2014-09-30

Land Sales Down 50% yoy in Q3, Down 70% in September

From a CREIS report, Nationally, land sales in Q3 were 415.9 billion yuan, about equal to Q2, down nearly 50% yoy. Residential sales are down more than commercial. September land sales are down 70% yoy.

iFeng coverage: 三季度住宅价格继续下行 土地出让金下降五成
CREIS report:土地市场推出量环比减少46% 出让金降幅近半

From the report: Cumulative homes sales through the end of Q3, 10 major cities. Yellow line shows the change from last year. On the bright side, the report also shows many cities have seen sales volume pick up in the last week, ahead of the National Day week-long holiday. Still down yoy, but way up from the previous week.

Pay Off Your Mortgage and Be Reborn As First Time Homebuyer

WSJ: PBOC Eases Mortgage Lending Rules
The People's Bank of China said that purchasers of second homes could now be considered first-time home buyers, giving them access to lower down payments and mortgage rates. To qualify, the home buyers have to pay off any existing mortgage debt from their first purposes.

......The PBOC said home buyers who paid off their prior mortgages can now be considered first-home buyers and can enjoy down payment rates of 30%. Previously such home buyers would either not qualify for a housing loan at all or have to pay a minimum 60% down payment. Banks could also offer as much as a 30% discount on benchmark rates for mortgages, the statement added.

The big news isn't the first time home buyer rule, it is that banks can again discount mortgages up to 30%. The big question is will they? The evidence to this point says no.

The WSJ also got a sneak peak at the results of CREIS 100 city survey: prices dropped 0.92% month-on-month in September, the biggest drop in the 4-year history of CREIS data.

Chief Economist at Haitong Sees Real Estate Cycle Low in 2017

Echoing what Michaal Pettis has said about Chinese growth rates, Li Xunlei says that slower growth rates are good for China. If GDP growth stays high, a financial crisis will be closer and closer.
Lee Xunlei: Chinese economy is basically in a downstream process, and is far from the bottom. In terms of overall growth expected this year, about 7.3 percent, next year will be lower. There are three factors that may cause the Chinese economy to continue to slow down: The first is the aging of the population, and the second is the debt ratio of the whole society is relatively heavy, need leverage, it is impossible to have good growth in investment. The third is the Chinese technological progress is slowing.

But I do not feel pessimistic, but think this is a good thing. Future economic anchor China's GDP growth should be around 6%. This is a very good sign. In the course of the economic downturn, to be able to adjust the structure, squeezing out some of the foam. Despite the economic slowdown, but the people's income and consumption growth will exceed the GDP growth rate.

On real estate:
Lee Xunlei: Real estate is probably the biggest factor for a financial crisis triggered in China, if there is no effective way to reduce the debt ratio, the point is likely to occur around 2017, the logic behind this is that China's construction period (also known as the Kuznets cycle) as early as 2010 had a downward inflection point, continues to be downward, maybe it can extended to 2017,2018 or even 2020, with regards to real estate, autos these two used to stimulate growth in the past 10 years, the negative impact is huge.


李迅雷:中国房地产危机或在2017年 难避免

2014-09-29

Guangdong Leads SOE Reform Effort

From the SCMP: Guangdong eyes SOE reform
In addition to Guangdong's target for 70 per cent of its state enterprises adopting a mixed-ownership structure by 2017, meaning allowing some form of private ownership, the province wants to see private investors on board all SOEs by 2020. This requirement excludes those state enterprises deemed to be subject to national security considerations, with investors left guessing on the industries that may be off-limits.

Gilbert Ho, managing partner of AID Partners Capital, a Hong Kong-based private equity fund, thinks Guangdong will struggle to meet the 2017 deadline for the first phase of the reforms.

"Even if the Guangdong government is willing to sell out stakes of its state-owned enterprises, it would take time to identify the right buyers and to close the deals. The buyers, including those foreign investors, on the other hand, would need time to do the due diligence and negotiation." he said.

Also SCMP: Reform continues in the Shanghai FTZ, Beijing eases restrictions on foreign firms in year-old Shanghai free-trade zone
Beijing said it was lifting restrictions on foreign investments in several industries, such as the shipping sector, in Shanghai's free-trade zone, a day before the much-hyped "mini Hong Kong" marks its first year in business.

The policy change follows Premier Li Keqiang's statement this month that market forces would be allowed to play a dominant role in the FTZ, touted as a testing ground for sweeping reforms.

According to a circular to ministries and provincial governments from the State Council, more than 20 sectors are to be opened up to overseas investors in the FTZ.

The End of Globalization 2.0

The first wave of globalization lasted from 1870 to 1914. It ended with a war, an interwar period, and a second war. The second wave began in 1945 and lasted until 2001 or 2008 or a date yet to be chosen by historians.

Socionomics predicted the end of globalization with the social mood peak in the year 2000. The generational theory of Strauss & Howe predicts a 4th turning, a period of great upheaval. Economists see the limits of free trade. Even solar cycles predict a rise in warfare, if a solar minimum is on the way:

Michael Pettis asks, How much longer can the global trading system last?
At that point the global trading and capital flows system nearly collapsed. It was clear that the cost to the United States of maintaining the regime exceeded the benefits. Rather than opt out of the system, however, the US was able to “resolve” the crisis in August 1971 by reneging on its Bretton Woods commitment to convert dollars into gold, following this up with a series of agreements in 1972 and 1973 in which Japan and Europe took steps to reduce their external imbalances by adjusting their currencies. Because there was no automatic adjustment mechanism, it was wholly up to the US to decide whether to abandon its role altogether and allow the system to collapse, or to improvise a negotiated resolution in which other counties agreed to take on part of the adjustment cost.

The “Nixon shock” in 1971, by severing the link with gold, eliminated one of the few formal constraints left within Harry Dexter White’s system, although because the gold link only existed to the extent that no one tested it, it was a fairly meaningless constraint.
I disagree that it was not a constraint. Here is the growth of total debt, by annual percentage change.

The end of the gold standard unleashed a period of financial instability that lasted until the 1987 crash. Another period began after the fall of communism in the 1990s, with a continual rising growth rate in debt issuance in the United States until 2008.

Here too is the trade balance. The severing of the gold link looms large.

Back to Pettis:
hether the US captured a disproportionately large or disproportionately small share of the total benefits, and arguments can be made in either direction, it is probably safe to say that the US share of total benefits has declined since the 1940s and 1950s in line with the decline of the US share of the global trading system. As the world has grown faster than the US, and especially as countries that were once excluded fro the global trading system have joined – Russia, China, and large parts of Africa and Asia – the US share of the relevant world has declined very sharply.

But there are substantial costs to maintaining this system, and these have risen sharply. As the creator of the rules, and as by far the largest player within the system, the US is not able to game the system in the way other countries can. And other countries do often game the system – among the most obvious examples being cases that I discussed above, for example Germany and France (in two very different ways) in the 1960s, Japan in the 1980s, and China in the 2000s – not for evil intent but simply because policymakers everywhere always prioritize the resolution of domestic imbalances over external imbalances, and domestic and external balances are often difficult to manage simultaneously.

