2012-02-29

Yuan cross border settlement will expand in Shenzhen

China Takes New Step on Yuan Liberalization
Individuals, both Chinese and foreign, have few approved channels to send their yuan funds abroad or bring them back to China. They usually have to convert their yuan holdings into foreign currency first before remitting them offshore.

Banking executives say that, at least initially, demand for the new service will come mostly from mainland Chinese who plan to travel to Hong Kong, where the currency is widely used.

The Shenzhen directive applies to the local branches of Chinese banks, including Industrial & Commercial Bank of China Ltd., Bank of China Ltd., China Merchants Bank Co., Citic Group's Citic Bank, and Hua Xia Bank, the people with knowledge of the issue said,

The directive says that individuals can transfer across the border up to 80,000 yuan ($12,700) in funds per day through accounts with the Shenzhen branches of those banks. It is unclear whether authorities will permit repeated transfers over an extended period of time.
If Chinese start moving out of the yuan, Shenzhen and Hong Kong banks will be the first to know.

2012-02-28

This won't end well: China goes subprime; developers extend credit to home buyers

Lower down payment to reduce supply of housing
As the real estate market tilts in the favor of buyers, property developers in Guangdong, Hubei and Anhui provinces have gone so far as to provide upfront to first-time homebuyers two-thirds of the down payments that they will need to buy residences.

"Usually, you have to pay a minimum down payment of 30 percent to buy a house for the first time," said a salesman at an apartment project in Huizhou, Guangdong province, who only provided his surname, Zhuang.

"But there will be a larger discount if you buy an apartment before the end of the month. You will only have to pay a 10 percent down payment."

Zhuang said the remaining 20 percent required for the down payment will be advanced by the developer. So long as a homebuyer pays the money back before the project is completed in March 2013, he or she will not owe interest or extra fees.

"The special offering is only for local first-time homebuyers or people who have lived in the city and paid taxes for more than a year," Zhuang said.
Easy credit! The solution to every crisis. Except for the one caused by too much credit.

Some Chinese Developers Cut Down Payments, Business News Says
Developers have fairly strong needs to boost sales under this environment,” said Zuo Hongying, a Shanghai-based analyst at AJ Securities, adding that the practice “won’t become too widespread” as delaying down payments in effect increases leverage and risk.
This policy was used in 2008 on a temporary basis, but who knows how long this will last. If the market has truly turned a corner, they will not be able to stop the policy. This also brings to mind Lucent's policy in the late 1990s of extending credit to customers. They booked sales when the goods were sold, but the cash came later. Developers, who are starving for credit themselves, are now in the business of extending credit to their customers and the result will likely be the same as it was for Lucent and other firms that use this tactic to boost sales: disaster.

One of the firms offering these types of discounts? China Merchants, discussed in Chinese real estate market on the verge of explosive price declines. Is this firm in any condition to make these offers? Consider 招商地产叫卖一成首付 暗藏购房者主动违约风险
根据招商地产去年三季度财报,该公司扣除存货的流动资产仅184亿元,却要偿还一年内到期的各项流动债务近214亿元,还款压力显然很大。
In plain English: China Merchants had ¥18.4 billion in current assets after backing out inventory (as of Q3 2011), but has to repay ¥21.4 billion in debt this year.

Other firms said they are looking very closely at income, but documentation is unreliable in China. One analyst said China Merchants is legitimate, but other firms may fake the documentation, conspiring with buyers to defraud the banks. The developers will take advantage of the plan to extend the banks credit to their customers. Which, by extension, puts the bank on the hook. If buyers break their contract, then the banks auction the home and eat the losses.

The article doesn't make clear what are the grounds and penalties for breaking a contract. If home prices fall by more than 10% and the buyer finds a better deal, it makes sense to lose the 10% down payment and buy somewhere else. Also, when the the market weakens, next in line to be defrauded will be the shareholders, after earnings of developers are restated.

Another article that gives some details on the various offers is 北京万科等房企推首付分期 最低首付5万.

Chinese buying U.S. dollars; yuan dips

China Yuan Down Late On Central Bank Guidance
China's yuan was weaker against the U.S. dollar late Monday after the central bank, in a surprise move, guided the yuan lower via its daily reference rate.

On the over-the-counter market, the dollar was at CNY6.3019 around 0830 GMT, up from Friday's close of CNY6.2978. It traded between CNY6.2980 and CNY6.3029.

The People's Bank of China set the dollar-yuan central parity rate at 6.2985, up from Friday's 6.2965, despite the dollar's weakness against the euro overseas.
A Chinese friend told me she is dollar-cost averaging the purchase of U.S. dollars, buying 3000 renminbi worth every month. That works out to roughly US$500. Gold is the latest hot investment with stocks down for two-plus years and now real estate losing its luster, but it will be very interesting if U.S. dollars become popular since it could lead to major changes in the currency markets, such as yuan depreciation. For now, it is but a single anecdote.

2012-02-27

Chinese developers debt/equity ratios as of Q3 中国开发商的资产负债率

Since the debt-to-equity ratio for developers is starting to become an oft discussed data point, here's a few with data stretching back to the late 1990s in some cases. For comparison, large developer Evergrande (3333.HK) sported a debt-to-equity ratio of almost 120% at the end of 2010, while SOHO China (0410.HK) was 40%. Chinese developer stocks rose today on expectations of looser policies from Beijing, but the market also expects China Merchants' national price cut strategy will be copied by other developers, with Poly Group cited as one firm aggressively slashing prices. Both firms were covered in Chinese real estate market on the verge of explosive price declines.

2012-02-26

Chinese real estate market on the verge of explosive price declines

上海开发商强势降价20% 第二波降价潮爆发? (Shanghai developers mighty 20% price cut, is the second wave of cuts breaking out?)

Developer Poly Group has slashed prices on a Shanghai development, a move the media is dubbing the first cut of 2012 and a sign that a new wave of price cuts may hit Shanghai. The property in question wase selling for 19,000 yuan/square meter. Today, the price is 17,000 yuan/sqm plus 2,000 yuan/sqm in furnishings. This amounts to a 10.5% price cut and a 21% total reduction.

Another property in the Baoshan Songnan area announced a 5,000 yuan/sqm price cut as part of a group buy promotion, cutting the price to 19,500 yuan/sqm, about 20% below the previous price.

New home inventory in Shanghai is headed for 10 million square meters. An analyst said this inventory would have been sold in 6 months in 2010, 3 months in 2009 and 13 months in 2008, the year of the crisis. At today's optimistic pace of 600,000 square meters sold per mont, it would take 15 months to absorb the inventory.

上周12大重点城市新房成交套数环比齐涨 (Sales in 12 key cities rose in the past week)

Real estate transactions increased in the past week for 12 major cities. This news is greeted warmly by the industry and media, but an analyst at the end of the piece says sales increases will depend on whether developers continue to give huge discounts.

招商地产掀全国降价风暴 自称“史无前例” (China Merchants Property Development country wide price cut storm "unprecedented")

[China Merchants Property is the real estate division of China Merchants bank (0144.HK); the real estate division has two share classes: A shares trade under symbol 000024.SZ; B shares 200024; and in Singapore: C03.]

China Merchants Property will cut prices by 20% in as many as 14 cities: Beijing, Shanghai, Guangzhou, Shenzhen, Suzhou , Nanjing , Chongqing, Chengdu, Zhenjiang, Xiamen , Zhangzhou, Foshan and Tianjin. There are 4 projects in Shenzhen; 3 in Chongqing and Tianjing; and 1 or 2 in the remaining cities. Internal sources place the value of the price cut at 1 billion yuan.

Real estate firms have enjoyed gross margins of 40% in China and up to 50% by mid-2011. According to an internal source, China Merchants Property 2011 sales reached 20 billion yuan, an all-time high, but inventory also reached an all-time high at more than ¥40 billion.

A look at their inventory shows rapid growth (data through September 2011):

Profit margin is about 20%. Last year net profit for 9 months through September was about 2 billion yuan. Even assuming 2012 is about even with 2011 in terms of profits, a cut of 1 billion yuan would lower earnings on the order of 35% or more. Their asset-to-liability ratio hit 66.9% in the third quarter of 2011, the first time it ever exceeded 65%. Analyst Liu Ning said if the market doesn't shift, the sales pressure will be enormous.

