Challenging The Post-Tiananmen Compact
A report from China Daily. “Housing prices will remain under pressure for the foreseeable future, and the government isn’t expected to take any steps to boost the market, industry analysts said. Many developers launched innovative sales campaigns during the three-day Dragon Boat Festival, which ended on Monday. Downward pressure on the prices of pre-owned homes has become more evident. Yu Lulu, an agent with property brokerage firm Homelink Real Estate, said the average price in the residential community he’s responsible for has fallen more than 10 percent in the past four months. ‘After the market adjustment, prices have become more affordable, and there are more bargain-hunters,’ said Yu.”
“According to Wang Tao, China economist with UBS, typical analysis of property downturns focuses on price corrections, but she said that construction volume matters more in the case of China. A big drop in construction activity—even without a large price correction—would likely have a serious negative impact on the industrial complex and, through that, economic growth and banks’ balance sheets.”
“‘We think property construction is facing a serious adjustment, and the era of the secular property boom is perhaps behind us. Our sensitivity analysis suggests that a 10 percentage point drop in the growth of construction volume would result in a 2.5 percentage point drop in GDP growth, including second-round effects,’ said Wang.”
Want China Times. “Zhang Dawei, an analyst with Centaline Property, said the property slump began early this year and the trend of a cyclical adjustment in the market is now very obvious. He said that this is the first property slump in history that was not a result of policy factors, which he said could lead to a longer and deeper adjustment period, especially in non-nuclear cities. The recent market slump has been attributed to the rising real estate mortgage and credit because of fund shortages, with some cities having more supply than demand, and bidding farewell to a time of insufficient supply.”
“In addition, regional real estate price cuts have spread to eastern Chinese provinces such as Zhejiang, Jiangsu and Jiangxi. At the same time, potential buyers have adopted a ‘wait and see’ attitude after seeing the continued price drop as real estate agents began adopting the strategy of ’surrendering part of the profits in exchange for more sales.’”
From NTD TV. “Property price cuts in Beijing are much higher than in the neighboring cities during May. The house oversupply is over 80 percent in 35 major cities. Beijing Central Line real estate chief analyst Zhang Dawei: ‘Most house buyers are hesitating because Beijing credit is relatively tight, but low-cost affordable houses are available. The house market might go into a tailspin if there is no large credit release and bailout with continuous price decline.’”
“Beijing Maitian Real Estate Broker Zhang Ze: ‘Money is tight in the bank and hard to be loaned out because many enterprises are short of cash. Some enterprise bosses sold their own houses at low prices to raise cash. Banks don’t have liquidity so are having to use real estate.’”
The Epoch Times. “An established fact is that China’s property market has long been in a state of oversupply. Data provided by China Real Estate Research Association in 2012, suggested that new construction area in the country is around two billion square meters, making up half the world’s total each year; over 70%, or 1.4 billion square meters of the new construction area is for residential purposes, and over 40% of which is in first- and second-tier cities in China. The above figures did not include housing area completed in 2013. The National Bureau of Statistics put the figure at 1.067 billion square meters.”
“With so many flats, who are the real buyers? Judging from property prices, the vast majority of the middle class and grass-root people could not afford to purchase their own flats. Therefore, home buyers are mainly officials and wealthy people who seek to preserve their asset. This is a fact confirmed by media exposure of the ‘housing family’ in recent years.”
“China Vanke’s chairman Wang Shi stated publicly that Nanjing municipal government fined the company 40 million yuan for a reduction in real property prices in 2008. Wang’s statement was backed by others in the industry. China’s property market, similar to the country’s stock market, has come to rely solely on confidence as a result of over-speculation. The characteristic of a market like this is that people would only have confidence in it when the prices are rising.”
“The real trouble is that in a market, supply and demand has a law of its own. Forcible intervention could only be partially effective over a given period; it is not possible to be effective at all times. Measures a government can take to regulate the economy have their limits and they are not omnipotent after all.”
From Forbes. “You may not be aware of it, but tomorrow is May 35th – or at least, it is to the hundreds of millions of Chinese computer users who are unable to refer to the June 4 1989 Tiananmen Square protests more directly. China is making an all-out assault on freedom of speech for the 25th anniversary of the event. Over the last few days, it’s blocked those international versions of Google’s search engine that were previously available. Anti-censorship monitor GreatFire describes it as ‘the strictest censorship ever deployed.’”
