Investors Thought There Was No Risk In Real Estate
A report from Want China Times. “May has always been a prelude to hot property sales in China’s real estate market for the second quarter, but this year its sales have been unusually stagnant. The various sales promotions and sales tactics of developers have failed to stir up excitement and the number of cities seeing property price fall has instead increased sharply, triggering anxiety over whether May is instead heralding a property bubble or the omen of a price collapse, reports our Chinese-language sister newspaper China Times.”
“China’s property market has failed to upgrade the production efficiency of its labor force and is now tethered to many speculative financial products. Oversupply is evident as domestic property developers are halting the construction of new projects. The current supply will take four and a half years to be fully digested.”
The Beijing Review. “The new round of price declines in two years have crystallized worries of a grisly end to the housing boom, but analysts say fears of an American-style sub-mortgage crisis or Japanese-style collapse are overblown. Lu Ting, an economist at Bank of America-Merrill Lynch, ruled out the possibility of a large-scale crash in China’s housing market. Instead, he said the biggest problem in the property sector is a misallocation of resources.”
“‘With only about one third of the 1.3-billion Chinese population living in urban centers, too many homes that will never be filled have been built in small cities. This will likely see a sharp spike in bankruptcies among small developers,’ Lu said. ‘But it will not cause a big crash.’”
From China Daily. “Mao Daqing, Executive VP of real estate developer China Vanke Co Ltd discusses the ‘chilly winter’ sweeping over China’s real estate market and its future on Beijing TV’s talk show. Yang Lan: ‘In May We saw housing prices decline in some cities such as Shanghai and Shenzhen. How do you interpret this?’ Mao Daqing: ‘I would describe it as an indigestive condition. In other big cities that had hot real estate markets, such as Beijing, investors thought that there was no risk in real estate investments. No mater how high the prices were, a ‘rigid demand’ will always be there.’”
“‘But some people still claim it is ‘rigid demand’ even when prices reach 80,000 yuan ($12,890) per square meter. What is this ‘rigid demand’? This demand doesn’t represent those in low middle income; it means real estate in big cities can be easily acquired at any price.’”
From MarketWatch. “You can take your pick of evidence that China’s growth has relied on overindulging on unhealthy levels of debt. But one new statistic that caught my eye — and puts China’s size and debt in perspective — comes in author Joe Zhang’s new book on China’s state capitalism. Zhang calculates that despite having an economy about half the size of the U.S. at current exchange rates, money supply (on a broad measure) is already about 61% bigger. And there is little sign of belt-tightening, with China’s credit balance still compounding at an annual rate of 13%-14%.”
“This credit path might seem self-destructive, but it also comes with a salutary side effect: an enormous property boom. This did not just inflate GDP numbers, but also brought feel-good asset wealth through rocketing land values.”
From NTD TV. “The Chinese real estate bubble is in an extremely perilous situation. Therefore, the Chinese Communist Party (CCP) has implemented a series of real estate control policies, from the Central Government’s micro-stimulation to the local governments’ cancelling the purchase ban order, and the zero down payment measures. There are many ever-changing bailout patterns.”
“Mainland financial commentator Niu Dao: ‘The current situation is that the governments now do everything to maintain the (real estate) bubble does not break, but we all know that the main problem of China’s real estate is the funds rather than other problems. It is about why the collapse of the CCP now takes place? It is impossible for them to solve all conflicts. They are only seeking to protect their own interests to move forward?’”
The New York Times. “Ou Chengbi, a butcher at a sweltering open-air market on the outskirts of Guangzhou in south-eastern China, can scarcely see signs of recovery in her country’s economy. She described how as recently as last winter she could still chop up an entire cow each day and sell it all. ‘Now I can only sell half a cow a day.’”
“Millions of Chinese merchants like Ou seem to be struggling, even as data suggests growth is stabilising. Independent surveys of businesses across China show that in sector after sector, sales and confidence are still deteriorating. ‘All of them are pointing in the opposite direction from this supposed GDP number,’ said Leland Miller, the president of China Beige Book International.”
The Sydney Morning Herald. “The role of Australian banks in helping to fund foreign investment in real estate is coming under scrutiny, as politicians investigate overseas buyers’ activity in the housing market. The trend highlights the global pressure on banks to know more about their customers’ financial dealings, amid allegations wealthy Chinese citizens are secretly transferring money into overseas property markets, including Australia’s.”
“The questions come amid allegations wealthy Chinese residents are using back-channels to move money out of the country, including into Australian property. Chinese media have cited estimates 20 billion yuan ($3.4 billion) has been moved out of China illegally since 2011 via banks. Macquarie analysts referred to this figure in a report last week, alongside estimates Australian lending to non-residents had surged 27 per cent in the year to March.”