A Dongxing Securities report says that developers will change strategy: they will increase turnover to recoup capital, but it will put downward pressure on margins.

[End article summaries]

The news conforms to the various stages of real estate bubbles. Activity has slowed because buyers anticipate lower prices and developers are holding back from selling, hoping for lower prices. The more aggressive firms, such as Vanke, were first to strike last year with big price cuts in order to move inventory. Now, we may be entering the stage where financial pressure forces the weaker firms into dumping properties. This will exert a major downward pressure on prices and reinforce buyer's expectations of lower prices. This is why I anticipate declines on the order of 40%. Declines of about 20% still dominate the news as the price cuts spread, but the overall declines are still around this level. In stage one of the decline, developers hope the government will step in and most people do not believe the bubble has burst. In stage two (or wave 3 after a small rebound if you're going by Elliot Waves), buyers and sellers realize the magnitude of the problem and prices plummet as buyers vanish and sellers worry about solvency rather than profits.

In terms of a small rebound, property stocks have been climbing despite the worsening conditions in the real estate market. 地产股演绎绝地反击 (Real estate stocks strike back)

From this chart (shown are Poly Group and China Merchants; Guggenheim China Real Estate (TAO) has the same pattern) we can see that real estate stocks were bottoming in October. This is the month when stories of Shanghai residents protesting big price cuts made it into the mainstream press. At this time, I view the rebound in property shares as the move up before the big decline. Investors tend to overreact and things haven't been so bad since the first wave of price declines came; gross margins are still high and firms remain very profitable. Activity is picking up these past couple of weeks and that has people optimistic for a turnaround or at least stabilization, but as we see with China Merchants Property, some firms are in bad financial shape. I expect a turning point for the share market soon, perhaps in the next few weeks. Later, perhaps near the end of Q2, we will see much larger declines in home prices.

Obama admin won't help Europe; European state run healthcare systems completely bankrupt; debt crisis getting worse

President Obama and his administration are frequently accused by the right of wanting to make the United States more like Europe. Much of the opposition to financial bailouts comes from the right, especially when money goes overseas to the IMF, foreign banks or foreign governments. Yet the Obama administration isn't interested in helping either.

Geithner, Schaeuble Spar Over Debt Crisis
The U.S.’s refusal to join that effort is hampering a drive to raise funds from other nations, Paulo Nogueira Batista, Brazil’s representative to the Washington-based lender, said in an interview. G-20 nations including Japan and China pledged to help Europe through the IMF, as long as Europe increases its financial backstop, or firewall, to contain the crisis.

“The reluctance or skepticism of a country the size of the U.S. is a handicap, especially if you consider that the G-20 is a consensus mechanism,” Nogueira Batista said.
The Brazilian government has the same opinion as the U.S. though, unless they get something in the deal:
Brazil’s Finance Minister Guido Mantega, after a meeting with his counterparts from Russia India, China and South Africa -- the so-called BRICS group of major emerging markets -- sided with the U.S. view that Europe needs to take more action. Developing nations will only contribute more funding to help Europe if the region’s leaders follow “precisely to the letter” a 2010 agreement to give them a bigger say in how the IMF is run.
The big talk over this weekend is of firewalls: act boldly to prevent a default from spreading across global markets.
Even so, the ECB’s offer “isn’t a substitute for the firewall,” Gurria said in a panel discussion in Mexico City. “We still have to build the mother of all firewalls.”
A firewall is possible, but due the politicians understand social mood? They do not anticipate further declines in social mood, therefore even if a firewall were possible, it would be overwhelmed by the fire. Furthermore, the negative social mood means there will not be cooperation or at least not enough to solve the problem. Instead of coming together on a deal and thinking of how everyone benefits, the politicians are thinking of all the costs and want side deals at other nations' expense.

Elsewhere, in On PIGS on Drugs, Bruce Krasting informs us that Recession-hit nations owe pharma firms billions
As austerity measures across Europe lead to healthcare spending cuts, hospitals in Portugal, Italy, Greece and Spain are delaying paying for drugs by up to three years.
There's a lot of good info in the Krasting post, such as the following:
Note #1

I was part of the problem (and part of the solution) for the Latin American debt crisis of the 80’s. I had a front row seat with each central bank as they went bust. Every effort was made to kick the financial can down the road. In the end, it all blew up.

For every country, the death march was the same. When big trade creditors finally balked, and said, “No mas IOU”, debt default followed within weeks.

Note #2

Novartis and Roche have the PIG “trade receivables” and those Greek “Zeros” on the books at 100% of par. The other global drug companies who are sitting on the rest of the $20b of IOUs have it booked the same. These debts are not worth par. One day these drug companies will have to write them off. I do wonder what other big EU companies are sitting on chunky IOU’s from PIGS. None of this is “money good”.
Some firewall. The Greek debt crisis is metastasizing; people were worried about the European banking system, but it turns out many non-financial firms are holding Greek debt. In spite of the bailouts, the crisis is growing worse, the debt is growing larger and very few people know non-financial companies are holding Greek bonds. It's a recipe for disaster.

Australian Labor party internal dispute puts the U.S. GOP to shame; Japanese voters unhappy, may give reformers a shot at leadership

The U.S. GOP is involved in civil war, but the fault lines are largely ideological. A rising power that takes form in the Tea party movement is trying to rest power from the establishment. In Australia, the battle is even more intense, but it is coming from within the ruling party and is entirely personal.

My favourite Anglosphere politician
The party's present convulsions betray a contempt for the electorate, a sense that the little people will put up with whatever they're damn well given. No one is even pretending that the Rudd-Gillard vendetta is ideological. This is the first leadership campaign I can remember where not a single politician has used the words 'I want to focus on the issues'. Given the Corsican nature of what is going on, such a phrase would be risible. Instead, Labor pols fall back on that most desperate of appeals: 'Keep the other lot out'.

Aussie PM battle pits Gillard’s support among insiders against Rudd’s skill with the people
The rivals, once political partners, will face off Monday in a vote of Labor Party lawmakers called by Gillard in hopes of extinguishing Rudd’s desire to recapture the top job. Labor lawmakers turned on Rudd two years ago to install Gillard, but he is banking on his popularity with the public and the fact that polls suggest the party would suffer landslide losses in elections next year with Gillard at the helm.
Rudd resigned from leadership (rather than be fired) in 2010 and was replaced by Gillard. The proximate cause was his support for a mining tax, but it was social mood that was his undoing. The party was weak in the polls and sought a leadership change to maintain power, and the analysts note that Rudd is more popular with the electorate, Gillard with party insiders.
Rudd is the clear underdog in Monday’s secret ballot. Far more Labor lawmakers have spoken out publicly in support of Gillard than for Rudd ahead of the vote — an extraordinarily vicious contest that will leave the party diminished in voters’ eyes regardless of the outcome.
This battle perfectly encapsulates the social mood. Internal fighting for zero political gain for the party and a public looking for new leaders, including possibly a new party in power.
Australia's Gillard Suffers Setback
Mr. Rudd, himself overthrown as prime minister in mid-2010 by Ms. Gillard's supporters, has built his challenge on the argument that he is a better candidate to lead Labor into the next general election, scheduled for late 2013. Mr. Abbott's Liberal-National coalition has built a commanding position in opinion polls.

Still, wresting power from Ms. Gillard is a daunting task. She heads into Monday's vote counting on support from about two-thirds of the 103 member caucus, according to her campaign team. A bigger danger to her leadership could come after the vote. Mr. Rudd's challenge has done long-term damage to Ms. Gillard's government and exposed deep divisions within Labor.

"I believe the last few days have done damage to our party," said Mr. Albanese.
Australia's political situation is bad, but it's nothing compared to Japan's: Prime-Ministerial Unpopularity Contest at the Edge of the Japanese Abyss

This graph shows the popularity of Japanese prime minsters since Junichiro Koizumi left office in 2006 after six years in office. The poll numbers drop for every prime minister because the electorate's mood is negative. They are unhappy with all of their leaders and always want new leadership. In that light, consider this headline: Japan mayor’s call for a ‘dictator’ strikes chord with voters
“What Japan needs most now is a dictator.” Toru Hashimoto (pictured), a lawyer and TV celebrity-turned politician, was quick to add when he made that widely publicised remark last year that a Hitler-style dictatorship was neither desirable nor possible given Japan's democratic checks and balances.

