Money-Laundering, Housing Trick: An Open Secret
ECNS reports on China. “Record-high payments will come due for China’s real estate investment trusts (REITs) next year, but they may not have the money to pay back their investors, the Shanghai Securities News said. Data from the China Trustee Association show that as of March 31, unpaid REIT amounted to 115 million yuan ($18.5 million), which was 10.4 percent of all industries’ unpaid trust products. Trust products worth 203.5 billion yuan ($32.8 billion) will enter maturity in 2015, doubling this year’s volume, according to Use Trust, a website specializing in the trust industry ‘China’s REIT default is unavoidable this or next year,’ said Yao Wei, economist at Société Générale’s Hong Kong arm. He said the industry is at a turning point, with a huge imbalance in demand and supply.”
“China is taking measures to crack down on off-balance-sheet lending, or shadow banking, which includes trust companies and wealth management products issued by banks. However, given the amount of loans and lending that developers have, Yao said ‘the cooling property market will definitely take a toll on China’s financial system.’”
The Taipei Times. “A looming correction in the Chinese property market poses the biggest threat to China’s economic growth, which may show more evident signs of slowdown next quarter due to an imbalanced supply and demand, Hong Kong-based UBS chief economist Wang Tao said. ‘The imminent corrections would have more to do with an overestimated demand from urbanization rather than a volley of tightening measures,’ Wang told a teleconference.”
“The urbanization trend has fostered a real demand of 3 million apartment units, whereas the builders and developers have put 11 million on the market, steeply raising inventory in cities across the country, she said.”
From China Daily. “For Li, a Beijinger who has grown up and lived in China’s capital city all her life, the city’s skyrocketing housing prices turned out to be a windfall. Last year, she sold her only living space in the city, an old two-bedroom apartment in Shuangjing, Chaoyang district, for 3 million yuan ($483,300), which in turn made it possible for her to buy six houses in Houston, Texas in the US.”
“Li rents out each of her properties in Houston for more than $400 per month, and still lives in her original apartment in Beijing, but this time on rent. Her rental income collected in the US minus the amount she pays for her apartment in Beijing comes to 10,000 yuan per month, meaning that Li’s annual earnings from her ‘housing trick’ will be more than 100,000 yuan.”
“Of course, Li is not the only Chinese enthusiastic about the US property market. Buyers from the Chinese mainland, Hong Kong and Taiwan purchased about a quarter of international sales of US properties, according to a report by the US-based National Association of Realtors (NAR). For the period April 2013 through March 2014, the estimated investment from the Chinese totaled $22 billion, with 76 percent of purchases in cash, said the report.”
From Bloomberg. “For years, wealthy Chinese have been transferring billions worth of their money overseas, snapping up pricey real estate in markets despite their country’s currency restrictions. Now, one way they could be doing it is clearer. Last week, when China Central Television leveled money-laundering allegations against Bank of China Ltd., the state-run broadcaster’s report prompted the revelation of a previously unannounced government program that enables individuals to transfer their yuan and convert it into dollars or other currencies overseas.”
“China needed to improve its oversight of capital flows after $2.7 trillion in unexplained funds moved overseas in the decade prior to 2012, Anthony Neoh, a former government adviser who helped the country open up to foreign money managers, said last year, citing data from Integrity International. Those funds fueled property bubbles in cities such as Hong Kong instead of being invested in domestic assets, he said. ‘We know the demand to move abroad is there,’ said ANZ’s Zhou. ‘Even if you impose various restrictions, the money will find its way out of the country, via underground banks and other means.’”
Business Spectator. “China’s major banks have halted an experimental program, sanctioned by the country’s central bank, that helped citizens transfer large sums overseas despite government capital controls, according to people with knowledge of the matter. Analysts and economists have widely acknowledged that China’s closed capital-account system has become more porous and that the rules are routinely circumvented. A 2008 report by the PBOC said that up to 18,000 corrupt officials and employees of state-owned enterprises had fled abroad or gone into hiding since the mid-1990s, and that they were suspected of having taken $US123 billion with them. A favoured method, according to the PBOC report, involved squirreling cash away with the help of loved ones emigrating abroad.”
