By on April 11, 2010

Chinese dually. Picture courtesy

I spent an interesting Saturday with two old friends of mine. They had never met before. One, American, CFO of an insurance company, had been in the finance and banking business all his professional life. The other, born Chinese, naturalized American. Was one of the top mortgage writers in the Silicon Valley before the dotcom crash. Came back to China and heads a Chinese/American bank. The two got along splendidly.

Of course, we talked about money and cars. Recently, there was a discussion on TTAC on how the bursting of the Chinese real estate bubble would destroy the car market just like it had in the USA. I eagerly set out to pick their brains.

Quite oddly, the first one to throw water on the bubble theory was my friend, the staid CFO of the staid insurance company. He thoroughly debunked the myth that the American car bubble of 2000 was created by people who had come into money by flipping homes instead of burgers. He had one number right off the top of his head. “Each year, about a million homes change hands. Sometimes more, sometimes less. Even assuming they were all flippers, they didn’t buy 17 cars per home and year.” Instead, he said, it was easy credit that had driven up the sales of cars before it drove up prices of homes.

Need some cars to go with it? Picture courtesy

Did the wealth effect, the feeling that you suddenly sat on a three  million home that you had bought for $500,000 (with $100,000 down,) did that urge you to fill up that three car garage to its limit? No, said my friend, the staid CFO. Housing prices were relatively flat through the 90s while car sales increased. Car sales peaked in 2000, just when home sales started to skyrocket. Real estate taxes rose right with it, and those three cars turned into a liability. Car sales eased.

“Easy credit did cause the car and housing bubble. The credit crunch burst both bubbles. But the housing bubble was not the cause of the car bubble,” said my bean counting friend. If you look at the charts which I linked in this paragraph, you see that while doing it off the top of his head, he was right. The car boom in the U.S. preceded the real estate boom. Both crashed when the easy money was gone, or, as my beancounting friend put it, “when the hedge funds said to sell everything that’s not listed on the NYSE.”

He then went into a long monolog about high yield asset-backed-securities and credit derivatives that were en vogue with hedge funds. He did that much to the fascination of my Chinese friend, but I lost him.

About 60 skyscrapers in Beijing are vacant. Picture courtesy

When the discussion came to the Chinese real estate bubble, my Chinese banker friend emphatically acknowledged that China is in a huge one. Mostly in the tier one cities, but getting into the tier 2 cities also. He said that it is an absolute insanity. People buy homes and apartments, and keep them empty. Vacancy rates in tier one cities are sometimes higher than 30 percent. About 60 skyscrapers in Beijing are vacant. He congratulated me on my choice of renting, and suggested I should move, because rents are actually coming down. Caused by the oversupply of unsold properties, held for speculative purposes.

When they are poor, they take the bus or the train... Picture courtesy

When they are poor, they take the bus or the train... Picture courtesy

Coming to cars, my Chinese banker friend emphatically denied that easy money has anything to do with the skyrocketing car purchases in China. “That’s an American fantasy. Chinese don’t finance their cars. They pay with cash.” He told me how forays of his bank into the automotive financing field had failed, to the utter disbelief of his American partners.

The official party line is that “less than 20 percent of Chinese car purchases are financed.” My Chinese banker friend figures it might be less than 10 percent. “The number of financed cars is actually going down. Chinese don’t borrow to buy a car. When they are poor, they take the bus or the train. When they earn more, they buy a car.” He said that that Chinese increasingly earn more. About 25 percent of China’s 1.3b to 1.5b people are considered “middle class.”

… when they earn more, they buy a car. Picture courtesy

Then, my Chinese fried mentioned the high savings rate of the Chinese, and that many of them don’t know where to stash their money. That got the fascination of my bean counting friend. They both bemoaned the lack of high yielding safe investments. When they started discussing yield curves, instead of the curves I am interested in, I lost them again.

We went for dinner, all three of us agreeing that in China, the boom in cars has nothing to do with the boom in real estate, that the two are much more disconnected than they ever were in the U.S., that the Chinese real estate market will go boom unless the government will intervene (very likely, as it is often state owned enterprises that are driving the prices up and are building the empty towers,) and that the car boom in China will last until the motorization has reached Western standards. In a country where cars aren’t financed, tight or easy money has little impact on car buying.

A level of motorization according to Western standards  is about 600m cars away. So even if the Chinese would – horrors of horrors – buy 50m cars a year, instead of the 15-17m this year, China would have 12 years until the beginnings of a market saturation.

I asked both whether I should buy oil futures. They both shrugged, and we had the best Beijing duck in town.

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30 Comments on “Three Guys Discuss The Chinese Car Bubble Theory...”