But the call for strong leadership from the charismatic mayor, whom some believe has ambitions to be Japan's next premier, is resonating with voters frustrated by years of political deadlock that has kept the country from tackling the deep-rooted problems of a fast-ageing society. Rising voter support for the boyish-faced Hashimoto, 42, who was elected as mayor of the major western city of Osaka last year after serving three years as governor of the broader region, mirrors the sagging fortunes of Prime Minister Yoshihiko Noda.
Voters are clearly in a bad mood and the desire for dictators is also an expression of authoritarian tendencies during periods of negative social mood. More people long for a single figure to step in and push through reform. Where there's more negative social mood, a greater fundamental crisis or history of such leaders, the higher the probability that a nation would turn to a dictator.
"A lot of 'floating voters' who get captivated by the latest flavour could vote for Hashimoto. It's a way of sticking their finger in the eyes of the established parties," said Gerry Curtis, a Columbia University political science professor. Others, though, say Hashimoto may just end up as the latest outsider to fade after a flurry of media and voter attention.
What does Hashimoto propose by way of reforms?
The party's main demands include the direct election of the prime minister and reform or abolition of parliament's upper house which has become the stumbling block for new laws passed by the lower chamber and is blamed by many for Japan's political stalemate. Both changes, though, need hard-to-enact constitutional amendments.

Hashimoto wants to scale back the government's role to diplomacy, defence and macroeconomic policies while giving the regions more independence, a stance echoed by many other local politicians as well as the small Your Party, created in 2009 by former LDP lawmaker Yoshimi Watanabe, now a Hashimoto ally.
The first paragraph's reforms are change for change's sake in my opinion, as the form of government is not the problem. The second paragraph sounds like the U.S. Tea party movement or Republican presidential candidate Ron Paul: a push for smaller and more decentralized government. This is a move away from dictatorship.

Socionomics Watch—Wyoming government prepares for collapse of federal government

Wyoming House advances doomsday bill
House Bill 85 passed on first reading by a voice vote. It would create a state-run government continuity task force, which would study and prepare Wyoming for potential catastrophes, from disruptions in food and energy supplies to a complete meltdown of the federal government.

The task force would look at the feasibility of Wyoming issuing its own alternative currency, if needed. And House members approved an amendment Friday by state Rep. Kermit Brown, R-Laramie, to have the task force also examine conditions under which Wyoming would need to implement its own military draft, raise a standing army, and acquire strike aircraft and an aircraft carrier.

2012-02-24

Euro shorts decrease ahead of euro rally


Binzhou residents steal natural gas, use plastic bags to transport bombs

H/T: Chinasmack.



Reformers getting noisier in China......and also more popular

Liberals on rise, in words if not deeds
"In the course of reforms, the scary thing is not the voices of opposition, but for the reform to halt immediately whenever there are opposing voices," it said.

The commentary said policymakers should be willing to touch on sensitive and difficult areas for reforms because "the easy reforms were almost done and what remains are the tough ones that cannot be avoided."

Although the commentary did not elaborate on the "tough" areas, advocates have long called for democratic reforms, as the past 30 years has focused on economic reform.

"There are risks in reforms, but the party will be in danger if there is no reform," it said, echoing comments by Premier Wen Jiabao on a tour of Guangdong this month that the country "will come to a dead end without reform".
A lot of articles have been appearing in the Chinese press, Chinese blogs and on Weibo that are critical of the government's economic policy.

皇甫平对话吴敬琏:20年来经济处于半统制半市场状态 (Huang Fuping and Wu Jinglian dialogue: 20 years later, the economy is still half-market half-controlled)

Here is the wiki for Wu Jinglian and here's a NYTimes profile from 2009: China’s Mr. Wu Keeps Talking
Mr. Wu has not been interrogated, charged or imprisoned. But the fact that a state newspaper, The People’s Daily, among others, was allowed to publish Internet rumors alleging that he had been detained on suspicions of being a spy for the United States hints that he is annoying some very important people in the government.

He denied the allegations, and soon after they were published, China’s cabinet denied that an investigation was under way.

But in a country that often jails critics, Mr. Wu seems to be testing the limits of what Beijing deems permissible. While many economists argue that China’s growth model is flawed, rarely does a prominent Chinese figure, in the government or out, speak with such candor about flaws he sees in China’s leadership.

Huang Fuping is the pen name of Zhou Ruijin (there may be several writers using the same name). Here's a recent article on his ideas: Zhou Ruijin: reform and the way forward
Looking at the grassroots [of society] and online public opinion, you can see there is a strong base of support for reform. This must be leveraged, bringing the will of the Party and the people together [on reform] and promoting the innovation of social management. Like Guangdong, [we must] give priority to and promote social construction (社会建设), using government and civil society strength in coordination to resolve the complex problems facing our society in transition. Just as [Deng] Xiaoping said that year: “Once certain something must be done, we must dare to experiment, carving open a new path.”

皇甫平对话吴敬琏:20年来经济处于半统制半市场状态 There is a transcript of the dialogue at the link. There's also a 30 minute video of the conversation:



These two men have been saying the same things for 5-plus years. Their tone has gotten more urgent and they've found wider acceptance. A result of the social mood perhaps?

Cry havoc! Protectionism goes international

The EU carbon trading brouhaha has gone from a nuisance to a potential trade war. I noted the news in China, but it seemed like a country-by-country rejection of the EU policy. Now, these countries are teaming up to harmonize their retaliation against the EU.

EU faces trade war over carbon law
China, the United States, Russia and 20 other nations have agreed to co-ordinate potential retaliatory trade measures against the European Union in response to a new law that requires airlines to pay for their greenhouse gas emissions.
After a two-day meeting here led by Russia, 23 countries signed what they called the “Moscow Joint Declaration.” If not yet engaged in a trade war, the countries declared a readiness to start one in a way that could add to the cost of tickets to Europe. They agreed to coordinate any retaliatory action against European-based airlines that fly internationally, like Air France and British Airways, and listed nine possible ways to do so.

“We intend to get the E.U.’s carbon trading measures either canceled or postponed,” Russia’s deputy minister of transport, Valery Okulov, told journalists after the declaration’s adoption. In addition to the United States and China, supporters included Cuba, India, Japan, Saudi Arabia and Nigeria.
This is a serious rebuke of the EU and note that these countries do not agree on sanctions against Iran or other areas where economic policies are the thrust of the debate. Yet, for a slightly less political situation, they easily join together to fight encroachment on their economic sovereignty. This is the same exact reason why the EU itself is falling apart.

Zero profit homes in Beijing: developers sell for cost to recoup capital

“零利润”楼盘再现楼市 关键看购房者是否买账 ("Zero Profit" buildings, will home buyers buy)

Below are some key portions of the article, translated or summarized.

A Dongya Xinhua Group (东亚新华) development in Tongzhou, Beijing is selling at cost. At the end of last year, this development sold for 13,200 yuan/square meter. Today, the price is down to 12,400 yuan/sqm—and estimates put the development cost at more than 12,000 yuan/sqm.

At the end of 2011 in Tongzhou, Dongya Xinhua's Yipin Court sold for a new market low of 13,200 yuan/sqm and a neighboring property slashed its price. A Pearl River International property was expected to sell for about 24,000 yuan/sqm based on cost plus an 8% profit. Instead, the property hit the market at an "eye popping" 13,200 yuan/sqm, including 10-15% of free floor space, meaning even that final price was discounted.

Based on land and construction costs, the Dongya Xinhua property cost about 12,347 yuan to build, barely below the current sales price.

In early 2010, the average transaction price was more than 20,000 yuan/sqm, with some properties selling for more than 30,000 yuan/sqm. Today, that average has fallen to between 13000 and 16000 yuan/sqm.

Industry insiders say it isn't that developers don't want to cut prices, it's that they bought land at peak prices in 2009 and 2010, and it's not realistic for them to sell below cost, at most are the properties such as Yipin Court that are recovering their capital.

To deal with the depressed and deadlocked market, developers have tried direct price cuts, but these aren't working. They are racking their brains to come up with innovative marketing ideas. Aside from the "zero profit" strategy, controlling the supply of homes reaching the market, help with down payments and delayed sales are just a few of the myriad methods employed.