“As China loses many of its growth drivers – cheap labor, exports and investment – analysts are predicting that the country’s GDP growth will fall to a mediocre three or four percent per year over the coming decade. And, as Pei Minxin, director of the Keck Center for International and Strategic Studies at Claremont McKenna College, points out: ‘Once growth falters, the Communist Party’s rule will be increasingly vulnerable as its performance-based legitimacy erodes.’”
From Bloomberg. “Chinese president Xi Jinping’s unbridled effort to keep growth from falling below the official 7.5 per cent target is cementing China’s fate. China is investing just as much as it did in 2008 and 2009, when authorities were desperately trying to avert a slowdown. Just as debt troubles in Japan, Europe and the US ended badly, so will China’s. Why, then, with so many clear examples of financial excess leading to ruin, is Xi continuing down this road? Blame it on the ghosts of Tiananmen Square.”
“In the aftermath of the crackdown on student protesters on June 4, 1989, China’s leaders made a bargain with their people: We will make you richer, as long as you no longer dissent. After the crash of Lehman Brothers, the regime had to go to extraordinary lengths to keep up its end of the bargain, pumping up what was already the world’s highest investment rate. In doing so, China itself became a Lehman economy — powered by shadowy funding sources, off-balance-sheet investing and unconvincing claims that all remained well.”
“Yet Xi and Premier Li Keqiang apparently can’t bring themselves to roll back those policies and rebalance the economy away from exports and toward more consumption. They know that if they do so, growth will slow a lot, challenging the post-Tiananmen compact. Local-government debt risks are bad enough. Investors such as Patrick Chovanec of Silvercrest Asset Management are right when they warn that China’s property bust is the real time bomb. If the main asset underpinning everything from local-government finances to state-owned-enterprises goes bad, watch out.”
“Credit expansion can’t outpace GDP growth forever, not even in China. As Xi flexes his muscles around the world and ramps up military spending, he would do well to reflect on this irony: The very thing from which his party has derived its strength and legitimacy in the 25 years since Tiananmen — a booming economy — is fast becoming its biggest weakness.”
“1.4 billion square meters of the new construction area is for residential purposes…”
That dwarfs the US house building boom. After a rapid $23 Trillion credit expansion to accomplish this boom, “Banks don’t have liquidity “.
I don’t believe that everything hinges on a supposed Tiananmen Square “compact”. The Chines people have for thousands of years considered their leaders close to deity. When prosperity goes the deity lose their authority and are removed. So I have read about the dynasty changes in ancient history, not from military defeat from outside but from rebellion resulting from famine.
Grow or die. Tiananmen was about freedom. What lies ahead is more serious, it’s about money.
Blue Skye wrote, “Tiananmen was about freedom. What lies ahead is more serious, it’s about money.”
They are one and the same.
Money represents energy.
The ability to buy, sell, and trade this energy is at the heart of freedom.
It is the essence of Tiananmen. Imho.
Ah, the beauty of it all …
One article says this:
“The recent market slump has been attributed to the rising real estate mortgage and credit because of fund shortages, with some cities having more supply than demand, and bidding farewell to a time of insufficient supply.”
“Fund shortages”. Hey, this has something to do with me! Well, ain’t I important!
Then another article says this:
“Our sensitivity analysis suggests that a 10 percentage point drop in the growth of construction volume would result in a 2.5 percentage point drop in GDP growth, including second-round effects,’ said Wang.”
Wow! I am important! If I supply the necessary credit then then we have growth, if I don’t supply the necessary credit then we have a slump.
Bahahahahahahahahahahahahahaha
It’s a real gotcha situation, no?
Bahahahahahahahahahahahahahahahahaha
You can’t lose with the stuff I use.
Bahahahahahahahahahahahahahahahahaha
“China’s property market, similar to the country’s stock market, has come to rely solely on confidence as a result of over-speculation. The characteristic of a market like this is that people would only have confidence in it when the prices are rising.”
“The characteristic of a market like this …”
The characteristic of a market like this is Price equals Value.
” … people would only have confidence in it when the prices are rising.”