Put differently, the world economy is necessarily volatile, and to the extent that the US tries to limit destabilizing volatility, it can only do so by finding a way to absorb that volatility itself. The most obvious way the US absorbs external volatility is by absorbing trade and capital flow distortions, and the associated cost is likely to be higher to the extent that other countries try to game the system to generate more growth at home.

Pettis sees the tipping point as already having been passed:
I would argue that we have probably already passed that point, and that the US would be better off today by significantly modifying the way it participates in the global trading system. The longer it waits to do so, the riskier it will be, and either the more debt or the more unemployment it will have to accept. Among other things, the US must address the role of the US dollar as the world’s reserve currency and the way this role forces the US into absorbing volatility and shortfalls in demand that originate abroad.

......Many economists may disagree with me that the costs of the current role the US plays in the global trade regime exceeds the benefits, but the point of this essay is to show that even if I am wrong, as long as the world grows faster than the US, more of the world is incorporated into the global trading system, and more countries design growth models that suppress domestic consumption in order to subsidize domestic growth, there must of necessity be a point at which it makes sense for the US to opt out of its role as shock absorber, and – by raising tariffs, intervening actively in the currency, restricting foreign purchases of US assets and especially US government bonds, or otherwise reducing capital inflows – become simply one more member of a system with no automatic adjustment process.

The current system, in other words, is inherently unstable and will sooner or later force the US economy into a position of choosing either to take on excessive risk or to abdicate its role as shock absorber.

If there is no shock absorber, then the market will turn to the shock absorber par excellence: gold.

Shanghai Composite versus New Stock Accounts

Hangzhou Restarts Land Sales, With Restrictions

Hangzhou's Yuhang district will sell land next month with important stipulations: only 10% of the project can be pre-sold. The rest can be sold after completion. The purchase also requires a 50% deposit, which will be forfeit if the developer gives up the land. These rules all but eliminate cash strapped developers and will keep inventory from hitting the market until late 2015 or into 2016.

杭州土地出让试水现房销售 业内:降房价减库存

Smaller Chinese Banks Still Hunting for Deposits at Quarter End

The CBRC has all but banned deposit wars, but its not stopping some banks from continuing the tradition.

Relevant portion from the article below:
It is worth noting that the recent 21st Century Business Herald reporter visited a bank in a city in Hebei, issued a number of City firms cashback solicit depositors. "1 year deposit, 10,000 yuan get 80 yuan in cash, 100,000 to 500,000 get 90 yuan, more than 500,000 deposit get 100 yuan, the scene can be removed."A city in southern Hebei firm to lobby manager of a branch of the 21st century economy reported this reporter.

This phenomenon, city commercial retail business unit general manager, said this:. "This practice firm in the city which is not surprising, although regulators have long stopped, but repeated, but also reflects the existence of a certain rationality."
Reading a bank in southern Hebei, my immediate thought is Handan.

The CRBC's crackdown has had one major impact: buying deposits hasn't been this cheap in well over a year.

“存款偏离度”发酵不一 部分银行依旧季末冲量

China Reform Summary

Nothing new here, but a condensed version of the case for the reformers.

China's New Age of Reform

Housing Market Chill Complete As Beijing Rents Slip

The real estate slowdown in Beijing has now hit rental apartments. Rents are down 1.8% in September. Still up 2.5% yoy, but that could quickly reverse given the current pace. Transactions fell 10% mom.

To give an idea of how fast rents increased, in August 2010 I was paying ¥2600 for an apartment and this year when I left, rent was about to hit ¥4000. Granted a subway stop was built nearby, increasing the attractiveness of the area, but the rent I paid was consistent with city averages.
Image source:Behind Beijing’s Runaway Home Rental Prices

9月北京住宅租赁市场不温不火 房租环比微回落

2014-09-28

Front National Picks Up Senate Seats

The way things are going, FN isn't going to be far right for much longer. The biggest threat to the party may be if the eurozone breaks apart before the 2017 election.

France's far-right grabs first ever Senate seats

Chinese Overseas Ore Investments Lose Money

China's rush to buy up resource production overseas is not unlike the Japanese real estate investments in the 1980s. Some resources such as oil will pay off, but many could end up as big money losers should the slowdown knock commodity prices. From a geopolitical standpoint, the investments may yet pay off, but in the near term, the financial hit could be serious for firms and even the government.

After Overseas Rush, Chinese Firms' Iron Ore Projects Run into Trouble
Many Chinese companies have gone abroad to invest in iron ore projects over the past decade, hoping to get more negotiating leverage in prices by taking stakes in projects.

But now the price of iron ore has fallen about 35 percent from a peak of US$ 134.5 per ton at the beginning of the year.

Meanwhile, the world's four largest iron ore producers, Vale SA, Rio Tinto Group, BHP Billiton Ltd. and Fortescue Metals Group, are ramping up production of cheap iron ore.

"Their increasing output will drag down prices," said Li Xinchuang, deputy secretary-general of the China Iron and Steel Association, a trade organization. "Large miners will make a little profit, but this possibly means death for Chinese companies' overseas projects."
Some Chinese projects will have a per ton cost above $300.

Hungary: The West's Mirror

Media coverage on Hungary is close to useless. Since Hungary's Fidesz-led government is decidedly nationalist and right-wing, it is the enemy of the EU and the elites of Europe. The opposition to the ruling party comes from the actual far right in the form of the Jobbik party, which is not playing the obscure bogeyman role it fulfills in most countries, but is actually on the verge of becoming the second largest party. Hungary's political center has shifted greatly to the right and it may be semi-permanent in the short-term and even permanent in the long-term if a major cyclical shift in politics is underway. Certainly, Fidesz is capturing the move towards identity and community as described by Mr. Farage in the UK, himself a bogeyman to many on the left despite his decidedly liberal opinions.

Here's the latest coverage of the country as the government looks set to score major wins in local elections. The Economist writes: Orban the Unstoppable
Next month’s local elections will consolidate Mr Orban’s grip on power. The once mighty left has splintered into three parties, none of which poses a serious challenge to his ruling right-wing Fidesz party. Instead, disillusioned Fidesz supporters are moving farther right. Polls show Jobbik, a nationalist party, neck-and-neck with the Socialists.