“Until recently, Bank of China had been offering the yuan-transfer services to its wealthy clients, according to officials with knowledge of the bank’s operations. In its statement last week, the bank said that the services were limited to clients who seek to emigrate through investments — gaining residency rights abroad by putting money into businesses in the host country — or to buy property overseas. It also said that it has in place a procedure that requires the bank to check the sources and purposes of clients’ funds. ‘It’s a very important policy initiative, but CCTV is making a very bad name out of it,’ said Ligang Liu, chief China economist at ANZ Bank in Hong Kong.”
From Forbes. “Bank of China, naturally, had competition helping the Chinese put their money offshore. Said an employee of a major state bank speaking anonymously to the South China Morning Post, ‘BOC is not the only bank providing these kinds of services. All major banks do.’ A Swiss banker called the involvement of the big Chinese institutions ‘an open secret.’”
“CCTV’s public attack on the bank suggests infighting among top leaders because officials knew they could punish adversaries for violations of capital control rules. A sure sign of weakness in a political system is a purge, and in China there have been many of them recently. The significance of CCTV’s attack on Bank of China is that struggles among senior leaders have broken out into a new arena. The Communist Party, which looked so sturdy in recent times, is beginning to come apart. Now, personal struggles are tarring the image of the critical institutions of the one-party state. This cannot be a good sign for Chinese stability.”
Unfortunately, I have no time to play today but I will post this very balanced article on China. Like the IMF and I think the general tone of this article despite real obstacles I believe China will succeed moving from a poor socialist country to one of the rich free enterprise countries:
http://thediplomat.com/2014/04/can-china-become-a-high-income-economy/
‘I believe China will succeed moving from a poor socialist country to one of the rich free enterprise countries’
OK, so what does that have to do with anything here?
I guess I’m a dumba$$ when it comes to China, but my understanding was that China was a society movin’ up in the world. Manufacturing good stuff, importing raw materials like my recycled cardboard, buying up Africa, exporting goods all over, goodcolleges and research facilities, a middle class that can buy its own goods, lots of cars, stamping most of Wal-Mart and much of Home Depot with Made in China. That is, they look like America in the 50’s and 60’s. Aren’t they even working on a moon mission?
So WHY do they need all this crappy banking to stay afloat? Yes, we need it because we don’t do anything else anymore, but why would the Chinese? They should be doing well on natural growth alone.
‘WHY do they need all this crappy banking to stay afloat?’
China is a complicated story. (I don’t think they have a middle class, BTW). They have so much corrupt, centralized control, it isn’t comparable to most bubbles we can think of. But there is this; a bit of truth is evident in every bubble.
In 1980’s Texas, there was an oil boom. It was as real as could be. What most of didn’t realize was there was also a real estate bubble. We didn’t need it. Didn’t ask for it. The conditions were right and it took off in the minds of the participants. The oil price drop exposed this bubble and all the shenanigans, but the bubble would have popped eventually somehow. The RE collapse combined with the oil depression made things seriously bad.
Similarly, the weather is nice in some parts of California or Florida. There are tech companies in the bay area. There are expensive universities and high paying jobs in Boston and DC. NYC does have a financial sector. That doesn’t keep them from having bubbles. It is used to justify bubbles, and that spreads. Pretty soon you have people snapping up $300k houses in Manteca. “Oh, it’s close to the bay area.” Or, “you can commute to NYC from New Jersey, so the houses in Jersey must be worth $400k.”
As far down the road as we’ve been with this stuff, it can be boiled down to what lenders will lend. Houses cost $100k more in Flagstaff than Phoenix because that’s how much you borrow. And that’s why the Chinese have these crappy shadow lending setups. Without it, you couldn’t give away a Beijing condo.
I’ve asked Dan the same thing; if China’s economy was so great, they wouldn’t have materials or time to waste on empty cities and the bullet trains to them. So the reasonable conclusion is that their economy is really a basket-case.