When prices are rising then values are rising and if values are rising then one should latch on to these rising values and ride the rise and if one does not have the money to ride the rise then he should BORROW it.
And when enough people do this then you have before you an economic boom, a pure miracle of a sort.
PFM.
Value is meaningless in a debt driven society. The only thing that matters is if something will fit in the donkey cart. When people place no value on thirty or forty years of their short lives, who can judge the value of the things they buy?
Blue Skye wrote, “Value is meaningless”
Seriously, think about that.
I like a lot of your posts, but this one, whoa.
If the only thing that matters is if something will fit in the donkey cart, then clay bricks would be the same as gold or chickens.
Value is subjective. Always.
But Never is it meaningless.
scdave wrote, “…My suspicion is its so big and global that there is no way the DOJ or any other justice department in other countries can monitor it…For every one they catch there maybe thousands that slip through…”
Is that why every time I pay with a twenty Dollar bill or a fifty Dollar bill the clerk swipes a magic pen across it to see if it’s real, or holds it up in the air to see the bar code? Here in honest flyover country.
That Never happened to me prior to oh say, 2001.
Now, it’s an everyday occurrence.
It’s kind of insulting, too.
Sorry, that comment was supposed to be way below.
Although, I did try and comment about Blue Skye’s rant about how Value is meaningless and it went ‘poof’.
Value is Never meaningless.
It’s always subjective.
RE: “The only thing that matters is if something will fit in the donkey cart.”
Ya, like a stack of bricks is the same as a stack of gold bars?
…Even at thirty and forty years, bricks and bars of gold are Not equal.
‘The article also quotes Shih Wing Ching, founder of Centaline, as saying the firm has more than 10,000 employees on the ground in China so their assessment can’t be wrong. There is a clear oversupply in the second- and third-tier cities and the large developers are beating a strategic retreat to avoid having stranded capital, better to take some losses and get out quick. Current home buyer demand is not enough to soak up demand and investors are avoiding the market. He also agreed with Pan Shiyi that the greatest risk is for financial products such as trusts, WMPs and private equity.’
‘The Hangzhou price decline restriction story has gone viral in China. CCTV ran a 30 minutes special on the city’s situation on their Business Half Hour program. Following are the main points:
The first saleswoman interviewed says all discounted homes have been sold and they cannot sell anymore at ￥10，000 /sqm because of the government rules, so the price is back up to ￥20,000 /sqm. The next salesman said the odds of more price falls are small because the government limits the price.’
‘At 10 minutes, a developer says he set a low fixed priced on a building recently and it has still fallen in price. But his building is in a disaster area, prices are down 30% and even 50% and sales volume are still weak. He said they aren’t buying any land because their land inventory is still large.’
‘At 16 minutes, the reporter recounts how he saw a real estate agency making calls all day trying to sell existing homes, but nobody had any success.’
‘At 19 minutes, the agent says even existing home buyers want discounts of 10 to 20%.’
‘At 21 minutes, a researcher says Hangzhou has 97,000 homes, among them 15,000 where developers obtained advance sale permits, but they have not sold the homes. Instead, they went to the bank and use it as collateral for loans. It will take about 16.5 months to sell all of this inventory.’
‘At 21:30 there is a discussion of land sales. At the 2013 peak Hangzhou sold ￥130 billion in land. This year through May, Hangzhou has only sold ￥40 billion. He later says home sales are down more than 70% or 80%.’
‘This line sums it up: Hangzhou prices really drop, if the previous preferential discounts were “still partly concealed”, now you can use “straight down” to describe the market.’
“Chinese president Xi Jinping’s unbridled effort to keep growth from falling below the official 7.5 per cent target is cementing China’s fate ??
Michael Spence warned of this some time ago…The question is, if it falls below that number, will we know about it…
People working the mines in Australia will know it.
People who depend on people working the mines in Australia will also know it.
There’s an unraveling effect.
Oh, is this a good time for me to say “poof”?
People working the mines in Australia will know it ??
I understand the point but if the government tries to purposely conceal the slow growth maybe they will keep buying the ore even if they don’t need it in a attempt to conceal what is really going on with their GDP…I mean, if they are willing to build Ghost cities, its not a reach to think they would continue to buy commodities that they don’t need….
