in CCP like the disaster in US in 2008
    4) What effect can this have on global/US markets

    There are enough excess housing in CCP for everyone in Germany to live, from what I read, and if it is collapsing as pointed out that developers are selling at 1/2 price that this will cascade even more downward, so I believe a mess is inevitable.

    So how widespread can it be is what I’m interested to understand.

    • Jonathan Vause says:

      the CCP can easily prevent a ‘collapse’, but they can’t prevent the inevitable slide into Japanification – GDP goes sideways and asset prices go down or sideways for, like, ever, and for exactly the same reasons that that happened in Japan. (but as household consumption is less than 50% of GDP, the standard of living can still improve even as the economy doesn’t grow, as also happened in Japan since 1990.) there won’t be an immediate crisis and the effect on global markets will be negligible, but the problem for the government in that the usual solution (roll over bad debt and financial repression/negative real interest rates as nominal GDP continues to grow) won’t be easy to achieve as the bubble is so big and consumers aren’t exactly going to be rushing out to buy more stuff they don’t need when their savings are calling in value. expect house prices in some cities to slowly deflate for a very long time, and more sabre rattling around taiwan

      • Jack says:


        “he CCP can easily prevent a ‘collapse’, but they can’t prevent the inevitable slide into Japanification – GDP goes sideways and asset prices go down or sideways for, like, ever”

        Correct, with some caveat.

        “There won’t be an immediate crisis and the effects on global markets will be negligible “!

        Very very wrong.

        As pointed out in another comment here , the impact on the US , European, and Asia pacific regional markets will be sharp and almost immediate.

        • Freddy says:

          Also, a construction slowdown in China was cause a drop in demand for natural resources / commodities (copper, iron, plastics etc.)

        • Jonathan Vause says:

          nobody outside of China is invested in Chinese housing. the numbers are tiny

        • Nick Kelly says:

          Freddy: a severe recession in OZ is pretty much baked into the cake. About 35% of total Oz exports go to China and of that over 80% is iron ore. Of the iron made into low grade steel in China the largest portion was for construction rebar.

          Oz, with the richest iron ore ( up to 60 % from Pilbara range ) closest to largest, nearly insatiable customer has had one heck of a ride as it contended for its own spot in the top real estate bubbles. The softness of the landing is entirely dependent on China and it looks hard.

          Joking, sort of, they better wrangle for as much local content of the submarine contract as possible.

    • Ron says:

      All excesses get returned to the mean the everything bubble will pop expect to lose 90 % of your assets 75 years of foolish behavior doesn’t just disappear

    • Randy says:

      But from what I’ve read, and the videos I have seen of how shoddy those “apartments” are built and falling apart already, I would never live there if I could avoid it!! Some are said to not even be habitable, due to no plumbing or electricity in them! They were built solely with the intention of being bought and resold as the prices went up, just pure speculation!! Maybe that was a reason for the sudden loss of sales? Is anybody really so damn stupid that they’d buy something that can’t be used for anything other than a large closet??

    • char says:

      I don’t think that the Chinese government wants to stop the (orderly) collapse of a) evergreen or b) house prices. What they do want to stop is the collapse of the builders by building social housing on a 9 to 5 schedule instead of 996 and some workers leaving the business. This is he big difference because (almost) American had to leave the home building business in 2008. But this will still lead to a massive lower demand for steel and cement and the energy needed to make them. Also the higher cost per weight products like doors, fittings etc. will find a way to the world market

  11. Ole C G Olesen says:


    • Mojer says:

      Very correct and no commentator has remembered this big problem is hidden, are the big investment funds like BlackRock and Vanguard going to lose in the billions or trillions of dollars?
      This is the real question about China now.

      • kam says:

        Let us not forget that BlackRock, et al, are “Too Big to be responsible for their own choices.”

        • 91B20 1stCav (AUS) says:

          kam-your words make me realize now that thinking ‘too small’ was where i went wrong years ago…

          (to paraphrase R.A. Heinlein: “…have you ever noticed that those who go broke in a big way never seem to miss a meal? It’s the average fellows who always have to pull their belts in another notch…”).

          may we all find a better day.

    • Djreef says:

      There’s no way to truly know. Information about most financial things is carefully guarded by the CCP. This is what makes this so dangerous. Multiplication due to hypothecation and derivatives contracting could make this much much larger than we believe it to be.


  12. roddy6667 says:

    You read in a lot of financial sites about all the surplus housing that is not needed in China. These authors are not aware of the plan to move 300 million rural citizens to the cities. It is a 20 year plan and only a few years old. As jobs for these people are arranged, they can make the move. This allows farmng to become more efficient. When you travel through the countryside in China, you see many millions of postage stamp size “farms” being worked with hand tools. In America, 1.3% of the population supplies the food for the entire country. In China, 53% of the people are farming. This is very inefficient and backwards. Combining the farmis into larger ones that use modern methods will guarantee that China can feed its people. All these people will need housing. They will not be buying the nicest high-rise units, but will be occupying the older 5-7 story buildings that are the most common type in the country. Like first-time buyers in the West, this will allow everybody to move up a step. These workers will take up any slack caused by dwindling birth rates, and keep the construction industry working. It will also help clean up the air. Rural homes burn coal in individual stoves. Very dirty. In the cities, community heating plants are much cleaner and reduce the pollution per household to a minimum.

