2015-01-31

Wind Power Access Rights Collapse

Yet the energy produced is still too expensive.

Massachusetts Wind Leases Sold for Fraction of Prior Sale Price
The U.S. Interior Department sold two leases to build wind farms off the coast of Massachusetts to the only two bidders and for a fraction of what the agency received from previous sales.
RES America Inc. agreed to pay $281,285 for access to 187,523 acres and Offshore MW LLC is paying $166,886 for 166,886 acres, according to the Bureau of Ocean Energy Management. Previous auctions generated millions of dollars.

“We knew that developing an offshore wind facility in these areas is going to be more expensive,” she said. “As a result of that, we set the minimum price for the bids lower than for the other states. We’re happy with the results of this auction.”

“It’s difficult with the Investment Tax Credit to find a utility willing to pay four to five times the price of wholesale power for offshore wind, especially as the price for solar and onshore wind decline,” Grace said. “With the expiration of the federal tax credits, it’s even more difficult to justify.”

Euro High or Low?

U.S. Dollar has seen its annual high or low in January in 20 of past 21 years
There is an extremely powerful tendency for the U.S. Dollar Index to experience its annual high or low in January. The same (but opposite) is true for the Eurocurrency.

In fact, in 20 of the past 21 years the EuroFX has topped or bottomed in January. In four of these 20 years the January high or low was part of topping or bottoming phase that was not resolved until February or March. The table and chart below tell the story.

A $1.21 high for 2015, or a $1.10 low for 2015?

2015-01-30

QE and Volatility

Chinese Investors Create Ghost Cities in America

China's overseas property investment to reach $20 bln in 2015-study
Chinese investors are set to fork out $20 billion on offshore property this year, up 21 percent on 2014 as more domestic real estate developers and insurers internationalise their holdings, Jones Lang LaSalle Inc said on Monday.

Chinese offshore property investment had increased 46 percent to $16.5 billion last year on the year before, with nearly 70 percent going to commercial real estate, the property consultancy said in a report.

This story is about outbound investment to California and comes with this anecdote:
Chinese Real-Estate Firm Looks West—to California
“Around 2011, that’s when the floodgates really opened up,” said Ken DeLeon, founder of DeLeon Realty, which specializes in high-end homes in Silicon Valley. Mr. DeLeon said developers have begun bringing in feng shui consultants, and prices of homes are listed with more eights at the end, a lucky number in Chinese culture.

Some of the homes end up sitting vacant for much of the year, brokers say, used only when the owner visits the area.

This, in turn, has sparked concerns among some longtime residents that an influx of foreign ownership could ultimately lead some neighborhoods to become empty during days and nights, where homes are just investments.

Peter Carpenter, a board member of the Menlo Park Fire Protection District, which includes Atherton, said he worries about firefighters, who typically take risks to extinguish a fire under the presumption that a house is occupied.

“If you knew for sure that there was nobody in it, you would take a very different approach,” he said. “From a fire-department standpoint, it means putting your people at risk for no reason.”

Offshore Yuan Sinks Again

Offshore Yuan Drops to Weakest Since 2012 on PBOC Easing Signs
The yuan traded in Hong Kong fell to its weakest level since 2012 as the People’s Bank of China said it pumped funds into the money market, fueling speculation the authority is easing policy further amid an economic slowdown.

As I pointed out yesterday in Will China Devalue or Deflate?, if China eases, the yuan will devalue.

A falling offshore yuan can have a big impact on the Mainland market.
The Informational Power of the Offshore Yuan Exchange Rate

