2015-05-28

Chinese Real Estate P/Es

35 cities the average price earnings ratio of 8.7, has 14 cities the price earnings ratio is higher than the average. Two typical cities, Hangzhou property market in 2014 was significantly cool, reasonable price earnings ratio tends to be. And Xiamen prices rose, the price earnings ratio grew too fast, healthy development of the property market negatively.

Sub-regional perspective, the eastern cities continuation of last year's ranking, and a wide gap. Surprisingly, Shenzhen and Beijing ranked first again, the price earnings ratio as high as 20.2; second-tier cities in eastern price earnings ratio climbed 0.4 from last year, the average is 9.2; the middle-tier cities increased income housing 60%; second-tier cities in the west continued the downward trend. But excluding marketable type of affordable housing, in 2014 the 35 large and medium cities had an average price earnings ratio of 10.6, which Shenzhen, Beijing, Shanghai, Fuzhou, Xiamen, five cities ahead, Shenzhen up 21.7, surpassing Beijing ranks first. Overall, the price earnings ratio ranking, mostly east of the city.
Data was based on new home prices though.

From my own estimate of local prices and rents, P/Es of 50 to 100 are not uncommon in Beijing, which is why equities were so much more attractive in recent years.

iFeng: 内地35城市房价收入比出炉:深圳超北京居第一(名单)

Shanghai Cuts Time to Residency From 7 to 2 Years

People living in Shanghai can qualify for residency in as little as 2 years under new rules being drafted. Though many will still need to wait 3 or 5 years, that's down from the previous 7 years. Also, instead of relying on job skills and money, the new requirements will focus on entrepreneurship.

Residency reform is being formulated across China, 16 provinces have already announced new policies:
According BEIJING reporter to incomplete statistics, the country has Xinjiang, Heilongjiang, Henan, Hebei, Sichuan, Shandong, Anhui, Guizhou, Shanxi, Shaanxi, Jiangxi, Hunan, Jilin, Fujian, Guangxi, Qinghai, officially announced the 16 provinces Opinions reform the household registration system in the region.

iFeng: 居住证改革缩短落户年限 房价或将产生波动

2015-05-27

Yuan Exceeds 20 Yen For First Time

At some point, even Chinese nationalists can't ignore a sale.
iFeng: 日元4年贬值40%:兑人民币跌破0.05 兑美元创8年新低

FIFA Donated To Clinton Foundation

ZH: The Farce Is Complete: FIFA, Qatar Donated To The Clinton Foundation
Earlier today, when commenting on the latest global criminal scandal, that of "rampant corruption" at FIFA, we - jokingly - said: "And now we just sit back and wait to see how many of the defendants sent "donations" to the Clinton Foundation and how many speeches Hillary and/or Bill gave at the Baur au Lac in the past two decades."

Then we decided to make sure the joke wouldn't be on us and that FIFA hadn't indeed donated to the Clinton foundation.

The joke was on us... because not only did FIFA donate to the Clinton Foundation...

... but so did the Qatar 2022 Supreme Committee, responsible for organizing and winning the 2022 World Cup, a world cup hosting which was also contested by the United States:

H / A Share Discount List For 2015-05-28


China Further Breaks Oil Monopoly: Shandong Dongming Granted Import License

Flashback to August 2014: China Begins Breaking the Oil Monopoly
China's Guanghui Energy has received a crude oil import licence from the government, becoming the first non state-owned enterprise to be granted the sought after licence as Beijing gradually loosens its grip on the oil market.

Now what was the largest teapot refinery as of 2012, Shandong Dongming, has won an import license: 能源垄断松动:山东地炼首获进口原油使用权

Bloomberg in February 2015: China ‘Teapot’ Refineries May Access Imported Oil Under New Rule
China will allow more oil refiners to process imported crude, opening the door for small, independent plants known as teapots to use an alternative feedstock.

Refiners investing in overseas oil exploration or capable of advanced processing and pollution-treatment technology will have priority to use imported crude, the National Development and Reform Commission said in a Feb. 9 statement released on its website on Monday. To be eligible, plants must also have at least one crude distillation unit with a designed capacity of more than 2 million metric tons a year, it said.

The Barrel: Should China’s state-owned giants fear the teapot refineries?
China’s intention to relax hitherto strict crude import rules may be causing alarm within its state-owned refiners.

The country’s small but resilient independent teapot refiners have long complained that restrictions on crude import rights have forced them to rely on alternative feedstocks — primarily imported straight-run fuel oil — and, as a result, hampered their margins and crimped processing volumes.

So the announcement of guidelines for new crude oil import quotes last month by the National Development and Reform Commission was received favorably by the refiners.

Will the ability to officially import crude revive teapot refiners’ fortunes?

Japan Will Drink All of East Asia's Seaweed Flavor Milkshakes

USDJPY 52-week high.

Where Have All The Equities Gone?