    • Jonathan Vause says:

      53% farmers is way out of date

    • Wolf Richter says:


      “…the plan to move 300 million rural citizens to the cities. It is a 20 year plan and only a few years old.”

      OK, basic math (assuming for the moment that what you said is correct). 108 million apartments under construction at the end of 2020, at an average occupancy of 2.5 per apartment, provides new housing for about 270 million additional people in 2021.

      And they’re still building new apartments in 2021 and they will be building in 2022… etc.

      And you’re saying that all these housing units that are already available for 270 million people, and the additional housing units for hundreds of millions of people over the next few years, will be built to accommodate 300 million people (requires 120 million housing units in total) by 20 years from now? Even as the working-age population — which is the population that is looking for new housing as they form households — is already shrinking?

      And that plan of moving 300 million people is “a few years old,” as you said, and so they already moved a bunch of those people into new apartments over the past few years, and now there aren’t 300 million people left to move.

      No, this is a serious issue of overbuilding to drive economic growth, no matter what the costs, and you cannot brush it off by spreading CCP propaganda. Just sounds silly.

      • roddy6667 says:

        It’s not commie propaganda. It’s what is happening. A large percent of the housing stock is tired and is torn down to build all the new homes. I don’t see anybody subtracting these millions of homes from the equation, just adding the new ones. In any city in China you see huge areas that have been razed for urban renewal. 5-7 story buildings built as late as 1990 are all leveled to build 20-30 story high rises. This leaves more room for retail, schools, parks, recreation, green spaces and the like. There is nothing wrong with building excess homes, as long as people have the cash to buy them, and right now, they still do. They pay cash for second and third homes. This is a sign of prosperity. Americans can’t do this.

      • RedRaider says:

        Current population of China is 1.444B. At 2.5/family means 578 million families. The world bank says 60% of population is urban. Which means 347 million urban families and 231 rural families. If China is to equal the USA 1.5% farming then 220 million rural families will need to go urban. With urban home ownership at 90% there is a need for 35 million urban apartments plus the 220 million rural to urban migration. A 20 year plan for rural to urban migration would require 10 million/year. Add in the 35 million current need means 45 million the “first” year. This means the 108 million units under construction represents approximately the first 3 years for the 20 year plan. In and of itself I don’t consider this outrageous. But there are extenuating circumstances:

        1. This is pretty much all debt financed
        2. We don’t know how many unoccupied units for investment there
        3. The rural to urban migration does not mean all rural families
        move to urban centers. Which means you don’t know where to
        build the apartment buildings. Take the USA for example. In the
        18th century 95% population was rural the vast majority farms. In
        2010 19.5% was rural the vast majority nonfarm.

        When this is factored in something that is not outrageous becomes outrageous.

        • Wolf Richter says:

          “Rural” doesn’t mean they’re doing farming. They live in small towns. Americans do too.

          And the older people now living in these rural areas and small towns, they’re generally not moving to the city. Only the younger people in the labor force are. So using the overall population number is already off target and turns this whole argument into nonsense.


          China: Agriculture and related industries: 23.6% of total employment.

          US: Agriculture and related industries: 10.3% of total employment.

          The ag sector is a big employer in both countries, and it isn’t going away, and it is labor intensive. US has been suffering big labor shortages in the ag sector for years.

        • RedRaider says:


          I think I addressed rural/farming/urban in #3. As far as the 19.5% rural figure for USA I got it from census bureau documentation. It does seem high relative to your figure of 10.3% for farming and related industries which I’m sure includes corporate farms which is different than population. But then agriculture is extremely small percentage of rural America. Lots more happening out there than farming and related industries. My town in central Wisconsin is a paper mill town. The local mill is ironically owned by a Chinese company (Ten Dragons) making shipping containers.

        • RedRaider says:


          My main point in mentioning the 19.5% rural figure was to show China’s current rural population 40% of total population would not be going to zero but probably more like the USA’s 20%. In this case the rural to urban migration wouldn’t be 220 million families but 110 million families which equals the 108 million units currently under construction. Sounds to me like the Chinese were trying to satisfy their next 20 years needs in the next 3 years.

        • Mojer says:


          You cannot compare the two agriculture US and China without remembering the fundamental difference of the main food resource in China which is rice which is also grown on very decorative hills but also very efficient with manual labor and impossible with a mechanization. The Chinese agricultural population still has many years of manual labor for food subsistence.

    • kam says:

      Efficiency is always about doing more with less people. Less people working is a metastatic cancer for the CCP.
      Methinks people flowing out of Chinese cities into the countryside as also in the cards.

      • roddy6667 says:

        Nobody wants to live in a stone house with no indoor bathroom that is crudely heated with a small coal stove. You can only bathe in warm weather. Everybody has a TV and sees how the other half lives. Nobody wants to go back to the country.

        • kam says:

          Hmmm….. I live in “the country”. I have every amenity, all the toys I want, a home with electricity (yes, it’s true, electrification was brought to most country roads 70 years ago.) Satellite TV, Internet, and clean air.
          I don’t have to breath the flatulence of a million fast food eating hive members.
          We, in the “country” control resources, including food.
          Stone huts? You live in a stone hut.