2015-01-29

All But One Chinese Province Misses GDP Target in 2014

 
  2014 GDP Growth Forecast 2014 Actual GDP Growth GDP Miss
1 Shanxi 山西 9.00% 4.90% 4.10%
2 Liaoning 辽宁 9.00% 5.80% 3.20%
3 Yunnan 云南 11.00% 8.10% 2.90%
4 Heilongjiang 黑龙江 8.50% 5.60% 2.90%
5 Gansu 甘肃 11.00% 8.90% 2.10%
6 Ningxia 宁夏 10.00% 8.00% 2.00%
7 Guizhou 贵州 12.50% 10.80% 1.70%
8 Guangxi 广西 10.00% 8.50% 1.50%
9 Hebei 河北 8.00% 6.50% 1.50%
10 Qinghai 青海 10.50% 9.20% 1.30%
11 Shanxi 陕西 11.00% 9.70% 1.30%
12 Inner Mongolia 内蒙古 9.00% 7.80% 1.20%
13 Tianjin 天津 11.00% 10.00% 1.00%
14 Xinjiang 新疆 11.00% 10.00% 1.00%
15 Fujian 福建 10.50% 9.90% 0.60%
16 Shanghai 上海 7.50% 7.00% 0.50%
17 Sichuan 四川 9.00% 8.50% 0.50%
18 Hunan 湖南 10.00% 9.50% 0.50%
19 Zhejiang 浙江 8.00% 7.60% 0.40%
20 Anhui 安徽 9.50% 9.20% 0.30%
21 Hubei 湖北 10.00% 9.70% 0.30%
22 Jiangxi 江西 10.00% 9.70% 0.30%
23 Jiangsu 江苏 9.00% 8.70% 0.30%
24 Shandong 山东 9.00% 8.70% 0.30%
25 Beijing 北京 7.50% 7.30% 0.20%
26 Henan 河南 9.00% 8.90% 0.10%
27 Chongqing 重庆 11.00% 10.90% 0.10%
28 Tibet 西藏 12.00% 12.00% 0.00%

Source: 
20多省去年GDP增速未达预期 山西差4.1%为差距最大

Beckground: Liaoning Sounds Warning on Chinese Economy

Some of the 2015 Forecasts:

Some provinces, such as Liaoning, cut their forecasts about to their 2014 growth rate. That's probably still too optimistic, but it is one of the more realistic forecasts.

Beijing and Shanghai Reject Calls For Easing

Developers want Beijing and Shanghai to ease buying restrictions, but officials are holding the line. Only 5 cities still have buying restrictions: the four tier-one cities and Sanya.

Critics argue that if first-tier cities lifted restrictions, first-tier cities might suck the oxygen out of the market. Rapidly increasing prices in first-tier cities would draw developers and investors, while the third- and fourth-tier cities sink. In any event, first-tier cities do not want rapidly rising prices in the first place.

"From the perspective of land finance, the land market in first-tier cities has warmed, relaxing buying restrictions is useless. In addition, the third- and fourth-tier cities are different, there demand is weak, but first-tier cities' housing demand is still very strong. If buying restrictions are canceled, it could cause rapid increases in house prices in the short term." China Index Academy, executive vice president Huang Yu said.

An insider at the Shenzhen Urban Planning and Land Committee told reporters that behind the first-tier cities unwillingness to ease buying restrictions is not central government pressure, but all kinds of local government concerns.

iFeng: 北京上海楼市限购拒谢幕 开发商执着呼吁局部松绑

Will China Devalue or Deflate?

Two articles out today discussing the impact of devaluation on the stock market and real estate, along with the PBOC's new worry: capital outflows.

BLS Says Patriots Ball Boy Found Tampering With CPI Spreadsheets

Europe has slipped into deflation and so has the United States. This data is from the Billion Price Project at MIT. The freshest data comes from their sister side, Price Stats. It shows the decline in monthly inflation continued unabated into 2015, so monthly deflation is now at 2008 levels. Monthly deflation only lasted for 5 months in 2008/2009.

Mish has a discussion of deflation at his site (Asset Price Deflation Coming Up? Food Prices About to Drop? CPI About to Go Negative? Credit Deflation?), and he posted this picture. The annual CPI bottoms out one year after the peak in oil prices.

Here's the core CPI, which didn't go negative in 2008, but did slip below zero for one month in January 2010.

I went back to the late 1990s to see how the CPI was doing then, and the drop in oil all the way to $8 a barrel did slow inflation, but it didn't cause deflation. Looking at 2008 and current prices, annual deflation is likely to last until the summer, assuming the drop is similar to 2008. If a more pernicious slowdown is underway, perhaps due to a rapidly slowing Chinese economy, the deflation could last much longer than the 2008 episode.

2015-01-28

China Relaxes Public Housing Fund Rules Again

The rules for the housing fund were eased in 2014, with changes such as allowing savers to tap the funds nationwide. Previously, a Beijing worker, for example, could only tap housing funds for a Beijing home or rental.

