May 5, 2014

Once The Bubble Is Broken, The Finances Will Be Done

A report from the China Economic Net. “Home prices in first-tier cities are finally showing signs of dropping, with some apartments currently being sold at price discounts. An apartment of around 90 square meters, worth around 3 million yuan ($479,400), could be sold at a discount of 100,000 yuan to 200,000 yuan in Beijing, according to Gao Yuan, a Beijing-based realtor. ‘An apartment used to have more than five potential buyers, but now there are only one or two,’ a Beijing-based realtor, who declined to be named, told the Global Times.”

“The property market in Shanghai is also cooling. Units in a new real estate project in Pudong district were being sold at a price discount of as much as 28 percent recently, media reports said. Nearly half of the 100 cities monitored by the China Index Academy have reported negative month-on-month growth in April. Industry insiders said high-end properties have been hit harder. ‘It is hard to find buyers for high-end properties, even with price reductions,’ Huang Wenquan, a Shanghai-based realtor at Century 21, told the Global Times.”

“It is also the case in Beijing. An apartment at a prime location in the city, worth around 7.5 million yuan, has had its price cut by as much as 1 million yuan, Beijing-based newspaper China Business Journal reported Saturday. ‘In Beijing, the increasing supply of welfare housing is a major reason behind the current price drop,’ Chen Guoqiang, deputy head of the China Real Estate Society, told the Global Times.”

The Standard. “Home transactions in Beijing during the current Golden Week plunged to a six-year low of 200 deals - a stark sign of the bearish sentiment reigning in the mainland property market. Amid more supply in the subsidized mass-housing market and the tight credit environment, only 169 new homes were sold between May 1 and 3, Xinhua News Agency reported. On the other hand, 31 secondary market flats were bought over the three-day break. Both figures are the lowest since 2009. They represent about a 80 percent plunge in transactions from 2013.”

“A 137-square-meter apartment at Hesheng Guoji in Chaoyang District failed to secure a buyer even after the asking price was slashed by one million yuan (HK$1.23 million) to six million yuan, or 43,796 yuan per square meter. The average price of units in the district is more than HK$50,000 psm. Agents also revealed that secondary homeowners generally lower prices by at least 100,000 yuan just before negotiations start.”

“The slow pace of deals kept most real estate agencies in the capital inactive during the three-day holiday. Only one out of the 15 agencies in the capital saw transactions during the golden week holiday, Xinhua reported. Meanwhile, a new project in Shanghai even launched a swim-suit fashion show in a bid to boost sales.”

The Telegraph. “A leaked recording of dinner speech by Vanke Group’s vice-chairman Mao Daqing more or less confirms what the bears have been saying for months. Li Junheng from JL Warren Capital has translated his comments, which I pass on for readers. ‘In 1990, Tokyo’s total land value accounts for 63.3pc of US GDP, while Hong Kong reached 66.3pc in 1997. Now, the total land value in Beijing is 61.6pc of US GDP, a dangerous level,’ said Mr Mao.”

“Mr Mao said 42 new projects for elite homes in Beijing will be finished in 2015, hitting the market with an extra 50,000 units that ‘can’t possibly be digested.’”

From IFR Asia. “A combination of bearish reports from analysts and weaker-than-expected home sales is raising concerns among overseas investors of a credit crunch in the Chinese property sector. An asset manager in Singapore says asset turnover has decelerated and so have gross margins for the sector, a twin drop that give cause for concern. ‘There are concerns about China property as bond issuers have bought a lot of land. So, they are building up inventory,’ said a hedge fund manager. ‘If you are cutting prices and don’t sell, that is bad.’”

From ECNS. “Major domestic banks have experienced significant increases in nonperforming loans, their first-quarter results show. China Construction Bank Corp had 90.81 billion yuan ($14.52 billion) in NPLs as of March 31, up 5.54 billion yuan from the end of 2013. Bank of China Ltd had an NPL balance of 80.32 billion yuan, up 7.05 billion yuan. Agricultural Bank of China Ltd’s bad loan balance increased 4.21 billion yuan to 91.99 billion yuan.”

“Slower credit expansion contributed to the increase of NPLs, said Ni Jun, an analyst at Shanghai-based Greenwoods Asset Management Ltd. ‘The banking regulators have tightened their grip on shadow banking. As the banks have grown cautious in lending, it’s gotten tougher for many companies to get loans,’ Ni said. He noted that the regulatory policies on shadow banking will benefit Chinese companies in the long run, especially those in certain sectors including iron and steel, nonferrous metals, coal and shipbuilding. ‘Raising funds from the shadow banking system is like taking drugs. Our companies will get better if they can endure the pain of stopping,’ he said.”

From NTD TV. “In an interview with China Business News, Hou Yunchun, Vice President of the State Council Development Research Center said that China has been through so many years of development, so a housing bubble certainly exists. But Hou says it’s a bubble that cannot be allowed to burst, otherwise, it would really shake the economy.”

“Gong Shengli, China affairs expert: ‘Housing interests make up 60% of the local governmental revenue in cities like Nanjing, Hangzhou, Wuhan and Guangzhou. Government in the U.S. or European countries has no more than four levels of administration, but China has seven levels. Besides the seven levels, the interests are again split between the party and the government. So the cost of keeping government in China is the highest in the world.’”

“At end of 2013, Du Meng, Chairman of China Enterprise Capital Alliance revealed that there were 68 million empty houses in China. Moreover, the capital chain of real estate in many cities have been broken. Recently media have reported that 30% of the projects in the Tianjin Binhai Business District, known as ‘China Manhattan,’ have failed to materialize, other construction projects have been shutdown.”

“Wu Fan, US-based chief editor of China Affairs magazine, says there are hundreds of ghost towns in China, yet the CCP still builds new houses: ‘Once the bubble is broken, the finances will be done. The entire market will collapse, the CCP will reach it’s end. Thus they are in very conflicted situation. Nevertheless, this conflict was caused by none other than the CCP.’”

Want China Times. “In Ordos, one of the 12 subdivisions of Inner Mongolia, people in the ghost city are bartering to settle their debts. Ordos real estate entrepreneur He Jun has gathered many debts since the private loan sector in the city collapsed two years ago. He is just one of the army of debtors in Ordos, once the richest city in China in terms of per capita GDP on the back of its coal reserves but now called the ‘city of debt,’ according to the China Securities Journal.”

“Since most of the debtors are also creditors, they started paying debts with objects such as wine and houses that their own debtors had provided to settle their debts, the journal said. He Jun turned to precious metals because of the ban. ‘After the real estate bubble burst, many houses remain uninhabited in Ordos. As a result, no one is willing to exchange houses for gold. Houses can only be exchanged for silver,’ He added.”

“For example, He use silver objects worth 500,000 yuan (US$80,000) to pay off at least 1 million yuan (US$160,000) in debt. According to He’s estimate, the value of private debts in Ordos stands at over 200 billion yuan (US$32 billion). ‘They can only be settled gradually over time,’ he added.”

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