In reality, price is their only weapon. Either a low price or a good value (price-quality ratio) will attract buyers, such as the Longhu property which was the first "zero profit" development to hit the market. It set a sales record and sold over 100 million yuan of homes in January. As of the first half of February, Longhu was the sales champion for the area. The Dongya Xinhua property is seeing similar attention. In January, there were 78 phone inquiries; that has quadrupled to 332 in February. There were only 40 visits in January, but already 109 in February. Dongya Xinhua's marketing head Jia Yupeng said the sales cycle is longer now. Buyers hesitate for about a month, to wait and see if there will be policy changes and investigating the price-quality ratio of surrounding properties. He expects sales will steadily rise in March.

Developers are still using strategies such as "buy a house, get free appliances" and auto shows, in addition to giving away movie tickets and birthday parties, as they give it their all. Chairman of 伟业我爱我家 (I Love My Home) Chariman Hu Jinghui said the buyers have the initiative due to the level of inventory. Whether firms earn zero profit or a small profit will depend on whether the buyer thinks the price is good; it makes no difference to them whether the developer earns a profit.

A new property in Chaoyang near the Beiyuan subway stop is selling 65 sqm units for 17,500 yuan/sqm, much less than the surrounding average price of 25,000 yuan/sqm and attracting a lot of interest from buyers. About 55% of the units were sold and last week, new units came to market at 19,000 yuan/sqm and already half have been sold.

There are more examples of price cuts boosting sales and comments from various analysts. Near the end, one analyst says that of the new buildings hitting in Beijing in March, the average price reduction is 40%.

“零利润”楼盘再现楼市 关键看购房者是否买账 ("Zero Profit" buildings, will home buyers buy)

Below is the cover page of the real estate section of the Beijing Times (京华时报) for Friday, February 24, 2012.


Brokered campaigns could avert brokered GOP convention

If there is no brokered convention, it will be due to brokered campaigns: a pre-convention deal between two of the campaigns. In this video, Ron Paul adviser Doug Wead discusses the Santorum attacks and ongoing conversations between the various campaigns.

2012-02-23

Gold miners having a moment in the Sun

With gold challenging the $1800 level, miners are popping, in part due to a heavy hit in the press, with several articles detailing their undervalued status. Follow this link to Yahoo! Finance, it lists quotes for every holding in Market Vectors Junior Gold Miners (GDXJ). You can sort the quotes by the column headings. One miner I recently bought that is not in GDXJ is Wesdome (WDO.TO). In GDXJ, the best performer this morning was Great Basin Gold (GBG.TO), which also trades in the U.S. under the symbol GBG.

GDXJ Holdings (Yahoo! Finance)

Romney and Paul tag team Santorum?

On February 9 I wrote Does a Romney/Paul ticket make sense? and on February 18 Romney/Paul ticket is now in trial balloon phase. The idea of a Romney/Paul ticket has gone even further mainstream, with Rick Santorum alleging a "tag team" and pundits openly discussing the possibility.

Santorum campaign suggests Mitt Romney may have done deal to make Ron Paul his running mate
"You have to ask Congressman Paul and Governor Romney what they've got going together," Santorum told reporters in the spin room in Mesa, Arizona. "Their commercials look a lot alike and so do their attacks."

Santorum's top strategist John Brabender went even further, charging that the two men had "joined forces" and were coordinating attacks against his man

"Clearly there's a tag team strategy between Ron Paul and Mitt Romney. For all I know, Mitt Romney might be considering Ron Paul as his running mate. Clearly there is now an alliance between those two and you saw that certainly in the debate."
However, the Romney campaign dismissed the idea of coordination in advertising or during the debates.
The Romney campaign ridiculed the notion there was any coordination. "If ever there was an iconoclast who got up there and said what he believed, it's Ron Paul," said Stuart Stevens, Romney's chief strategist.

"The President of the United States's political action committee is now running ads that are just like Rick Santorum's. Is Rick Santorum coordinating with the President of the United States? I don't think so.

2012-02-22

Hong Kong philanthropist donates 25万 for new school in Shanxi; local government leases it to auto dealership

Village Converts Primary School into Auto Dealership

The village is converting back to a school, three years later.

Brokered convention remains a hot topic; GOP infighting a sign of social mood and good for long-term prospects

This discussion points out the difference between an actual brokered convention and a deal before the convention. A deal is more likely, with two candidates teaming up as the most probable event, should there be no outright winner.


Many people discuss how this is negative for the GOP, but I believe this is long-term beneficial. A massive political shift is underway and the negative social mood will bring about more sweeping changes at the ballot box. The worst possible outcome for the Democrats is for Obama to win reelection because this delays the internal reform of the party. Simply put, the infighting in the GOP is partially due to social mood and partially due to the party structure at the peak of social mood. People didn't care about changing the direction of the party while social mood was positive and from 1980-2000 both parties basically saw insiders slowly takeover. In 2004, there was the foretaste of revolution in the Democrat party when Howard Dean surged ahead in the primaries. In 2006, the party had a shot at change, but instead coasted to victory on the back of Republican failures. Then in 2008, Obama was seen as a new politician who could bring a new direction; instead he let the established powers in Congress run the show. The Democrats have now gone 8 years without another major breakout of their discontented voters.

In contrast, the GOP breakup was fomenting by 2006, as voters stayed home. By 2008, Ron Paul's campaign was seen as quixotic, but only one year later, the groundwork laid by his Campaign for Liberty helped fuel the Tea Party movement that was sparked by Rick Santelli's rant.


In 2010, the Tea Party delivered a big victory to the GOP, but also started to change the GOP by bringing in new members and challenging the current leadership. In 2012, Ron Paul's campaign is still trailing the field, but close enough that he could play a role in deciding the nominee. He's also bringing in disaffected Democrats and independent voters; to the extent that he's included in the next government, he could bring in a group of new voters. Meanwhile, the grassroots voters saw an attempt by the party leaders to force a nominee on them and they've been resisting for months.

The Republican side looks messy and disorganized, but it reflects the negative social mood in full bloom. On the Democrat side, opposition is bottled up as the party stays unified behind Obama. Since the Democrats aren't immune from social mood and the longer it takes to reform, the messier it will be. Due to the peak social mood hitting in 2000, the current leadership in both parties is firmly established. Conservatives have spent four years chipping away at the establishment and may need 2 to 4 more years to get a new candidate. If Obama wins reelection, the Democrats may be 8 years behind the GOP in terms of internal reform. And as I've said previously, the main thing voters do when they are in a negative mood is throw out the establishment and incumbents. The party that does the job for them and throws out its own incumbents in the primaries is the one best positioned to win the final elections.



China and Japan fighting again

Nagoya mayor denies Rape of Nanjing took place in front of Nanjing official
"Why were people in Nanjing kind to Japanese soldiers only eight years after the incident? I could go to Nanjing and attend a debate on the history of the city, if necessary," Kawamura said.

"There were regular combative activities, but I believe the Nanjing (Massacre) never happened," he said.

Nanjing suspends official contact with Nagoya
Southern Chinese city Nanjing said it will suspend official exchanges with Japanese city Nagoya following its mayor's denial of the Nanjing Massacre, a spokesman of the foreign affairs office of the Nanjing municipal government said Tuesday night.

China's Communist party milks the Nanjing massacre for all it is worth. On this news site, there's an entire page dedicated to this dust-up, with lots of stories, interviews, news reports, etc. Below are three screen captures in case the page address changes or is later taken down.





2012-02-21

A sign of German mood?

If the crosswalk says don't walk, even if there are no cars in sight, Germans will wait for the light to change. I don't know how the cities are today, when I was in Berlin I jaywalked and no one yelled at me, though I've heard it happens.

In The culture that is Germany (Jaywalking Edition), we see the cover of the latest Hamburg Morgenpost:
The headline, Erwischt!, or Caught!

“How more and more Hamburgers are crossing at the red light – and how they make excuses,” it warns, in best Daily Mail style.
Germans may take their road rules seriously and this is admittedly one data point, but I would guess the probability of seeing a front page story on jaywalking during positive social is quite low. I liked the latest comment under the story:
Your name (guest) says:

This article is so petty, that it is now being made fun of on American blogs.