The new change allows savers to tap the funds for rent after making 3 continuous monthly contributions.

iFeng: 租房提取住房公积金条件放宽:连续缴存3个月可提

More Bad News For China Debt

Local borrowing sounds alarm bells
Recent estimates from China International Capital Corporation put local government debt levels at around 22 trillion yuan ($3.51 trillion) by the end of 2014, with 15 to 20 percent of this amount tied up in "highly risky" projects.

The local government bond market is now valued at about 5.6 trillion yuan, most of which will mature in 2016. By that point, local governments could face enormous repayment pressure.

More debt and less growth:

Local govts lower 2015 GDP forecasts
Fifteen provincial-level governments out of 17 that had published their economic growth targets as of Tuesday have cut their forecasts for 2015, to focus on quality and efficiency of growth amid a slowing economy.

Three out of China's four municipalities have lowered their 2015 growth targets. Beijing set its 2015 growth target at 7 percent, down from 7.5 percent in 2014. North China's Tianjin cut the 2015 forecast to 9 percent from 11 percent in 2014, and Southwest China's Chongqing has set a 10 percent growth goal for 2015, compared with 11 percent in 2014.

Many provinces have missed their growth targets for 2014. For instance, North China's Hebei Province saw GDP growth of 6.5 percent in 2014, compared with the target of 8 percent.
The forecasts are still too optimistic: 2015 growth will be slower than 2014.

Shanghai to introduce stress tests for city's banks
Shanghai's banking regulator is requiring commercial banks in the city to run stress tests related to credit for realty development, including credit for developers and home buyers, in a bid to curb risk exposure, Reuters reported on Tuesday.

The report quoted a circular from the Shanghai Office of the China Banking Regulatory Commission dated Monday, saying that the CBRC will continue monitoring risks that may be brought by realty development and credit to property companies outside the city.

China's Albatross of Debt

A great piece on Chinese debt.
WSJ: Debt That Once Boosted Its Cities Now Burdens China (Alternate Link)

A little over a year ago, a Chinese credit agency downgraded a government-owned financing company in this dusty industrial city. Default—nearly unheard-of in China on government bonds—was a possibility, it said.

But during discussions with lenders, city officials made sure Wuhan Urban Construction Investment & Development Corp. could keep borrowing...

...Wuhan Urban, whose debt jumped 20% in 2013, has borrowed big. A listed unit raised 650 million yuan ($103.9 million) in November from bond sales to underwrite a construction blitz that earned Wuhan’s mayor, Tang Liangzhi, the nickname Mr. Dig Dig...

...“When it comes to raising funds for the purpose of developing the city, we leave no stone unturned,” Wuhan Urban said in a July report...

...“The guys running local government financing operations won’t roll over and die,” says Fraser Howie, co-author of “Red Capitalism,” a study of China’s financial system. “These companies take on a life of their own.”

...Roughly 8,000 local-government-financing firms across China are responsible for the rapid development of cities but also the glut of housing, industrial parks and other projects economists and officials say threaten China’s economic health. “If you’re building projects that can’t cover their cost, you’re spending money on keeping them going,” says Mr. Howie. “Some hospital somewhere isn’t being built; some small company isn’t getting money.”
The punchline is that China is adding debt faster than Japan and Korea prior to their recessions.

Also, land sales had fueled a lot of this development, but as Deutsche Bank pointed out, land sale finance will hit this year: Deutsche Bank Says Land Sales Slowdown Only Started Hitting in Q4
There is a common misperception that land revenue has already dropped sharply in 2014. The market appears well aware of the slowdown of property sales and land auctions in 2014. It likely overlooked the lag between land auctions cooling off and the decline of fiscal revenue. The reality is, land market started to cool down sharply in March 2014, but land sale from a fiscal revenue perspective in yoy terms remained positive until Q3 2014. We believe the fiscal shock to local government revenue only started in Q4. The full impact will likely be seen in H1 2015.

What happened to real estate investment in December 2014? It went negative for the first time in at least a decade and probably much longer.

Any guesses where Jan-Feb will land, short of a massive increase in credit?

Background on how a real estate recession is a Threat to China's Development Model
China International Finance Limited, chief economist Peng Wensheng sees three effects from weak land sales. The first is reduced local government investment, reduced fixed asset investment. [There's your economic rebalancing away from investment.] The second is increased debt risk for local governments. The third is restrained credit growth. Peng also makes the important point that real estate price decline expectations are still forming. As I've pointed out here in previous posts, the situation was worse from a price standpoint in 2011. Peng goes on to note that developers haven't started to reduce land purchases yet, but that could be coming in the next few months, in which case land revenue growth for many cities will decline and even turn negative.