“Figures provided to the inquiry by Treasury show approvals of overseas purchases were $24.8 billion in the first nine months of 2013-14, a jump of 93 per cent on the previous year. Australian Bankers’ Association chief Steven Munchenberg said in a submission that when banks were lending to developers, they did not have direct contact with the foreign buyers and could therefore not investigate their funds.”
“‘Basically, a bank will seek to ensure that the pre-sales contracts represent genuine sales,’ he said. ‘The source of funding for foreign purchasers, however, is generally not investigated.’”
“China’s brewing housing bubble and a slowing economy have led to a growing number of Chinese buying real estate abroad, according to China News Service’s real estate web portal. During the 12-month period ending in March, Chinese buyers spent a combined US$22 billion on housing in the United States, up by 72%, compared with the same period a year ago, and taking up 24% of the total housing purchases made by foreigners in the United States, according to the US-based National Association of Realtors.”
“Lu Heren, president of Meritros Investment Group, said the return rate for investing in the housing market in the United States could touch 8% after fees such as property tax are deducted. The relatively higher price of rent will also allow housing owners to recover the cost in six to seven years, according to the report. In comparison, it may take a homeowner a century to recover from buying a residential property in Beijing, Lu added.”
“Not everyone can profit from their investment abroad, Lu said. Some Chinese buyers bought housing in Detroit after the US city went bankrupt. But poor public security made it difficult to lease the houses. Yan Yuejin, a researcher at the Shanghai Yiju Real Estate Research Institute, also said that some real estate agencies hide the possible dangers involved and exaggerate the high returns on such investments in order to boost their sales performance.”
Can’t wait to see how the China real estate pimps on the board spin this thread!
That’s the whole thing about not having “ears to hear” or “eyes to see”.
Exactly.
“‘With only about one third of the 1.3-billion Chinese population living in urban centers, too many homes that will never be filled have been built in small cities. This will likely see a sharp spike in bankruptcies among small developers,’ Lu said. ‘But it will not cause a big crash.’”
One should try not to whistle too loudly while walking alongside a graveyard.
Since China is in the business of copying what Americans have invented, I’m surprised they haven’t mastered the fine American art of granting local tax breaks and corporate welfare to lure the businesses to the small cities, where the empty housing is.
They have enough housing for twice their population. Moving the chairs around won’t fill them.
“China’s meaningless GDP figures”
Would those be the same figures that have been boldly predicted by the resident China economics expert to go up by 7.5% a year (or was it 7%?) until kingdom come?
economics expert to go up by 7.5% a year (or was it 7%?) ??
If some are correct, China GDP below 7% will be a big problem…I am not smart enough to know why but if they are correct and we are seeing stated numbers like the ones above, seems like China is on the edge and thats assuming the numbers are accurate…
Continue to misrepresent while you are too cowardly to make a prediction and be showed up by me. 7.5% growth is 7.5% growth, it is not meaningless to the people that are enjoying the ten percent pay raises that it has caused.
You are clearly the king of the HBB Chinese economic forecasters, as evidenced by your consistently correct 7.5% GDP growth forecast. Who would dare to challenge you?
I never said 7.5% that is the actual number that came out. I expect a slowdown but not a crash so I use 7% so put a number on your drivel.
It must be nice to have soaring exports, from China Daily:
China Export and Credit Insurance Corp (Sinosure) insured $229.12 billion in the first half of 2014, a year-on-year increase of 19.2 percent, the China Securities Journal reported on Tuesday.
Short-term export credit insurance accounted for $181.38 billion; $7.62 billion was in mid to long-term export credit insurance and $18.88 billion was in overseas investment insurance.
Sinosure also paid $360 million of indemnities to businesses and helped business obtain around $130 billion of financing from banks.
Sorry, but I find the exercise of picking a Chinese GDP growth number out of the air, then backpedaling if it doesn’t pan out, to be an exercise in futility.
I feel similarly about election forecasts — cheap entertainment, to be sure, but rather pointless, especially the requisite spin exercise if the prediction doesn’t pan out.
But don’t let me stand in the way of your enjoyment!
No logical person would make predictions about a mania, except that it will eventually come to an ugly end.
China has already told us what the fake number will be anyway.
Accuracy of Chinese data:
http://www.frbsf.org/economic-research/publications/economic-letter/2013/march/reliability-chinese-output-figures/
while you are too cowardly to make a prediction ??
Well most of us are not efficient prognosticators like you & Rasmussen..Your special…
“…you & Rasmussen…”
Hah!