More important is the following: a book burning. See FLAMES IN THEIR HEADS
Zet declared that he is willing to collect Sarrazin’s book from those readers who would like to do away with it. In the course of 7th Berlin Biennale, the artist will use the collected copies to develop an installation in the KW Institute for Contemporary Art exhibition spaces. The form of the work will depend on the number of books collected; Zet will decide their future fate along with the public.
The target is Thilo Sarrazin's book, "Germany Abolishes Itself," a critique of Germany's multicultural, welfare and immigration policies.

Germany is extremely sensitive to WWII and the swastika is illegal. If a book burning takes place, it signals a big shift in the public's attitude.

Global warming conspiracy collapsing

If you keep up with climate science news, you may have seen this story: Leaks show group's climate efforts
Leaked documents from a prominent conservative think tank show how it sought to teach schoolchildren skepticism about global warming and planned other behind-the-scenes tactics using millions of dollars in donations from big corporate names.

More than $14 million of the money used by the Chicago-based Heartland Institute would come from one anonymous man, according to the documents prepared for a meeting of the group's board.

Heartland is one of the loudest voices denying human-caused global warming, hosting the largest international scientific conference of skeptics on climate change. Several of its documents were leaked this week to the news media, showing the planning and money behind its efforts. Heartland said some of the documents weren't accurate, but declined to be specific.
These documents were stolen in an attempt to balance out the Climategate email scandal, which showed climate scientists were covering up data that was negative to their cause. The charitable description of events is that they "know" there is global warming, but some of the science isn't settled and they didn't want to give man-made climate change skeptics any ammunition.

The Climategate information was an Freedom of Information Act (FOIA) request and the material was collected for the purpose of releasing it to the public. When climate scientists blocked the release, someone working inside the university released them to the public. In the Heartland case, the information was stolen. Additionally, we now learn that the information was stolen by a climate researcher and that he forged some documents in order to create a scandal. In other words, in an attempt to discredit climate-change skeptics, he succeeded in discrediting climate science.

Peter Gleick Admits He Obtained Fakegate Documents by ‘Deception’, Heartland Responds
Gleick, in a blog post at Huffington Port, says:

Since the release in mid-February of a series of documents related to the internal strategy of the Heartland Institute to cast doubt on climate science, there has been extensive speculation about the origin of the documents and intense discussion about what they reveal. Given the need for reliance on facts in the public climate debate, I am issuing the following statement.

At the beginning of 2012, I received an anonymous document in the mail describing what appeared to be details of the Heartland Institute’s climate program strategy. It contained information about their funders and the Institute’s apparent efforts to muddy public understanding about climate science and policy. I do not know the source of that original document but assumed it was sent to me because of my past exchanges with Heartland and because I was named in it.
Heartland responds with:
In his statement, Gleick claims he committed this crime because he believed The Heartland Institute was preventing a “rational debate” from taking place over global warming. This is unbelievable. Heartland has repeatedly asked for real debate on this important topic. Gleick himself was specifically invited to attend a Heartland event to debate global warming just days before he stole the documents. He turned down the invitation.

Gleick also claims he did not write the forged memo, but only stole the documents to confirm the content of the memo he received from an anonymous source. This too is unbelievable. Many independent commentators already have concluded the memo was most likely written by Gleick.
Climate science is a relatively new science and relies heavily on computer models. Research will continue, but the politicization of climate science will come to an end soon because it will become just another field of research. As social mood turns negative, people search for people to blame for their negative feelings. Sometimes scapegoats are found and sometimes society attacks legitimate problems. Whether you believe in man-made global warming (AGW) or not, climate science is very likely to become a target for three reasons. First, it is expensive. The decline in social mood weakens the economy and AGW solutions will further weaken the economy. Politically, the agenda is dead. Second, there is considerable debate over the direction of the climate. Many scientists focus on the "consensus" around man-made warming, but putting aside the fact that science relies on fact, not consensus, there are a lot of scientists who argue the Sun will overpower man's effect. Even if one agrees with AGW, one may disagree with the climate forecast and any political policies is derived from it. Third, the scandals are coming from AGW proponents. Their argument from the start has been that skeptics are lying and furthering a lie for money, paid by corporations who will lose money from AGW policies, such as the fossil fuel industry. It turns out that all the actual lies and theft were made by AGW proponents.

From an investment perspective, whether global cooling occurs or not, the fossil fuel industry has caught a break.

Chinese steel price decline accelerating


Manufacturing is a lead indicator for economic growth and all signs point to a major slowdown in the steel sector.

China's steel riddle
The curiosity about the Chinese game plan is understandable for its dominant presence in the world steel industry. According to World Steel Association, global production of crude steel in 2011 rose 6.8 per cent to 1.527 bt. This is largely on account of China, which once again sprung a surprise lifting output by 8.9 per cent to 695.5 mt, giving itself a share of 45.5 per cent of world production. How much steel does the world expect from China this year? We understand the boom in real estate development and construction sustained Chinese daily steel output at over 1.9 mt for much of last year. This, however, fell to nearly 1.7 mt in 2011 fourth quarter and as we go forward we may see further production contraction in China, in case margins for the industry there do not improve.

China Steel Prices May Fall Amid High Inventories, Mirae Says
Baoshan Iron & Steel Co., China’s biggest publicly traded steelmaker, raised its products prices by at least 150 yuan ($24) a ton for March delivery, the second increase in three months, the company said Feb. 10. The market usually expects steel demand to rise as construction resumes after the weeklong Chinese New Year holidays, which ended on Jan. 29 this year.

“Construction demand for machine power remains weak, with a disappointing improvement post the Chinese New Year, due to insufficient cash injection from local governments into infrastructure projects,” Mirae Assets said in the note. “The current rise in ex-factory prices is mainly being driven by steel mills rather than end-user demand. We believe steel mills will have to compensate traders later when prices fall.”

2012-02-20

China's weak financial system supported by private lending; crackdown on private lending leads to more business failure

I have previously covered the Wenzhou saga, where factory bosses were fleeing their homes to avoid unpaid debt, and the recent scandal with Sichuan Sinopec, where an employee at a state owned firm at the very least appropriated company funds to turn the sales division into a real estate developer lender.

The loans have been going bad for awhile and AP has gotten around to covering some of the stories in China's unofficial lending falters, savers protest
Underground lending by ordinary Chinese like Zhang flourished over the past decade, providing trillions of yuan (hundreds of billions of dollars) needed by private companies that create China's new jobs and wealth. Its popularity reflects public desperation for an alternative to China's banks, which pay low deposit rates that fail to keep up with inflation and channel savings to government companies.

But the high cost of underground credit — interest rates of 70 percent a year or higher — and a slump in global demand caused a wave of business failures last year, prompting owners in cities such as Wenzhou in the southeast to flee.
In the Sinopec story, I mentioned how there was no sign of underhanded business in the Wenzhou cases. Extremely high interest loans are dubbed loan-sharking in Chinese and probably would be in English as well, but in most cases, there was no crime syndicates involved. Instead, the interest reflected the dearth of capital. In a nation awash in foreign investment and 20%+ money supply growth, private businesses operated in a credit desert. While state-owned firms drowned in liquidity, private business could only turn to family and friends, or underground lending syndicates that charged high rates for the high risk loans.
Only 19 percent of bank lending last year went to small businesses, while total loans fell 6 percent from 2010 to 7.5 trillion yuan ($1.2 trillion), according to the official Xinhua News Agency.

The underground credit market is estimated by China's central bank and private sector analysts at 2 to 4 trillion yuan ($325 to $650 billion), or as much as 7 percent of total lending. In some areas, informal lending exceeds that of official banks.
Both borrowers and lenders like the arrangement. The central government suppresses deposit rates in order to capitalize the banking system. Chinese consumers fund a never ending bailout fund for the banking sector, which itself is the key support system for state-owned companies. To put an exclamation point on the fact that most lending cases (in contrast to what's alleged at state-owned Sinopec) are mutually beneficial:
Yao Yafei, a manager of a chemical company with 20 employees in the central city of Linfen in Shanxi province, said it has used informal lenders since 2004. He said that in its latest round, the company borrowed 500,000 yuan ($80,000) in July and repaid it two months later with 2 percent monthly interest.