“I will post this very balanced article on China.”
Is it fair and balanced?
and smart like a Fox……….???
To my recollection the saying goes, “Crazy like a fox.”
Great link - a “balanced” article that starts out by saying China’s economic rise is “inevitable.” So is its fall. Does anyone think that China’s corrupt communist party will actually give up its privileges so that China can become a “high income” economy? The party officials are already planning their escapes, for those that haven’t already left or gone into hiding. “A 2008 report by the PBOC said that up to 18,000 corrupt officials and employees of state-owned enterprises had fled abroad or gone into hiding since the mid-1990s, and that they were suspected of having taken $US123 billion with them.” And now it’s 2014…
BTW, Obamacare is doing very well indeed. Keep up the good work, Mr. President!
China’s elite want the same crony capitalist society we want. Only that for their’s, the top 0.0001% get a free ride while here the top 1% and bottom 47% get a free ride.
http://blog.mpettis.com/2014/07/bad-debt-cannot-simply-be-socialized/
Thanks for vetting it for us to make sure its “very balanced”.
I begin to suspect a Forum Fluffer, i.e., a troll alt who posts silly things to jump start discussion.
“…who posts silly things to
jump starthijack discussion.”Yeah jump start is way too positive.
Also that “balanced article” is over 3 months old. Weak sauce. Much about China has been learned in that time.
‘China’s police have found 271,000 fake or duplicate ID records in the first half of this year, all of which have been nullified, the Ministry of Public Security (MPS) said on Saturday. A total of 149 cases of counterfeiting and selling fake ID cards or “hukou” documents have been solved and 46 members of the police system have been punished for involvement, the ministry said in a statement.’
‘Hukou is China’s household registration and administration system, which is linked to citizens’ ID cards and records. The hukou system ties access to basic local welfare and public services to one’s place of residence, and hukou of different regions entail different benefits, thus brewing demand for counterfeiting.’
‘Also, as many Chinese cities restrict property purchase of individuals and households to prevent housing bubbles, demand is also growing for duplicate IDs. Last year, China found and nullified 790,000 fake IDs.’
‘In a prominent case, Gong Ai’ai, a woman dubbed “Sister House” by Chinese netizens for having over 40 properties in Beijing despite property market restrictions, was sentenced to three years in prison for forging IDs and residency records.’
‘A majority of the 28 severe bribery cases handled by courts in Guangdong over the last three years involve real-estate projects, and suggest that housing developers favor giving bribes to regional communist party chiefs.’
‘In 10 such bribery cases, the targets for bribery were the regional government because it is easier for real-estate developers to acquire projects with their help rather than the urban construction department.’
‘Guangzhou-based Southern Metropolis Daily reported that some regional or township party chiefs also change land-use status by illegal means to benefit developers. Developers are known to bribe officials regularly to maintain good relations, even when there is no specific project in the offing.’
‘Some developers also ask government officials to help them advertise their projects as the first step towards forging good relationships with them. In return, these officials help developers obtain infrastructure projects or other construction projects.’
‘It is reported that since China’s credit crunch started among shadow banks, almost 90% of loan companies in Wenzhou have stopped business. Wang Xiao, a Zhejiang entrepreneur who invested in a loan company, told media that loan guarantors are certainly taking huge risks right now. As more loan defaults occur, their company will soon be forced to shut down.’
‘Chinese media reported on June 12 that the breakup of the funding chain in the real economy had put tens of financing loan companies in a hopeless situation. Thirty-five of them are about to shut down.’
‘In Guangzhou, banks are trimming cooperation with loan companies. Along with the economic slump, over half of loan companies are struggling in their business. Zhong Dajun, director of Dajun Think Tank in Economic Studies, said massive closedown of loan companies resulted from lack of funds, especially the lack of cash flow.’
‘Zhong Dajun, :”First, economic activities are not as active as before. Drop in trade and production has negative effect on business revenues and their available funds. In addition, banks are tightening control over loans and it’s harder to borrow money now. Many companies and financial organs thus fail to survive in such a situation”
Don’t look now, but it sounds like a collapse of China’s shadow banking sector is underway, similar to what happened to subprime mortgage lending in the first half of 2007 (if you forgot, the sector essentially went up in flames to the point where it ceased to exist after 2008).