What is Fidesz doing to earn themselves the ire of the West?
Mr Orban swept to power with a two-thirds majority in April 2010, a feat repeated four years later, in part thanks to Fidesz-friendly adjustments of campaign rules and biased media coverage, according to the Organisation for Security and Co-operation in Europe (OSCE).
So Mr. Orban is like Barack Obama.
Mr Orban’s centralisation of power has drawn protests from the European Union, America’s State Department and human-rights groups. Corruption has worsened, says Transparency International, a watchdog. More than a third of the population live at or below the poverty line.
So Mr. Orban is like Barack Obama.
The situation of the Roma, the largest minority in the country, remains as parlous as ever. In Miskolc a slum-clearance programme has made many homeless.
All over the world there are sympathetic minorities persecuted by governments; the Roma are probably the least sympathetic for a number of reasons. Orban's Roma-related policies would probably win solid majorities in Italy and other European countries.
Mr Orban outlined his longer-term vision in a much-noted speech on July 26th in Baile Tusnade, in neighbouring Romania. Hungary, he explained, would become an “illiberal state”. Speaking admiringly of Russia, China and Turkey, he said Hungary would remain a democracy, and not reject liberal principles such as freedom of speech, but would be based on “a different, special, national approach”. The approach, say critics, was evident earlier this month when police raided the Budapest office of Okotars, an NGO that manages funds from Norway, Iceland and Lichtenstein, and confiscated computers and documents for alleged financial mismanagement. Okotars strongly denies the charge. The police raid was “completely unacceptable”, thundered Vidar Helgesen, Norway’s minister for Europe.
NGOs are a tool used by intelligence agencies to push political agendas across national borders. Putin in Russia kicked out NGOs, China bans them, and now Hungary moved against one. What is Okotars? The Hungarian Environmental Partnership Foundation. Does Okotars represent the views of the Hungarian people or the views of its paymasters in Norway and Iceland?

Police raid Okotars premises
The opposition E-PM party said the raid was part of a politically motivated procedure and accused the government of “Putinist methods” and trying to intimidate civil organisations, which “defend what is left of Hungarian democracy”.

The leftist Democratic Coalition (DK) called on the government to stop its “attacks” on the civil society. Csaba Molnar, managing deputy head of the party, referred to “intimidation by police” and called it unacceptable that the government should “send riot police against a civil group which performs social functions the government is not capable of”.

According to the Socialist Party, the police did not have the legal grounds to occupy the foundation’s headquarters. Gergely Barandy, Socialist deputy chair of parliament’s legislative committee, said that Monday’s crackdown, which he said was evocative of a police state, could “terrify the entire civil sector”. Prime Minister Viktor Orban must not “consider Putin’s illiberal autocracy as an example”.
The battle against NGOs is a major fault-line in the right-left battle. Nationalists favor the policies of the nation, the native people and their national government. Socialists are internationalists who do not believe in national governments. They carry out political operations across political borders through organizations such as NGOs.

Should foreign governments be able to fund political organizations and support their own political agendas? Or should politics be the province of the nation?

Back to the Economist article:
Whereas most EU leaders have scaled down their criticism of Mr Orban’s illiberal ways, the Americans are stepping theirs up. Bill Clinton, a former American president, told a talk-show host on the Daily Show, a current-affairs programme, that Mr Orban was an admirer of “authoritarian capitalism” and never wanted to leave power. “Usually those guys just want to stay forever and make money,” Mr Clinton added.
So Orban is like Bill Clinton.
A few days later, Barack Obama, America’s president, took Hungary to task in a speech at the Clinton foundation, noting that “from Hungary to Egypt, endless regulations and overt intimidation increasingly target civil society”.
So Mr. Orban is like Barack Obama. (President Obama used the IRS, America's revenue department, to harass political opponents.)

Previous coverage:
Right ascendant in Hungary
Unelected European Commission tells elected Hungarian government to change policy
Hungary developments; rise of the right?

2014-09-27

Chinese Construction Quality in Question

Headline: Shabby construction, many buildings won't last 30 years.

盘点近年楼歪歪等豆腐渣工程:很多建成不到30年

The Death of the Federal Reserve

Very slow motion, but it is unfolding step-by-step as social mood declines. The Fed may survive, but lose its independence, or go the way of other American central banks.

The Secret Recordings of Carmen Segarra
An unprecedented look inside one of the most powerful, secretive institutions in the country. The NY Federal Reserve is supposed to monitor big banks. But when Carmen Segarra was hired, what she witnessed inside the Fed was so alarming that she got a tiny recorder and started secretly taping.

2014-09-26

China Banks May Need to Raise $200 to $500 Billion to Cover Bad Debts thru 2018

Some news from the past month:

China ‘bad bank’ Huarong secures $2.4bn pre-listing capital
Another of China’s four big “bad banks” has successfully raised pre-listing capital, with China Huarong Asset Management attracting $2.4bn from investors led by Warburg Pincus, Goldman Sachs and Malaysia’s Khazanah.

Mainland banks’ preferred shares have appeal for analysts
The securities pose some problems. They can only be priced in yuan and the same restriction applies to the dividends. The preferred shares can only be placed with 200 investors, greatly restricting the market.

However, as the outlook for banks' common equity shares is threatened by rising bad loans and an overall slowdown in the sector, the relatively high fixed yields on the preferred shares are becoming much more attractive.

"In terms of whether the market can digest [the preferred shares], well, I'm not worrying too much about that," said Erin Lee, an analyst at Yuanta Securities in Shanghai.

Fund managers and asset management companies are already dumping common shares of mainland banks with the hope of buying into the preferred shares later, she said.

China's Bank of Communications Starts Bond Sale
Bank of Communications Co., the country's fifth-biggest lender, has started meeting overseas investors to sell a type of debt that complies with new global regulations, according to people familiar with the matter. The lender has hired eight banks for the proposed debt offering.

Shadow banking's benefits to China undeniable -c.bank official
China should grasp the opportunity to guide shadow banking to serve businesses with needed financing, while at the same time strengthening regulation of the sector, a central bank official was quoted as saying.

A string of shadow banking defaults, such as that of a 4 billion yuan ($652.18 million) credit product backed by Evergrowing Bank earlier this month, have raised speculation about whether the government will crack down further on the sector.

These just scratch the surface of the funding needs for Chinese banks. Lending is tight because banks know their bad loans are extensive and growing. Short of a major crisis, the banks will have to raise capital in the market, and the amounts could run as high as $200 billion over the next few years. CEBM Group estimates that Chinese commercial banks will need ¥1 trillion in captial, about $160 billion, for every 1% increase in bad debts between now and 2018. Should bad debts rise 3% (which wouldn't remotely constitute a crisis), the banks would need nearly $500 billion in capital.

From QQ Finance: 信贷扩张受限压力空前 银行多渠道补血规模超6000亿

Central Bank on First Mortgage Rule Changes: Wait for the Official Document

Will the central bank ease mortgage rules? Liu Shiyu said wait for official documents.

央行副行长回应“房贷松绑”:具体请等文件

Chinese Buy 1 of 8 New Homes in Australia

Chinese bought 1 of 8 new homes in Australia in the past year, causing prices to soar.

Australia Finance Minister Joe Hockey says he is not worried about rising prices. He does not think the Sydney property market bubble, "This (housing prices) mainly because of lack of supply."

Australia needs to supply 100 million homes for the 300 million Chinese who would like to emigrate. Or the Australian government should take steps to stop Chinese inflation from pouring into the housing market, but then that would be Mr. Hockey's problem.

