June 9, 2014

A Bubble Of Epic Proportions, And Already Losing Air

Caixin Online reports on China. “A property tycoon who is selling most of his stake in a developer of luxury homes says government policies have ‘deformed’ the market. Song Weiping said at a press conference that the government has played too large a role in his industry. ‘Buyers and sellers should have the right to trade freely in the market,’ he said. ‘However, after the government took measures in 2005, 2008 and 2010, the home market has been deformed, and it is no longer a market.’”

“Song said government polices have cut the company’s number of potential buyers by two-thirds in the past two years. However, he did not blame his sale solely on the government’s policies. ‘We met with difficulties because of the environment and our own problems.’”

“The developer used to pursue quality without considering costs, an employee of Greentown said. It once spent 45 million yuan – three times the budgeted amount – on a garden area for the Blue River development in Hangzhou. Greentown sold homes worth a total of 35.3 billion yuan in 2011, down from 54.2 billion yuan in 2010. Its debt-to-asset ratio was 132 percent in 2010 and 148.7 percent the next year. In 2012, it had to sell shares to Wharf Holdings and projects to other companies.”

From Bloomberg. “Chinese property developers face a record surge in maturing debt next year. The amount of dollar-denominated bonds that must be repaid in 2015 will jump to $2.83 billion, the most in data compiled by Bloomberg going back to 1993. Most Chinese builders listed on the mainland or in Hong Kong are behind fiscal-year sales targets and achieved less than 33 percent of their target in the first four months, analysis based on Bloomberg data show.”

“Chinese builders raised 49 percent less through trusts last quarter as the collapse of Zhejiang Xingrun highlighted default risks. Issuance of property-related trusts, which target wealthy investors, slid to 50.7 billion yuan ($8.1 billion) in the first quarter from 99.7 billion yuan in the fourth quarter, data compiled by Use Trust show. ‘Smaller developers that have weak access to onshore bank loan financing and high trust-loan exposure, they would be most vulnerable,’ said Franco Leung, an analyst with Moody’s.”

From CCTV. “Moody’s latest report forecast that the current slowdown in housing demand in China will last longer than the two previous downward cycles due to the ongoing economic rebalancing and high inventory. ‘We expect the current slowdown to last longer than the down cycles in 2008 and 2011 as the government is unlikely to completely remove home purchase restrictions,’ said Franco Leung, a Moody’s Assistant Analyst. ‘Even if home purchase restrictions are removed in certain cities, such a measure is unlikely to spur material additional demand unless it is accompanied by increased availability of bank credit to the sector and a reduction in mortgage rates.’”

From NTD TV. “On June 5, the IMF was reported to urge the Chinese Communist Party (CCP) authority to reduce financial risks, and to be more careful with economic stimulus. Experts comment that China’s financial problems had been present two years ago. These, however, had been concealed by the CCP with excessive money-printing. At this stage, the CCP has frozen its economy, and more money-printing will not help solve the problem.”

“Niu Dao, Chinese Economic Commentator: ‘The risks had been there for a long time. The first outbreak occurred in 2012, when a lot of local governments failed to pay salaries to its employees. Even some state-owned groups, such as Wuhan Iron and Steel and Anshan Iron and Steel were in the same trouble. They had to turn to bank loans for help. Currently, the CCP authority is trying to save them by printing money during the past two years. However, you cannot do that over a longer period.’”

“Wang Jianguo, PhD Advisor of Guanghua School of Management at Peking University: ‘China’s economy is inactive and stagnant with poor interactions. In such cases, any newly-printed money quickly becomes fixed capital similar to water freezing into ice. When the economy warms up, continuous money-printing will result in economic bubbles. It can even lead to financial crisis.’”

“In recent years, China has seen many ‘empty towns’ or ‘ghost towns.’ Statistics show that China’s developing residential areas are able to accommodate half of the world’s population.”

Want China Times. “Since Chinese New Year in late January, the high-end housing market in China has experienced a significant expansion in supply, Guangzhou’s 21st Century Business Herald reports. Some sellers of luxurious properties sought to keep their identity secret but most of them were government officials, a real estate broker told the paper. A source from a state-owned property brokerage in Shanghai said 60% of owners of residential units who put their property up for sale wanted to be anonymous and had used fake names or company names, using lawyers to conduct the deals for them.”

“In Shanghai, most of the mystery sellers of luxury homes were officials, some civil servants, according to Lin Jingjing, an industry expert. Some sellers who had hastily offered to sell their homes had cut prices several times to move their properties quickly, Lin added. Lin attributed the sales to recent reports that the government plans to roll out policies about raising property taxes and measures that require public officials to file declarations of their assets.”

“Between November 2013 and January 2014, Guangzhou and Shanghai were the two leading cities that had seen the largest number of high-end properties put up for sale by officials, at 4,880 and 4,755 units, respectively.”

The Telegraph. “The way we are going, the whole world will end up with zero interest rates or some variant of quantitative easing before long. Such is the overwhelming power of deflation in countries with burst credit bubbles. In China the new talk is ‘targeted monetary easing,’ with the first hints of outright asset purchases. The authorities are casting around for ways to keep the economy afloat while at the same gently deflating a property boom that has pushed total credit from $9 trillion to $25 trillion in five years.”

“This is not an easy task, not least because land sales and taxes make up 39pc of state revenue in China, and the property sector employs 20pc of workers one way or another. It is clearly a bubble of epic proportions, and already losing air. Mao Daqing from Vanke - China’s top developer - says total land value in Beijing has been bid up to such extremes that is on paper worth 61.6pc of America’s GDP. The figure was 63.3pc for Tokyo at the peak of the bubble in 1990. ‘A dangerous level,’ he says.”

“China faces this delicate task with deflation lodging in the economic supply chain. Factory gate inflation is -2pc, with prices falling for 27 months. It has no safety buffer against a shock, and is facing demographic headwinds. The workforce has already peaked and is now shrinking by 3m a year, much like the squeeze that played such a big role in the onset of Japan’s deflation.”

“Narayana Kocherlakota, the Minneapolis Fed chief, suggested as far back as 2011 that zero rates and QE may perversely be the cause of deflation, not the cure that everybody thought. This caused consternation, and he quickly retreated. Stephen Williamson, from the St Louis Fed, picked up the refrain last November, arguing that that the Fed’s actions are pulling down the ‘liquidity premium’ on government bonds (by buying so many). This in turn is pulling down inflation. The more the policy fails - he argues - the more the Fed doubles down, thinking it must do more. That too caused a storm.”

“Masaaki Shirakawa, the former governor of the Bank of Japan, says wearily that the world might have learned something if it had studied QE in his country. The monetary base was doubled after 1997, yet deflation ground on.”

“‘We deployed all sorts of unconventional monetary policy measures ahead of other major central banks. Japan has been living in a world of zero interest rates for almost all of the past 15 years. The Bank of Japan hugely expanded its balance sheet, purchased non-traditional assets and adopted forward guidance on future policy,’ he said recently. ‘It is not an exaggeration to say that almost all the policies adopted by other central banks after the Great Financial Crisis, were policy measures which the Bank of Japan had ‘invented’ much earlier, in uncharted waters, and without textbooks or precedents.’”

Bits Bucket for June 9, 2014

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