    • pjbaggot says:

      finding jobs for 50% of population might be more difficult
      than making housing for them

  13. LeClerc says:

    China is big.

    Their central planning operation took one approach to economic growth that worked until it didn’t.

    Now they will do something else.

    Their culture will survive.

    • phleep says:

      Yes, maybe, but now China is very urbanized and aimed at global power. It is very hard to unring certain bells (alike Americans who came off the farm in the 20th century).

      I see China’s particular yin and yang of gains with accrued problems: being behind a wall has upsides and down. A massive population (and financial system) captive to central planning has some unique tools for attempting a fix, but it if is all aimed long and strong enough at a cliff, can it turn, and where? The masses who have been the convenient sump to absorb risk and loss may not take it forever. I see this article passage as key:
      “… even bailouts cannot revive the old business model that led to all this.”

      China’s abandonment of Taoist thinking in favor of a mono-fixated march in one direction as a cultural theme, betrays the weakness. Confucian obedience to those above — the “strongman” “trust me” model — has its grave risks in modern times. Our (USA’s, developed west’s) particular mishmash suddenly looks less messed up, if only a little.

      • phleep says:

        Sooner or later, a Long March to nowhere, like a bridge to nowhere, like a ghost city, loses buy-in.

      • char says:

        You describe the World according to American propaganda, not as it is. For instance your claim that Chinese are more obedient than Americans which is incredible funny.

  14. Matt says:

    It will be interesting to see how they manage to employ and pay these rural citizens once they have moved to the cities.
    I imagine at present they grow or barter all their own food and live frugally, in a community. They may then be earning for any work that they get in the city but also having to buy food, pay rent unless that is subsidised etc, meanwhile there will be investment in mechanising food production which will need to be subsidised for the displaced to be able to afford it, somewhere in this circle the vultures will appear and grab the new farmers by the short and curlies and control all their inputs and outputs.
    Short term it could work but longer term I don’t see it.

    • Paulo says:

      China just over 60% urban

      US just over 80% urban

      Canada 82 % urban

      The plan for increased Chinese urbanization is nothing new if you look at our numbers and lifestyles. At least they are planning for it. We just forced it with decreasing opportunities and dislocation. Disenfranchise, and they will move… we did for the past 40 years.

      The only folks that I know that live rural by choice are people like me that had commutes to work and now have a stable source of outside income, or those who are employed in the resource sector and hope their work remains stable until they can retire.

      Canada, the second largest country in the World with vast uninhabited spaces yet with over 90% living within 100 miles of the US border. And people complain about our city housing costs….because everyone wants to live there and building new on restricted space is expensive.

      Modern Chinese cities look horrifying to me; their size, the pollution, crowded lifestyles, etc. But at least these cites are new, modern, and have transit. We have lots of worse examples, before we even discuss decaying infrastructure and don’t go there neighbourhoods.

      Their problems are not insurmountable. They’ll just do it differently when the current model needs adjusting.

      • roddy6667 says:

        I, and millions of others, like to live in arge cities. Crowded is relative. It does not mean unhealthy. Hong Kong is the world’s most vertical city and very densely populated. They are very healthy. The women live longer than anybody, and the men are outlived only by the Japanese. The citizens of China’s large cities now outlive the average American. Restated, I am comparing the urban dwellers of China with the total population of America. The urban Chinese live longer.

      • char says:

        It sounds like you live exurban, not rural. That makes a big difference

  15. Sound of the Suburbs says:

    China thought their time had come after 2008.
    They didn’t realise the problems were inherent in neoclassical economics.
    They made the same mistakes after 2008, we made before 2008.

    Neoclassical economics is the economics of the Roaring Twenties, the Wall Street Crash and the Great Depression.
    Policymakers sooner or later use the economic growth model of the Roaring Twenties, oblivious to where this is leading.
    Yes, even Chinese policymakers.

    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.

    1929 – US
    1991 – Japan
    2008 – US, UK and Euro-zone
    The PBoC saw the financial crisis coming by looking at the private debt-to-GDP ratio and you can too by looking at the chart above.
    The Chinese were lucky; it was very late in the day. The Chinese had done the same thing as everyone else, but worked out what the problem was before the financial crisis.
    They are still on the edge of the precipice, and might fall in like everyone else. The Chinese have set up the usual real estate ponzi scheme that could collapse and feed back into their banking system.

    Chinese policymakers are desperately trying to find out how an economy really works.
    The private debt fuelled, Roaring Twenties, economic growth model has reached the end of the line.

    • Depth Charge says:

      Long after we’re all dead and gone, this entire era will be looked back upon as central bank folly, with crackpot economists thinking you can just print money and create wild economic distortions without long term ramifications. These crackpot – better yet crackpipe – economists are fools.

  16. intosh says:

    “a property crisis in China that is making the US mortgage crisis of 2008 look like child’s play in terms of magnitude”

    I’ll believe it when I see it. If it’s that big, then EVERYONE on the planet will get a taste of it.

    • Winston says:

      I sincerely hope it will be the pin that pops the Everything Bubble because the longer the bubble remains inflated, the worse the damage will be when it pops.