From ifeng: 中国人一年购澳洲1/8新房 致使当地房价飙涨

2014-09-25

More Evidence of Fake Exports and Imports; SAFE Finds $10 Billion in Overstated Invoices

Nothing new here except the government is uncovering more fraud in the export/import sector, which ranges from relatively benign (in that the act is victimless) cross border arbitrage all the way to defrauding lenders.

Here's ZeroHedge on the topic, with a refresher course in Chinese commodity financing deals.
China "Faked, Forged" Documents For Exports And Imports: At Least $10 Billion In Fake Trade Exposed

Bloomberg: China Watchdog Finds $10 Billion in Fake Currency Trade
“Some companies used the trade channel to bring in hot money,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. SAFE’s investigation “will likely further cool down hot money inflows and commodity imports could slow as banks will likely conduct more careful checks on documentation.”
I am stunned that banks are still lending in this environment. Maybe Chinese authorities leaned on banks the way Xiaoshan district in Hangzhou told banks to lend or get out of town.

The impact on commodities hasn't fully hit yet:
“Qingdao is not over,” said Chae Un Soo, a metals trader at Korea Exchange Bank Futures Co. The news will “definitely” impact demand for metals tied up in financing deals, he said.

Financial Times: China hot money crackdown reveals $10bn in fake trade
China’s currency is freely convertible for foreign trade and other current account transactions but there are tight restrictions on investment flows. For the past decade, speculators aiming to circumvent these capital controls have overstated the value of export invoices, allowing them to disguise speculative capital as income from the sale of goods and services.
Plus obtain their speculative capital from the bank and also earn tax rebates, a nice added bonus.

The way the story reads, I usually think of offshore hot money looking for a place to park in China. However, many people behind these "hot money" flows are exporters in China, and many are conducting arbitrage. Since profit margins are near zero for many exporters, their business model now consists of obtaining fraudulent letters of credit from Hong Kong and then depositing the money in high yield WMPs in Mainland China. The biggest risk to this model is a decline in the offshore yuan, which causes exporters to hoard dollars overseas and pull out dollars if possible. The drop earlier this year was supposedly the PBOC's handiwork, but the yuan fell in late 2011 and early 2012, the last time the economy suffered a similar economic slowdown.

The ever present cash crunch could become crunchier if the offshore yuan starts sliding due to hot money coming out of China.

Still No Confirmation on Final Bullet Mortgage Easing

The article below dubs mortgage easing as the final shot to rescue the housing market (short of a major policy effort from up high). At the end, a developer says without detailed rules, these policies will have no effect, just as the central bank telling banks to ease mortgages earlier this year had zero impact.

From May: PBOC Delivers Political Message to Banks: Lend to Individual Home Buyers; Monitor Public Opinion and Respond to Negative Media Reports

放松房贷成救市最后一招:政策都用过了

PBOC Denies Zhou Leaving

The PBOC denies Zhou Xiaochuan is on the way out.

外媒传周小川将被替换 央行内部人士否认

Third Tier Cities Bottoming, Handan Collapse Exaggerated

Don't panic. Handan's real estate market won't collapse and third tier cities are bottoming out as demand picks up.

三线城市楼市见底迹象明显 邯郸楼市真会崩盘吗?

2014-09-24

Handan Developers Try to Repay Debts With Homes

In Credit Bubble Collapses in Handan; Arrests Made; Developers Repaying Suppliers With Property, reports said that developers were repaying suppliers with property.

The latest news is that developers debt repayment plan is swap debt for property, but the creditors are balking because, among other reasons, the properties are unfinished. In one case lenders can turn their debt into an advance payment on a home an receive a 4% discount........not too enticing. Most lenders want their money back.

邯郸多家企业拟用房源偿债 官方表态要盘活项目

Chinese Netizens Say Let Sinosteel Go Bust

As of this evening, 93% of netizens having read the QQ Finance article linked below oppose a bailout for Sinosteel.

中钢雪崩:资金危机三年未解 总裁再去职

Global Endgame Comes Into Sight

Rumor is that Zhou Xiaochuan will pushed out of office as the nationalists claw back power from the reform camp. If so, the reform efforts of the past couple of years may be terminated and a return towards 2008 policies (though likely not as large) may be in the cards. If this happens, then one has to wonder if Li Keqiang also goes the way of Zhu Rongji and serves a single term.

There's a lot of questions, including if this happens and what it means, but very bad news for the long-term global economy if true.

China Considers Replacing Central Bank Head, Party Officials Say

Chinese Cities Ease Lending Standards, But Will The Banks Follow?

More Chinese Cities Relax Mortgage Policy as Property Sales Fall
The eastern port city of Qingdao said yesterday that households selling their only home to buy a new one should be considered first-home buyers as long as they’ve paid off the mortgage, broadening the scope of borrowers eligible for lower down payments and interest rates. The city joins Shaoxing in Zhejiang and the southeastern province of Fujian that loosened the definition of the category of the buyers last month.

Nanjing has also called for relaxed lending standards. The issue is the banks do not have to follow their recommendations and the banks have previous said they are worried about profits.

China’s four-biggest banks may ease mortgage lending by revising the criteria for loans to first-home buyers, the 21st Century Business Herald reported Sept. 22, citing unidentified people at Industrial & Commercial Bank of China Ltd. and Agricultural Bank of China Ltd.
There is still no confirmation of this rumor.

All of these efforts will fail because the real estate market has peaked. The only thing that can save the market now is major monetary stimulus, which the leadership has said is not coming. Lending standards can be completely thrown out an it wouldn't stop this contraction. The inflation has ended, the deflation cometh.

Sinosteel in Debt Quagmire; Steel Prices Decline

Chinese media is buzzing about a possible bailout for Sinosteel as the firm joins a long list of steel makers that have shut or gone bankrupt due to mounting debts. According to the Chinese report, Sinosteel is overdue on a ¥690 million debt.

China trader Sinosteel says facing financial problems but no debt crisis
Chinese state metals trader Sinosteel Corp is not about to undergo a restructuring as a result of mounting debt, a company official said on Tuesday, denying domestic media reports.

China's biggest state-owned steel trader earlier told financial magazine Caixin that it was facing financial problems as a result of unpaid bills from customers, but it denied rumours that it is struggling under the weight of overdue loans amounting to 10 billion yuan ($1.63 billion).
The general rule with rumors is that they should be discounted until they are officially denied.

The Reuters article goes on to say a crackdown in lending following the Qingdao port scandal has hurt the industry, but steel trading actually collapsed more than a year earlier. The story this year was the exploding number of court cases. Steel Trade Lawsuits Explode; Banks' Unceasing Nightmare; Defendants Flee. If the banks continued lending into 2014, then we can look forward to bigger losses and court cases stretching into 2016.

The outlook for steel is not good, and its worse for miners than have been optimistic about China's demand:
Chinese steel man says production won't reach billion tonnes predicted by big miners
The big miners have long predicted that China's steel industry will peak at around 1 billion tonnes per year of iron ore, but Mr Li said it was more likely to peak around 870 million tonnes.
"Over the next 10 years, according to our studies, China's steel production can be over 800 million tonnes for a long time, but it cannot go over 900 million tonnes," he said at the International Mining and Resource Conference in Melbourne on Monday.