"Underground banking is popular here," Yao said. "They offer really good service and send the money to you just one minute after you ask. They even send the cash to your place if you want.
Regulators became worried when the obvious consequences of their market intervention led to market distortions:
Regulators started to worry about underground lending after high returns drew state companies and civil servants into the business, blurring the line between banks and informal lending, according to Guo.

"They could easily borrow from banks and earn a profit by re-lending the money," he said. "If a problem happened, it would become destructive."
Cheap credit to state-owned companies allowed them to profit simply by taking out massive loans and then relending the money at higher rates.
"There were no problems in the past two or three years, so people believed they could make money from it," she said by phone from Anyang. The borrowers paid 4 percent interest each month but when the six-month loan came due in September, they said they had no money left, she said.

"It was just gone," Zhang said.

Thousands of frustrated lenders in Anyang took to the streets on New Year's Day, demanding the government recover their money, according to Hong Kong news reports.

Police blocked some who tried to board trains to Beijing to complain to the central government and authorities in Anyang are investigating hundreds of people suspected of involvement in investment schemes.
To satisfy negative social mood and unrest stemming from the failures, the government is attacking these lending "schemes" and in some cases handing out death sentences. In these cases though, the illegality is banking outside of the banking system, not any type of moral crime such as theft. The firms unable to pay their loans are in trouble due to the economy, not fraud. There must be fraud cases out there, but they are the exception rather than the rule. The only difference between the lenders sentenced to death and the lenders at the big banks is that the big banks are state supported, complete with bailouts. The financial condition of the banks and the state-owned firms that borrow from them is no better, and possibly worse, than the condition of the private sector.
The propaganda department of Anyang's Communist Party branch said investigators have detained 160 people and recovered 1.8 billion yuan ($290 million) out of 4.6 billion yuan ($741 million) sought by lenders.
It's unclear what this means. If similar to the case of Wu Ying, it means that the government has seized the assets of ongoing concerns and auctioned off assets, in which case they will cause greater losses and then arrest those involved for fraud, possibly ending with death sentences. In other words, in their desire to "do something" and placate an angry populace, they are making the situation worse. Is it any wonder that wealthy Chinese are fleeing the country?

China social mood in a graph


Social mood is an average of millions of individuals. People have a herd instinct and move with the group, which is why a social mood exists, but individuals do not necessarily follow the herd. In fact, there are many smaller groups that could have exact opposite mood. A good way to express social mood is with a graph similar to the one above, with a negative and positive portion of society. Although this graph is about real estate, the first thing I thought when I saw it was social mood. Chinese constantly talk about real estate and consider buying homes if they don't own one. It isn't as efficient a social mood signal as the stock market because the stock market has millions of trades each day, but it's a stronger signal in markets that are in a bubble.

Chinese social mood isn't as negative as the chart shows, but it does represent the trend.

Supply of homes to surge in March; Beijing real estate market faces first big test in 2012; Polls indicate lower prices

Next month we will learn whether Beijing's real estate market is in a slowdown or a prelude to collapse. Twenty-one properties will hit the market and thus far, only four have given firm pricing. March's new supply exceeds the total supply for January and February. Most of the new buildings are located in the outer suburbs of Beijing: Changping, Fangshan and Daxing.

下月21个楼盘羞答答入市 仅4个项目给出明确报价

不过,对于各界关注的价格,开发商却遮遮掩掩。亚豪机构统计数据显示,3月21个计划开盘项目中,有15个给出了报价,然而开发商的报价方式却发生了明显转变,有7个项目报出了一个大致的价格区间,4个项目仅报出了项目的最低售价。只有4个项目给出相对明确的均价,而这4个项目的整体开盘均价为17500元/平米。
Of the 21 buildings, 15 have given some indication of price. Seven have given price ranges, four have announced the lowest priced apartment, and four have given clear pricing. Those latter four buildings have an average price of 17500 yuan/square meter. Some of the properties have much higher prices, in the range of 30000 to 40000 yuan/square meter. The situation makes sense: the developers targeting the broad section of the middle class have announced prices that are not high, while those at the higher end of the middle class market are more cautious.

Elsewhere, there was a Beijing Evening News/Sina poll asking where respondents see the real estate market headed.

北京晚报联合新浪乐居调查:低地价就有低房价

A couple of questions are specific to the Wangjing area, but the last three are general (percentages as of 3 PM Beijing time):


4.您认为北京房价是否目前已经探底? (Do you think Beijing real estate prices have bottomed?)

是 (Yes) 16%
否 (No) 84%

5.您认为北京房价在未来两年内的趋势是?(In the next two years, you think Beijing real estate will trend?)

逐步降低 (Progressively lower) 47.3%
趋于稳定 (Stabilize) 20.7%
未来会有反弹 (There will be a bounce) 19.1%
难以判断 (Hard to say) 12.9%

6.您认为开发商是否会低于地价卖房?(Do you think developers will sell homes below the cost of land?)

绝无可能 (Absolutely not) 64.6%
有可能 (Maybe) 35.4%

If you click through to the poll, on the right hand is Sina's mascot. Clicking it will open a pie chart that shows the geographic location of respondents who gave that answer. At the top are also options to change the look of the results (pie chart, columns) as well as data on all poll respondents. As of 3 PM, 5500 people had responded. At that time, 39.4% were from Beijing. In question 5, Beijing respondents were more likely to expect lower prices: about 43% chose the first response. They were also more likely to have chosen the second answer to question 6. However, overall the numbers were very similar, showing only a slight difference of opinion in Beijing. The biggest came in the question regarding prices in the Wangjing area of Beijing, which non-Beijing residents would know less about. Overall, it shows that Beijing serves as a psychological bellwether for the national real estate market.

2012-02-19

China cuts reserve requirements: is it too late?


This graph comes from a BIS working paper: China’s evolving reserve requirements. I highlighted an important portion from the abstract as it relates to the cut in the reserve requirement:
This paper examines the evolving role of reserve requirements as a policy tool in China. Since 2007, the Chinese central bank (PBC) has relied more on this tool to withdraw domestic liquidity surpluses, as a cheaper substitute for open-market operation instruments in this period of rapid FX accumulation. China’s reserve requirement system has also become more complex and been used to address a range of other policy objectives, not least being macroeconomic management, financial stability and credit policy. The preference for using reserve requirements reflects the size of China’s FX sterilisation task and the associated cost considerations, a quantity-oriented monetary policy framework challenged to reconcile policy dilemmas and tactical considerations. The PBC often finds it easier to reach consensus over reserve requirement decisions than interest rate decisions and enjoys greater discretion in applying this tool. The monetary effects of reserve requirements need to be explored in conjunction with other policy actions and not in isolation. Depending on the policy mix, higher reserve requirements tend to signal a tightening bias, to squeeze excess reserves of banks, to push market interest rates higher, and to help widen net interest spreads, thus tightening domestic monetary conditions. There are, however, costs to using this policy tool, as it imposes a tax burden on Chinese banks that in turn appear to have passed a significant portion of this cost onto their customers, mostly depositors and SMEs. However, the pass-through onto bank customers appears to be partial
Consider the highlighted sentence in light of the following articles, all from the previous week:

FDI drops over EU debt crisis
Foreign direct investment dropped for the third straight month in January as European investment plunged by 42 percent from a year earlier. The slump in European investment was instrumental in causing a slight fall of 0.3 percent in FDI.

The drop prompted a warning from the Ministry of Commerce over the "grim" outlook for FDI.

China's Forex reserves likely to decline this year: Report
Chinese forex reserves will continue to decrease in 2012, Lian Ping, chief economist at Chinese Bank of Communications, said.

China's economy is no longer as heating as in the past, and that is the main reason among others why Chinese exchange reserves are dwindling, he said.

Chinese Banks’ Bad Loans Rise in Fourth Quarter as Economy Slows
Non-performing loans rose 20.1 billion yuan ($3.2 billion) to 427.9 billion yuan as of Dec. 31, the China Banking Regulatory Commission said in a report on its website today. Bad loans accounted for 0.96 percent of total lending, up from 0.95 percent in September and 0.17 percentage point lower than a year earlier.

