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.’”




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62 Comments »

Comment by Combotechie
2014-06-09 04:39:15

“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.”

And ground on, and ground on, and ground on …

Cash rules in such an environment and debt sucks - debt really, REALLY sucks.

Comment by Combotechie
2014-06-09 04:43:52

“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.’”

And our guys (and a gal) in the Fed are following the same route because … because … because …

… it’s all they know.

Comment by snake charmer
2014-06-09 07:26:43

This is why it infuriates me to see the financial media hanging on the Fed’s every word. We easily could have an algorithm write the typical Fed statement. Japan is in obvious decline in every way, defeated by its own ideology. As we will be.

 
Comment by FavelaTouro
2014-06-09 07:50:37

Is there a list of what the BOJ did after their own QE? Did they wind it down or taper? Did they do something else that would be next up in our stolen playbook?

Comment by Ben Jones
2014-06-09 08:16:17

‘what the BOJ did after their own QE’

I can answer to a certain extent because I was in college studying economics and accounting. Many of these non-performing corporate loans were shuffled onto off-shore entities. Like Enron did. The government allowed to occur. So the Japanese balance sheets looked clean, while there were reflections of assets that would never be paid. I assume they are still there. Zombie companies. They got 20+ years of recession.

One economics professor told us that this situation was not possible in the US because our accounting rules would never allow it. However, Fannie and Freddie set up over a thousand off-shore entities. We never found out what happened to those. The GSE’s and FHA, remarkably, are still backing most of the loans today! The FASB rules were changed so banks didn’t have to recognize losses on house loans. And the Fed buys MBS to keep the whole system liquid. This arrangement is actually Japan’s setup on steroids. By design, of course, because the modern central banker complaint about the “Japan Model” is they didn’t go far enough.

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Comment by Whac-A-Bubble™
2014-06-09 21:32:08

“So the Japanese balance sheets looked clean, while there were reflections of assets that would never be paid.”

Same or different than Fed-funded MBS purchases through balance sheet expansion, a substantial share of which doubtless will never be repaid?

 
 
 
Comment by Neuromance
2014-06-09 15:23:37

Combotechie: And our guys (and a gal) in the Fed are following the same route because … because … because …

… it’s all they know.

They push debt because it is profitable for themselves and the cronies. That’s it. Then they entice the population into taking on more debt.

But entice is a bit of a weak term. Why? The government steps in under the banner of helping the poor (see medical care, education, housing). This pushed up prices of these necessities for everyone else. Which then strongly encourages them to use debt if they wish to have these items. On top of it, the government insures private debt, thus pushing prices higher.

It is a politically resolvable problem however.

 
 
Comment by Whac-A-Bubble™
2014-06-09 06:28:24

“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.’”

Is there a qualitative difference between when Western nation governments employ ‘Quantitative Easing’ and when the CCP authority ‘prints money’ in an attempt to save their economy?

I’m missing it.

Comment by azdude
2014-06-09 06:31:00

same thing buddy. quantitative easing is a nice way of saying , we will devalue the currency so we can prop up asset classes for our rich friends.

Comment by Ben Jones
2014-06-09 06:57:53

But what about when everybody is doing it?

‘Germany’s DIW institute is calling for €60bn of bond purchases each month, equal to 0.7pc of total EMU sovereign debt, and roughly in line with moves by the US Federal Reserve. 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.’

I woke up this weekend thinking about the idea that you can’t print wealth. If you could, every nation would be rich. So what happens when many trillions are created? Old theories would suggest rampant inflation, including wage inflation. But we have ‘the nagging fear that QE itself may be causing deflation’.

How would this happen? Over-capacity. If you have vast segments of economies producing stuff no one needs, there is no wealth being created, thus it’s deflationary.

But the new money has to go somewhere. Is it any wonder that bonds, stocks and real estate have soared?

These central bankers are digging their own graves. Try not to end up with dirt hitting your face.

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Comment by Whac-A-Bubble™
2014-06-09 07:05:06

“Over-capacity. If you have vast segments of economies producing stuff no one needs, there is no wealth being created, thus it’s deflationary.”

At some point, the global central banking cartel may finally have to throw in the towel and admit that fundamentals actually matter.