…Until they can’t…
“Until they can’t.”
Thus far, we have yet to see what “can’t” actually means insofar as money printing goes. The time frame is unknown.
Agreed. In my mind the limit is hit at the point when some future monetary “intervention” results in swift reactions in the markets, that are the direct opposite of what they intended. In other words, a clearly delineated cause-and-effect that exposes their true impotence for all to see.
An example might be a massive new expansion of money printing in reaction to the next major recessionary downturn. In my imagined scenario, the infusion would be intended to buy long term notes and drive long-term interest rates down. But in this case for once, the markets are spooked by the idea that the tipping point for massive inflation has arrived, and in response interest rates shoot much higher. What would they do then?
China will never willingly acknowledge the truth. It is as much smoke and mirrors as possible, all the time. China is one big lie.
“There is a clear oversupply in the second- and third-tier cities and the large developers are beating a strategic retreat to avoid having stranded capital, better to take some losses and get out quick.”
Capitalistic reality is catching up with communist China.
‘Macau, a special administrative region like neighbouring Hong Kong, is the only place in China where citizens can legally gamble in casinos, and analysts say its growth prospects in the longer term remain strong, due to its proximity to the mainland. Eight new resorts are also set to open within three years.’
‘But while annual revenues reached a record $45 billion in 2013, elevating the tiny territory high above rivals, investor sentiment has soured after the Macau authorities said they would restrict next month the use of China’s state-backed UnionPay card in a bid to tackle money laundering.’
“The anti-money laundering crackdown is affecting people going to Macau and can be turning point for the sector,” said Benjamin Chang, chief executive of hedge fund LBN Advisors that invests $800 million in China.’
‘Qingdao, China’s third-largest port, has long been a crucial manufacturing link and one of the key hotspots in the global commodities trade, due to the vast amounts of raw materials like iron ore, copper and aluminum that flow through its warehouses.’
‘But as of last week, the port’s shipments of crucial metals have been completely frozen, as officials investigate whether or not companies have been fraudulently inflating their stockpiles. Some 20,000 metric tonnes of copper and 80,000 metric tonnes of aluminum are reportedly missing.’
‘If the investigation finds widespread evidence of wrong-doing, it could create a ripple effect of credit squeezes and defaults. That’s because Chinese companies that struggle to get bank loans are fond of using inventories of metals like copper, which sit in bonded warehouses in port cities like Qingdao, as collateral to secure short-term loans. These loans, in turn, sometimes are used to invest into high-yielding shadow banking products.’
“We have heard that some banks in China are offering financing against photocopied warehouse receipts,” one metals trader told MetalBulletin, which first broke the news of the investigation and export freeze. There is currently a hold on all commodities that have been used as collateral for financing, which includes iron ore, aluminum, alumina and bauxite, and aluminum ore, MetalBulletin said.’
‘Chinese steel futures dropped for a fourth session to hit an all-time low on Tuesday, reflecting pressure on demand from a weak property sector and hefty supply as markets reopened after a holiday weekend.’
‘Iron ore futures in Dalian also slipped for a fourth straight trading day to their lowest since their October launch, potentially weighing on spot prices that have already fallen by almost a third this year.’
“Given the risks in the real estate market, traders and end-users are not willing to increase their stocks and this is putting pressure on the mills,” said Zhou, adding those risks had overshadowed recent signs of recovery in China’s manufacturing sector.’
‘Friday’s 4-percent plunge was iron ore’s biggest single-day slide since slumping by more than 8 percent in early March. The raw material ended May down 13 percent, falling for a sixth straight month, which was its longest losing streak on record.’
“High cost domestic iron ore producers in China are now feeling the pinch. If prices remain depressed under $100/tonne, these mines will be forced to curb supply,” Australia and New Zealand Bank said in a note.’
Fraud and greed run the entire world.
‘Export log prices have tumbled as a result of a drop in demand in China, the main market. NZX Agrifax primary industry analyst Nick Handley said log prices had fallen 20 percent in the past two months. “There’s been a significant price correction in the Chinese market after inventory levels got too high in the first quarter. A slowdown in China’s property market led to a general tightening of credit that has affected several industries in China,” he said. “This slowdown, combined with log deliveries coming in at a record pace, meant supply and demand became unbalanced very quickly.”