  • avatar

    I agree with this article. Chinese are not Americans. They save their money and they live ultra-frugaly. If Chinese car sales are skyrocketing, its because of the boom in their economic centers (Beijing, Shanghai, Hang Zhou, etc), and the fact that their public transportation sucks – which causes people to seek a car in order to be able to make it to work.

    I’m also not suprised by the low financing numbers. Chinese hate loans and they hate interest. You’ll never get them to submit to credit cards like the banks did America.

    The worst thing about owning a car there – I rented one in Shanghai from Gao Xing motors – is parking it and maintaining it. Although there weren’t alot of car shops when I went, I’m sure the number is growing. Parking spaces were minimal and I’m sure the fees to park are huge.

    What will hurt the Chinese though are the huge housing prices. They have been effected by the economic bust just like we have. The apartment I owned there which cost me just $200 a month in 2003 now costs over $700. For me that’s nothing…but for my friends there, that’s alot of money. To own a car and an apartment is a dream there.

  • avatar

    I suspect your two business friends are overlooking the contribution of the real estate boom to China’s economy. The cash people are paying for their cars comes from their jobs, and – in too many cases – the jobs & income come from the boom. Will the boom pop? You bet. Like Japan two decades ago, China’s current economic vitality is an empty skyscraper of stimulus, debt, and distortion. One other thing: the US real estate collapse is certainly hurting the US economy, and to the extent it does it damages our ability to buy Chinese goods. That in turn hits paychecks in China. WalMart’s recent price cuts are a good barometer of what’s in store for export-dependent Chinese industry.

    • 0 avatar

      My two business friends have been at this a bit longer. Both had seen several booms and busts. And you are wrong. 2008 was an awful year for China. The Chinese economy was overheating (incl real estate boom) in 2007 and China pushed on the brakes hard in the end of 2007. The stock market and the real estate market crashed dramatically (see chart). On top of that came the Financial crisis of late 2008. Nevertheless, car sales continued to grow. Not the usual double digits, but they grew.

      What doesn’t seem to get into the heads of some people is the difference between an over-saturated market, like the USA and a market that just has begun to motorize, like China.

  • avatar

    Sounds like a interesting and fun night. The first part of which was documented in a very interesting article. Thanks Bertel!

    Despite the comments of your two colleagues, by the end of the article I was thinking about;

    1. the fungibility of credit to the average person, and how (if this is the case) easy money rates (whatever they may be) on mortgages might translate into enough money to be able to still buy a car;

    2. if point 1 is true, then these homeowner/consumer types are not the newest of the emerging middle-class, but, perhaps, folks that have already been saving for quite some time and then making two big purchase decisions within a, say, 5-year span (I don’t know if the domicile precedes the vehicle, or vice-versa);

    3. if the saturation point we need to search for is not the long-term and ultimate saturation point that you indicate in the artile, but rather a near-term saturation point, wherein those in point 2 are not replaced fast-enough, or even quicker, with people sharing a similar economic demographic;

    4. the replacement rate, in point 3, is probably most dependent upon a) job creation, b) wage growth (esp in the eco-demo above), these both being dependent on a sustainable rising economic tide of exports and internal consumption (the proportion between the two is of importance as well) and trade defecit/surplus (defecit recently became an issue, the importance of which has not been analyzed in any articles I’ve yet seen.)

    So, given all that, if there is a fungibility relationship between the bubbles, and job or wage growth stagnates for a period long enough that the “middle-class savers don’t convert to middle-class home & car buyers” but home buyers only, there could be a slow-down in auto purchases.

    That said, if the government tries to cool-down the market by selectively tightening credit, and if mortgage credit is affected, then it may also happen that (provided folks have a place to park them) car sales increase (buy a car instead of getting a home mortgage.)

    I’m interested to see how the B&B see this.

    • 0 avatar

      I think your third point is the most important here, I had the same thought after reading the article.

      If most of these cars being purchased are not being financed, then it stands to reason that a lot of the ‘middle class’ Chinese have already been saving for a few years to be able to make such a purchase. New entries to the middle class will have to either wait for a couple years before being able to purchase without financing, or they will have to finance.

      Given that a bubble bursting tends to destroy jobs as opposed to create them, and rising unemployment tends to lower overall wages as demand increases for fewer jobs, the sudden increase in Chinese middle class could slow as well.

      Real estate is also huge business, and it effects a lot more people than just the real estate agents and speculators. Here in South Florida the housing bubble burst nearly destroyed the local economy. Construction and related fields were where most people worked down here, and when people stopped buying homes there was no reason to build new ones, so you have thousands of out of work builders, electricians, plumbers, etc, in addition to the people who were in business to improve all of these homes people were buying, cabinet makers, kitchen re-modelers, landscape architects, etc, who were suddenly out of work, and had no way to make their own mortgage payments which just led to more foreclosures and more time before the area recovers.