 
Comment by Ben Jones
2014-06-09 07:10:37

“Treat economic causes, not symptoms”

“Michael J. O’Connell’s letter of May 28 observed that only government has the coercive authority to rebalance the economy. But as his proposed solution addresses the symptoms, and not the underlying causes, perhaps there is a better way.”

“There are additional contributing factors that led to the current economy that were not discussed in his letter, but which are worth considering before deciding upon a course of action. It was the government, through the easy money policy implemented by the Federal Reserve, which provided the fuel to inflate the multi-trillion dollar housing bubble. It was government action, through the Troubled Asset Relief Program (TARP), which then bailed out the affected institutions. It is government action today, through numerous and unprecedented Quantitative Easing (QE) programs, which have kept interest rates at artificially low levels and continue to distort our economy.”

“Initially, those with assets to invest have benefited the most from these QE programs, as can be seen in the record-setting prices for artwork and basketball teams. Longer term, it seems likely that QE is likely to raise all prices, which will further harm those with the least ability to increase their income.”

“As QE is unprecedented, history can provide only limited guidance to how it will end. But economic theory is clear in telling us that distorting the money supply, which QE does, leads to malinvestment, and will likely result in a correction at some point in the future. While it seems unlikely that those with assets will be harmed to a greater degree than those without, it seems likely that all will be harmed.”

“So, while we can indeed implement government programs to redistribute wealth, this would merely shuffle the deck chairs, so to speak, and would not address the underlying issues that led to the current situation. A better course of action would be to undo the harmful government policies, which have already been implemented, in order to allow the economy to heal itself.”

 
Comment by Ben Jones
2014-06-09 07:33:43

To finish my thoughts on this: if wealth can’t be printed, what happens to all this money? It has to go away. Inflation would be one route. But if we’re stuck in a self-perpetuating deflationary cycle, this isn’t going to happen. The other way would be for the avenues the money took to lose value permanently. (In other words, poof). If this is correct, we could then expect price declines corresponding to the amounts created, in the areas where it ended up.

So China made up 15-20 something trillion$. The US, we’re told, at 4 trillion$. Japan, another couple few trillion$. I don’t know how much in the EU. All in all, I wouldn’t be surprised to see declines in assets in this ball park.

Who is going to lose this money? The people that borrowed. The institutions that lent it. The companies engaged in the activities involved. And if there is a systemic reliance on this funny money, economic damage could exceed the money printing.

 
Comment by snake charmer
2014-06-09 07:37:12

It’s incredible to me that China’s existing residential areas can house half the world’s population. And “growth” is supposed to continue? Somebody with a mathematical bent can do the math for me, but I’m guessing that 8% growth in housing stock per year means that China will be able to house everyone in the world in ten years or so.

This year is the 100th anniversary of WWI. These choices by the world’s economic policymakers aren’t killing millions of people, at least not directly, but in their own way they are just as mad.

 
Comment by AmazingRuss
2014-06-09 09:10:44

“At some point, the global central banking cartel may finally have to throw in the towel and admit that fundamentals actually matter.”

Never. If push comes to shove, our puppet leaders will start screeching about how “THEY” are to blame… the Chinese, the Russians, the Indians, it doesn’t matter who. The offending party will be happy to have a bad guy to shift the blame to. We’ll embark on World War 3, a few billion will be murdered and the board will be reset for the next game. We’ll destroy all the stuff we built that we didn’t need, and then some.

War is what happens when society breaks, and when this economic film flam finally flies apart, global society is going to shatter. The bankers perpetrating the fraud will be responsible for mass murder on a scale orders of magnitude larger than humanity has ever seen, yet they will never be blamed for it, and will profit hugely from the slaughter.

Humanity will never rise up to defend itself from the real threat… they’re too busy crowing about their 4% low down payment mortgage on their wildly appreciating stucco boxes. They’ll never make the connection that the bombs that obliterate their boxes were purchased with the profits on their loans, or that the war machine that shreds their offspring was built by their own stupidity.

I used to feel sorry for stupid people, but I’ve come to realize how dangerous they are.

 
Comment by Blue Skye
2014-06-09 10:12:56

Another way to look at it is that the war has already happened. Instead of untold millions losing their lives suddenly, they have insidiously lost their lives by slaving under debt. Instead of having to clean up the rubble of bombed buildings, we will have to tear down useless houses, malls, factories and mills. Instead of there being too little and us fighting over it, there is too much of everything. The world is upside down.