If prices of houses are going “straight down” and prices of the materials to build them are collapsing, it will be amusing to see what China says its GDP growth is.
They will probably float some wildly inflated number, similar to former North Korean leader Kim Jung Il’s 10 holes in one in an 18 hole round of golf. China = lie.
Nice Data mining Ben….
It’s been tough. As I mentioned yesterday, the Chinese government shut down a lot of the usual information flow in the past half week.
They must be lobotomizing American workers, too. According to Carl Morris, everything is just peachy.
Did I say that?
From the Epoch Times article:
‘This is a fact confirmed by media exposure of the “housing family” in recent years. High ranking officials were reported to have to their names a dozen or several dozens of flats; senior officials like former Railway Minister Liu Zhijun, Politburo Standing Committee member Zhou Yongkang owned even hundreds of villas.’
‘In June 2013, there was a widespread claim that there are at least 6,000 Liu Zhijun in Beijing, meaning that in the capital city of China, there are at least 6,000 others who owned more than 300 flats. And I found this claim somewhat credible, given that the country is one that practices centralization of power and in Beijing there are just too many officials with access to all sorts of rent-seeking opportunities.’
‘A near infinite demand of flat ownership like this was driven predominantly by the need of asset preservation—China has seen high inflation rates in the last decade and the only thing that can keep up with inflation rates is the surge in property prices, and it was said that whether or not a household bought flats and the timing they made such purchases was the cause of a wealth gap among the middle class. Now, however, a significant reduction in the need to preserve assets through property ownership emerged, for two reasons: anti-corruption and the imminent introduction of property tax.’
And the NTD TV piece:
‘Beijing Maitian Real Estate Broker Zhang Ze: ‘Money is tight in the bank and hard to be loaned out because many enterprises are short of cash. Some enterprise bosses sold their own houses at low prices to raise cash. Banks don’t have liquidity so are having to use real estate’
I am coming to the conclusion that the Chinese aren’t buying houses in all these countries to live in them. How can they live in dozens of places? And haven’t we even heard them being referred to as safe deposit boxes? If this is the case, they’ll sell them fast or slow, but they’ll sell them. Maybe when they need some money!
‘When searching for real estate, well-heeled Chinese consumers are buying properties as investments and for future generations, with many spending between $1 million and $3 million on the latter purchases. That’s what Sotheby’s International Realty found in a recent survey of affluent real-estate consumers in China, the U.S., U.K. and Brazil.’
‘Seeing homes appreciate in value is a main driver for wealthy Chinese home buyers, with 99% of respondents saying a return on investment was important, compared with 89% of U.S. survey takers. At the same time, China’s property slowdown appears to be taking its toll, as only 63% of Chinese respondents felt more confident in the strength of their housing market compared to five years ago.’
99% are going to be pissed
Sum Ting Wong
“If this is the case, they’ll sell them…”
If they are not among the scapegoat beheadings in the rising anti-corruption crackdown.
A few months ago, I posted an article that reported on Chinese buyers of pre-construction condos in Melbourne, Australia. It mentioned that the developer cut the price 15% as soon as the condos were finished. Around the same time, utility figures showed many city units not being used.
When you are money laundering, you are going to pay a cut here and there to get the money out. So what if they lose 15 or 30% on selling the condo? It’s better than getting nothing. This would explain throwing huge amounts of money at houses sight unseen.
When you are money laundering, you are going to pay a cut here and there to get the money out ??
I agree Ben and I also think its been happening for some time and accelerating…My suspicion is its so big and global that there is no way the DOJ or any other justice department in other countries can monitor it…For every one they catch there maybe thousands that slip through…
The world is awash in cash both printed money & dirty money…Impossible to any comprehensive idea on which is which…So, its dirty money in and then maybe 10 years later, clean money out and like you said Ben, even if they lose 30% so what….70% on dirty money ain’t to bad…
‘Money laundering in Macau is a secret to no one. A mind-boggling 202 billion USD in dirty cash is estimated to be laundered every year in the former Portuguese colony. Slightly more surprising (but still not very) is that even China’s state-run banks are in on the game.’