      I’d be willing to bet that many of China’s newly affluent have made a significant portion of their income either directly from or related to the real estate boom.

    • 0 avatar

      A big reason not to buy a home isn’t money but an expected price drop and that makes more room for the purchase of a car.
      Also the buyers in China have at the moment two option with cars. Buy new or don’t buy. If you get a serious slowdown than the relative number of second hand cars will rise which allows the not so rich to buy second hand car when the somewhat richer trades their old car in for a new one.

  • avatar

    Answered above. Look at 2008.

    I have no comment on the one month trade deficit. It comes too convenient for the current exchange rate discussion. It’s also a function of the infrastructure projects that caused an import spike. And didn’t everybody scream that the Chinese should consume more at home and export less? Now they do and they are wrong again.

  • avatar


    Do you know anyone at Sinopec? What are the forecasts for domestic Chinese petroleum consumption in the coming years? What does that mean for the Leaf/Prius/Volt?

    • 0 avatar

      I do. All they say it’ll be up. Not linear with the car growth, because the bulk of the new cars are low displacement low consumption cars.

      Re E-cars, China is gung-ho. See former article on subsidies. But I don’t know how much of an impact that will have. A pretty negligible one, from what I hear from other forecasts.

  • avatar

    Regardless of the fuzzy effects of taxation, economies are built on circulation of capital, and balance of trade.

    No matter how the Chinese RE bubble deflates, it will deflate. When that deflation occurs, there will be knock-on effects to money circulation – when construction collapsed in the US, a large swath of economic activity simply ceased.

    As the Chinese do still generally pay for their cars in full, credit tightening from a real estate bust won’t directly impact available credit for automotive purchases. But when construction collapses, the effects spread far and wide in any economy.

    Will that merely shift workers back to manufacturing, or will there be a larger unemployment issue to deal with? That’s an interesting question.

    The most important difference from the US is that the Chinese economy has a positive balance of trade. Money from abroad hides a multitude of sins – it worked for the US, right up until the mid-70s.

    The other interesting thing will be how quickly that famous Chinese savings rate will erode, as Chinese youth emulate the bad habits that have done the US economy no long-term favors. Credit card issuance continues to grow in China, and while the penetration is nowhere near US levels, it continues to grow. As do the delinquencies.

    • 0 avatar

      Where did you hear the delinquencies? Most credit card balances are paid in full by the end of the month, often direct debited. Credit cards are a rarity, most of what’s out there are ATM cards that are accepted in some stores (i,e, Unionpay.)

    • 0 avatar

      The report below is about 6 months old, is a bit laden with financial double-speak, and hey, consider the source (BOA). But, parse the data and it holds some interesting trend windows.

      This one is also not yesterday’s news, but is current enough and a rather starightforward news blurb.

      As the employment trend has seemed to have gone positive again, I’m sure some of these trends may reverse a bit. Beyond that, as there is no BK law, creditors can always shame the parents of these kids into giving up those years of saving to pay off their kids’ debts.

      The penetration of Westernizing influences is going to be the determining factor. As the youth become more interested in little black dresses than Little Red Books, the basis of the economy will continue to shift.

      It seems to me economics is always inextricably linked to sociology. The Party may retain ultimate power for some time, but part of that retention will be by distraction of the People with bright, shiny objects.

      Barring a massive sea change, the march of greed will continue. The Party will continue to allow it as long as it serves their purpose and as long as the social contract remains acceptable, the average person in any nation-state is merely along for the ride.

      BTW- Of course, you’re right about how tiny the Chinese consumer credit market is when compared to US levels. Especially couched in debt v. GDP terms. But it’s there. It’s growing. And dollars to dumplings says it’s going to continue.

  • avatar
    George B

    Bertel, would available parking and road capacity in the more affluent areas of China limit car purchases at a level lower than simply the ability to buy a car? I’d be less interested in driving if I couldn’t find a place to park when I got there or driving on congested roads took more time than riding on public transportation.

    The other obvious limit to the growth in car sales is fuel prices. Does China have active Coal or natural gas to liquid fuel programs to help overcome limits of oil production? Other countries with fewer lawyers than the US? The world still has a lot of oil in the ground, but it’s not like we could double the production rate.

    • 0 avatar

      There is no lack of parking in affluent areas.

      I can’t give you an intelligent answer to the liquefaction questions. There is something going on, but I don’t know how much. In any case, insignificant.