To recap the situation: Chinese local governments sell land to developers who build homes and commercial centers. The revenue from land sales pays for development of supporting infrastructure, everything from roads and subways to schools and parks. Land sales also finance local government debt which exploded after 2008. In the post-2008 economy, developers rushed to build property amidst a real estate bubble and when the government moved to restrict activity in first- and second-tier cities, developers poured into third- and fourth-tier cities and repeated the model. However, developers have run ahead of many local governments. In areas where there are true ghost cities, support infrastructure such as schools and hospitals have not been built. If the real estate bubble bursts and land sales fall, local governments will need to find another revenue source or they may be unable to finance the infrastructure that generates GDP growth and supports the local real estate market, and they may even face a debt crisis in some of the worst hit areas. This ignores all the potential issues with indebted developers, plus overproduction and bad debts in other sectors of the economy.

Do You Plan to Hoard Dollars?

As I've covered previously, when the Chinese yuan slides, the financial media in China starts talking of hoarding dollars. Mostly unseen since 2012, it's back.

21st CBH: 人民币贬值持续 囤点美元划算不? (Yuan Devaluation Continues, Do You Plan to Hoard Dollars?)
The question is, after you've exchanged for dollars, what do you do with them, just hoard them? Renminbi financial products yield 4.4% or you can put cash into the stock market or P2P lending, but U.S. dollar financial products only yield 1.2% to 2.5%. A lot of bank sub-branches do not even offer U.S. dollar products. For investors thinking of changing yuan to dollars to profit from a rise in the dollar, it is worth it to think twice.

It goes on to suggest investors use QDII products that invest in the U.S. to profit from a rising dollar, though this carries more risk. The one product mentioned is a real estate investment fund from GF Securities. For people traveling abroad, it is suggested to "cash in" now before the dollar gains more strength versus the yuan.

Key point: Chinese individuals can walk into most banks and walk out with U.S. dollars, or put them into a U.S. dollar account. If the Chinese herd decides buying dollars is the thing to do, the move will be incredible.

A-Share Futures Slump on Margin Check News

Bloomberg: China Index Futures Fall in Singapore on Margin Curb Concern
Chinese stock-index futures slumped amid speculation increased regulatory scrutiny of margin loans will spur some leveraged investors to reduce holdings.
SGX FTSE China A50 Index futures for January delivery dropped as much as 5.2 percent before paring losses to 2 percent at 11:41 p.m. in Singapore.

7 Provinces Launch Govt Homebuying Schemes

I covered the launch of Fuzhou's bailout plan here: Chinese Governments Get Serious About Bailouts and Growth. Six other provinces have cities that have launched bailout plans involving the direct purchase of private homes: Sichuan, Anhui, Jiangsu, Liaoning, Inner Mongolia and Guizhou. Governments are trying to find ways to digest 600 million sqm in empty homes and the need to provide 7 million affordable homes. Since the Ministry of Housing plans to spend about ¥500 billion on shantytown renovations this year, and 40% can be used for relocation, this equals ¥200 billion for home purchases, equal to roughly 1 million homes.

For example, the government took the financial Appropriations, what can only acquire real estate? Was selected as replacement housing real estate projects, how to enjoy tax relief? Real estate projects under construction, which projects are eligible to enjoy the ride halfway CDB support? How to prevent government officials in the selection of housing projects in the process of the abuse of power? These types of problem are unresolved.

"Although the details of the operation still encounter many problems, but at least three or four lines to ease pressure on the stock as a short-term strategy for promoting stable and healthy development of the real estate market in these areas is of great significance." Yanghongxu think.

But insiders pointed out that even though the policy is good, but for a huge inventory digestion in third- and fourth-tier cities, the effect may not be large. Assuming a home is 60 square meters, the repurchase of 1 million units will only take care of 60 million square meters of inventory, accounting for 10% of the 600 million square meters in stock. Last year new home sales topped 1.2 billion square meters.

Yanghongxu that the government purchase and the practice of real estate as a long-term solution is not appropriate, otherwise there might return to the era of welfare housing. China's housing supply system, improve housing security system, should be independent of the development of logic and institutional framework.