‘At least two state banks have been implicated in a cash-for-gambling racket worth over 40 billion RMB. Hand-held UnionPay swipe-card devices are being used in Macau to provide cardholders with access to cash for gambling, disguising cash transferred as purchases of watches or jewelry by a third-party processing company.’
‘Since Beijing only allows 20,000 RMB to be moved out of the mainland at a time, visitors to Macau intent on getting money acquired through bribery or embezzlement out of the country will often circumvent this rule by depositing money with junkets in the mainland, who then ferry the money across the border to be used as credit. As well as funneling their ill-gotten gains through casinos, punters also go to the SAR’s ubiquitous pawnshops to buy watches or jewelry on credit, and then immediately sell them back to the shop for cold, hard cash.’
I agree Ben and I also think its been happening for some time and accelerating…My suspicion is its so big and global that there is no way the DOJ or any other justice department in other countries can monitor it
When you think about it, what incentive do we have to stop capital from flowing into our economy via laundering? It’s propping up some of our housing markets and it probably helps finance the deficits.
Why is money laundering illegal in the first place? Is it because by its very nature, there is some element of crime at its source, even if it’s just tax evasion? With this China exodus, there are many complications. I posted this yesterday:
‘Since former CCTV deputy director Li Dongsheng was sacked, the finance channel director Guo Zhenxi, current CCTV director Hu Zhanfan, and 100 CCTV staff members have been taken in for questioning. Some were since arrested. Commentators analyze that the anti-corruption campaign has spread from the Central Politics and Law Commission to the Propaganda Department. It is a further purge of the Jiang Zemin forces within the regime.’
‘Sources in Beijing revealed to an overseas Chinese website that almost all CCTV hosts are millionaires, and managers have at least 100 million yuan in personal assets. While CCTV cannot be shut down, the significant figures such as the station director Hu Zhanfan have been detained for investigation.’
‘Hua Po, Beijing political analyst: “The regime mouthpiece has been the hardest hit by corruption. CCTV, in particular, transferred assets to Zhou Yongkang when Li Dongsheng was the former deputy director. Xi Jinping intends to control the power of the ‘pen’ by conducting a cleaning purge of the media.”
‘Hua Po: “A number of high officials from the mouthpiece have committed suicide recently. There might be more ‘suicides’ or imprisonment. I don’t think Xi Jinping can tolerate the mouthpiece becoming an independent kingdom.”
This corruption purge looks more to me like crooks hammering other crooks. I started watching A Touch of Sin last night. If it’s anywhere near true, the globalist have tied us to a sinister bunch. What’s meaningful in the housing bubble context is that we have a bunch of not-so-nice people owning houses among us, and that this flow of cash will end. It’s not like an ongoing stream of drug money. This is the looting of a country - a generally poor country. China’s golden years are ending, and you can expect fewer cashed up Asians at the open house near you.
‘even if they lose 30% so what….70% on dirty money ain’t to bad…’
Except that you’re missing one key element in all of this:
Economic and political pendulums always swing no matter what. But why do both of them often swing so hard and violently, when maybe the underlying conditions may be soft but not really that adverse? IMO it’s because those in the drivers seat, if they have the ability, will ALWAYS overplay their hand.
If the dirty money would settle for a significant cut of the proceeds, then things might go on indefinitely, you might actually have one of these vaunted “soft landings”. But the greed sets in, and they’re being allowed to overplay their hands, and overplay they will, until the thing blows up. Again.
‘Former banker, Tan Sri Lin See-Yan is a Harvard-educated economist and a British Chartered Scientist who speaks, writes and consults on economic and financial issues.’
‘The lure of shadow banking is ever present. Bank of England governor Mark Carney points to shadow banking in emerging markets as the greatest danger to the world economy. That’s serious. Indeed, I receive regular requests to unravel this phenomenon and why it creates such an all-round “con-attitude” every time the concept surfaces.’
‘Why did it evolve? How large and pervasive is it? Will it lead to instability and precipitate a systemic crisis? One thing is certain; its operations are not necessarily shadowy; it’s global, it’s huge, it’s fast-moving, it’s popular but it’s poorly understood. It can be a powerful tool for good, but if badly managed, can be explosive.’
‘Chinese shadow banking – encompasses a huge network of lending outside formal channels and beyond the reach of regulators, such as trusts, leasing, business-to-business lending, credit guarantee outfits and money market funds, including on-line finance platforms, pawnshops and micro-credit.’