      The powers-that-be got away with bailing out the perps behind the massive fraud which led to the GFC and implemented the “temporary emergency measure” of artificially low interest rates still in effect 12 years later (because they’re trapped) which robs savers of many billions of dollars every year.

      However, China’s economic engine won’t be there to bail out the world this time, so perhaps the powers-that-be will not be able to bail things out without destroying the dollar and the games and circuses will then be reduced sufficiently for the US’ majority idiocracy to awaken.

      But like H.L. Mencken, I have no confidence in the masses. After all, they’re the ones who have allowed us to get here via their easy manipulation by the “elites.”

      • kam says:

        America’s 3 cancers. Those which hamstring personal freedom and free-market enterprise.
        1. The Citystate of Washington DC, awash in Roman decadence
        2. The Fed. The Central Bank whose job it is, is to facilitate natural economic activity, not lead to squandering the nation’s assets and wealth. e.g wealth creation by economic production, not the Wealth/Poverty effect.
        3. The failure of enforcement of Anti-Trust, by nourishing the Monopolies, that buy corrupt politicians to carve up the American family.

  17. YuShan says:

    In China, residential real estate is a kind of Bitcoin: It has no utility (it was never intended to live in) and people just sell to each other at ever higher prices, creating an illusion of “wealth”.

    I’m told the quality of construction of many of these buildings also reflects that. Nobody cares about quality because it is not for living in. It is just about square feet and location.

    I’m really surprised that they have kept this going for so long. Even when I lived in China (20 years ago), I was told by locals that people preferred to keep buildings empty (not rent them out) because then they remained “new” and their value would increase faster.

    I wonder where Chinese people are going to put their money next. Stocks were always considered risky and crypto has been largely banned. My guess is gold.

    • Mojer says:

      Gold may be there but to a small extent, the Chinese love gambling so they will go more in that direction and maybe the CCP will open many casinos in mainland China to keep the population busy.

    • Ron says:

      Can Chinese citizens purchase gold

      • roddy6667 says:

        Yes, they own a lot of gold. My granddaughter is 6 and has about $20000 of gold she got for birthday presents. People buy little amulets from the bank that they keep at home.

    • Jake W says:

      yushan, isn’t that true about all assets now in the u.s. as well? no one cares about a company’s earning potential, all they care about is the stock price and how much they can sell it for to the next person. no one cares about whether they can actually rent out an apartment or house, it’s purely buying for capital appreciation.

    • kam says:

      “people just sell to each other at ever higher prices, creating an illusion of “wealth”.”
      Another cheap Chinese copy of U.S. policy.
      “The Wealth Effect” for those close to the Fed, The Poverty Effect for everyone else.

      My 93 year old Mother called to tell me that one of my sisters just sold her house for $1.1 million. I told her that was great, what was she going to do with her million dollars? The reply was after paying off the mortgage, there wasn’t a lot left.

  18. SocalJim says:

    This Chinese economic earthquake may throw the world into super stagflation with political turmoil. We are in the easy part of the event … just go long well located real estate.

    Eventually, this event will get very difficult to navigate and I can imagine a currency crisis evolving that will cause the world powers to shoot Bitcoin dead. This is how wars start. Scary.

    • Depth Charge says:

      “We are in the easy part of the event … just go long well located real estate.”

      You’re nothing but a shill at this point. Every one of your comments is about going long on real estate. It’s the biggest bubble in history, and it’s popping right now. Many, many locales are posting massive price drops. You don’t have a clue what you’re talking about.

      • kam says:

        Central Banks are the only thing holding up Real Estate.
        And the Central Banks call on the credit of all their own citizens has a price.
        Inflation, become hyperinflation, is the wedge that cracks the illusion of wealth.

        • char says:

          Hyperinflation are rare and only happen in enemy states. If it happens in the US you would be in so deep shit before that happens that hyperinflation wouldn’t be a big issue.

      • SocalJim says:

        Goldman Sachs forecast: “Home prices will grow a further 16% by end of next year.”

        Personally, I think their forecast is too high, I would guess half of that.

  19. Crush the Peasants! says:

    Where is the fundamental value (a quaint term) in investing in an empty apartment that generates no revenue? Sounds a bit bitcoinish.

    • Petunia says:

      It’s not about value investing, in China, it’s about posturing for status. It’s no coincidence luxury items are big sellers in China. Asian women in general spend a lot of money on luxury goods, out of proportion to their income, and they are obsessed with brand names. The investments in housing in China are just another extension of this trend of buying status.

      • Jake W says:

        Not that different from women in LA, Long Island, Miami, or any other large American city.

        • Petunia says:


          The difference is that in America women are not buying real estate at 46X incomes, to show off, like they do in China. American dingbats are either smarter or have a lot less money.

        • Jake W says:

          they’re not spending much on real estate period to show off, it’s more chanel bags, tory burch shoes, or whatever else is in these days. i’ve known many women who go into credit card debt to buy this crap. men do it too, just on different items.

  20. Winston says:

    Underfunded and Under Pressure, U.S. Pensions to Keep Investing in China – Large U.S. pension plans relying on ambitious returns to fill massive shortfalls aren’t finding it easy to steer clear of regulatory risk in China – Feb. 19, 2021

    Tuberville Demands Ban on Federal Pension Fund Investment in China
    Legislation would ban civil service pension investments from going to Chinese companies – May 18, 2021

    … to prevent Thrift Savings Plan (TSP) a retirement fund for federal workers and the military, from investing in companies connected to the Chinese military and other Chinese Communist Party operations. In 2019, TSP fund managers announced plans to invest $54 billion in an index fund with roughly 8 percent of its capital going toward Chinese companies.