In China aims for 14% M2 growth; M2 growth hit 17% in December, I showed money supply growth is still in a multi-year downtrend, but remains in the high double digits. I discussed China's dilemma in a December 2010 post, Larry Meyer echoes Liu Junluo:
For many countries, it may be too late, particularly in the case of China. They should have started moving away from exports years ago and let their currency appreciate more rapidly, and now they are caught in a bind. If they do not allow the currency to appreciate, inflation may quickly surge into the double digits. Once that happens, they must take drastic action, but even if they act to stop the inflation, it may be too late to prevent a deflationary bust in the real estate market (especially in China) or other asset markets.

Federal Reserve policy is likely to create a crack-up inflationary boom that leads to another Asian Crisis and the actions taken by Asian governments and central banks will also lead to deflation.
China's policy mistake, if a major crisis erupts, was to delay restructuring. Without a positive shock to the economy, the government and central bank are caught between the Scylla and Charybdis of major inflation or deflation. In order to stop inflation generated by the Fed's QE policies and slow the internally fueled real estate bubble, the PBOC tightened and the central government clamped down on real estate. Deflation is now settling in. The big question is how bad is the real estate slowdown? If the optimists are right, the sector will stabilize in the second half and central bank easing will help spur growth to offset negative shocks. If it's bad, the PBOC is behind the curve and more serious deflation will follow. Then the money spigots will open and we'll really see some inflation accompanied by currency depreciation (unlike the brief dip in late 2011). Then we may see a China gold frenzy that puts the past two years to shame.

On the subject of hyperinflation, in September 2011, I posted Liu Jun Luo: Six to ten months until Chinese hyperinflation. Liu argued for a policy of wage inflation, using the war analogy of taking losses to slow the enemy. By raising wages and accelerating domestic inflation, the government would kill the export sector but support the rest of the economy—and crucially protect the exchange rate. Otherwise, Liu argued negative economic shocks from Europe and the U.S. would lead to serious deflation and then money printing, which would cause hyperinflation fueled by exchange rate collapse.

Liu has been talking about hyperinflation for awhile. He targeted 2012-2013 as the years for hyperinflation in China. This post of his is from March 2010:2012年——2013年中国恶性通货膨胀. He also expected (still expects) a gold market crash: Liu Junluo: Gold crash coming. He saw a gold bubble in China, but it has only grown much larger in 2012. If he's right about hyperinflation, gold may do well priced in yuan, but the decline in global growth would be deflationary. Commodity exporting nations and commodities would be hit hard, taking gold with them at least temporarily (similar to 2008). During this period, Chinese may prefer dollars to gold, an action that would lead to the type of currency collapse he predicts.

2012-02-18

China to widen property tax base; no changes in short or long-term housing policy

住建部首提加快推进房产税 试点范围扩大

The government plans to accelerate the move towards property taxes and also plans to widen the areas covered by the policy. Currently Shanghai and Chongqing have implemented the tax. The tax isn't large enough to kill the market, but it may be enough to kill speculation.

住建部政策研究中心:楼市调控长期短期都不动摇

China's Ministry of Housing and Urban Policy Research says long and short-term policy will not waver.

业内预计房价将延续下滑态势 二季度或成楼市分水岭

Finally, the industry is turning even more pessimistic. As I've pointed out in previous real estate posts, the common wisdom is that the housing market will stabilize in the second half of 2012. Now, some are starting to say the second quarter will be a watershed. If volume doesn't pick up in the next quarter (and volume does lead price, which is why the big declines on the order of 50+% around the country look ominous) things could turn very bad in the second half, should the government fail to adjust its policy.

Romney/Paul ticket is now in trial balloon phase

In Does a Romney/Paul ticket make sense?, I speculated that Romney's desire to be president was not in conflict with Ron Paul's desire to further a cause because Romney's campaign is not very ideological. Now, the idea has graced the pages of the New York Times in Amid Rivalry, Friendship Blossoms on the Campaign Trail
In an interview on CBS this past weekend, Mr. Paul volunteered that since his rivals were largely identical in policy substance, “when it comes down to those three, it’s probably going to be management style more than anything else.” According to one person close to the Paul campaign, it would be accurate to infer from that phrasing — “management style” — that Mr. Paul has a willingness to listen to overtures from Mr. Romney, who has been trying to sell himself to voters as a proven manager.
Political pundits refer to speculative ideas leaked to the press as trial balloons. Usually these are leaked by those in power to gauge public interest, but this appears to be more natural or possibly even coming from the Paul campaign. Either way, this idea will hit the mainstream soon and we'll see whether it has legs. It makes sense because Paul will step aside to let younger leaders take over the movement and Romney needs the support. Also, Paul has some very popular ideas that serve as wedge issues against Obama. One area that can't be left alone is foreign policy, but Romney could agree to ask Congress for a declaration of war before sending troops into harm's way (something he'd likely receive from a Republican Congress anyway). On domestic issues, he could agree to deescalate the drug war. He could agree to legalize gold as currency and form a serious committee that pursues monetary reform, a committee that would be majority influenced by Paul. Finally, less likely but an electoral vote winner, would be if Romney agreed to look at the Patriot Act and restrict the increased police powers to terrorism cases. Currently, the expansion of government power allows federal agencies wide latitude. The best case that sticks in my mind is the one where a couple getting intimate on a flight were arrested for terrorism.
Mid-flight sexual play lands US couple afoul of anti-terrorism law
A couple's ill-concealed sexual play aboard a Southwest Airlines flight from Los Angeles got them charged with violating the Patriot Act, intended for terrorist acts, and could land them in jail for 20 years.
According to their indictment, Carl Persing and Dawn Sewell were allegedly snuggling and kissing inappropriately, "making other passengers uncomfortable," when a flight attendant asked them to stop.

"Persing was observed nuzzling or kissing Sewell on the neck, and ... with his face pressed against Sewell's vaginal area. During these actions, Sewell was observed smiling," reads the indictment filed by the Federal Bureau of Investigation.

On a second warning from the flight attendant, Persing snapped back threatening the flight attendant with "serious consequences" if he did not leave them alone.

The comment was enough to have the couple, both in their early 40s, arrested when the plane reached its destination in Raleigh, North Carolina, and charged with obstructing a flight attendant and with criminal association.

They have been placed under legal surveillance until their trial on February 5. If found guilty, they both could be sent to jail for up to 20 years.

Persing's lawyer William Peregoy said his client was not feeling well when he placed his head on his companion's lap, and that he only threatened the flight attendant with reporting him to his superiors on landing.

2012-02-17

Massive cracks in Shanghai's financial center

Literally. Liujiazui, the financial center in Pudong, is cracking under the strain of too many skyscrapers and the tallest one (Shanghai Tower) is still under construction.



For a very detailed discussion of the building above, see the SkyscraperPage Forum entry (currently at 60 pages): Shanghai Tower / 上海中心大厦 | 2,073 FT / 632 M | 128 FLOORS


According to this article in Caixin 632米高楼上海中心施工 引发陆家嘴沉降, the cracks are due to construction and Shanghai's soft land. Shanghai literally means on the sea and much of the land is sand. However, as a sign of current social mood, many Shanghai residents fear that it could be the total weight of the buildings (skyscrapers in Shanghai are clustered in the financial district of Pudong) and a catastrophe could occur. In the article, engineers said this type of ground disturbance is normal in Shanghai when doing construction. However, one engineer does lend credence to this fear.
Chief Engineer Yan Xuexin of the Shanghai Institute of Geological Survey said that a single high-rise building usually will have an evenly distributed settlement, so there will be little impact on the building itself. However, the group of high-rise buildings form a cohesive force, causing the entire city of Shanghai to have a certain degree, a certain area of uneven settlement, so much that it causes hidden dangers.
上海市地质调查研究院总工程师严学新曾经表示,对单个高层建筑而言,一般发生的都是均匀沉降,所以不大会对建筑物本身发生太大影响。但是,众多位置、规格不一的高层建筑形成合力,对整个上海市就会造成某种程度、某种区域内的不均匀沉降,甚至引发建筑安全隐患。

H/T: Chinasmack. Shanghai Ground Cracking Under the Weight of Its Skyscrapers

Non-stop bad news for China real estate: toxic floors

万科上万套房使用安信毒地板 爆料人怀疑内部有人受贿 (More than 10,000 Vanke homes used Anxin toxic flooring Whistle blower suspects bribery

Homes in more than 10 cities have formaldehyde emissions from the flooring that is five times the contracted standard.