‘This vast volume of shadow banking activity was valued at US$4.4 trillion at end-2012 by the Chinese Academy of Social Sciences, or about one-half of China’s GDP. It accounted for 1/3 of new social lending in 2013. That’s huge by any standard.’
‘Many of them are respectable; others less so because of their blatant attempts to side-step the many rules about how much banks can lend to which companies and at what rates. Indeed, China’s concern is centered on trusts.’
‘They offer savers, frustrated by the low caps placed on bank deposits, returns up to 10%. They on-lend at much, much higher rates to firms with poor access to banks because of their low credit standing or they are in frothy industries (property or steel or coal) where regulators have judged to be “over-invested”, so banks are “curbed” from lending.’
‘Regulators now worry that investors will lose faith in trusts, prompting a run which may, in turn, spark a crisis of confidence in the face of overall economic slowdown. Ironically, trusts are regulated by the same agency CBRC (China Banking Regulatory Commission) that supervises banks. So trusts are now subject to tightening oversight, forcing monies to flow to less closely watched but weaker SBs.’
‘Fear of a downward spiral in which pricking the property bubble or the collapse of commodity prices can lead to panic among SBs, pushing housing and commodity prices and overall growth down further…The dilemma for China’s regulators is that while the impact of manoeuvres by SBs can spread to the real economy, many trust loans are secured with decent enough collateral, mainly property so that losses should be manageable. The problem is timely access to liquidity. The real threat remains moving too forcefully by regulators to rein in shadow lending in the face of default, accidentally precipitating a run on SBs.’
‘The irony is that China can really benefit from the activities by certain forms of shadow banking, especially securitisation. After all, China needs to develop deep capital markets and here SBs can be managed to make finance safer. Unfortunately shadow banking has already made quite a mess.’
‘Regulators have so far moved warily and, in my view, allowing an occasional minor real default can do some good. Calibrating their activities is tricky. Realistically, there is no easy way out of this mess.’
“China needs to develop deep capital markets…”
Deep in the shadows?
If their expansion is built on sand, how much does it matter how deep it is?
‘When visiting friends in China’s capital, environmental activist Wu Lihong must slip away from his rural home before sunrise, before the police officers watching his home awaken. He rides a bus to an adjacent province and jumps aboard a train just minutes before departure to avoid being spotted.’
‘In a neighboring province, veteran dissident Yin Weihong finds himself hauled into a police station merely for keeping in touch with old friends from the 1989 Tiananmen Square pro-democracy movement. While he’s technically a free man, the treatment makes it virtually impossible to keep a job or have a normal home life.’
‘A quarter century after the movement’s suppression, China’s communist authorities oversee a raft of measures for muzzling dissent and preventing protests. They range from the sophisticated — extensive monitoring of online debate and control over media — to the relatively simple — routine harassment of government critics and maintenance of a massive domestic security force.’
‘And while Wu can use some ingenuity to visit his friends in Beijing, he said, “As soon as they find I’m gone, they send officers to bring me back. You try to adapt, but it takes a real toll on your family and on you psychologically.”
‘Shortly after The Associated Press interviewed him, Wu was taken from a friend’s home and interrogated for 24 hours straight.’
‘Despite these efforts, China sees many of what it calls “mass incidents” threatening social stability. One Chinese sociologist, Sun Liping, has estimated there are about 180,000 per year, ranging from organized marches to spontaneous protests and even violence sparked by anger over working conditions, corruption, environmental degradation and ethnic unrest.’
‘Meanwhile, the party has tackled many of the major contributing causes of the 1989 protests, devoting funds and attention to fighting corruption, boosting employment and housing and even holding down pork prices. That has eliminated many sources of discontent, though many Chinese remain deeply cynical about corruption among the newly rich and political elites.’
“They realize that economic growth is not enough, so the whole strategy is to avoid cases of large-scale unrest through an entire social security package,” said Joseph Cheng.’
‘China shares had their worst day in more than two weeks on Wednesday, dragged down by the property counters as investors fretted that soft demand for homes will increase developers’ problems.’
‘The CSI300 property subindex declined 1.9 percent after mainland media reported record-low sales turnover in major cities during the past holiday weekend, adding to concerns that a housing oversupply will result in more price cuts.’