‘It has been touted as an affordable real estate investment destination in an up-and-coming market, an attractive alternative to Singapore’s pricey housing scene. But property buyers in Iskandar are now facing two big investor problems: a potential oversupply of homes and an inadequate supply of property data.’
‘Mainland Chinese developers have been launching mega housing developments, with thousands of units each in the Malaysian territory, sparking fears that a supply glut might dampen residential prices and rents.’
‘Complicating the situation is a dearth of data about Iskandar’s property sector, underlining the risks of investing in a market less transparent than Singapore’s.’
‘As at the fourth quarter of last year, there were 118,191 homes under construction in Johor state, where Iskandar is located, and another 168,371 planned, according to the Malaysian government. To put this in perspective, Singapore - which has a population of 5.3 million, compared with Johor’s 3.5 million - had about 67,000 homes under construction and another 6,000 planned, as at the first quarter of this year.’
‘The massive upcoming supply in Iskandar is a result of hefty investments in the property sector in recent years. Units being built now will be ready in about three to five years’ time. But investments that create jobs may take years longer. Who will live in the homes then?’
‘Current projects also face falling demand in the wake of property cooling measures introduced by the Malaysian government last year. The curbs include property gains taxes as well as minimum purchase amounts and stamp duties for foreign buyers. “Developers who expected to sell out by now still haven’t,” says property agent Ryan Khoo. “Country Garden Danga Bay is one. It has hovered at about 60, 70 per cent since August last year.”
‘He adds: “Sales have definitely dropped since the introduction of the cooling measures and because there are a lot more choices on the market, property buyers have become very cautious.”
‘Mr Getty Goh, director of property research firm Ascendant Assets, notes that condominium sales in Johor Baru fell 37 per cent from the last quarter of last year to the first quarter of this year. “All you need to do is to drive around Iskandar Malaysia and you can see that there are many units still vacant,” he says.’
‘Real estate agent Germaine Ng, who owns a condo unit in Iskandar that she is considering renting out, says: “Rental demand could come not just from expatriates working in Johor but also those working in Singapore who would like more space and the lifestyle in Iskandar.”
‘Although the market is a tad quieter these days, she says home buyers are still keen on Iskandar, as “prices here are stabilising and still attractive because of the weak ringgit. For about $400,000, you can get a semi-detached house.”
‘Not all property buyers in Iskandar are speculators looking for a quick profit, she adds. Those seeking a weekend or retirement home are unlikely to dump their properties if the market heads south, minimising the risk of a downward market spiral.’
‘Some segments of the market - such as landed property - may also be less at risk of oversupply, says investor Mohd Mokhtar Mohd Amin, who bought a landed home in Leisure Farm last year. “There might be an oversupply of condos in Iskandar now but if someone is looking to rent a resort-style landed home like the ones in Leisure Farm, their choices would be limited,” he says.’
‘On a spring afternoon in Beijing, Zhou Fang is busy hawking apartments in a new residential complex along the city’s third-ring road. He doesn’t appear to be having much luck. The buildings opened a couple months before and have plenty of amenities, including a community gym with a swimming pool, shops and a large underground parking ramp. While the apartments are not “luxury”, they are certainly designed to attract upper middle-class residents.’
‘Zhou’s real estate agency does not allow him to offer discounts on these apartments even as the market slows. He says that “nearly everyone” in the area has heard of the developers offering “substantial” discounts on new properties further out in the suburbs, and now prospective buyers have been asking him for price cuts too. Such discounts, which began in Hangzhou and Changzhou earlier this year, are just one sign of trouble brewing in China’s property sector.’
‘A period of accelerated consolidation seems likely—though just what shape it takes will depends on how both developers and policymakers respond. “You see the results of the Chinese developers listed in Hong Kong, and they tend to be doing pretty well. But at the same time, you’ve got smaller developers defaulting on bonds or cutting prices,” says Sam Crispin, a longtime China property analyst based in Shanghai. “That suggests there’s a real issue here.”