From the Chinese article (Google translated below) we learn Sinsosteel's debt crisis began in June when it was unable to repay a bank loan. The loan isn't completely in default: Sinosteel has repaid part of the loan, but several hundred million remains unpaid. The cause of the problem is placed on the Shanxi Haixin Iron and Steel Group bankruptcy earlier this year, as well as Sinosteel's radical debt fueled expansion in 2011.
This post Second Generation Wealthy Meet Their Waterloo has a graphic showing the massive overproduction of steel in China, where profits sank from the equivalent value of an iPhone to that of a popsicle.

According to CRBC data, there is ¥690 million overdue. Sinosteel has ¥18.7 billion outstanding on ¥25 billion credit lines from eight major banks. The optimists point out this is a small overdue debt relative to total debt. Of course banks are now restricting and shrinking those lines of credit......

This news hasn't shaken the steel sector; shares of public companies are broadly higher today.

Finally, today China released price data from September 11 through 20. Steel prices were down roughly 2% from the prior 10 day period. Since the start of the year, rolled steel is down 16%, and since the first 10 days of August, it is down 7%. 流通领域重要生产资料市场价格变动情况(2014年9月11-20日)

中钢6.9亿贷款逾期引债务风波 国务院没出面干预

2014-09-23

Land Audit Fallout: Six Officials Investigated for Violations in Shanghai

There isn't a lot of news at this time, but within the span of 2 minutes, six separate announcements of Shanghai officials being investigated for violating party discipline have been announced. In all 10 officials were named, but the six are involved in land and land transfer issues.

土地审计风暴:上海2分钟内公布6名官员被查(名单)

Handan Credit Bubble Affects Entire City Economy

I try to shy away from using exaggerated headlines and I suspect the government may intervene to prevent widespread bankruptcies. Without intervention, the credit bubble will collapse rapidly. It is not only developers that have borrowed; the developers' suppliers are also deeply in debt to private lenders, as are mines, farms and others. This is a text book credit bubble imploding, what makes it different from Ordos and the cities in coal-rich Shanxi and Shaanxi is that it wasn't triggered by a depression in the main industry (energy), but by the end of the inflation. There was plenty of speculation to go around, but at this point, many firms need high interest loans just to survive because bank credit is nearly impossible to obtain.

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved." -Ludwig Von Mises

April 2014: Handan Farm Cooperative Goes Bust; 100,000 Rural Households Invested Over ¥140 million; Boss Has Fled

In April, a rural cooperative that had been paying double the interest rate of banks in order to attract deposits to fund......vegetable growing schemes.......started going bust. Another plan was to truck coal from Inner Mongolia and then ship vegetables back. In reality, the most likely borrower was developers. The cooperatives started having trouble in 2013 when monetary conditions tightened, and by 2014, with real estate slowing, the game was over. The amount wasn't huge in comparison to the amounts raised by developers directly, but more than 100,000 households had deposited money in the bank. Later, this bankruptcy would be described as the aircraft carrier going down.

July 2014: Hebei Rural Cooperatives Go Bust
Hebei's economy is experiencing a serious slowdown due to the weakness in heavy industry, particularly steel. Rural cooperatives pay up to 5 times the interest rates that banks pay. They are supposed to help develop the agricultural economy, but there's no way they're doing that at 16% interest. Furthermore, the rural cooperatives employed agents to drum up deposits and many urban residents also deposited money. A big cooperative went down at the end of March in Handan. Now the bosses of other cooperatives have fled (the other type of bank run) and the whereabouts of the depositors money is unknown. A wild guess: they invested it in real estate, either directly or through high interest (20% and up) loans to developers.

August 2014: Another Credit Guarantee Gone Bust, One Month After Backing A Trust

Developer Golden Century goes bust. The firm had raised billions of yuan in privately funded loans, roughly 20 times the amount raised by the "aircraft carrier" cooperative that went bust in April. In addition to real estate development, the CEO also had a credit guarantee firm that only one month before backed a trust product. The CEO makes like a tree and leaves.

September 2014: Handan Residents Afraid to Buy Homes; Market Frozen With Developers on the Brink

The total amount of private lending to developers is now estimated at ¥10 billion, about 70 times the size of the cooperative that failed in April. Many developers have fled, leaving behind huge debts and unfinished construction projects. Home buyers will not prepay for homes for feat the developer will run away. Without bank loans or private fundraising, developers have no money to finish buildings. The real estate market grinds to a halt.

Credit Bubble Collapses in Handan; Arrests Made; Developers Repaying Suppliers With Property

The government sweeps in only days after reports come out. Over 90 people are arrested for involvement in illegal fundraising. (Private lending is illegal, but only punished when the bubble bursts.) Analysts estimate that Handan has 10 years of housing supply under construction and enough new homes to house the entire city population. With no cash, developers are paying suppliers in homes, who are then trying to sell them into a frozen market.

Now there is the report below which reminds everyone that private lending at high interest is the lifeblood of the bubble economy.
Not only that, in addition to real estate, building materials, agriculture and animal husbandry, energy, construction, medicine, etc. use private financing. With the debt default detonated in the real estate industry, these industries are also going into default. Recently, the Handan municipal government announced that Dongshan iron ore, Central Asia Calcium Carbonate, Green Beauty animal husbandry and other companies are involved in illegal fund-raising.

It is understood that Hebei Green Beauty animal husbandry borrowed more than 300 million yuan for more than 1 year from private borrowers; Handan Wu'an Dong Shan Iron borrowed 700 to 800 million yuan, Central Asia Calcium Carbonate borrowed nearly 1 billion yuan. These firms that have fallen into the vortex of private lending are almost all private enterprises, loan defaults are also a concentrated outbreak.

The real estate crisis has a direct impact on the downstream industries, Handan city has at least three mixing stations directly impacted by the high interest rate debt crisis, some construction companies have also been directly impacted, which in turn directly affects many migrant workers wages.
More in the Google translation below.

The most important part of the story is that Handan is no different from hundreds of other cities in China. A concentration of events has burst this credit bubble, but other bubbles exist all around China. As long as real estate prices continue to decline and credit remains tight, there will be more Handans.

From 21st Century Business Herald: 民间借贷风险集中暴露 实体企业“求钱若渴"

2014-09-22

Credit Bubble Collapses in Handan; Arrests Made; Developers Repaying Suppliers With Property

Handan's housing crisis is centered on illegal fundraising. Earlier this year, banks that used illegal fundraising collapsed, and now developers are going down. Ten of thousands of residents and roughly ¥10 billion is at stake. The local government has formed work groups to deal with the situation, with at least 13 companies already in trouble. One person who helped raise the money said 10% of Handan households may be involved, and in the case of one developer alone, there are more than 10,000 lenders.