 
 
 
 
Comment by In Colorado
2014-06-09 07:38:56

If it’s inflation they want, then all the central banks have to do it print money and hand it out to the proles as gifts, not as loans.

Comment by AmazingRuss
2014-06-09 10:02:52

They don’t want inflation. They want slaves.

Comment by Carl Morris
2014-06-09 20:18:11

They want slaves.

Yup. The instinct to enslave is strong.

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Comment by EastCoastLurker
2014-06-09 05:38:43

I have not been following this blog for several years and looked it up to see if there was discussion about China. Thanks Ben for keeping it going and remaining current. HBB has the best information and comments of any site that I know.

I assumed that the wave of Chinese buyers and the long anticipated correction in Chinese real estate were related. For me, these reports confirm it.

This is going to be interesting. Perhaps the final unraveling.

Comment by Ben Jones
2014-06-09 06:26:29

‘China residents Chun Lan Li and Shi Lin Zou planned to buy a retirement home near New York City to be near their son and daughter, who have been living and working in the city.’

‘But after the married couple traveled to the Grand Strand while on vacation for the Chinese New Year in February, the plan changed. They came across Black Bear Golf Club, and the search for a home became a new search for a home in the vicinity of the golf course they now own.’

‘Li and Zou said they will keep the course in operation and currently have no plans to build housing or commercial developments on the property. They plan to maintain dual residences on the Strand and in Nanjing. The restaurateurs from the city of Nanjing have sold the bulk of their restaurants but still have a minor stake in some.’

‘No one in the family plays golf, but they all plan to learn now that they are course owners.’

Comment by snake charmer
2014-06-09 08:24:17

I recall that Japanese bought the Pebble Beach golf course near the peak of Japan’s property bubble in the 1980s, which should have been an indication that things were well out of hand. Here’s more from Ben’s link:

“They closed last week on the $1.5 million purchase of the 25-year-old, 6,787-yard Tom Jackson design that sits on 186 acres off S.C. 9, becoming the third Chinese person or couple to buy a Strand course in the past year.”

One of the other golf course owners is identified only as a mysterious “Mr. Pan,” as if this was a Bond film.

Nothing from the article on the source of this couple’s wealth, or that of the other new owners. Does it matter?

 
Comment by In Colorado
2014-06-09 09:30:46

They came across Black Bear Golf Club, and the search for a home became a new search for a home in the vicinity of the golf course they now own

The article says that they paid 1.5M for the golf course, which is the price of a mid range Silly Valley house, and that they paid for it by selling some restaurants back home (they must be pretty successful restaurants to fetch that much, or perhaps that is just their official story).

It will be fun to see what they will do with this white elephant they bought. Does it cash flow positive? I guess if he wanted positive cash flow he should have bought some trailer parks. Of course telling the relatives back home that they own a golf course has a lot more cachet than saying they are slumlords.

Comment by oxide
2014-06-09 10:54:01

Why don’t they just carve out a piece of the golf course and build a new home right on it? For $50/ sq ft?

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Comment by Doom
2014-06-10 06:56:39

I got a better one, why doesn’t China build $55 ft homes in their rice fields and hire HA as the superintendent of the project?

 
Comment by Housing Analyst
2014-06-10 12:17:10

Aww how cute. An underwater donkey love fest.

 
 
Comment by snake charmer
2014-06-09 13:00:46

Thanks. In my ire, I missed that they were “restauranteurs.” And that does seem rather cheap for an eighteen-hole golf course close to a resort town, although I don’t golf and don’t have any idea what such a property would cost.

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Comment by Arizona Slim
2014-06-09 14:20:31

I think that a lot of these wave-buyers are getting the eff out of China while the getting is still good. They know their country’s history, especially the parts relating to the Cultural Revolution and the Communist takeover. They don’t want to be caught on the wrong ends of the bayonets this time around.