  21. Zircman says:

    So if China is entering an extended period of deleveraging, should this not be deflationary for the ROW?

    • Citizen AllenM says:

      Well, yes, nice of you to notice.

      Assets grow like sequoias to scrape the lunar regolith!

      Until they seek the abyss.

  22. Seneca’s Cliff says:

    Look at the bright side. After the financial rubble stops bouncing they will at least have millions of cement apartments, instead of crumpled crypto coins or shares of AMC. They can always deal with the excess apartments the way middle class Russians did, by hooking several small apartments together to make a bigger apartment. So the Chinese middle class can continue to up its standard of living in American sized homes.

    • Cobalt Programmer says:

      China also invested trillions in the infrastructure rather than QE and tax breaks. Infrastructure will not be profitable for the investors but the roads, railway network and ports remain. Economic initiatives like silk road will by bass the need for naval superiority. Check book diplomacy is better than a new fight. They are on a hundred year march. They got something right. If deficit spending is borrowing from future generations, let it be on infrastructure.

      • kam says:

        @ Cobalt
        Without rigorous engineering standards “infrastructure” is just depreciating junk.
        China’s low trust culture negates quality long term assets.

      • Old school says:

        You have to be careful with infrastructure because it’s not a one time spend but a commitment to maintain it from now to end of life and then to return it to nature.

  23. Tzun Kwa says:

    China , the Middle Kingdom and its people are amazing.
    Without socialism and its inherent dictatorship, it would be at the top of the world.

    • Nick Kelly says:

      Yes. Taiwan has a GDP per person about 3 times that of the Mainland.
      If the Chinese Nationalists had won the Civil War instead of Mad Mao’s CCP, China would have been the world’s biggest economy 25 years ago. As well as avoiding unimaginable suffering and starving to death for millions.

      The fundamental problem for China now is moving on from the CCP. If the CCP itself had evolved, this might have been otherwise, but it can’t even apologize to the Chinese people for the outrage of the Cultural Revolution.

      • Tzun Kwa says:

        It cannot for a simple reason.
        Those behind the CCP are not who we think they are.
        Just like those behind Russia’s CCCP were not Russian.

  24. Yerfej says:

    Is it possible that top down government managed social and financial engineering is only good in the short term and mostly leveraged to allow the elites to confiscate the wealth of the common people? Whether in a capitalist or socialist system it seems to ALWAYS lead to magnification to the downside?

  25. historicus says:

    “This history of history is nations debasing their own currency.” Hayek

    (except the Swiss)

    • Xavier Caveat says:

      The Swiss sold off most of the all that glitters about 20 years ago for 1/5th of its current value, they’re just another fiat country now.

      • Nick Kelly says:

        It’s one heck of a fiat. The Swiss have a very competent high tech engineering export biz ( it sells nuke power plant stuff to the US) and its major problem is always the high value of the franc.
        The franc was tied to gold not that long ago and was removed by referendum.

        Re: the word ‘fiat’ It just means ‘by command’ The strength of the fiat depends on the entity issuing it. The US once issued a fiat that the Japanese Empire would cease to exist.

        • Petunia says:

          Rolex has made Swiss watches an asset class.

        • Nick Kelly says:

          Rolex is the Swiss lux name best known. There are at least 10 Swiss competitors for exclusivity. Tag Heuer is the entry level and not one. Rolex is bit of a late comer and relative bargain compared to the oldest maker:

          Vacheron Constantin Patrimony Moonphase Retrograde Date watch
          Vacheron Constantin
          Buy Now

          I only mention this because ironically, a decent quartz watch is far more accurate, and can be waterproof. The above things are a way for men to wear expensive jewelry. But I am in awe of how the Swiss industry transitioned.

      • Mojer says:

        This is just what the Swiss central bank has to follow in harmony with other central banks, but the private gold deposit in Switzerland is the first in the world.

  26. Ishkabibble says:

    How China’s Model of Dictated Economic Growth Blew Up

    Very, very funny article, Wolf. To see the humor, just substitute the phrase “the US’s” for the word “China’s” in your article and then, at the end, mention the US’s debt and compare that to China’s debt, and who is the debtor nation and who is the creditor nation.

    You might also want to compare “the US’s” manufacturing capacity to that of China, as well as, while you’re at it, the US’s total deaths from covid-19 to that of the CCP-controlled capitalist economy of China (as of today, a bit over 755,000 for the US, versus a bit over 4,600 for China); ……. Who is supplying Whom with all the manufactured tools, electronics, etc. that are (or are not, because of a backlog at US ports of entry) on the shelves in Walmart, Home Depot, Lowes, etc. etc. ad infinitum.

    (BTW, how many people has China murdered outside its borders over the past, say, 60 years versus the number of people outside its borders that the US has murdered?)

    • Wolf Richter says:


      You just committed a fallacy called “whataboutism” — google it.

    • MikeG says:

      Found the wumao.