I wouldn’t want to live in a country where a butcher has to keep half a cow in a “sweltering open air market,” 7.5% growth or no 7.5% growth.
Fine but forty years ago they were lucky to get a little rice to eat each day.
All except about 30 million of them.
“The role of Australian banks in helping to fund foreign investment in real estate is coming under scrutiny, as politicians investigate overseas buyers’ activity in the housing market. The trend highlights the global pressure on banks to know more about their customers’ financial dealings, amid allegations wealthy Chinese citizens are secretly transferring money into overseas property markets, including Australia’s.”
“The questions come amid allegations wealthy Chinese residents are using back-channels to move money out of the country, including into Australian property.”
“‘Basically, a bank will seek to ensure that the pre-sales contracts represent genuine sales,’ he said. ‘The source of funding for foreign purchasers, however, is generally not investigated.’”
I’m sure this could never happen here in the U.S.
“Not everyone can profit from their investment abroad, Lu said. Some Chinese buyers bought housing in Detroit after the US city went bankrupt. But poor public security made it difficult to lease the houses.”
Sounds like Detroit’s New Era Chinese slumlords turned out to be dumblords.
“Lu…said the return rate for investing in the housing market in the United States could touch 8% after fees such as property tax are deducted…”
Chinese scamming Chinese New York City style!
Just imagine how it will turn out for them if the renminbi is eventually allowed to float up to full exchange value relative to the dollar.
The insiders converting their assets into dollar denominated houses might be suggesting that the renminbi might not fall up.
Talk about dumb money. Detroit is internationally infamous for crime. How could the buyers not know this? They would have been better off gambling that money in Macau.
That said, I believe there will come a time when Detroit revives somewhat. I have said that the city has hit bottom, but it probably will stay on the bottom for awhile.
It seems Detroit real estate prices have improved somewhat. I don’t know if it was ever feasible, but I always thought it would be cool to buy 5 acres worth of $1 houses, raze them, fence it off, and turn it into a garden with a view of the city. Course, the junkies would probably break in.
the junkies would probably break in.
If the raccoons, woodchucks, possums, deer, etc. don’t get there first.
July 22, 2014, 1:47 a.m. EDT
China real estate dominates the economy: official
By Laura He
HONG KONG (MarketWatch) — About 60% of China’s manufacturing and financing activities are related to the property sector, China’s state media quoted a senior government economist as saying Monday. Although China’s economy has stablized, registering 7.4% growth for the first half of the year, the property sector remained a worry, said Zhu Baoliang, head of the State Information Center’s economic forecast department. The state-run China News Agency quoted Zhu as saying that the property sector has “too great an influence” on China’s economic health. “If any big problem occurred in the real-estate industry, it would have a great impact on the economy,” he said.
“China’s property market has failed to upgrade the production efficiency of its labor force and is now tethered to many speculative financial products.”
“many speculative financial products.” = Don’t work a job, instead borrow your way into prosperity.
“Oversupply is evident as domestic property developers are halting the construction of new projects. The current supply will take four and a half years to be fully digested.”
But … but … but … “the construction of new projects” was the only thing that kept China’s economy going after those broke-assed Westerners ran out of money and stopped buying all the stuff that China could produce.
So, now what?
“China’s property market has failed to upgrade the production efficiency of its labor force and is now tethered to many speculative financial products.”
What exactly is that economic gobbledygook supposed to mean?
“Yan Yuejin, a researcher at the Shanghai Yiju Real Estate Research Institute, also said that some real estate agencies hide the possible dangers involved and exaggerate the high returns on such investments in order to boost their sales performance.”
All-cash Chinese investors in California real estate can rest assured that California real estate always goes up.
All-cash Chinese investors in California real estate can rest assured that California real estate always goes up ??
I have read a number of educated opinions on this..What many say is that they are comfortable with the possibility that they could lose some asset value if they are buying at these prices…The alternative, they way they view it, is that they could “lose it all” if they left it in their homeland…
“Financial bath of their lives” (as Whac says): $250K, maybe.
Paid-off safe house where kid can go to Stanford and the family can escape execution: priceless.
And if kid at Stanford stays in CA and has his own kids, they will own the house long enough to make up the $250K. In the long run, we may be all dead, but the kids won’t be.
Donk,There are large losses associated with a “paid off house.”
