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If you were only to read one thing…
FT Alphaville – China’s household debt problem – Matthew C Klein 3/6
- “The rapidity and size of China’s debt boom in the past decade has been almost entirely without precedent. The few precedents that do exist — Japan in the 1980s, the US in the 1920s — are not encouraging.”
- “Most coverage has rightly focused on China’s corporate sector, particularly the debts that state-owned enterprises owe to the big four state-owned banks. After all, these liabilities constitute the biggest bulk of the total debt outstanding, and also explain most of the total growth in Chinese debt since the mid-2000s.”
- “Chinese households, however, are quickly catching up. This is bad news.”
- “The simple story of China’s debt boom is that government-backed companies borrow from government-controlled banks to pay for wasteful investments to support jobs and other political objectives. This creates lots of problems for China today and in the future, but it does have one virtue: the losses from centralized credit allocation can be distributed over a broad population over a long period of time.”
- “Household debt is different. Borrowers are widely dispersed and lack political power. The lenders are often newer finance companies or loan sharks. Worst of all, there is essentially zero chance that additional household borrowing pays for productive investment. Some of China’s additional infrastructure and manufacturing capacity may prove valuable one day. Household debt probably won’t. Atif Mian and Amir Sufi have ably shown that increases in household borrowing tend to predict slower income growth and higher joblessness.”
- “This chart is therefore cause for concern:”
- “As of mid-2017, Chinese households had debts worth about 106% of their disposable incomes. For perspective, Americans currently have debts worth about 105% of their disposable incomes, on average. The difference is that American indebtedness has been basically flat the past few years after steady declines since 2007.”
- “Chinese households have been experiencing rapid income growth by rich-country standards for a long time, but their debts have grown far faster:”
- “Since the start of 2007, Chinese disposable household income has grown about 12% each year on average, while Chinese household debt has grown about 23% each year on average. The cumulative effect is that (nominal) income has slightly more than tripled but debts have grown by nearly a factor of nine. The mismatch has been getting worse recently, as can be seen in the kink in the pink line towards the end.”
- “All this is finally starting to affect the aggregate debt numbers. Household debt in China is still small relative to the total — about 18% as of mid-2017 — but household borrowers are now responsible for about one third of the growth in total nonfinancial debt:”
- “The problem is that households cannot service their debts out of GDP. Instead they have to rely on their meagre incomes. Since 2007 the share of Chinese national output going to households has ranged from as high as 46% to as low as 42% of GDP. (The rest of China’s national income is mostly captured by government-controlled enterprises and their elite managers.) The household share of income has dropped by about 1 percentage point just in 2017:”
- “For comparison, disposable income in the US has tended to hover between 71% and 76% of GDP over the past few decades.”
- “The trick for Beijing now is to bring non-productive investment down as rapidly as it can without causing unemployment to rise to dangerous levels. Because it has proven difficult to replace non-productive investment with productive investment (and, I have long argued, unrealistic even to expect it could happen), the only way to do so is to replace it with consumption. But levered consumption obviously cannot solve the problem of rapid debt growth, so rising consumption must be driven by rising household income, even as declining investment causes workers on investment projects to be fired. In the end this may be politically a difficult problem, but economically it is just an arithmetic problem about wealth reallocation.” – Michael Pettis
Perspective
CNBC – 42% of Americans are at risk of retiring broke – Jessica Dickler 3/6
US Census Bureau – Irish-American Heritage Month and St. Patrick’s Day 2/6
Worthy Insights / Opinion Pieces / Advice
Economist – How the West got China wrong – Leaders 3/1
- “It bet that China would head towards democracy and the market economy. The gamble has failed.”
FT – Forget flu, it’s time for your fake-news jab – Hannah Kuchler 3/6
- “News literacy should be taught like sex and drugs education, to protect individuals and society as a whole.”
Real Estate
WSJ – Daily Shot: Cresset Wealth Advisors – US Housing Price Change from Pre-Crisis Peak 3/7
WSJ – New York Housing Is Getting (Gasp!) More Affordable – Josh Barbanel 3/7
- “Housing costs are taking a smaller bite out of the typical household’s monthly budget, according to a new U.S. Census Bureau survey that is conducted every three years. The survey also shows a record amount of new housing and the third-highest rental-vacancy rate since the bureau’s first survey in 1965.”
WSJ – That Much Prophesied Commercial Property Bust Still Hasn’t Happened – Esther Fung 3/6
- “The delinquency rate for securitized loans in the commercial real-estate industry has dropped for eight consecutive months, defying expectations in recent years of a wave of defaults.”
- “According to real-estate data provider Trepp LLC, the delinquency rate for real-estate loans in commercial mortgage-backed securities clocked in at 4.51% in February, down from 5.31% in the same period a year earlier. The rate hit an all-time high of 10.34% in July 2012.”
- “Investors had been expecting an increase in defaults in 2016 and 2017 as the large volume of CMBS packaged during the 2006 to 2007 period reached maturity. But rising real-estate values, low interest rates and a surge of debt capital from insurers and other sources have allowed property owners to refinance or restructure their debts.”
Yahoo Finance – Foursquare CEO: There are 2 types of malls that are seeing growth – Melody Hahm 3/6
- “While consumers are getting lured online by cost savings and the convenience factor, there’s still ample data on foot traffic into physical stores, said Foursquare CEO Jeff Glueck. In fact, he’s found that the rise in online shopping has largely affected middle-market malls. Malls serving high-end and low-end customers are actually seeing growth.”
Finance
WSJ – The New ID Theft: Millions of Credit Applicants Who Don’t Exist – Peter Rudegeair and AnnaMaria Andriotis 3/6
Cryptocurrency / ICOs
Construction
WSJ – Daily Shot: Change in Construction Producer Price Index 3/7
- “US construction firms continue to struggle with rising materials costs. Higher steel prices will exacerbate the problem, especially for commercial property developers.”
Asia – excluding China and Japan
China
Europe
WSJ – Daily Shot: FRED – European Central Bank Balance Sheet 3/7