FTAlphaville: The mysterious decline in the number of US public companies
Had the relation between new lists and startups stayed the same after 1996, the U.S. would have had 9,000 more new lists in the post-peak period than it actually had. Thus, the decrease in listings in the post-peak period appears to be due to a lower propensity of firms to be listed rather than a decrease in the number of firms available to be listed.
Regulations aren't the answer:
It is often argued that the regulatory and legal changes in the early 2000s, including Regulation Fair Disclosure (“Reg FD”) and the Sarbanes-Oxley Act (“SOX”), made it more expensive for small firms to be listed relative to large firms so that these changes led to a drop in the number of listed firms, especially for small firms. The fact that the decrease in listed firms was well on its way before these changes took place implies that they alone cannot explain the listing gap.
The best explanation is that is it a bear market phenomena. It may also be a sign of significant economic and political change. Not a few people have charged that American democracy is slowly morphing into an aristocracy.

Falling CO2 Emissions Signal Weaker Chinese Growth

Balding's World: Why Greenpeace Leads Us to Believe Chinese GDP Growth is Low
Greenpeace has released a report (make sure to click through to the underlying links) suggesting that in the first quarter 2015, YOY CO2 emissions and coal consumption have fallen by 5% and 8% respectively. If true this staggering and incredibly important for our understanding of the Chinese economy. There is one important caveat. Greenpeace is utilizing Chinese government data, which as I just noted, is notoriously unreliable. As one article about the Greenpeace report notes, China has previously reported large drops in coal production only to later adjust the numbers back up enormously due to producers simply not reporting output.

While we need to proceed cautiously in interpreting these numbers, for the reasons noted, I believe we can make reasonable interpretations of this data.

... A plausible guestimate, based upon electricity growth between January to April 2015, would be GDP in the 1-3% range. There is simply no way you can have zero electricity growth and manage 7% GDP growth.
Add CO2 emissions to electricity, real estate investment, industrial production and trade figures all pointing to a serious slowdown.

2015-05-26

Playing Hot Potato With Chinese Steel

Western shift to protectionism threatens Aussie steel makers
A surge in trade protectionism in the US and Europe is threatening to push more steel into south-east Asia and depress profits for already stretched Australian producers.

Shares in BlueScope Steel have plunged 40 per cent this year in the face of weak steel prices, while Arrium is still trying to run its OneSteel business to conserve cash as the oversupply crimps margins.

Bank of America Merrill Lynch's global team of steel analysts warns that growing western hostility to foreign steel imports could put further pressure on already reduced steel margins in Asia.

"We believe the most negatively impacted region may be the rest of Asia [excluding China], which could feel the brunt of any redirected exports," BAML said in a research note.
China's steel puke is being focused into a smaller and more concentrated stream as nations move to block imports.

FT: Europe steps up fight over cheap steel imports
“China is caught with all this capacity, there’s always an incentive to keep on producing and offload the material rather than cut production and lose out to a competitor,” says Jeremy Platt, analyst at steel consultancy MEPS. “Because there’s so much excess capacity in China it’s going to take a long time to get to a normal level.”

The tariffs will probably lead to a further widening of the price difference between Chinese and European steel products. As China looks to export elsewhere, prices in those destinations will also fall.

This will mean that while Chinese imports to Europe may decline, steel from other countries could rise. When the US set anti-dumping duties on steel tubes from China in 2010, tube imports from Korea and Vietnam grew substantially “even though the latter hosted hardly any manufacturing capacity,” according to HSBC analyst Thorsten Zimmermann.

“Defending against global steel overcapacity is like a whack-a-mole game,” says Mr Rosenfeld. “You hammer it down in one place, and then it pops up in another. In one sense protectionist policy only serves to redirect steel imports from one region to another.”
Unless all the regions adopt protectionist policies.

China: TANSTAAFL

Forbes: China 'Debt Bomb' More Like A Bottle Rocket
McKinsey Global Institute says that from 2007 to 2014, China’s total debt, including debt of the financial sector, nearly quadrupled, to $28.2 trillion, or from 158% of GDP to 282%.
The most positive take is that China is a demographically aging country running up a pile of debt similar to the developed world, a uniquely large and centrally controlled economy that can deal with the debt. A crisis is avoided, but the debt load and demographic changes leads to sub-5% annualized GDP growth. Negative spin: every emerging market that saw a similar debt increase suffered a crisis.

Another new report, by economists at the Hong Kong Monetary Authority says the rise in indebtedness has been partly related to a big stimulus package launched in 2008 to 2009 following the U.S. mortgage debt bomb, a debt bomb that was noted by a few, like Addison Wiggins, and denied by most. There is no equal in China to the housing and derivatives bubble collapse in the U.S.. There’s no AIG with mortgage backed securities it bought on triple leverage. There’s no subprime mortgages in the market. Unlike the deficit-financed stimulus packages in the West, led by the Toxic Assets Relief Program in ’08, China’s trillion dollar stimulus package was funded mainly by state bank credit at the muni level. This was done largely to keep China’s full-employment policy in full effect.
There are a lot of subprime players such as the credit guarantee companies who guaranteed bank loans. (See: Credit Guarantee Firms Go Down Like Dominoes) They used AIG's business model and they are backing a lot of loans on the banks' balance sheets. Banks gave out loans to very bad credit risks because credit guarantee firms put their stamp of approval on them, but in many cases, the credit guarantee firm is one default away from bankruptcy.
The buildup state company debt has been policy driven leverage designed to keep Chinese people employed. These companies would have borrowed less if they were basing their decisions on the market. But, again, China is not a market economy. At least not fully. So the same rules of thought do not apply when analyzing this country from afar.
In a market economy, we could assume the debt was at least used efficiently, even if it was for unproductive consumption. Even though the market is being distorted, it is still responding to market signals. When interest rates are too low, capital flows away from the most efficient uses to the less efficient uses. Entrepreneurs and consumers behave as if there is more capital in the economy than exists. Projects that are unprofitable at higher rates of interest are started and consumers spend more than they otherwise would. When rates are normalized, the boom turns to bust and the economy finds it has even less capital because of the malinvestment during the boom years.