    • MCH says:

      Hey Ishkabibble….

      I know you’re a troll, and I love trolls…. so in regards to that one comment: “as of today, a bit over 755,000 for the US, versus a bit over 4,600 for China”

      Let me just say, I have this bridge that goes between NY and NJ, it’s a fine piece of property, I make a fortune charging tolls on it daily, but I’m frankly too annoyed with having to deal with the ins and outs of daily business. I’d like to sell it to you for a low low price of $100M, interested?

    • Dave says:

      And the evil CCP is forcing the owner of Evergrande to use his own fortune to pay off the company’s debts! Such beasts, the CCP!

  27. TimTim says:

    Great article. Thanks.

    Wolf references the estimation of the off balance sheet financing. Scary numbers.

    What is the level of such financing across all sectors and how under strain will the current property fiance concerns put those trust funds etc. Can anyone quantify the effect on their ability to provide liquidity to other parts of the Chinese economy moving forwards.

    That’s if they do so, which someone may be able to quantify here.

  28. The CCP has the power to implement policy in ways that we don’t. I also think that they understand both monetary and fiscal policy better than our “leaders”, most of whom have expertise only in getting elected. I’m betting that they deal reasonably well.
    Currently my three favorite investments are in China, although most of my money is invested in the US.

  29. Concerned American says:

    Does this put pressure on China to devalue the Yuan and if so what does that do to world markets? My guess is that might just take some of the air out of the everything bubble in the US or maybe even burst it?

    • Xavier Caveat says:

      If the Chinese devalue the yuan, all that will do is make consumer nations more horny for goods they can’t even deliver now.

  30. sunny129 says:

    ‘The state owns the largest four banks, and it can tell them to lend, and it can tell them not to hound borrowers, and it can tell them to convert defaulted debt to equity, and move on, and it can clean up their balance sheets later’

    Haven’t they done this, repeatedly over the past decades?
    What’s so different NOW? They have creative accounting magic also!

  31. Flashman says:

    Bang! 2021. Good luck all

  32. Chauncey Gardiner says:

    Appreciated this post. As an ordinary American I certainly don’t know, but an article in Barron’s this week by the co-founder and the managing director of China Beige Book, respectively, took a view somewhat counter. Their view is that the acknowledged problems in the property development sector, while serious, have not been serious enough to generate pressure on Beijing to stimulate; i.e., China’s overall economy has not been doing as poorly as commonly thought. Further, they state the CCP is for now more concerned about instability attributable to popular perceptions of wealth inequality and jobs creation, rather than economic growth.

    Could be a paradigm shift dictated by policy failure, but perhaps we also need to be careful abut analyzing China’s economy through a western lens of financial metrics and GDP growth. It might be that the CCP has pivoted to policies more aligned with their history and middle initial. There could be a reason why Xi has shown a rather sudden fondness for publicly donning a Mao jacket rather than western business suits. However, as Michael Pettis of the Carnegie Endowment said this week, this doesn’t mean that Beijing won’t revert to debt-intensive growth in the future.

    • Nick Kelly says:

      ‘Further, they state the CCP is for now more concerned about instability attributable to popular perceptions of wealth inequality and jobs creation, rather than economic growth.’

      ‘more concerned about jobs creation, rather than economic growth.’

      How does one distinguish between ‘economic growth and jobs creation’?

      • Chauncey Gardiner says:

        Um, how about services and manufacturing sectors?… from the Barron’s article published on Oct 20:

        … “Finally, and most crucial to Beijing, jobs growth continued to improve in Q3-2021. Manufacturing again led in hiring, while Services sector employment expanded fastest.

        This is all far from the popular narrative of a teetering Chinese economy.”

        • Nick Kelly says:

          ??? I didn’t say the economy was teetering. I asked how jobs creation is distinct from economic growth. My question is about an apparent contradiction in the use of English. Another seems to be repeated here:

          ‘Manufacturing again led in hiring, while Services sector employment expanded fastest’

          If services employment expanded fastest, how could manufacturing lead in hiring.

          I admit this is nitpicking.

        • Chauncey Gardiner says:

          @Nick Kelly,

          I interpreted their text to mean that manufacturing jobs growth was the highest in absolute numbers, while services jobs growth is the highest in percentage terms off of a smaller base than that of the manufacturing sector.

          Don’t believe Jobs creation within the services and manufacturing sectors of their economy requires overall GDP growth, although the authors of the Barron’s article did say that China’s third-quarter 2021 GDP growth was 4.9%.

          Not defending an autocratic system, just questioning the currently dominant narrative about their economy based on a recent article from a respected source.

  33. California Bob says:

    Wolf, You beat Krugman to the punch by a week (today’s NYT editorial). His take: this is when authoritarian governments need to create an ‘external distraction.’ Hmmmm … wonder what the Chinese might do?

    • MonkeyBusiness says:

      You don’t need an authoritarian government to create an external distraction.

      For Dems: it’s the Russian!!! And now the Chinese too. See Joe B’s comment on Taiwan
      For Reps: it’s the dar* Chinese!!!

      Meanwhile this country is rotting.

      Of course that can also mean that our government is equally authoritarian ….. But it can’t be right? Right????

