China dragon now limping on all legs

The Chinese economy has been deflating since the US consumer debt bubble peaked and burst in 2007.  In the first quarter of 2015, official growth averaged 7%-less than half the 2006 peak–while real life indicators like energy and freight use suggest that actual growth in China might be 3%.  As the economy has swooned, policy makers have turned to the usual debt tricks seeking to entice borrowing and speculating as a way to add ‘liquidity’ and soak up excess capacity.  It has not worked, but it has seduced many Chinese workers and companies down a time worn path to financial demise.

Greek default news this morning is further reason to rattle the Chinese stock market which was already crazy fragile.  Bubbling Chinese stocks had fallen 20% in the past couple of weeks, and lost a further 3% today.  About 10% of Chinese households own some amount of stocks (compared with 50% in America).  Still in a population of extremely modest means and perilous, world-record-financial-leverage/debt, the hit to sentiment in recent losses is no small matter.  See:  China’s economy not immune to market sickness.

All of which is particularly damaging because home prices have already been falling in China for over a year, and working people have lashed themselves to the debt-rack there in epic proportions. Only the Chinese can make Canadian households look stable in comparison.  An article this weekend in the Globe, summed the situation poignantly, see: China’s middle-class dream on shaky ground:

Among the many ambitious but debt-burdened Chinese millennials I met this week, one of them, a 28-year-old air-conditioning engineer named Li Hongyan, is pretty much the living and breathing embodiment of the new, post-export Chinese economy: Ambitious, highly risky, mildly panicked, tumultuous and impossible for his authoritarian government to predict or manage.

I met Mr. Li in the claustrophobia-inducing dormitory room he shares with his fiancée in northern Beijing, taking part in the suddenly popular Chinese activity of worrying about real estate.

It has been five months since Mr. Li used years of savings to buy his (and his entire extended family’s) first house – a 650-square-foot apartment in a slightly worn-out building.

His flat cost him the until-recently-unthinkable sum of $519,000, or 22 times his salary. On top of that, he borrowed most of the 40-per-cent down payment from a variety of friends and relatives; he, like many of China’s millennials, is leveraged up the wazoo.

His mortgage payments on the little apartment, at 5.3-per-cent interest, are $2,400 a month; his salary is $2,000 a month, which should make him comfortably middle-class, except that he really can’t afford the property that goes with it. So he’s renting it out, but can only get $940 a month for it, so is still paying the largest share of his earnings to support a house he cannot afford to live in.

Masses of people the world over are steadily awakening to the reality that ‘get rich quick’ schemes sold to them the past few years as the path to prosperity, have brought them only bankruptcy–fleeced by the bankers, salespeople and politicians that they looked to for advice.

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