 
 
Comment by taxpayers
2014-06-09 05:49:04

song weeping
sum ting wong

they’re all here !

japans new sales tax should kill their last keynsian whirl

 
Comment by Ben Jones
2014-06-09 06:02:04

‘The real estate bubble in China appears to be on the edge of bursting and the China Insurance Regulatory Commission (CIRC) has decided to prick the bubble to avoid a soft landing, reports our Chinese-language sister paper China Times.’

‘In a notice issued by the CIRC on June 5, ten regulations will be enforced to downsize the risk of real estate bubble. Major insurance companies received the notice in late May, with the regulations covering insurance companies holding real estate categorized as investment directly, or indirectly through stockshares.’

‘The only thing for certain is that real estate is no longer a profitable investment, according to an analyst at Cinda International Holdings. There have been huge pressures in the real estate market, the analyst said, citing overdeveloped cities and a trailing risk chain that includes insurance products such as entrustment and infrastructure. Among these products, entrustment is the most rampant, and most vulnerable to overevaluation through a variety of channels.’

 
Comment by Ben Jones
2014-06-09 06:09:20

‘Mainland firms are finding it difficult to secure financing by selling accounts receivables to banks. This follows one of the big four state- owned lenders discovering that the owner of a telecoms equipment factory had faked the numbers of invoices, sources said. The matter came to light only after the owner committed suicide.’

‘The suicide incident comes as mainland private enterprises face financial difficulties and are forced to turn to credit guarantee firms and usurers, which charge double-digit or even higher rates of interest.’

 
Comment by Ben Jones
2014-06-09 06:13:25

‘GDP growth in certain parts of China’s industrial heartland plummeted to as little as 0.1 percent in the first quarter of this year, according to the National Bureau of Statistics, with provinces linked to heavy industry such as coal mining being especially hard hit.’

‘In one of the hardest hit regions of the country, GDP growth in Taiyuan, Shanxi has slid from 12 percent a year ago to essentially zero today. Q1 economic growth for Shanxi Province as a whole (5.5 percent) was also among the worst nationwide, along with Heilongjiang, Hebei and Ningxia. These figures come in the wake of slowing demand for coal nationwide and anti-pollution measures aimed at curbing production. Shanxi produced 25 percent of China’s total demand for coal last year.’

‘Among the provinces, Heilongjiang missed its target for Q1 GDP growth by far and away the biggest margins—a whopping 5.6 percent. This was attributed to a “very rare fall” in petroleum output, a critical component of the provincial economy. Hebei, which surrounds Beijing, saw growth drop to 4.2 percent, nearly half of that from one year ago.’

‘These figures come even after Q1 GDP targets for 22 provinces were lowered following the 2014 annual meetings of the National People’s Congress and Chinese People’s Political Consultative Conference. While in the latest World Bank assessment, China’s manufacturing industry appears to be back on track, the greater worry now is that repeated slowdowns such as this one will perpetuate an unsustainable level of government-led investment and credit expansion.’

Comment by Whac-A-Bubble™
2014-06-09 06:43:04

‘GDP growth in certain parts of China’s industrial heartland plummeted to as little as 0.1 percent in the first quarter of this year, according to the National Bureau of Statistics, with provinces linked to heavy industry such as coal mining being especially hard hit.’

Did they have a bad winter over in China like we had in the U.S.?

Comment by Carl Morris
2014-06-09 20:22:14

Did they have a bad winter over in China like we had in the U.S.?

Not in Shanghai.

 
 
 
Comment by Blue Skye
2014-06-09 06:13:50

“…gently deflating a property boom that has pushed total credit from $9 trillion to $25 trillion in five years…”

Gently would be improbable. More than half of the miracle GDP over five years was pure credit. 40% of government revenue is selling the people their own land. Enough housing is being built right now to house over twice their population.

When these guys have a going out of business sale it is going to be epic.

Comment by Arizona Slim
2014-06-09 14:22:30

Back in the day, I took a course on the Chinese economy. It was taught by a professor who was an expert. He repeatedly told us about the challenges of teasing the real story out of statistics supplied by the Chinese government. He was too nice of a guy to say that the Chinese were lying, but that was the implication.

Comment by Blue Skye
2014-06-09 15:25:30

From my experience, lying is not immoral in the Chinese tradition, only failing.