This link leads to numbers that show China’s public debt (government debt) and its external debt what it owes to people outside of China. External debt is both private and public debt owed to people outside the country. It is insanely low. The Chinese have a savings rate close to 30% and they have invested in their own country. The debt is owed to them. Unlike essentially bankrupt Europe and soon to be bankrupt U.S., they do not rely on outside financing. Our external debt is 14 times theirs on a GDP basis. Just after WW II we were in a similar situation, we owed a lot of debt but we owed it to ourselves, so it was quite easy to have a boom to pay down the debt particularly since we produced our own goods.
http://www.usdebtclock.org/world-debt-clock.html
As I recall, Japan had a very high internal savings rate before and after 1990. Apparently a high internal savings rate is no guarantee against a real estate bubble collapse.
No but their real estate did not collapse until they had lost their economic competiveness due to high wages caused by a high value yen. China is not even close to being uncompetitive.
Link will post soon, China’s external debt is 7% of its GDP and the U.S. has an external debt of 100% of its GDP and it is China that has the problem? The fiat banksters can try all they want to bad mouth China but it will have the dominate gold back reserve currency within twenty years and within ten years it will be the number two currency in the world. P.S. external debt is all debt private and public owed to people outside the country.
¨ Lu Ting, an economist at Bank of America-Merrill Lynch¨
Sometimes I think they make their names up just for laughs.
add to Ho Lee Fuc and Sum Ting Wong
Lu Ting Sum Ting Wong?
Were in a deflationary spiral as is China. Hold onto your cash. You’re going to need every penny you can get your hands on. And above all else, DO NOT BORROW.
I WISH we would tilt toward deflation. (Declines from the current ridiculously high home prices is not the same as deflation across the board.) As a traditional saver, now on a pension, and someone without a mortgage, this would have few downsides for me.
You’re talking about price fixing and market bottle-necking. That’s not inflation.
‘Trading in China sovereign credit default swaps has more than doubled in the past year as fears over slowing growth and rising corporate defaults in the world’s second-largest economy have transformed the contract into the go-to Asia hedge for macro investors.’
“People are not realistically betting on China defaulting. It’s more of a mark-to-market hedge. That’s why it trades at 70bp outright,” said Unsal. “If there really was a China default, people would have bigger worries than a lack of CDS deliverable obligations.”
So they did not believe China will default does not seem like the experts are counting on much more than a slowdown, so am I that is why I am saying 7% for the next two years as they close old polluting plants.
‘Three months after China launched a probe of illicit financing of imports, investigators are still trying to get to the bottom of a growing form of fraud. While the extent of the fraud is unclear, it appears to illustrate the unplanned consequences of blocking traditional loans under the government’s crackdown on industrial overcapacity and enforcement problems in a high-risk lending environment.’
‘Last July, the Ministry of Industry and Information Technology issued sweeping orders to over 1,400 companies in 19 industries, demanding that they close outmoded facilities and eliminate excess production capacity by the end of 2013.’
‘Prime targets included major energy-consuming and high-polluting industries including steel, electrolytic aluminum, cement, and plate glass, as well as copper and lead smelting. Compliance has been spotty, as companies cling to sinking profits and local officials fret over lost jobs.’
‘The central government has ordered steel makers to cut 80 million metric tons of capacity by 2017 with 27 million tons of closures this year. But in April, Xinhua conceded that “things have not gone entirely to plan.”
‘The industry has continued to pursue new projects, said China Iron and Steel Association (CISA) vice president Zhang Changfu, who called the development “worrying.”
‘Borst sees the damage from the metals scandal as paling in comparison with the larger risks to the financial system from the spread of wealth management products and shadow banking…Depositors have turned in droves to the unregulated instruments, which offer higher rates of return than regulated accounts at state-owned banks.’
‘Although the products are often marketed by back-room operations of the same banks, there has been little disclosure of risks to investors or opportunity for due diligence. Borst said that about 15 percent of China’s deposit base is now tied up in wealth management products.’
“These bank-offered wealth management products have gotten very, very big,” said Borst.’
‘By the end of May, over 400 financial institutions were offering more than 50,000 wealth management products with a book balance of nearly 14 trillion yuan (U.S. $2.25 trillion), the official English-language China Daily reported.’
‘Citigroup Inc has about $280 million in loans tied to commodities in two Chinese ports which are at the center of a probe into possible fraud, a senior executive said on Friday, becoming the first U.S. bank to disclose its potential exposure.’
‘The total is a large portion of the bank’s roughly $400 million worth of so-called repo commodity financing deals in China. Short for repurchasing agreements, repo deals give customers access to short-term credit in exchange for goods.’
“At this stage we believe the activities are isolated and just specific to those very specific locations,” chief financial officer John Gerspach said in a conference call with analysts.’
‘The loans are to clients that are non-Chinese subsidiaries of large multi-national corporations and the contracts are guaranteed by the parent companies, he said.’