    • 0 avatar

      There is a big program for using CNG in Iran, where I think is mandatory to put the system in the car by the manufacturer.

      Here in Venezuela we also have a program.

  • avatar

    My wife is Chinese and I can add a little.

    First, none of the Chinese I know, and they are average working Wongs, think there is a real estate bubble. They are all trying to get rich quick on speculation and the stock market. Many have indeed done this. This can last a fairly long time, too, because of the enormous internal market in China. Basically, the better educated and motivated people are fleecing those less so.

    Second, here in Vancouver, British Columbia, Sovietcanuckistan (you know, the place where we had no financial crisis)we now have the most expensive real estate in North America. The reason: You got it, Chinese speculation. The average price of a three bedroom, 2000 sq foot home in Vancouver is now over $1,000,000 Canadian Pesos (which is about $5 US dollars, I am told by my southern neighbours. These people pay CASH for these houses, knock them down and build the biggest place they can fit on the lot.

    However, the centre-left city government has some concerns that 4,500 sq ft homes have two people living in them (the mom and the Little Emperor or Empress) so this month passed a regulation that all demos now have to be replaced with multi unit developments, so that Canadian citizens might actually have a chance of living in the city they built. Not a single Chinese I know is aware of this, since they can, and do live in a Chinese world, Cantonese or Mandarin. the Canuckistani government is also cooling the real estate market as of April 19 here in commieland because house prices in general are getting overheated. Basically, to buy a home you will now need to qualify for a 5 year fixed term note rather than one year and you will need 20% down for the time being.

    As for cars, there is really no reason to own one in a major centre in China other than keeping up with the Wongs. A taxi in Shanghai is like $2.00 (in REAL US dollars) for 3km so there is absolutely no reason to have one when you can take three cabs a day anywhere you like for like ten bucks. The subway is like thirty cents.

    Being married to a Chinese has taught me the power of savings. I do not finance cars. We simply save forward. It is not that hard to save up C$30k (approximately $40 US dollars) to buy a car. Instead of making payments after the purchase, you simply saved a couple of years before. We also buy low depreciation vehicles and change them every four to five years. For example, I had a 2004 Civic I paid $17,500 for, drove it four years, sold it for $13,500 bought a Fit for $15k. Two years later clean Fits are selling for $13k or more. It just takes a little planning. For the wife’s car, we recently bought a 2009 Camry and got a screaming deal on it due to all the nonsense regarding Toyotas at that time.

    We can learn from the Chinese but in my experience they are not that good at learning from us.

  • avatar

    Great article Bertel – and I fully agree that credit is what drove US car buyers (who wanted better cars) and need is driving Chinese buyers.

    However, there is one point I’d like to make about the so called “saturation point” of car ownership. While China is booming, there are clouds on the horizon from what will be a very top heavy population pyramid from the one-child policy. Faced with having to look after a large aging population and too few workers to pay for it, it is very hard to make long term predictions about Chinese consumption.

    • 0 avatar

      carguy, China has a HUGE population. Simply enormous, if you have not been there you can’t imagine it. That saturation point is a long, long, long time away, and by the time it is reached most of the cars sold like this week will have been replaced.

      Sure, China will face an aging work force but it will not be any time soon. There is, and will be for the foreseeable future, a gigantic pool of disciplined, motivated and productive labour.

      There are something like a BILLION farmers on small holdings in China. As the population thins out, farms will be enlarged and the excess people given residence permits to move to the cities to find jobs and consume things like apartments and cars. You see, without a permit, you cannot leave the farm in China, which is why you do not see any shanty towns in major cities, unlike other Asian mega cities.

  • avatar

    “Three Guys Discuss The Chinese Car Bubble Theory”

    Manny, Moe and Jack?

  • avatar

    Once china’s car market hits the sturation point, you’re going to need SCUBA GEAR to breath over there.

    The environment over there right now is so bad its amazing humans can live there. Lets add another couple trillion tons of greenhouse gases and make it more like MARS !

    • 0 avatar

      It won’t be the cars and trucks though. They are getting tough (legislatively) on emissions. Now, it does remain to be seen how well a cheaply built catalytic converter will last, but they really are trying to do something about it.

      It’ll be the coal-fired power plants. Though they are way ahead of the US in constructing clean and efficient coal plants, the numbers are just staggering.

  • avatar

    “and we had the best Beijing duck in town.”
    Was this at Dadong?
    I was there two weeks ago- truly fantastic.

  • avatar


    Over the past couple of years I’ve seen a number of references to the fact that Chinese banks are carrying a lot of worthless assets on the books, that a while back they converted non-performing loans to equity so they wouldn’t have to account for the bad loans. The equity is essentially worthless.