 
 
 
Comment by Ben Jones
2014-06-09 06:17:22

‘The copper price dropped 3.5% last week after a weaker than expected gauge on manufacturing activity in China together with a probe into the use of metals in trade finance deals rattled the market. As these deals are being unwound it could lead the dumping of copper onto the market that would otherwise have been tied up in financing deals leading to sharply lower prices. China consumes 42% of the world’s copper.’

‘The process is already playing itself out in iron ore which has slumped 20% over the past month. Iron ore was hit first because apart from the credit clampdown China is also targeting the steel industry’s chronic overcapacity and environmental impact as part of its “war on pollution”.’

‘Should stockpiles of iron ore of more than 110 million tonnes and the “off-market” copper warehouse inventories be released, both commodities have further to fall. Copper plummeted 8% over just three trading days during the March slump which was prompted by China’s first ever corporate bond default and markets could now be entering a particularly rough patch as banks start to call in dubious loans.’

‘Capital Economics sees the correction this way: “If the historic relationship between copper and iron ore prices is to be restored, it is likely to take the form of a renewed fall in copper prices.”

Comment by Ben Jones
2014-06-09 06:21:04

‘Banks looking into suspected fraud involving metals stored in China as collateral for loans are expanding their probe into more warehouses amid worries the problem is more widespread, people familiar with the investigation said.’

‘A half-dozen banks, including Citigroup Inc. and Standard Chartered PLC provided loans to trading firms that were backed by metals such as copper and aluminum stored at one of China’s biggest ports, the people said.’

‘Banks fear a private Chinese company may have used the metal as collateral to get multiple loans, potentially defrauding the lenders and trading firms. If the problem is more widespread, banks could cut back on financing for commodities in China, cutting demand and roiling global markets.’

‘The potential fraud raises questions about the integrity of commodities warehouses in China, one of the world’s largest users of commodities, and how trading is financed.’

‘There has been concern among policy makers that commodities in China are being used to get financing for cash- strapped companies. As credit tightens and the nation’s economy slows, some investors worry that the commodities will be dumped onto the market as banks seize collateral, potentially knocking down prices.’

‘There is also concern that demand in China will collapse because so much of the metal had been stockpiled in warehouses.’

 
Comment by Blue Skye
2014-06-09 06:29:23

“…owner of a telecoms equipment factory had faked the numbers of invoices, sources said. The matter came to light only after the owner committed suicide.”

Iron, copper, coal, aluminum, telecoms, condos…hard to imagine there being many honest stones in the giant pyramid of corruption.

 
 
Comment by Whac-A-Bubble™
2014-06-09 06:32:15

“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.”

Incredible if true. Is there any independent evidence on this?

Comment by In Colorado
2014-06-09 09:33:49

That would mean they have enough surplus housing for 2 billion people.

Heh, if they think the traffic jams are bad now.

 
 
Comment by Whac-A-Bubble™
2014-06-09 06:36:12

“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.”

If an economic theory causes consternation, does that somehow invalidate it?

Comment by iftheshoefits
2014-06-09 07:24:56

The central banks now seem to think that they determine economic theory rather than operating within its bounds.

As long as they’re able to fabricate enough economic statistics to make a case that what they’re doing is ‘working’, it will continue. When the real economic situation can no longer be disguised in this way, it will end.

Comment by Whac-A-Bubble™
2014-06-09 21:35:50

“The central banks now seem to think that they determine economic theory rather than operating within its bounds.”

That’s right.

And how crazy is that?

 
 
Comment by snake charmer
2014-06-09 08:28:46

My theory always has been that somebody with the Fed periodically and half-heartedly will question the entity’s direction, so that the Fed might try to remain legitimate when this all blows up in its face. Maybe the governors draw straws.

 
 
Comment by Whac-A-Bubble™
2014-06-09 06:40:19

“The way we are going, the whole world will end up with zero interest rates or some variant of quantitative easing before long.”

Ahem.

Comment by Whac-A-Bubble™
2014-06-09 06:45:39

Markets More: ECB
The Era Of Negative Interest Rates Has Begun
Mamta Badkar
Jun. 5, 2014, 7:46 AM
REUTERS/Francois Lenoir
European Central Bank President Mario Draghi waves as he arrives at a eurozone finance ministers’ meeting in Brussels, Feb. 17, 2014.