‘Other foreign banks including Standard Bank Group and trading and investment firms, such as Citic Resources Holdings Ltd, face hundreds of millions of dollars of losses. This week, Standard Chartered launched legal action to recoup its losses.’
“…but analysts say fears of an American-style sub-mortgage crisis or Japanese-style collapse are overblown.” In other words, can’t happen here! Real estate values always go up!
“Real estate values always go up!”
Plus 7.5% China GDP growth FOREVER!!! You can bank on it.
‘Volvo Construction Equipment’s revenues for the second quarter of the year were down -9% compared to the same period last year at SEK 14.6 billion (US$ 2.14 billion). The division’s operating was down -43% at SEK 751 million (US$ 110 million).’
‘The company said that it saw mature markets in North America and Europe grow over the April – June period, but that this was not enough to offset a sharp downturn in China.’
‘The second quarter has seen a steep decline in China and Volvo says demand for excavators and loaders is now -19% lower than it was last year. It forecasts the Chinese market will fall between -10% and -20% in total this year.’
‘Volvo Construction Equipment president, Martin Weissburg said, “The second quarter was characterised by a considerable decline in China – the world’s largest market for construction equipment – which meant we had to adapt our operations to a lower level. The decline was rapid and accelerated during the quarter but we reacted quickly to ensure that production and inventory levels are soon balanced with demand.”
‘The second quarter has seen a steep decline in China and Volvo says demand for excavators and loaders is now -19% lower than it was last year. It forecasts the Chinese market will fall between -10% and -20% in total this year.’
Does this news, plus the recent assertion by a Chinese mainland economist that 60% of China GDP is real-estate related, have any implications for the 7.5% GDP growth forecast which is touted twenty times daily on the HBB?
China is now locally making such equipment Cat is facing similar competition.
http://www.chinamaterialia.com/how-to-win-in-the-mid-market/
china yuchi?
perennial disapointer
I’m pretty sure Komatsu is manufactured in China but a jap outfit. They’re every bit as good as Cat but at a substantial discount. Volvo is junk right from day one.
How much you you want to wager Cat or its holding company owns a large equity stake in Komatsu?
The big lie is unraveling quickly.
http://www.economist.com/news/business/21591864-chinas-best-makers-construction-gear-are-now-world-class-digging-victory
According to the article Sany is better than Komatsu so why would anyone buy Volvo?
‘China’s first domestic research study, ‘China Household Finance Survey’, conducted by Texas A&M University and China’s Southwestern University of Finance and Economics found that while 16.4% of university graduates between the ages of 21 and 25 were unemployed, only 4.2% of those in the same age bracket who had dropped out before middle school were unemployed.’
‘Last year, Xinhua reported that university graduates faced the toughest labor market in years, with an estimated 7 million graduates looking for jobs. “The education system and universities are run in a way similar to that of SOEs. In SOEs, the workers produce based on plans instead of market demand. In state-owned universities, students are trained in disciplines which the labor market has no interest in, and are merely there as ‘jobs’ for university professors,” says Di Dongsheng, a professor at Renmin University.’
“I can see that university students these days are all spoiled to a certain extent by not just their families, but also the entire society. It is seemingly better for them to be unemployed than to take a job below ‘their stations’,” he says. Gan Li, a professor at Texas A&M University who spearheaded the research on Chinese unemployment, says that a unique aspect of China’s labor mismatch is the lack of mobility for the younger generation. “Rising housing and rental prices make it difficult for young people to go to where the jobs are.”
They are working on it:
http://www.bbc.com/news/world-asia-china-22449179
For those who think the Chinese cannot invent, world’s first holographic phone:
http://usa.chinadaily.com.cn/china/2014-07/18/content_17833091.htm
People hardly use the video feature on their current phones. Heck, they hardly use the talking feature, preferring to text.
This is a product with no market.
“…Yan Yuejin, a researcher at the Shanghai Yiju Real Estate Research Institute, also said that some real estate agencies hide the possible dangers involved and exaggerate the high returns on such investments in order to boost their sales performance.”
Wait just a darn minute!! Is he inferring that realtwhores would LIE in order to make a sale?!?!
It comes as no surprise that the biggest impact of overpriced RE in China will be misplaced from the richest to the middle class workers. While the former can (and do) buy properties outside - in US, Canada, or european countries, the latter struggles in an overheated local market with no real chance to swing things in their direction. The only way it can go is through a massive burst with sharp decline in prices, when the situation becomes impossible to bear. I should point out that it would not resolve in humanitarian crisis, so it shall not cost any lives. But it will make Chinese economy much slower for the next decades.
Thanks for a very insightful article.
China has never changed Emperors without bloodshed and revolution.
China has never changed Emperors without a fight.