  34. Jon says:

    My Chinese friend in San diego has 3 houses in San Diego and 1 premium apartment in Shanghai which is vacant for last 2 years
    Such is the thirst for real estate
    I don’t see absolutely any bad or ill effect of this drama
    Chinese govt would for sure manage it
    There would be some western casualties but people won’t even notice it

    • historicus says:

      How about what the Chinese did to Vancouver about 5 years ago?
      And Toronto?
      People who grew up in those areas couldnt afford a house in their own neighborhood.
      And they say “Trade deficits dont matter.” The academics should rethink that one….

      • eg says:

        I don’t know who “they” are, but Pettis and Klein wrote a whole book to the contrary titled “Trade Wars Are Class Wars” that you might want to read.

        • Wolf Richter says:


          That book title and premise is BS. Globalization is a class war. And tariffs (that evil “trade war”) just disincentivize globalization.

        • sunny129 says:

          egg and Wolf

          Globalization is the trojan horse where (mobile) Capital became dominant and the labor became weak and got devalued in the west.

          Besides China which was allowed to WTO in 2000 was allowed to violate the fair trade rules, without any demand or accountability from the Western Govts and Multi-Nationals

      • Dave says:

        The ethnicity that has destroyed working class living standards through the offshoring of US jobs and unlimited immigration is not Chinese.

  35. Bobber says:

    The US got through it’s massive property bubble by allowing some debts to be written-off and allowing some bank and businesses to fail. The US papered over the rest of the problem by providing bailout lending and changing accounting rules so bad debts could be kept on the books and addressed over time. Nobody went to jail though.

    Shouldn’t we expect China to do the same? Some developers and banks will fail. Other will be supported with long-term bailout measures. Property prices will have to fall, and perceived wealth will recede a bit. As long as they hang a few developers and Fat Cats out to dry, the population will accept it. If they jail many of the worst offenders, they may recover sooner than the US did, with a lot more societal goodwill intact.

    • sunny129 says:


      But myth of China’s magic growth (GDP) rate above 5% is exposed!
      Global GDP rate of growth will be a lot less than expected!

  36. SpencerG says:

    Good analysis Wolf.

  37. in 2017 the avg urban dweller in China had about 400 sq feet. in America it’s about 700. By 14′ Chinese builders had added 100 billion sq feet or 74 feet per person. (No doubt a lot of supply was being held off the market [like US housing], due to speculation) You can fit more than 10 average Chinese houses in one American house. 165 sq feet is the overcrowding benchmark. Persons per room is also an important health metric, in the era of Covid. This difference in living space standards explains the imagined supply demand imbalance. The health concerns explain at one government policy decision in taking control of the housing market. The tradition of families buying housing for the brides trousseau, results in market distortions between short term finance and the consumers long term goals. Then the Chinese government did not bail anyone out. Only 5% of this debt reset is in dollar bonds. Krugman says “China isn’t deeply integrated into the world financial markets..” What’s the worry? China’s economy is getting a little more vertical, and the shippers aren’t back hauling empty containers. What’s with that?

  38. 42 says:

    jeeze louise

  39. DR DOOM says:

    I would swap our Fed central planing Bubbles for the Chi-com central planning construction bubble in a second. The Chi-coms have built first world airports and infrastructure bubbles. We have nothing but parasitic profits from Mal-investment due to the Fed central planning creating parasitic financial engineered bubbles that offer nothing other than extracting wealth.I will take useful concrete and re-bar over derivatives any day. Bubble are no bubble.

  40. cb says:

    Wolf said: “The central government has been trying to deal with rampant real estate speculation and prevent it from going even more haywire and take down the financial system and the economy.”
    How is it possible that rampant real estate speculation could take down the financial system and the economy?

    Rampant real estate speculation, particularly debt based speculation is a symptom of an already sick financial system, and adjustment is inevitable.

    • Wolf Richter says:

      Real estate developments and purchases are funded with borrowed money, and that’s the link the financial system.

      I list the amounts and percentages of that borrowed money, and where it came from, in the article. This will tell you who is on the hook, including the banks and shadow banks, apartment buyers, people putting money into “wealth management products,” bondholders (usually financial institutions, such as bond funds), etc.

      • historicus says:

        as an aside
        from a July 2020 article in NY Post
        “Invitation Homes, it turned out, was owned by Blackstone Group, the world’s largest real-estate investor. Created after a company called Treehouse Group was folded into Blackstone, then renamed in 2012, Invitation Homes was on a $10 billion spree, purchasing $150 million worth of houses per week.”
        and from a recent article
        “Investors’ share of purchases across the country decreased slightly from the 15.9 percent recorded in the previous quarter, but remained at the higher end of the typical range.”

        The entire arrangement is due IMO to the Fed having mortgage rates half of what they usually would be with inflation in this area.
        In 1999 and 2006, when inflation was similar and lower, 30yr mortgages were 6% and people could be a fair return on their savings. Both have been deleted due to intentional skewing of markets are rates by a hijacked Fed.

  41. Rudolf Zimmer says:

    The CCP was aware of the housing bubble and warned the public for years (at least since 2015, if I remember right). Nobody listened…

    And it was not only housing. Companies didn’t respect the “suggestions” of the CCP and loaded their companies and households with depth. Companies rushed to create monopolies and thought they could dictate policies like in the west (does somebody remember HNA?).