In a bid to counter weak growth and prevent deflation, European Central Bank chief Mario Draghi has lowered main interest rates.

Specifically, the ECB cut the deposit rate to -0.1%, from 0.0%, effective June 11.

This is a historic development, as it’s the first time a major central bank has cut any main interest rate to negative in a bid to spur lending and spending.

The idea is that if banks aren’t being rewarded with a good deposit rate by parking their reserves at the central bank, then they will be more likely to lend it to households and businesses.

During his press conference, Draghi pointed out that “the rates we’ve changed are for the banks, not for the people. …It’s wrong to think we want to “expropriate savers.” But he said the decision to lower rates for households would have to come from the banks not the ECB.

Comment by snake charmer
2014-06-09 11:07:07

Is lack of credit really a problem? I thought the problem was a lack of credit-worthy people and businesses who wished to borrow. “It’s wrong to think we want to ‘expropriate savers.’” Nothing is confirmed until it is officially denied.

I’m trying to think of what the next move will be when this doesn’t work. Forcing people to take out loans? Having an expiration date on currency?

Something’s going to have to happen because the EU rapidly is running out of political legitimacy.

Comment by Ed
2014-06-09 15:04:53

Lack of credit is not the problem. It’s a lack of credit demand. Even at an interest rate of 0, there is a repayment factor. Once you have already reserved future income for debt repayment, you cannot use that income for more debt. And because the household incomes are stagnant or declining, they cannot take on more debt. We’ve reached a saturation point with debt.

Debt is also psychological. Once you have a negative experience (get behind on bills, etc), you will be more likely to reject future debt based on that experience. Hence why credit card debt keeps declining, but student loan debt is ballooning (most kids student loans are their first taste of debt).

(Comments wont nest below this level)
 
 
 
Comment by Whac-A-Bubble™
2014-06-09 06:49:52

Monetary Policy
Europe Gets Negative Interest Rates. What Does That Even Mean?
JUNE 4, 2014
Neil Irwin

First there was ZIRP. Now get ready for NIRP.

The first is “zero interest-rate policy,” the strategy for trying to stimulate economic growth that the United States has undertaken for the last five and a half years (and the Bank of Japan much longer than that). The second is “negative interest rate policy.” And that’s what the European Central Bank put in place on Thursday for the 18 nations that use the euro currency.

That makes this a good moment for the curious mental exercise of pondering what a negative interest rate even means, and why it’s something that monetary policy mavens have been talking about more than they would like over the last half-decade.

What is a negative interest rate?

When a bank pays a 1 percent interest rate, it’s clear what happens: If you deposit your money at the bank, it will pay you a penny each year for every dollar you deposited. When the interest rate is negative, the money goes the other direction.

Comment by In Colorado
2014-06-09 07:43:53

Sounds like a ploy to get people to purchase government bonds

 
Comment by Blue Skye
2014-06-09 09:57:13

Consider that if there is actually no money, NIRP is theatre.

 
 
 
Comment by Ben Jones
2014-06-09 07:07:22

‘A lengthy property market slump and low interest rates are threatening the future of a uniquely South Korean home lease system that traces its roots back to the 19th century. Instead, the tenant forks out a hefty, up-front deposit — typically around 40 percent of the property’s value — which is then refunded in its entirety, or renewed, after two years.’

‘At its peak in the mid-1990s, two-thirds of all housing rents and leases in South Korea were using the jeonse system. The benefit for landlords was a large capital sum they could invest in high-yield opportunities that were plentiful during the country’s rapid industrialization in the 1970s and 80s, when banks often offered double-digit interest rates.’

‘Those investment opportunities included financing second or third properties purchased as a speculative investment on the back of fast-rising housing prices.’

“Essentially, the jeonse deposit played the role of a bank loan, which the home buyers could pay back in the future when they amassed enough savings and were ready to actually move in,” said Kwon Joo-An, analyst at Seoul-based Korea Housing Institute.’

‘But some didn’t bother to move in. Speculators would snap up several jeonse-leased houses at discount prices and then sell them at a huge profit, riding on and further fanning a real estate price surge.’

‘In 1978, property prices soared 49 percent across the country, 79 percent in six main cities and a stunning 136 percent in the capital Seoul alone.’