    Do the Three Guys have an opinion on this?

    • 0 avatar

      Non performing loans? Over the last couple of years? Where have you been? On Mars?

      The story of the non performing loans has been around longer than I had been in China, and I came here six years ago. The story of the non performing loans became so notorious that people became tired of typing “non performing loans” and the acronym NPLS was created.

      Remember Gordon G. Chang, trotted-out by Glenn Beck whenever he needs a slant-eyed poster-boy who disses China? In 2001, Gordon Chang published a book titled “The Coming Collapse of China.” In it, he predicted that China would implode by 2006, if not earlier, due to the mass of NPLS in Chinese state banks. Well, as we can tell, it didn’t happen.

      When I came here in 2004, the NPLS were figured at $500b or more. 20 % or more loans were said to be NPLS. Suddenly, they were gone. The Chinese government started a disposal operation. At a cost of what some say was 40% of GDP, the NPLS went away. Careful with the numbers, most Chinese estimates are wrong.

      Remember TARP? Those Americans have utter disregard of intellectual property. They simply copied the Chinese. It’s disgusting, and something should be done about it.

      To answer your question: Did my friends discuss NPLS? Yes, those of U.S. and European banks, and how those had to be bailed out, the acronym AIG was mentioned once in a while also.

      One loan remained unmentioned. The soon $14 trillion of U.S. national debt. A good deal of which is financed by China and Japan, who we love to kick around. Now there might be China’s (and Japan’s) biggest NPL.

    • 0 avatar

      Just for kicks I did a bit more digging.

      Kynikos ($6B hedge fund) is looking for a collapse of construction and the RE bubble pop. Near term. As about 50% of China’s current GDP is directly construction, when the bubble pops and the empty highrises quit being built, it’s gonna be ugly.

      They sometimes get individual companies wrong, but when it’s the easy to see (if you allow yourself to see it) stuff, they’re damn good. From Enron, to the Lehman, to the US bubble, to the Dubai bubble, they’ve been right.

      No disrespect to your dinner guests, but they are making the arguments that I used to hear in the US about our ‘non-bubble’.

      I could be wrong, and much depends on when the Politburo pulls the plug on lending. I just don’t see it happening though. The current measures have proven ineffective, so it’s likely a race to the end.

  • avatar

    Assuming this is accurate, the safest way to play it would be to buy platinum and palladium – the catalysts used in catalytic converters.

    • 0 avatar

      Don’t forget the other key ingredient of catalytic converters: rhodium. It reached US$10k almost 2 years ago before crashing to less than $1k and recovering to $2.7k/oz today.

  • avatar

    1) Bertel: Housing prices were relatively flat through the 90s while car sales increased. Car sales peaked in 2000, just when home sales started to skyrocket.

    True. But if you look at the NASDAQ index, you can clearly see that it also peaked in 2000. Could it be that the stock bubble fueled the car bubble when stock, instead of house, flippers used their capital gains to buy cars?

    I mean, the real estate bubble doesn’t have to be the single irreplaceable cause. Any type of bubble can be the fuel for a new bubble and my point would still hold.


    2) Bertel: The official party line is that “less than 20 percent of Chinese car purchases are financed.” My Chinese banker friend figures it might be less than 10 percent.

    But how many percent of those who paid cash for cars have a mortgage?

    Initially (late 90s and very early 00s), people pay cash for homes too, and as a result couldn’t afford a car after the home purchase. As home mortgage became more accessible, people can get a mortgage and use part of their savings toward a car. So, yeah, the loosening of home mortgage does have a direct impact on car purchases too.

    Right now the required down payment is about 20%~30%. If the requirement goes down, there will be more money freed to buy cars. If the requirement goes up, many people simply won’t have the cash to buy cars.

    In addition, as the first payment of houses came from 100% down to 20%, we saw this initial rush to buy cars. If the Chinese government can’t lower it further to 10% or 0% down, then the rush may fade after a while, as the accumulated demands have been meet.

  • avatar

  • avatar


    Remember, Canada is in its own housing bubble: prices have gone up 89% since 2003, and believe me, the median income has not gone up 89%. The Cons passed those laws to try and slow things down a bit, but it is too little, too late. The bubble will eventually burst, and while the pain won’t be as extreme as Ireland or America, the long hangover going to suck, especially since Canada’s economic growth (with a few exceptions) has been based on expanding consumer debt rather then, y’know, economic growth.

    As for China, I don’t understand all the speculation in real estate, and how it got so wildly out of control. There’s a newly built city in Northern China that is empty because of real estate speculation. No one nearby can actually afford to live there.

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