    Now the CCP pulled the plug.

    Many will pay for their lessons – Hot money will lose big in China.

    • MonkeyBusiness says:

      They could have pulled the plug whenever, but they didn’t. The CCP took the credit when the entire thing was on the way up, now they have to own it on the way down.

      • Rudolf Zimmer says:

        At the housing market, they tried with mild regulations and press articles. Since there was a danger of a hard landing they feared hard restrictions.

        Now it reached the point of destabilization.

        Ma disrespected the CCP several times in public (Why didn’t he do that at CCP meetings? He’s a member of the CCP), companies disrespected when they were hinted not to go public on WS, speculation made living in many cities impossible and turned real income wage grow negative…

        To summarize it got dangerous for the stability of the country and (!) the power of the CCP. They had to react.

  42. Rock Climber says:

    I thought the US had a system of dictated economic growth as well?

    According to its SOMA holdings The Fed just added around 90 billion to the markets in the last week! (When the Fed buys bonds it frees up money to go directly into the stock market)

    • Wolf Richter says:

      That’s not “dictated economic growth.” That’s “dictated asset price growth.” That’s an entirely different model.

    • Bobber says:

      You could argue that the US and China both operate a managed economy, but the transmission mechanisms are different. In China, it’s more a bottom-up approach. In the US, it’s clearly a trickle down approach, so the wealthy take a much bigger share of government interventions.

      For example, in China the wealth is in real estate, and the gains appear to be distributed somewhat broadly across the population. In the US, the gains are mainly in RE, stocks, and bonds, and those gains are highly concentrated within 10% of the population.

      • historicus says:

        Well the supply of money is managed by an unelected group, answering to no one, front running their own policies, though money minting is a Congressional power….

        I bet in China if you got caught front running you might just go to jail….but not here.

        Additionally, that same unelected group taxes the People with a promoted inflation while keeping interest rates at record levels below the inflation. That would be a TAX, and the People do not have representation on the Fed….so I guess we have taxation without representation… China like that too?

      • sunny129 says:


        As Wolf points”Real estate developments and purchases are funded with borrowed money, and that’s the link the financial system”

        To this I would add most of the asset bubble in USA is alsoby debt+leverage.

        So ‘distributiom from top to bottom or vice versa’ matters little. Everything built on thin ice of denb on denb since ’09! House of cards being patched up by band aids, but how long?

    • MonkeyBusiness says:

      To me the difference is this. In China, GDP is the input and economic activity is the output. In the US, the Dow, the S&P and the Nasdaq are the inputs, and the output is the Fed’s QE.

      Both are insane policies, but we live in an insane world.

      • Rudolf Zimmer says:

        Yes, both approaches are nuts.

        If you produce everything there is no point in doing trade – there is nothing to trade with. Last time China did the same error.

        If you don’t produce anything you give away all your assets until nothing is left or you start stealing.

        Both extremes can’t work.

    • gametv says:

      Interesing that they increased the balance sheet by 90 billion in one week. If they are supposed to be adding only 100 billion to the balance sheet per month, that means they have to stop buying the next 3 weeks?

      I wonder if this is a sign that the Fed is trying to prop up the markets when they fall but will fail. They cant keep hitting the buy side with 90 billion a week, unless they change the overall policy and admit they have increased QE, at a time of raging inflation.

      • Wolf Richter says:


        That $90-billion a week figure is BS in terms of the Fed’s balance sheet.

        Over the 7 weeks since Sept. 1, through last Wed (Oct 21), total assets have risen by $215 billion = $30.7 billion per week on average = $120 billion a month. If you look at the weekly chart, it looks like clockwork

        The Fed’s assets go up 4-5 weeks in a row and then go down for one week. This variation has to do with the timing of principal payments that the Fed receives as securities mature and are paid off and as pass through principal payments from MBS come in.

        There are a lot of securities that mature all the time, where the Fed gets its money back. MBS have huge amounts of pass-through principal payments as the underlying mortgages get paid off through a refi or sale and get paid down through principal payments. Those amounts, as they come in, lower the Fed’s assets. And the Fed then replaces those amounts with new purchases.

        For example, the Fed buys about $100 billion in MBS a month, $60 billion to replace the pass-through principal payments and $40 billion to increase its pile. So the balance grows by $40 billion a month, like clockwork.

  43. gametv says:

    It seems to me that this will further hit financial investments in other countries as well, as the Chinese no longer have large property gains that can be leveraged for investment elsewhere. Do these Chinese companies start to unwind their assets overseas?

    Combine this with a general unwind of US Treasuries and you have a net negative in terms of capital allocation in the world.

    There are other property bubbles – Canada, Hong Kong, New Zealand – I would say the US is in a property bubble as well, but not built on the same type of instability that China is. It all needs to unwind and wipe out the speculation, so we can return to a home being a place to live, not an investment.

  44. Dave says:

    Anyone who lives in China, or who visits regularly can see the facts on the ground–China is making progress in every area while the US is crumbling in every respect.

  45. Akam15 says:

    The real worry is what the government will do to meet future growth if real estate is no longer viable. Belt and Road is a good alternative but not big enough to sustain the Chinese economy. I’m afraid the likely next step is investing in the military industrial complex. That would be very frightening.

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