“Back then, jeonse was also a popular way to increase personal wealth,” said Kwon. “That’s what sustained the jeonse system for decades — the belief that property prices would just keep rising.”

‘Since 2008, both interest rates and property prices have fallen — seriously undermining the twin foundations that sustained the jeonse system. Housing prices were driven so high during the boom years that, even though they have fallen significantly, they remain out of the reach of many young South Koreans.’

 
Comment by taxpayers
2014-06-09 08:24:33

chanos(cina) and Whitney (county/muni) were right , just delayed in currency wars

 
Comment by Ben Jones
2014-06-09 15:26:42

‘As dusk descends upon the Singapore skyline, the excess capacity building up in the private housing market is evident. Dark patches in some condominium developments completed six to 12 months ago, or even longer, point to significant vacancy.’

‘After the global crisis, investors sought refuge in trusty assets such as real estate. Fuelled by the low interest rate environment, some took to hoarding property at new launches and are hence not bothered whether they can find a tenant after taking possession of their units, say observers. Some high net worth foreign buyers treat their Singapore property as a holiday home and leave it unoccupied most of the time.’

‘But there are others who leave units vacant because they are not able to find tenants. As Ms Lee notes: “Competition for tenants is increasingly intense, with both demand and supply factors at work. On the demand side, changes in labour policies have slowed down the flow of foreign professionals into Singapore while on the supply side, there is a higher-than-average number of private home completions.”

‘Developers left with unsold units, especially in the slow high-end segment, also contribute to vacancies as these projects are completed. Other factors may also be at play in specific projects. But the overall trend of rising vacancies and softening rents is clear amid climbing private home completions since last year.’

‘The 13,150 private homes that received TOP last year was 27.3 per cent above the previous year’s 10,329 and 40 per cent above the past 10-year average of 9,395. The figure for Q1 this year was 4,114 and the full-year tally is expected to hit 17,138, based on estimates submitted by developers to the Urban Redevelopment Authority. Thereafter, completions are slated to climb further to 21,738 next year and 26,252 in 2016 before easing the following year.’

‘URA figures show that the pool of vacant private homes has risen to 19,284 at end-Q1 2014 from 18,003 at end-Q4 2013 and 14,532 at end-Q1 2013.’

It wasn’t even a year ago that many of these Asia reports talked of a shortage of housing.

 
Comment by doom
2014-06-09 19:57:58

QE… Among the worse two letters a capitalist country wants to employ. In military terms QE is the equivalent to a full retreat.

The Fed either implements it or takes a chance,the country can pull itself out and who gets hurt, gets hurt, the chance was to great.

What will it mean in the future the jury is still out, but when all is said and done, most likely it will be thought as a dire measure that didn’t play out?

Inflation will be much higher, interest rates will be ahead full steam, job creation will be better, but pay will not be very good, 1% rich will be in even further control and the country will be even more restless. A DANGEROUS SITUATION FOR A DEMOCRACY TO BE IN.

If a Democratic President is elected, then look for 2016-2017 to make 1929 look like a cake walk, I’m very concerned.

Comment by Avocado
2014-06-09 21:55:11

is that because Bush did not participate in QE, growing the gov and wildly spending money he did not have? Reagan too? ?

Take a look at the gov jobs report under each pres.

 
Comment by Avocado
2014-06-09 21:55:11

is that because Bush did not participate in QE, growing the gov and wildly spending money he did not have? Reagan too? ?

Take a look at the gov jobs report under each pres.

 
 
Comment by Doom
2014-06-10 04:42:23

Keep blaming the past, why not go back to FDR?

Excuses are just that, this administrtion has been a mitigated disaster.

Comment by Avocado
2014-06-10 08:38:06

It is not just blame, it is history.

Obama has recovered all the lost (Bush jobs) and the stock market is at record highs.

Reagan tripled the deficit and give amnesty to millions of illegals. (shhhhh, it is the past) The GOP loves to talk, talk, talk. BUt their action state otherwise.

 
 
Comment by Jack Connor
2014-06-10 18:53:31

As I read the posts I find myself cackling. I haven’t cackled in a long time. I think my first was in 2004 and continued for a few years. After the carnage I was hrrrrumphing. It feels good to cackle again. I suspect the guys flying over Nagasaki cackled too. One more time.

 
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