January 22, 2014

People Thought The Party Would Go On Forever

The Wall Street Journal reports on India. “Indian firms are selling their assets to raise cash, as banks are tightening the screws on loan repayments to help stem rising bad debt. But selling assets in the current downturn isn’t going to be easy, bankers say, since global and Indian banks are hesitant to back companies seeking to buy struggling businesses that need large amounts of cash to turn around. Indian banks’ nonperforming assets climbed to 4.2% of total loans at the end of September from 2.4% in 2009. ‘Aggressive expansion by corporates during the boom phase with resultant excess capacities,’ contributed to worsening loan quality at banks, the Reserve Bank of India said in December.”

“Indian companies had borrowed heavily in the late 2000s, when interest rates were low and India’s economy was growing between 8% and 9%. Companies used the money to fund ambitious expansion plans. ‘People thought that the party would go on forever,’ said Avinash Gupta, head of finance at consultancy firm Deloitte Touche Tohmatsu India Pvt. Ltd.”

The Times of India. “It seems buyers are reluctant to loosen their purse strings or else why would apartments and villas worth about Rs 2,000 crore lie vacant in Kochi ask developers. Sources said the once-booming realty sector is awaiting the sale of over 2,000 apartments and nearly 1,000 villas. Even banks have noticed the trend as there is a marked decline in the number of applications and enquiries they get for home loans. ‘Earlier, we used to get nearly 100 applications a month, but now it has come down to 50. A study conducted by us last year revealed that there are over 1,000 flats in the 300 apartment projects approved by us, but there are few takers,’ said an SBI official in the home loan section.”

“Sources said that the apartment business declined by 60% and sale of villas fell by 50% over the past six months. ‘There is a dip in the number of enquiries and people who buy apartments as an investment have not shown interest in the recent period,’ said Gireesh Kurup of Bhavanam Expo, construction sourcing fair and property mart.”

“Though Confederation of Real Estate Developers’ Associations of India claimed that the sector has been witnessing a steady growth, they admitted the present demand is not driven by those keen on acquiring property as investment. ‘There is no bubble in the sector and the speculative market has completely dried up,’ said organization president John Thomas.”

The Atlantic on China. “Nobody knows how much we should worry about China’s shadow banks, because nobody knows much about them. Not even the people buying their bonds. Reuters, for example, looked into one shadow bank product called ‘Golden Elephant No. 38′ that promises a 7.2 percent return, but doesn’t say what’s backing the security. After some digging, Reuters found out it was an almost-abandoned housing project in a rural province. This might sound like a scare story, but it’s actually a fairly typical one. They looked at 50 other products, and didn’t find much better—or any—disclosure.”

Dow Jones Newswires. “In the latest sign of trouble in China’s loosely regulated shadow-banking sector, angry bank and insurance customers who bought an investment product that they say has since failed appealed to authorities to help them recoup about one billion yuan ($167 million). The product in question involves about one billion yuan in funds raised in 2012 by a little-known investment firm, Beijing Roll-In Investment Co. Beijing Roll-In planned to invest the money in several public housing projects backed by the government in the city of Chengdu, in western China, according to a dozen of its investors interviewed by The Wall Street Journal.”

“The principal came due at the end of last year, but so far Beijing Roll-In hasn’t paid the investors, they say. ‘I bought into the product only because it was said to be both principal and interest guaranteed,’ said He Yujing, a Beijing resident who put in one million yuan in exchange for a 10% advertised return. ‘But now, not only did I not receive the promised return but also lost my principal.’”

“Said Wan Xia, an investor in the southwestern Chinese metropolis of Chongqing, ‘the firm hasn’t paid us anything.’ The product sold by Beijing Roll-In offered returns of between 10% and 13%, according to the investors. They say a prospectus issued by the company included standard disclosures on risk, but said both investors’ principal and interest would be guaranteed by a third-party firm.”

“‘Ping An Insurance really talked up the product, and when they pitched it to me in 2012, they said they were only offering this product to their VIP clients,’ said Tian Zhu, an investor who bought the product from the insurance company.”

Forbes on China. “The argument that China can grow out of the credit bubble is valid if and only if GDP growth increases the debt service capacity of the debtors. As GDP is only a measure of economic activity, not efficiency or profitability, GDP growth alone does not guarantee a proportional increase in local authorities’ revenue that could be used to pay down debt issued via local government financing vehicles (LGFV).”

“In mid-2013, investments in city construction, land reserves, transportation facilities and social housing made up 35%, 11%, 24% and 7% of the total spending by local authorities, respectively, according to Citigroup analysts. Bulls would argue that these hard assets could be drawn on to repay the debt. But the financial returns from the physical assets funded by LGFVs are largely unknown and mostly likely negative, judging by common sense. If those projects were financially viable, why didn’t local authorities invest in them prior to 2008 rather than waiting till the onset of the global financial crisis?”

“It is clear that policy makers in China are focused on engineering a transition to slower but more sustainable growth without causing a sharp cyclical slowdown. From an empirical perspective, however, the number of economies that have historically succeeded in letting the air out of the credit balloon in a gradual fashion, without creating a credit crunch and a short-lived recession, cannot be counted on any fingers or any hands.”

From CNBC. “Economist and Forbes columnist Jesse Colombo claimed that the Singapore economy faces a ballooning credit bubble - in its property and finance sectors and other parts of the economy - fueled by ultra-low interest rates. Much like Iceland, he argued, Singapore is being falsely perceived as a safe-haven economy that will eventually crash.”

“The bubble claims sparked a swift response from the Monetary Authority of Singapore, Singapore’s de factor central bank, which strongly denied any signs of a bubble, arguing that the government’s property cooling measures have worked to dampen sky-high property prices and reiterating the strength of the government’s finances and a solid banking sector. But it seems the debate is far from over.”

“Colombo pointed to Federal Reserve Chairman Ben Bernanke and other high-profile economists who failed to preempt the economic collapse seen in the U.S., Ireland, Iceland and other hard-hit countries during the mid-2000s. ‘The bottom line is that Singapore authorities’ bubble denials do not help the country’s citizens any more than Ben Bernanke’s 2005 bubble denial helped Americans,’ he said.”

“‘In Singapore’s case, bubble deniers and apologists have not addressed the risk posed by the bubbles or frothy conditions in neighboring Indonesia, Malaysia, Thailand and the Philippines,’ he said. He also pointed to the severe risks developing in China, which he describes as a bubble economy, due to rapid credit growth in recent years.”

“The Forbes columnist has made similar warnings about the Malaysian and Philippine economies, which were also met with responses from their corresponding central banks denying the existence of economic bubbles.”

“‘There must be an unwritten rule in the shadowy world of central banking that demands that dangerous, society-threatening economic bubbles must be denied and covered up at all costs,’ said Colombo.”

Bits Bucket for January 22, 2014

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