“No tickee, no washee” becomes “no discount, no bite of the debt bait”
‘(Reuters) - Chinese construction machinery maker Zoomlion Heavy Industry Science and Technology Co Ltd has told analysts it rejected some 15 percent of new orders for truck-mounted concrete pumps in the first half for fear that China’s property market slowdown will hit customers’ ability to pay for them.’
‘The company, which warned on Monday that its first-half earnings would drop by as much as 70 percent, also told analysts in a briefing it is now requiring larger downpayments for new contracts. Zoomlion is trying to rein in accounts receivable that surged 47 percent to 27.8 billion yuan ($4.48 billion) as of the end of 2013 compared with the end of 2012.’
‘Calls to Zoomlion officials seeking comment went unanswered on Tuesday.’
‘New home prices in China fell in June for a third straight month, which hurts demand for Zoomlion’s equipment. About half of its business is directly tied to the property market, with the rest linked to infrastructure among others.’
“First-half property sales and property investment have slowed,” said CLSA analyst Alexious Lee, who took part in the Zoomlion call. “This will remain an overhang on demand for construction machinery. No one dares to say which way the property market will be heading to in the next three years.”
‘Canada is one of the few countries in the world that does not keep public data on foreign ownership of real estate. But it looks as if Vancouver city council is preparing to do something about it.’
‘In response to calls from UBC planners such as Andy Yan, who recently managed to get this important social issue into The New Yorker Magazine, Vancouver Mayor Gregor Robertson this month announced Vancouver’s new Affordable Housing Agency will “collect available data on issues such as vacant homes, and provide information on ways to limit investor speculation and unnecessary vacancies in Vancouver’s housing market.”
Yes. Collect that available data, agency! The goal is to preserve the status quo, and reduce public outcry, by making it look like leaders are doing something. Maybe politically-connected private consultants can be hired to analyze the data, thus killing two birds with one stone.
‘China’s REIT default is unavoidable this or next year,’
Not to worry…a closely-watched pot never boils over.
“Last year, she sold her only living space in the city, an old two-bedroom apartment in Shuangjing, Chaoyang district, for 3 million yuan ($483,300), which in turn made it possible for her to buy six houses in Houston, Texas in the US.”
Which brings to mind the question I keep asking: What will happen to the all-cash Chinese investor brigade, which is currently driving U.S. home prices to an Echo Bubble peak, once their real estate market reaches the point of no return?
Do the Chinese know about property taxes, insane public sector unions and property maintenance???
Use your own goddam brain instead of someone else’s for a change. With all the corruption and backhanded palm greasing, do you really think they are going to CARE about a public sector union?
They will when their property taxes double within 4-5 years…
And renting those houses out for $400 per month? Is she a slumlord? That sounds like a misprint.
I’d guess it’s 400 each. Probably condos.
It’s going to be hard to collect from Texas deadbeats when you are in China. A good rule for rental properties is to buy within a few miles of my normal travel route.
Let me think for a minute. China property crashes in price will mean an end to the source of the yuan to buy American properties. The flow of American purchases will stop. This will put a lot of realtards out of work in California. Home builders out of work. Recession and so on. California has 1/10 of the U.S. economy. New York probably significant too. Big drops in the U.S. economy as people in the real estate industry and ripple effect jobs run out of income and jobs for spending.
This WILL affect other states because people selling to Californians and New Yorkers do live in other states. Industries selling to Californians employ people in other states.
Combined with interest rate increases - which will happen independent of China property bubble burst - will crush U.S. house prices in all states, lower than 2010-2011.
‘China property crashes in price will mean an end to the source of the yuan to buy American properties. The flow of American purchases will stop. This will put a lot of realtards out of work in California.’
If China surpasses the US in economic ranking some day, what would that do to us if they have a REIC meltdown?