Investors were offered high interest rates and preferential pricing on homes. Chen Wei Real Estate had one project where buyers who prepaid ¥50,000 ahead of time could see their pre-payment appreciate 30% in one year, plus received a VIP card good for ¥50 yuan off each square meter purchased. The firm stopped paying interest to investors in July though. The project was to start in August 2011, but today the site is still under construction. No one knows where the money went.

Another developer said they would not have used private money, but last year the banks stopped giving out loans. It borrowed ¥750,000 yuan at 3% monthly interest for 6 months, but could not repay lenders when the contract came due in July. The firm says that except for the cash crunch, business is normal.

Handan is a historic third-tier city of 1.6 million in Hebei province, but the total population covered by the city is nearly 10 million, making it the third largest administrative region after Baoding and capital Shijiazhuang. At the peak, there were 500 developers in Handan and 300 buildings doing advance sales. According to the article below, several projects have enough space to house the entire city population of 1.6 million. Sales in the first half of the year were only 5800 units, but 1300 of those came in January and by April, sales were down to 750. Analysts estimate Handan has 10 years of housing inventory.

Some developers have resorted to paying their suppliers with property, or at least giving property as collateral. The result is suppliers are now trying to offload properties in order to pay their costs.

Officials have begun arresting those involved in the fundraising. From Mingtiandi: GOVT RAIDS 13 HEBEI DEVELOPERS AFTER FUNDING SCHEME COLLAPSES
94 people were detained in a growing funding scandal involving real estate developers and private lenders in the northern Chinese city of Handan recently as a slowdown in housing sales exposed risky funding practices.

The government can restore order and a sense of justice, but it cannot restore confidence in the market with arrests.

iFeng: 三线城市开发商跑路引发危机 大量房子没人买

Open House in Chengdu

A developer tries to stir up interest in a Chengdu property and succeeds. 成都现性感女郎举牌"开房"

2014-09-21

Handan Residents Afraid to Buy Homes; Market Frozen With Developers on the Brink

Earlier this week I posted Another Credit Guarantee Gone Bust, One Month After Backing A Trust, which covers the latest incident of a debtor fleeing his or her debts. In that case, the debtor is the developer Shi Yubao of Golden Century, who borrowed privately from thousands of people. The result of this episode, and no doubt the defaults earlier in the year that involved similar borrowing practices (see link above for more info), is that Handan residents are now afraid to purchase a home. They fear the others developers could also run away too since many of them have used the similar methods to raise capital.

Many developers in Handan have closed their sales offices and are in no mood to sell homes, they're looking for a way out instead. Besides the home buyers disappearing, the lenders want their money back. Suppliers and contractors want their money too. Normally, they would settle their accounts with developers at year end, but now they want to be paid in advance for fear the developer could skip town.

There is nearly a ¥10 billion black hole of private lending. Dozens of developers have 300 projects underway in Handan, at least half used private money. About ¥6 billion is already in trouble, but it could grow to ¥10 billion as other developers get into trouble. Interest rates on money raised from individuals can exceed 20%, and in order to keep up with debt costs, developers need rising home prices. With the market cooling, the developers can no longer out run their interest costs. According to the article, price growth through August is only 3% since 2012. Back in 2012, the estimated average profit on a home sale was only 19%. With construction costs rising, financing costs piling up and prices barely rising, profits have no doubt tumbled.

Handan developers are intimately tied in with local government and non-local developers avoid the market. Golden Century CEO Yu Shibao, the man who has fled town and precipitated this latest crisis, was appointed to a supervisory position in the Hebei Province People's Procuratorate. The firm also obtained the best pieces of land in Handan at preferential prices. Other developers also have ties to provincial government offices.

某城房企集体违约引崩盘 当地人不敢再买房

China Will Not Alter Policy For GDP Growth

China says will not alter policy because of one economic indicator
China will not dramatically alter its economic policy because of any one economic indicator, Finance Minister Lou Jiwei said on Sunday, in remarks that came days after many economists lowered growth forecasts having seen the latest set of weak data.

2014-09-20

Loan Demand Slumps in Q3

No surprise given the weak credit numbers, but the PBOC business survey reflects the weakness. Overall demand for business loans (according to bankers surveyed) was down to 66.6% (chart below). Broken down further, the demand from large, medium and small enterprises was as follows: 55.3%, 62% and 70.8%. No surprise there either as small firms still have a harder time accessing credit.


Here's the entrepreneurs' macroeconomic temperature (green) and economic confidence (red).

Here's the survey numbers for the bankers. Survey results are at their worst since Q3 2012.

Depositors are also surveyed. Here's their feelings on current wages (blue) and expected wages (red). Optimism is still there even though the trend is down.

The desire to spend more (dark blue), save more (light blue), invest more (red).

All data from the PBOC.

Caixin Covers the Interest Rate Spat Between Xinhua and PD; Beijing Youth Daily Calls It a Fairy Fight

Xinhua, People's Daily in Rare Tussle, over Rate Cuts
Xinhua News Agency and People's Daily have crossed swords over who has more faith in policymakers' determination to push through economic reforms and whether it is fine to cut interest rates, a rare public display of friction for the state media outlets.

Fears that China is falling short of the government's growth target for this year and calls for strong stimulating policies such as reducing interest rates have gained momentum, after August's weak economic data was published, an article published by Xinhua's website said on September 16.

"Looking back at the past few months, voices like this were heard at home and abroad almost every time monthly and quarterly economic data came out," the article says. "This means the speakers do not see clearly the 'new norm' of China's economy and lack faith in the reform that China has been pushing forward with force."

The article they site in the article came out a day before the one I saw: “强改革+巧调控”:中国经济持续健康发展“稳定器”

That was the first shot. The People's Daily rebutted with: Rate Cuts Not The Opposite of Reform

Xinhua fired back: Still Not Time For Rate Cuts; Don't Quench Thirst With Poison

Technically the PD is correct, but Xinhua is right on policy. It is not yet time for rate cuts.

However, if you want to know what the leadership thinks, turn to the Beijing Youth Daily, put out by the Communist Youth League. They summed up the two sides and called it a fairy fight.

评论:是否降息为何上演“神仙打架”

Li Keqiang: Use Reforms to Lower Financing Costs

Premier Li Keqiang met with PBOC head Zhou Xiaochuan and CBRC head Shang Fulin in Shanghai. They openly discussed interest rate policy.

Li Keqiang said the best way to reduce interest rates and take pressure off the PBOC would be to speed up reforms in the Shanghai free trade zone. He said to Zhou and Shang, allowing you to reduce interest rate pressure is really difficult, but you must force down rates through reform, lower the capital costs for business by letting the cross border capital flows into the country, this is the best method. The article mentions how Li has repeatedly brought up the funding costs of SMEs, such as at the July State Council meeting. (See below for the Google translation of the article.)

Rhetoric about 7.5 percent growth aside, an economic slowdown without a monetary bailout forces reform because it is the only option. The mistake some analysts are still making is they think the growth target is the top of the agenda. The reform agenda is priority one.

