China: As If One Bubble Wasn't Enough...

China's future, oddly enough, looks much like the U.S.' past. Fossil fuels, housing, and credit have never been more accessible or in higher demand. Once again, no one read the fine print: this is unsustainable. The extent of damage control possible is now a speculative bubble all its own. Here's what they're up against:

What's the secret fuel that powered the China growth machine? Coal, coal, and more coal (47 percent of the world's consumption in 2012 to be exact). Now, however, China's voracious appetite for this fossil fuel has reversed… Building new coal plants became a larger (and more painful) out of the state's pocket expense. As volatility of supply remained high and the tug of war over the coal money ensued, investment by many (rational) players of the coal game slowed. These cash flows were redirected towards renewables, where both energy and income are sustainable long-term. What if coal consumption caps, a ban on low quality coal imports, and carbon caps became more than just the World Health Organization's wishful thinking? Sounds like this investment has been justly branded with uncertainty. As China drew up plans to construct the largest coal pipeline in the world, its false hope became are glaring deterrent for investment. On top of that, economic growth diminished. It's safe to say China shouldn't hold its breath and neither should you.

If this bubble bursts it might not splatter the rest of the world like the U.S. did, but a few nations should definitely look into rain insurance. Chinese people saved more than Americans, and sure, they were required to put 20-30 percent down on the value of a house to get a loan. Sounded responsible right? Not enough. Chinese tier 1 cities were still more expensive than developed market cities according to the IMF house price to wage ratio. That income racehorse didn't catch up with housing. With the new leadership taking the reigns looks like it wouldn't come close, even as housing prices trended steadily upwards. Despite all the safety mechanisms China's banks put in place, 60 percent of Chinese household debt was consisted of mortgages. Living beyond your means wasn't sustainable in the U.S. and it won't be in China. As emerging markets such as Russia and Brazil outpaced China in terms of urbanization, at 73 percent and 87 percent in comparison to 50 percent respectively, it's unlikely that the government will undermine such growth. It's won't be an immediate concern until it is.

Fitch reported that Chinese credit is pushing growth boundaries that is no longer has to push, as credit jumped from $9 trillion to $23 trillion since 2008 alone. In fact, Ambrose Evans-Pritchard of

reported that, “They have replicated the entire US commercial banking system in five years”. That begged the question whether those proportions will hold true for the collapse as well. It got scarier. Chinese credit growth has outstripped economic growth for the last 5 quarters. Société Générale found China's debt service ratio to be at an alarming 29.9 percent of GDP. Correction, it got much scarier. China had the most leveraged companies in all of Asia and most of them are STATE-OWNED. Some might argue that the private sector had to shoulder some responsibility too. After all it was the average Joes that demanded Wealth Management Products (WMPs), more like weapons of mass poverty, in unprecedented quantities. Perhaps it's because they didn't know better; it's like all those companies that entered into ticking time bomb derivatives. The banks on the other hand gave them a ‘go' on a red light and are now desperately trying to brake as the outstanding value of such products grew to about ¥13 billion. The stage has been set for China's future. Whether it'll go out with a graceful government-crafted bubble reduction or just a ‘bang' is to be determined.