‘China Fortune Land, the top CSI300 percentage loser, tumbled 6.1 percent. Property giants Poly Real Estate Group and China Vanke lost 2.8 and 2.4 percent, respectively.’
‘Recently-hot nickel shares cooled. Both Jilin Ji En Nickel Industry and Chengdu Huaze Cobalt & Nickel Material slumped the maximum allowed 10 percent.’
‘In east China’s Nanjing, a postgraduate surnamed Li is interested in buying a four-bedroom apartment. Li is able to pay a 70-percent down payment, but still needs to apply for bank loans to complete the payment. So far, the application remains unapproved.’
‘Meanwhile, cash-strapped property developers in small cities have also been asked to fulfill requirements raised by the banks such as making deposits on fixed dates. Failing to do so may lead to down payment rises and lending delays, which will further slow developers from receiving sales money, according to Xu Jin, a credit lending expert at a financing information website.’
‘Zhu Zhongyi, vice president of the China Real Estate Industry Associations, also said in a research note that the slowdown in mortgage lending and property development lending has exacerbated the general deceleration in the real estate market.’
‘Li Yujia, an analyst from Shenzhen Real Estate Research Center, noted that commercial banks used to issue a large amount of credit in the heyday of real estate. “Now the banks have to bear the downward risks of the property market. That’s why they have taken the conservative track,” Li said.’
China spent the last 20 years building up a trade surplus and using the proceeds to buy U.S. bonds. Now they have 4 trillion dollars worth of foreign paper that is totally useless to them. If they sell even a small portion of those bonds their currency will rise and their industry will collapse. Who would have thought that communist bureaucrats would make such bad businessmen?
As G7 leaders meet, they have a lot to mull over. China is not who the world looks to. The backbone of the world America is seeing its business hold on by a thread. Increase in meat and coffee will drive many restaurants and chains locations out of business.
Auto companies have so many regulations I won’t be surprise if we see another round of auto divisions fold.
The world I believe is 7 billion now, most are not making it, have to wonder if the 1% can hold them off, don’t think so, this is more then serious.
Sinclair Lewis said it best, The yellow race will bury us, we turned out to be our own worse enemy, a out source country and call center nation?
Apparently all 7 billion are making it.
“In the aftermath of the crackdown on student protesters on June 4, 1989, China’s leaders made a bargain with their people: We will make you richer, as long as you no longer dissent. After the crash of Lehman Brothers, the regime had to go to extraordinary lengths to keep up its end of the bargain, pumping up what was already the world’s highest investment rate. In doing so, China itself became a Lehman economy — powered by shadowy funding sources, off-balance-sheet investing and unconvincing claims that all remained well.”
The aftermath of this situation may be rather unpleasant.
The issue is not so much how China’s economy is powered as whether what they build has any fundamental investment value.
Maybe if they build it, they will come — i.e. any day now a huge flood of peasants is destined to pack up their belongings and populate the millions and millions of empty newly constructed housing units in China’s ghost cities.
If the above doesn’t pan out, I guess we are destined to soon discover the real value of millions and millions of empty housing units.
“At the same time, potential buyers have adopted a ‘wait and see’ attitude after seeing the continued price drop as real estate agents began adopting the strategy of ’surrendering part of the profits in exchange for more sales.’”
Once established, deflationary psychology is very hard to break.
Nonetheless I suspect the world’s central bankers have various shovel-ready financial engineering schemes for just this purpose.
“Property price cuts in Beijing are much higher than in the neighboring cities during May. The house oversupply is over 80 percent in 35 major cities. Beijing Central Line real estate chief analyst Zhang Dawei: ‘Most house buyers are hesitating because Beijing credit is relatively tight, but low-cost affordable houses are available. The house market might go into a tailspin if there is no large credit release and bailout with continuous price decline.’”
This Zhang Dawei rocks!
It seems obvious policymakers have themselves in an irrevocable conundrum once the masses base their home purchase decisions on expectations for bailouts once price declines set in. Following through with the expected bailout will only encourage more ill-conceived speculative housing purchases and further overbuilding. Withholding the bailouts will result in a hard landing and an angry populace.
What to do, what to do…