China is in worse shape than a market economy because the capital that it did allocate from 2009 to 2014 was often directed by local government officials who had the political power to directly intervene in the real estate market. The level of intervention taking place in sectors such as steel is off the charts in comparison to developed markets and China's only avoiding the full brunt because it is passing the cost onto foreign steelmakers, a solution that is about to end shortly.

Another article hits the same theme in Forbes: 10 Reasons Why China's High Debt Level May Not Be As Bad As It Appears

There are costs to central planning and intervention in the market economy. Those distortions grow over time and there is always a bill to be paid. All the Chinese government can do, to the extent it can control the economy, is decide where the pain is felt. Keeping in mind that as reform opens the capital account and the domestic economy, the government has less control than before. The question you need to answer isn't will China have a crisis, it is who gets the bill? Where does the distortion flow to next?

Beijing Housing Market Enters Summer

Good times are back for Beijing's housing market according to one article. Sales and price data support the view at this moment:
In the 4th week of May (5.18-5.24), Beijing new residential net sales hit 2120 units, down 4.93 percent week on week, an increase of 72.36% year on year; area of ​​216,400 square meters, down 11.42% wow, an increase of 59.59% yoy.
This chart shows weekly sales. On the left is week 21 from 2014, to the right are sales by week in 2015. Blue bars show number of homes sold, red line shows average price.

Same format, existing home sales:

Baofeng: The Pause That Refreshes?

H / A Share Discounts for 2015-05-27

The announcement of mutual fund money crossing borders on July 1 sent stocks up almost across the board, but the trend over the past few days has been towards a widening discount. Vanke is down from a 10% premium to a 6% premium in the past few days.

The Age of Land Finance Is Over

In the first quarter, land finance only made up 32% of government revenue (as Chinese media reports it), down from 60% in 2013. The 32% figure is equivalent to about 25% of total government revenues. This has serious implications for local government finances, since some local government debt is backed by land sale revenue and land sales fuel development projects. It also heightens the need to speed the development of the muni bond market.

Land sale revenue fell 38.2% in Q1, while land sales spending fell 22.3%. Local government revenues rose only 2.1%, with revenue growth weighed down by the drop in land sales. As one auditor put it, "Land is the chicken, revenues are teh egg, the share of land finance in local revenues will of course decline."

Over the past 10 years, land sales have been a major source of local government revenue. According to data released by the Ministry of Finance, land sales as a share of local government revenue peaked in 2013 at 59.8%, and in 2014 fell to 56.2%.

The latest Treasury data shows that in 2014 Jan-Apr, the state-owned land use right transfer income was 901.6 billion yuan, down 557.2 billion yuan or 38.2 percent.

In Q1 2015, land sale income was 690.5 billion yuan, a decrease of 36.1%; Q4 2014 saw a decline of 21.5% year on year.

...In the 20 provinces with data, there are 12 where land sales was more than 50% of fiscal revenue. Among them, Hainan and Jiangxi in 2014 saw land sales reach 75% of revenue, the largest proportion. Land sales in Tianjin, Anhui, Shandong, Jiangsu came to between 60 and 70% of fiscal revenues.

Among cities, according to the same research, financial dependence on the land in 2013 in Hangzhou, Foshan, Nanjing and Changsha, and other four cities of more than 100% higher dependence; Sanya, Hefei, Fuzhou, Kunming, Jinan, Xuzhou Ningbo, Wenzhou, Chengdu, also over 80%.
The land dependence ratio compares land sales to other revenue, not total revenue, so a ratio above 100% is more than 50% of total revenues. While that makes the numbers less shocking, in many cases the overall number is still significant enough to cause financial trouble for the local government:
If the land revenue decline causes local government revenue to decline, local governments that rely on land sales to repay debt will face enormous pressure.

Prior to the "China Economic Weekly" has reported that the data are available 23 provinces, land debt in the government is responsible for accounting for the debt repayment obligations, Zhejiang Province ranked first with 66.27%; ranked second in Tianjin, 64.56%. In other words, Zhejiang, Tianjin, the two governments bear the responsibility to repay the debt, the share of two-thirds of all have to rely on land sales to repay.
That report was covered here: Analysis of China's 23 Provinces Shows Housing Bubble Laden Provinces Are Most Reliant on Land Sales to Repay Debt; Zhejiang Tops the List

iFeng: 卖地时代结束:土地出让金一季度仅占地方财政收入32%