On the continuum of possible economic policies and outcomes, the worst are those that slow or stop the reforms. At one end is monetary stimulus, booming economy and a return to business as usual. At the other end, there may be a limit to how much pain can be inflicted before insiders reject the policies. In between, the worse the slowdown, the greater the need for reform.

李克强对周小川尚福林称:让你们把利率压下来挺困难

2014-09-19

The Last Days Of Lehman Brothers

August Price Drop Worst in 10 Years

Chinese media have dubbed the August price drop the worst in 10 years due to its nationwide scope. 8月房价环比跌幅近十年最大 降价潮或持续

China's real estate industry at its lowest point since 2008. 中国楼市多项数据已跌到08年来最低点

The second article also mentions the second round of bailouts now under way in Sichuan, Fujian and Hubei, using tax rebates, subsidies and credit easing. The oft quoted Zhang Dawei of Centaline called the credit easing policies interesting, since local governments have zero control over banking policies.

Shanghai Gold Becomes The People's Gold

Shanghai launches its gold exchange
Premier Li Keqiang, who visited the FTZ on Thursday, said he has been closely following the progress of the international bourse and commended the SGE for launching trading. Li said more efforts are needed to promote the cross-border use of the yuan and also take stock of the various measures being undertaken at the FTZ.

The head of the People's Bank of China, the central bank, Zhou Xiaochuan, and Shanghai Mayor Yang Xiong jointly pushed the button that marked the launch of the first trade. The first matched deal between SGE's international members was completed a minute after the launch, and enabled China's gold market to be linked to the international market.

Video of the opening.


李克强妙解“上海金”:让“上海金”变“百姓金”
Li Keqiang on September 18th at Bank of China, visit Shanghai branch of the FTA. Turning to the international board of the Shanghai Gold Exchange is known as the "Shanghai gold" will start trading the evening, the Prime Minister said that the release of the Chinese continue to expand the financial opening up a strong signal. Since the reform and opening up, Shanghai has "a good drums Amoy gold", gold will continue to release future potential to benefit more people, so that "Shanghai gold" into "the people of gold."

Here's an opinion piece: In order to internationalize the renminbi, China must first internationalize the gold market.

解读黄金国际板:若想人民币国际化必先黄金市场国际化

The article has two charts showing trading volumes in NY, London and Shanghai. The growth in Shanghai below comes before the opening of the international board.

This chart shows the trade volume in London and NY in tons (unit is 10,000) of gold.

Here is Shanghai versus NY trade volume.

2014-09-18

Jingle Mail Comes to Hangzhou

The numbers aren't huge, but it is a relatively new phenomena. It is happening at the high of the market, and one luxury building has seen 5 homes returned in the first half of September.

Since the buying restrictions have eased, many people have come to return homes, but most of them are simply changing the names on the property now that it is not illegal to own several homes.

Of the people who want to genuinely return the home, the reason is lack of funds, often due to sudden financial problems. In some cases the developers help the owner find a new buyer.

The article doesn't say it explicitly, but it sounds like the situation is similar to Wenzhou: investors and businessmen are recouping capital due to cash flow difficulties.


From iFeng: 杭州多个楼盘频遭退房 平均1天1套不少人没钱了

Pan Shiyi: Market Still Adjusting

Summery: real estate not at the turning point, business isn't good this year, only IT firms are supporting the commercial rental market. SOHO is doing well, capturing the IT demand for rental space.

From iFeng: 潘石屹:市场还在调整中

China Launches the International Gold Board

International board opened today with a price of ¥245.28 per gram.

Videos below are in Chinese.

The report below is about the god board as part of the internationalization of the renminbi. International traders do not need to change currency in order to trade on the exchange. Around 1:50, a woman from the Shanghai Institute of International of Finance Center says the new board will allow China to increase its influence and slowly increase its say in the market.



More discussion here.

China's Double Bubble in Housing

China has two different housing bubbles. In the first-tier cities, prices are too high for the average worker. In the third- and fourth-tier cities, inventory is excessive. According to Shanghai E-House Research Institute, inventory climbed 2.8% in third-tier cities in August, but in first- and second-tier cities, the increases were 2.5% and 0.7%.

The solution to both bubbles is lower prices.

From iFeng: 中国楼市目前存在两类泡沫 房价一定还会下跌

China Charts Roundup

Lots of charts over at Solarcycles: Problems in China

New Home Prices Fall 1.1% in August as Buying Restrictions Fail to Stop the Decline

I predicted that by October, nearly all cities would see yoy price declines. Thanks to unfavorable comparisons over last years and falling prices, the number of cities with yoy price declines jumped from 3 in July to 19 in August and a majority will probably be down yoy by the end of this month.

March: 4 cities saw declines in price mom, 10 cities were flat, 56 were up.
April: 8 cities saw declines in price mom, 18 cities were flat, 44 were up.
May: 35 cities saw declines in price mom, 20 cities were flat, 15 were up.
June: 55 cities saw declines in price mom, 7 cities were flat, 8 were up.
July: 64 cities saw declines in price mom, 4 cities were flat, 2 were up.
August: 68 cities saw declines in price mom, 1 city was flat, 1 was up.

On average, prices fell 1.1% in August, up from 0.9% in July.

Prices declines were less volatile in August, with the largest decline 1.7% in Huizhou (Guangdong) and Jinhua (Zhejiang). Some cities fell as much as 2.4% in July.

New commercial homes fell 1.2% overall with the largest drop 2.1% in Hangzhou.

Xiamen remains the outlier; when the October data is out, it will be the only city still showing yoy price gains.

70 city new home price changes by area: below 90 sqm prices fell 1.1% mom; 90-144 sqm prices fell 1.2%; above 144 sqm prices fell 1.2%.

Only 1 city saw existing home prices increase, while 2 were flat. The average change across 70 cities was a 0.8% decline in existing home prices, the same as in July.

70 city existing home price changes by area: below 90 sqm prices fell 0.8% mom; 90-144 sqm prices fell 0.8%; above 144 sqm prices fell 0.9%.

Source:2014年8月份70个大中城市住宅销售价格变动情况
Data below

2014-09-17

Is Central Bank Intervention Hiding Social Mood?

Look for negative mood in the media and it is all over the place. Ebola. ISIS. Unemployment. Crisis on the border. Ebola and ISIS on the border!? President Obama a failure, even his supporters abandon him.

One doesn't have to believe any of the scare stories for it to be a mood indicator. It appears as headlines and popular stories, thus it reflects the public's mood. That disease outbreaks and weak presidents are more likely during negative mood is corroborating evidence of negative mood.

So why are stocks at an all-time high?

What Was That Strange Streak Of Light In The Bay Area Sky Friday Morning?
“I am used to seeing planes early in the morning with lights, but this was different,” said one bystander. “This had something coming out of it, it wasn’t just the light. I could see it spraying something.”
Mosquito fogging in Contra Costa County isn’t done by air, but by truck, and there were no plans to fog for mosquitoes in the area.
The light was also spotted by Barry Formslag of Novato.