2012-02-16

China aims for 14% M2 growth; M2 growth hit 17% in December

China's M2 to grow 14 pct in 2012
The targeted growth rate was slightly higher than that of last year, PBOC data showed.

The country's M2 rose 13.6 percent year-on-year to 85.16 trillion yuan in 2011, down 6.1 percentage points from the previous year.

By the end of January, the M2 increased by 12.4 percent year-on-year to 85.58 trillion yuan, according to the PBOC.
As I've covered in other posts on Chinese money supply, I don't know where they get their numbers. I pull them off the PBOC website and compare December 2010 with December 2011 and come up with 17% growth in money supply. By my count, January 2012's year-on-year growth exceeds 16%. Thus the 14% target is below the rate for most of 2011, when there were only two months with less than 14% year-on-year growth: August and September.

Below is a comparison of M2 money supply and the Shanghai Composite. Money supply ticked up in December and the market followed in January. Regardless of how they calculate growth in money supply, it has been falling for three years. Whether this latest uptick and forecast ends the three-year slowdown in money supply growth remains to be seen.


Socionomics and the Information Revolution

In Alvin Toffler's The Third Wave, he predicts a growing lack of consensus in the Information Age, due to the emergence of instantaneous mass communication (I'm going from memory, having read the book about 15 years ago.). He predicts a fracturing of the market into smaller segments, be it specialized TV channels and magazines, to the formation of new communities. What's interesting about Toffler's predictions is how they line-up with socionomic predictions. Instead of creating larger communities, he predicted smaller ones. As social mood declines in the 2000s, this tendency will be magnified as people turn inwards. There been some push for new governments, reminiscent of the city-state period in European history. This is predicted by Toffler and other "futurists," but it is social mood that can deliver the big push when people become dissatisfied with their current government. Thus, the decline in social mood will also see an acceleration of the shift towards an information economy. What futurists were predicting in the 80s and 90s have already started to appear, but the transition will accelerate in the coming decade.

I've been thinking about Toffler's work and how it fits with current social mood for awhile and this post by Daniel Hannan brought it to mind again.

Americans! Please stop calling us Europeans!
The change in attitude has happened over the past decade. As late as the first Bush presidency, most American opinion-formers, including most conservatives, vaguely favoured the idea of a united Europe. Federalism had worked on their side of the Atlantic, they would tell you, and Americans were fed up with being dragged into European wars. Nowadays, if you hear this sort of rot, you're almost certainly talking to a State Department official.

Why the new mood? In part, it's a delayed reaction to Europe's anti-yanquismo. The moment the Cold War was over, Euro-federalists started calling for Brussels to take on the hyper-power; but it wasn't until the second Iraq war that most Americans realised quite how intensely the Brussels élites disliked them. Nor is anti-Americanism confined to the Left. Last month, for example, the influential Christian Democrat who chairs the European Parliament's Foreign Affairs Committee, argued that the euro crisis was the result of a British-American plot.
We've seen Europe and the United States shift their opinions and we're likely to see further moves. This harkens back to the 19th Century, when the U.S. was dedicated to creating American culture and institutions apart from and/or in opposition to Europe. The creation of American football, for example, stems from a push for American sports.

He closes the piece with a look at England's cultural ties:
Britain is a common-law democracy, connected by outlook and sentiment to the wider community of English-speaking nations. We may be only 22 miles from Europe but, these days, distance hardly matters. Look at where our international telephone calls go: North America, the Caribbean, the Indian subcontinent, Australia, New Zealand. In an age of Twitter and cable television, geographical proximity is trumped by ties of language and law, habit and history, blood and speech. As a Europhile columnist recently lamented, the Internet has trapped us in the Anglosphere. Which, if you think about it, is another way of saying that our cultural élites no longer get to tell us who we are.

Naked authoritarianism in Europe

I've covered the anti-democratic nature of the EU and pro-EU politicians before and there's another example this week.

Greek rhetoric turns into battle of wills
Ahead of the call, Wolfgang Schäuble, the German finance minister, said in a radio interview Greece might delay its polls and install a technocratic government that does not include politicians like Mr Venizelos and Mr Samaras, similar to the model currently in place in Italy.

Karolos Papoulias, the Greek president, fired back during a visit to military chiefs at the defence ministry: “We are all obliged to work hard to get through this crisis, but we cannot accept insults from Mr Schäuble. Who is Mr Schäuble to insult Greece?

“Who are these Dutchmen, who are these Finns? We have always defended not only the freedom of our own country, but the freedom of Europe,” Mr Papoulias added.
An endgame of sorts may soon arrive for Greece, but this just the end of the beginning. The political battle for Europe's future will intensify when the crisis shifts to Italy and Spain. A Greece exit can leave the eurozone intact, but a Spanish or Italian exit, or both, could end the project. It will be the crisis that triggers an even greater political dispute and makes the current fight seem tame by comparison. All of which will be a result of a further decline in social mood.

2012-02-15

New China ETFs may be on the way

Cross Market ETF Applications Under Review
According to the CSRC, a review of two applications by Harvest Fund Management Co. and Huatai-Pinebridge Fund Management Co. for the launch of an ETF linked to the Shanghai Shenzhen CSI 300 Index opened February 6. The review is expected to be finished within six months.

Quasi-drachmas being issued?

UBS Asks: Has Greece Already Been Printing 'Quasi-Drachmas'?!
The Greek state hospitals accumulated arrears to suppliers during the period from 2005 to 2010. In May-June 2010, the Greek government decided to put an end to this practice and decided to take up this outstanding debt (law 3867/2010). In the following months, all the accumulated debt of public hospitals and the healthcare system from 2005 to mid 2007 was settled on a cash basis. The amount was EUR1.5bn for the years 2005 and 2006, with an additional EUR240 million for the first half of 2007. A total of EUR5.6bn accumulated between 2007 and 2010, was settled with zero coupon bonds. This was the creation of the “Pharma-Bonds”.

These financial instruments are bonds, and have all the characteristics of Hellenic Republic Bonds: they bear international securities identification numbers (ISINs); they are negotiable on the Athens Exchange and they rank pari passu with other Greek debt. The government, in one of its press releases, notes that “bondholders who choose to discount these bonds at the banks will crystallise a 19% discount versus their original claim.”

We would argue, however, that they are more than just another bond issued by the Greek government. To be specific, they seem to us very akin to what economists call quasi-monies. These quasi-monies have appeared in a number of cases, usually put in place by government to find an escape valve out of nominal fiscal rigidities in the face of a financing issue. This especially happens in a case of a government of a monetary union that cannot print money to fund its deficit.


16 major listed real estate firms see sales drop in Janaury; Beijing more pessimistic

Sales are down almost across the board, with Vanke seeing declines in both total area and value. 16家上市房企业绩普降 1月销售同比降52.8%

As the graph shows, Vanke (far left) saw a 40% decline in sales, but they also saw area sold decline 28%. Most firms saw similar results, with sales area down less than value, which means the higher end developments were seeing better results.

Key data from the article: construction may be down 20% to 30% and developers may halt land purchases. This is bad news for employment, the economy, and local government finances.

An English article with a look at sales by firm. Major Chinese developers' January 2012 sales

China Vanke (000002.SZ) -39%; Evergrande Real Estate (3333.HK) -77%; China Overseas Land & Investment (0688.HK) -50%; Longfor Properties (0960.HK) -72%; Shimao Property Holdings (0813.HK) -70%; Guangzhou R&F Properties (2777.HK) -57%.

Below is a six-month chart of the above shares, plus Guggenheim China Real Estate ETF (TAO). The news has gotten steadily worse, but investors sold ahead of the shift. In the past few weeks, shares have rallied along with everything else in the global financial markets.

While the markets are at least enjoying a reactive bounce, the mood on the ground is more intense pessimism. 北京楼市悲观预期加重 买卖双方博弈升级

In Beijing, buyers now expect price declines and this psychological change has shifted the market from one of buyers chasing higher prices, to gamesmanship. The article repeats the current common wisdom: a drop of 10-15% in the first half of the year followed by stabilization in the second half. Individual properties could see steeper drops. The article discusses how Beijing has a more complex situation because the government must deal with many non-Beijing residents trying to buy homes. The government has policies designed to slow population growth and make it harder for those without a Beijing hukou to buy homes.