The China bubble notion seems to have achieved widespread mainstream acceptance. Recently, China’s central government has effectively promised not to do anything to prematurely remove the punchbowl (Clusterstock). Like most things here, it’s possible that could change rapidly. Be there a bubble? From WSJ:

… Shares in dozens of other companies sell for two, three or even four times as much in Shanghai or Shezhen as they do in Hong Kong. The average sells for 42% more…

Chinese real estate, already at lofty levels, has risen alarmingly fast lately… average home prices in some cities on the mainland, such as Shanghai and Shenzhen, may have risen by more than a quarter since the start of the year. That may leave average prices in relation to household incomes higher than they are in New York, London, San Francisco and Sydney.

… The Chinese economy continues to grow — it expanded by 7.9% in the second quarter – the real juice, as usual, has come from easy money.

Bank lending is at high levels. The Chinese government has embarked on a $586 billion stimulus plan that includes giant infrastructure projects to keep the economy rolling. Interest rates are low: Since last September the typical three-month deposit rate has fallen by about half, to 1.7%. So mainland Chinese investors are looking for other ways to grow their money.

Capital restrictions make it difficult for that group to invest abroad, so lot of their money has flooded into real estate and the “A” shares…

Research Reloaded notes:

The government may fear the potential repercussions of deflating asset prices in the short term so much that they are willing to ignore the longer term consequences of fueling asset prices further. Fair enough, sounds like standard human nature when it comes to politics and just today Chinese officials have said they will investigate price gains but won’t cap new lending.

Katsenelson ups the ante and explicitly suggests deflation as an inevitable likely future scenario:

It appears that deflation is a more likely scenario as China is ridden with overcapacity – the country was geared for much higher global growth… in the long run, inflation appears an unlikely outcome: overcapacity and slower demand from the US and Europe will force Chinese producers to cut prices to increase utilization and stimulate demand.

Prior to the crisis, the central government was largely worried about ‘hot money’ inflows caused by high interest rates that couldn’t be altered due to the currency regime – allow the currency to appreciate, ‘hot money’ inflows would cease, and exports would fall. It seems they are in a similar sort of bind now – Chinese investments have long been cheap (even from a Chinese perspective) due to the exchange rate. Some of these commentators have pointed out that now China’s export machine lacks the security net of growing global demand, a-la 2003-2007, and so the eventual bubble pop is going to be even worse than had it occurred in 2008, at the peak of the global recession.

The optimist says that China’s domestic demand can pick up the slack – the pessimist notes that most domestic consumers are more price sensitive than their European and American counterparts, purely due to lower average incomes, but also the ‘cultural element’ I’ve argued previously. Personal opinion: there is a lot of pent-up demand for apartments, cars, air conditioners, washing machines… and evidence to support that increases in income are plowed directly into these products. However, if incomes stagnate, they are also much more quick to substitute out of such ‘necessities.’ There are extremely active second hand markets for all sorts of things, all the way down to half-smoked packs of cigarettes and half-empty bottles of liquor – the point being that decreases in income at any level will affect consumption patterns throughout a larger part of the distribution for just about every type of consumer good.

As a result of this (and numerous other factors I’m not smart enough to note), the notion here therefore seems to be manage this transition away from export reliance as slowly as possible – and why not? For the time being, they have a very deep bowl – let us hope the punch is not spiked. [Sorry to torture the metaphor. In reality, punch spiking isn't really practiced here - 白酒 doesn't mix so well. Need to work on cross-cultural allegories: 'the tea leaves are muddled - let us hope we do not misinterpret.' No...]