May 21, 2014

The Floor Falling From Beneath Their Feet

Shanghai Daily reports from China. “Shanghai’s new home market remained sluggish for a third straight week. As of Sunday, 315,000 square meters of new homes were sold in Shanghai in May, or a daily average of just 17,500 square meters, according to Uwin data. That compared with 761,300 square meters in April. However, the supply of new homes released locally more than tripled from the previous week to 236,700 square meters, according to the data. ‘There won’t be any major turnaround if developers don’t offer notable price cuts or release more mid- to low-end products to the market,’ said Huang Zhijian, chief analyst at Uwin.”

From NTD TV. “In Q1 2014, real estate investment in four provinces were negative, with Heilongjiang and Jilin declining more than 25 %. Finance scholars Du Meng recently said that China’s property market is in a typical crisis of overproduction, with 68 million vacant housing units. Chinese investment consultant Mr. Deng: ‘Real estate is a comprehensive industry and its risks have in fact already penetrated into all walks of life. When it is prosperous, everyone worships it; when it collapses, it is definitely out of favor. It is a demand all by itself. But the problem is that it has boom and bust cycles.’”

China Economic Review. “Residents in Tangshan are very familiar with the concept of oversupply. A severe glut in the steel industry has put many jobs at risk in the northeastern Chinese city. Between 2009 and 2012, the city was building about 17.4 million square meters of housing space. Yet at the local rate of consumption, some 1.46 million square meters per year, it would take more than a decade to exhaust this supply.”

“In the past year, the price of new housing in some developments has fallen from around US$1,603 (RMB10,000) per square meter to about US$961.8 (RMB6,000), according to Chinese media reports. For anyone who bought at the height of the market, such a sharp drop in prices is the equivalent of the floor falling from beneath their feet.”

“Talking to journalists in Shanghai in May, independent economist and renown China bear Andy Xie told of trips he’d made to small cities filling with empty apartment buildings. Party bosses would point to nearby cities and say that the residents there all planned to move in to the growing supply of housing. But upon visiting those nearby cities, Xie said he found a similar buildout in homes and the same attitude.”

“‘I go to the next city and the party boss tells me exactly the same story: The people over there are going to come,’ he said, drawing laughs from the crowd.”

From Caixin Online. “An investment banker has blamed the recent slowdown in China’s property market on the triple whammy of a graying population, high prices and oversupply – and he says urbanization won’t ride to the rescue. The comments by Ha Jiming, Goldman Sachs vice chairman for China, come amid debate over whether the property market has reached a tipping point after years of soaring prices.”

“High prices for homes mean most people are having difficulty making a purchase, Ha said. He estimated that in many large and medium-sized cities, average monthly payments on mortgages accounted for up to 78 percent of household income last year, up from 62 percent in 2010. ‘Such a high rate is unacceptable for most normal families,’ Ha said, adding that a more reasonable level was 50 percent.”

“Finally, the total area of the country’s commercial properties under construction was 4.9 billion square meters at the end of last year, Ha said, and this was four times what was needed. And this oversupply will only worsen as population growth slows, he said. As for suggestions that rapid urbanization will aid the property market, Ha said many migrant workers cannot afford home prices in big cities. ‘Urbanization can’t save China’s property market.’”

“On May 15, the Chinese Communist Party (CCP) Banking Regulatory Commission launched it’s latest data. By the end of the first quarter of this year, the balance of non-performing loans (NPL) for commercial banks reached 646.1 billion yuan. This marked a record for the highest level in nearly three years. In accordance with mainland China’s regulatory requirements, non-performing loans mean the borrower cannot repay loans.”

“Jack Xu, Taiwan Securities Analyst, points out that the NPL shows the real situation of China’s economy. He said that previously, the superficial economic growth was built on massive loans, not real prosperity. Mainland financial analyst Ren Zhongdao: ‘The CCP’s data is inaccurate, and it is all inflated. Related institutions and scholars have calculated that NPL ratio, in fact, is not as low as suggested.’”

“The French bank Societe Generale gave last year’s estimates. Taking into consideration negative impacts, such as excess capacity, and medium and small cities’ real estate bubbles, Chinese banks NPL ratio may have been close to 10%.”

South China Morning Post. “China will increasingly manage its troubled property sector at a local level as it seeks to avoid sparking either an abrupt slowdown that undermines the economy or another surge in prices, say government economists involved in policy discussions. ‘There is no sign that the central government will relax property controls on a nationwide scale even though the economy is slowing,’ said Zhao Xijun, deputy head of the Finance and Securities Institute at Renmin University in Beijing. ‘The pressure is mainly on local governments, because some of their debts are maturing and they need to repay.’”

From Money Morning. “Xiaoshan, a sub-district of the infamous Hangzhou, is one of the most beautiful regions in China. Xiaoshan has a population of 1.5 million, with a per capita GDP of RMB130,797 (AU$21,800). Xiaoshan’s Gross Regional Product shows that primary agriculture only contributes 3.5% to the overall economy. Tertiary industry produces 35.1%, and the main supporting industry for the region is its secondary industry with 61.4% contribution. Needless to say, Xiaoshan is one of the regions in China that has an overcapacity problem.”

“Behind the Chinese gardens and tea sets in Xiaoshan’s beautiful surroundings is an intensifying battle between the local government and China’s biggest commercial banks. As an angry official told the banks: ‘The government has already expressed in the congress, telling you banks not to recover debts. We want to let whoever is trying recover debt know, that if you continue to do so, Xiaoshan will not welcome you, and you can forget about your own business in this place.’”

Bits Bucket for May 21, 2014

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