I wonder about the credit markets. I’ve read the central government has $ trillion in reserves. How much of that is US treasuries? What if they needed the cash? Could they go from a net buyer to a net seller of US bonds?
‘Chinese property consultant CRIC is predicting that mainland developers will likely cut the prices of about 1,100 new housing projects in 21 big cities to lift flagging sales, underlining the pressures in China’s cooling real estate market.’
‘CRIC, which provides investment recommendations to homebuyers, has downgraded its ratings for 27 percent of the 4,038 new housing projects that it tracks. The developers of the 1,107 new housing projects are likely to cut prices to boost slackening sales, CRIC said in a statement. CRIC is a unit of real estate services firm E-House China.’
“For these projects that have been downgraded, we think their prices do not reflect the current market conditions,” said Ding Zuyu, co- president of E-House.’
‘Some vendors in the secondary homes market are now more willing to cut prices after recent tenders for land sites in the New Territories came in on the low side, according to property agents. Influenced by record-low tenders for plots in Ma On Shan and Pak Shek Kok, Tai Po, in terms of price per square foot, sellers in Ma On Shan are willing to discuss price cuts of 3 to 5 percent, agents say.’
‘A site in Ma On Shan was sold last month for HK$703.8 million, or HK$3,515 per buildable sq ft - a 10-year low in the district.’
‘A real estate agent in Beijing indicates a property for sale with 2 million yuan (US$320,000) off the original asking price, June 18. (File photo/Xinhua)’
‘Housing markets in major Chinese cities have seen a greater decline in transaction volume during the first half of 2014 compared with second and third-tier cities. Beijing sold 2.76 million square meters of newly built houses during the first six months of this year, down by 48% from a year ago, a record low over the past five years, according to Guangzhou’s Southern Metropolis Daily.’
‘The total transaction amount was 73.8 billion yuan (US$12 billion) during the same period, down by 38% compared with the same period in 2013. In Shanghai, the total floor area for newly constructed residential houses was 4.07 million square meters, dropping by 31.2% from a year ago.’
‘Han Shitong, an expert in the real estate sector, said surging housing prices in first-tier cities has resulted in a reduction in demand. People who can afford housing are investors but they are unable to buy more properties because of restrictions imposed on housing purchases in the city, while people who need housing are unable to afford it.’
‘Xia Bin, an honorary chair of the finance research department at the Development Research Center of the State Council, said China’s housing market is experiencing an adjustment cycle after years of high prosperity, which will be extremely painful and unlikely to be reversed, Xia said.’
‘Xia also noted that the current downturn is not a cyclical adjustment that has been seen every three years in China’s housing sector as there has been no substantial intervention resulting from government policies in the sector, which was the case in 2008, 2010 and 2011, when major housing policies were implemented.’
“A 2008 report by the PBOC said that up to 18,000 corrupt officials and employees of state-owned enterprises had fled abroad or gone into hiding since the mid-1990s, and that they were suspected of having taken $US123 billion with them.”
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Jesus. That averages out to almost $7 million per corrupt individual. Give us your tired, your poor, your financial criminals! And the Bank of China says that it “has in place a procedure that requires the bank to check the sources and purposes of clients’ funds.” I’m sure it does. At what point(s) in the process is the bribe paid?
“To the victor goes the spoils.”
What were American people thinking?
We have been through the greatest transfer of wealth in history. From US to them, with love. I’m in Longboat Florida and the new Publix has separate shelf space devoted to and labelled England and Germany.
The China shelf is coming.
Longboat sounds lily-white. From where I sit, there are three full-size Asian grocery stores, and a grocery store with 2 aisles of Hispanic food, all within walking distance.
Interesting. I did not know that. I was aware of certain parts of the state where Europeans were buying, but not that their tastes in food were being catered to.
For reasons that I’ve never fully understood, during the bubble the Four Corners area was very popular among UK residents. And Germans liked Fort Myers.
Chinese embezzlers bearing cash for overpriced RE may not be quite so welcome one of these days.
http://www.zerohedge.com/news/2014-07-15/china-warns-us-stay-out-south-china-sea-dispute