Following China's Central Economic Work Conference which concluded on Monday, and which mapped out China's economic priorities for next year, global markets soared on speculation that China will, once again, unleash some form of stimulus, which in turn sent commodities surging over the past three days even though ironically any incremental injections, monetary or fiscal, will simply force domestic producers - already on the brink of bankruptcy - to produce more, export even more, and accelerate the global deflationary tide which earlier today forced the US to fire the first trade war salvo after the Department Of Commerce announced Chinese steel imports will be taxed at 256%.
What the market once again is missing is that when it comes to China, it is no longer a question whether the PBOC or Beijing will inject a few billions into the economy, which they may well do, but a question of leverage: with consolidated debt/GDP of over 300% as of the end of this quarter (compared to 282% a year ago), China is now the most levered nation in the world behind Japan, more so than even the US.
Until this leverage comes down substantially, either through defaults or inflation, China will no longer be the world growth dynamo as it was in the early and mid days of the financial crisis, when it had "only" 160% in leverage.
As such it is only natural to fade the market's now traditional bullish misinterpretation of what China tried to convey to the market.
However, one thing that did catch our attention, is that for the first time, China officially admitted not only that it has a major housing bubble in the form of a massive excess inventory overhang, but that unless addressed said bubble could lead to an even greater crash in the economy.
According to the official mouthpiece of the communist party, Xinhua, "China will continue to actively destock its massive property inventory over concerns that the ailing housing market could derail the economy."
Xinhua adds that along with cutting overcapacity and tackling debt, destocking will be a major task in 2016. This is key because not only does it preclude any speculation about more stimulus, it actually suggests that Beijing is far more focused on the risks emanating from the overindebted economy.
It was here that, in a rare moment of rationality and logic, China's political leaders actually made a lot of sense: they admitted that the main reason why China's housing market is moribund is because as a result of the housing bubble which burst in 2014, prices are still too high, and need to come down substantially more!
"Obsolete restrictive measures [in the property market] will be revoked," said the statement, without specifying which "restrictive measures" it was referring to. To rein in house prices, China has been trying to curb real estate speculation, with policies such as "home purchase restriction" that only allows registered residents to buy houses. It is believed the restrictive policies mainly affected the property markets in third- and fourth-tier cities, which saw the most supply glut.
As we have shown before, and as Xinhua adds, "the property market took a downturn in 2014 due to weak demand and a supply glut. This cooling continued into 2015, with sales and prices falling, and investment slowing."
Furthermore, as we have also shown before, when it comes to household wealth, in China the housing market is of far greater importance than the stock market - in fact, for Chinese residents the real estate market is the equivalent to the stock market in the US.
Xinhua confirms as much saying that "property investment's GDP contribution in the first three quarters of this year hit a 15-year low of 0.04 percent. The property market is vital to steel and cement manufacturers, as well as furniture producers; its poor performance would breed financial risks."
So far, all of this surprisingly makes a lot of sense as China demonstrates an impressive ability to diagnose the causes of its economic slowdown.
Where things, however, suddenly veer dramatically off course into sheer delusion is China's proposal how to "solve" its affliction.
In brief, Beijing is hoping to "transplant" 100 million farmers into registered urban residents, who no longer being migrant workers, will rush to buy real estate in the process soaking up some of the millions of vacant square meters of excess capacity real estate. At least that's how the thinking goes: "attendees of the meeting agreed that rural residents that move to urban areas should be allowed to register as residents, which would encourage them to buy homes in the city. Property developers have been advised to reduce home prices, according to the statement."
More from Xinhua:
Nearly 55 percent of the population live in cities but less than 40 percent are registered to do so. There are around 300 million migrant workers but most are denied "hukou" (official residence status). In addition to housing rights, a hukou gives the holder equal employment rights and social security services, and their children are allowed to be enrolled in city schools.
Starting next year, China will roll out policy to transform 100 million farmers into registered urban residents, according to Xu Shaoshi, head of the National Development and Reform Commission, on Tuesday. No deadline for completion was specified.
And the punchline: "Ni Pengfei, a researcher at the Chinese Academy of Social Sciences, estimated that if 70 percent of migrant workers buy homes in the cities, it would solve the 2.2 billion square meters of housing inventory."
And since these migrant workers would be unable to afford local homes at going rates, they would get preferential prices: the government is suggesting a reduction of home prices. The monthly income for migrant workers in 2014 was 2,864 yuan (440 U.S. dollars), while property can easily exceed 10,000 yuan per square meter. People's Daily, the flagship newspaper of the ruling Communist Party of China, added in an editorial on Wednesday that "cutting home prices is an inevitable and wise option for developers in destocking, particularly for those in third- or fourth-tier cities."
Again, in principle this is great: 100 million potential buyers allowed deeply discounted prices will do miracles for China's ghost cities and millions of vacant apartments. In fact, what the Politburo is proposing, is to dramatically accelerate the rural-to-urban migration that has been taking place over the past 30 years, and to pull forward migrant worker demand.
There is just one problem - or rather risk - and it happens to be the one which only we touched upon over a month ago, in "Here Is The Biggest, And Most Underreported, Risk Facing China" a risk which has since been picked up by both the NYT and the WSJ: namely social upheaval and unrest.
As we have been discussing over the past two months, most recently yesterday in "China's Cost To Avoid The Dreaded Working Class Revolution: A Record CNY11.1 Trillion, And Rising", while China's biggest economic problems are record debt and excess capacity, the biggest risk is a suddenly very angry population which can no longer find either employment or acceptable wages. The result has been a record surge in labor strikes in the past few years, culminating with December of 2015.
So what does Beijing think will happen when its already imploding commodity companies, the ones who just happen to be the biggest employers across the country, are faced with 100 million new able-bodied workers, all recently moved into their brand new urban apartments which cost them far less than comparable costs for existing employees?
The answer: a deflationary wage neutron bomb, as millions upon millions of these migrant workers are hired over existing laborers who are suddenly expendable now that more ambitious, and less demanding workers are there to fill their shoes. Which is great news for the 100 or so million migrants... and very bad news for the 100 million existing workers whom they will replace.
What happens then? The same thing that we have been showing ever since 2014 when we presented China's riot police drills against a "working class insurrection"... drills which took place because it is only a matter of time before China has to deal with the real thing.
The conclusion: China has shown admirable aptitude in diagnosing the problem, and a terrifying lack of vision in its proposed solution. Then again, since none of the other conventional avenues to boost the housing market are available, perhaps it makes sense: with no other options, Beijing is resorting to only measure it knows will work if only for a while, before social unrest finally gets out of control.
Then again, the "developed countries" are not doing anything more prudent: the western central banks know well they have blown the biggest asset bubble ever, one which will have dire consequences, far worse than the aftermath of the Lehman collapse, but the prerogative is simple: kick the can for as long as possible. Is it any wonder that China is now doing precisely the same?
At the end, both "solutions" are doomed to an explosive failure, but for now sit back and just enjoy every day as it comes along, and try not to think too much about the future: with the increasingly more chaotic decisions made by the "leaders" of the developed and emerging worlds, there may not be one...