“About 6 a.m. this morning, I came out, I was walking down the driveway and I looked up at the sky and saw this little orange ball – above the Redwood trees,” Formslag told KPIX 5.
The phenomenon was also reported in Nevada and Oregon.

KPIX 5 went to Bing Quock of the Morrison Planetarium at the California Academy of Sciences. “Looking at the website of the American Meteor Society, it looks like there are several reports of a large bright object falling through the sky,” he said. “It’s rather unusual in that this one had a rather large tail following behind it.”

U.S. STATE DEPARTMENT ORDERS 160,000 EBOLA HAZMAT SUITS

Backing for Condoleezza Rice to take over scandal hit NFL

CDC issues Ebola checklist: 'Now is the time to prepare'

Texas Sheriff: Reports Warn Of ISIS Terrorist Cells Coming Across The Border

Obama's Approval Rating

And the latest, this op-ed in the NYTimes: The Great Unraveling

Xinhua: The Stock Market Is Safe, Foreigners Are Buying, Bull Market Is Here

....institutional investors, foreign institutions and even "national" social insurance funds are flocking to buy the dips.....

新华社17日再发两文挺股市:股市安全 看好股市行情

People's Daily Rebuts Xinhua: Rate Cuts Not The Opposite of Reform

Xinhua says Still Not Time For Rate Cuts; Don't Quench Thirst With Poison

The People's Daily says: Rate Cuts Are Not The Opposite of Reform
人民财评:降息不是改革的对立面

Xinhua: Still Not Time For Rate Cuts; Don't Quench Thirst With Poison

Update: Earlier today the People's Daily ran this editorial——Rate Cuts Not The Opposite of Reform.

Investors would have an easy time if they would only listen to the words spoken by Li Keqiang (Premier Li calls for courage, wisdom in upgrading economy and Xi Jinping. I'll grant that the leadership is saying two different things to some extent, so you have to pick one. Do you believe the 7.5% growth target, but not all the other calls for reform and rebalancing which necessitate a slower GDP growth rate? Put yourself in the position as a Chinese leader. Do you really care what foreign investors think, or are you more worried about the party elite? What is more plausible, that all of the talk of reform, rebalancing and anti-corruption, which scares the pants off many elites, is all for show; or the 7.5% growth target is a BS number to keep the elites going along with reform until the exits are all closed and they can't oppose the reform agenda?

Everything is being laid out in the open. There is going to be enough "stimulus" to (hopefully) keep the economy from slowing to near zero or lower. There isn't going to be any stimulus that sacrifices long-term growth for a short-term sugar high. Reform is going to accelerate in 2015. The government is setting the policies and moving the pieces into place, but next year is when SOE reform, financial reform, interest rate liberalization moves off the pages and into reality. The plan is reform and long-term restructuring, not stimulus. It is starting to look as if it is too late to stop the reforms anyway, but one it gets into 2015, the ball is going to start rolling downhill.

For those who still don't get the message, there is Xinhua to remind them.

The headlines says it's not time for rate cuts and there are plenty of other methods to fine tune the economy.

This one sentence sums up the opinion on major monetary or fiscal stimulus. Chen Yulu, economics professor from Renmin University: strong stimulus......is tantamount to quenching thirst with poison.

Update: ZeroHedge has a summary and analyst responses. Wall Street Responds To China's QE: Beijing Finds Lack Of Faith Disturbing

新华网再谈降息:还没到时候 预调微调手段有的是

Another Credit Guarantee Gone Bust, One Month After Backing A Trust

One of the features of the subprime lending fueled housing bubble in the U.S. was loans made closest to the peak failed first. This may be happening in China as well, with a trust product in trouble due to the credit guarantee firm going bust only one month after launch.

First some background on Handan, epicenter for this case. Handan in Hebei province has seen a lot of private lending and a lot of bankruptcies.

From April of this year: Handan Farm Cooperative Goes Bust; 100,000 Rural Households Invested Over ¥140 million; Boss Has Fled

That bankruptcy took down a number of smaller firms months later:

Hebei Rural Cooperatives Go Bust

Now the developers are going under. In one case a developer owes ¥3 billion, about half of which is owed to thousands of small private lenders. The developer has fled.

There's some English coverage of this news thanks to Macquarie being exposed to losses, due to the developer also owning a credit guarantee firm that guaranteed trust products.

From Australian Financial Review: Macquarie linked to bankrupt Chinese property developer
Handan Golden Century, a developer based in the central province of Hebei, is struggling to repay 2.9 billion yuan ($506 million) in debts and its major shareholder Shi Yubao may have skipped town, according to reports in Money Week and Handan News.

Handan Golden Century was the guarantor for a trust product launched last month by the Sino Australian ­International Trust Company (SATC), which is just under 20 per cent owned by Macquarie.

The product, known as Changying No. 66, is backed by a 280 million yuan loan to Linyi Golden Century, which is also controlled by Mr Shi, according to the Beijing-based business magazine, Money Week.

More coverage of China's credit guarantee system.

From iFeng: 邯郸开发商集资借贷还不起跑路 被骗者堵马路

Wuhan Illegal Rooftop Development

Last year there was the building with an illegal rooftop development in Beijing. This time a guy in Wuhan built up the top floor of a twelve story building. It started because there was serious leaks from the roof and the property manager had no funds to fix it. The owner of the entire 12th floor landscaped the roof with greenery and a fish pond. Eventually, he build around it as well and made it open to the building residents if they wanted to go and relax.

More photos here: 武汉一居民楼顶建两层楼 配有别墅鱼池

About that "Stimulus"

China Joins ECB in Adding Stimulus as Fed Scales Back
China’s central bank joined its European counterpart in boosting liquidity to address weakening growth, underscoring a divergence in direction among the world’s biggest economies as the U.S. reduces stimulus.

The People’s Bank of China is injecting 500 billion yuan ($81 billion) into the nation’s largest banks, according to a government official familiar with the matter, signaling the deepest concern yet with an economic slowdown.

This isn't a stimulus, even if true. It is filling a giant hole in the credit market caused by the slowdown in shadow banking. Furthermore, the CBRC just started cracking down on the quarter end deposit wars, upping the risk of a crisis in another couple of weeks. Demand for deposits is going up and it will stay elevated throughout the quarter as banks can no long wait until quarter end to add deposits.

Might it only be a rumor? Here is what the PBOC told reporters today: "if there is news, we will promptly notify." According to the big banks, they had not yet been notified of this plan.

From iFeng: 央行回应5000亿元SLF:有消息会及时通知
Great Wisdom [0.00% funding research report ] AAStocks Newswires September 17 hearing, was the central bank for 500 billion yuan SLF rumors owned five lines, the central bank to respond to the great wisdom ISD news agency said this morning, "the news will be promptly notified " . There are three rows of five rows press officer, told reporters that "the matter is not clear," the other two lines are not a formal response.

"Do not know this, my line information, please refer to the announcement dominated." Bank of China [ -0.74% funding research report ] (601988.SH/03988.HK) Head of Information Services responsible for the great wisdom news agency said.

ICBC [ 0.56% funding research report ] (601398.SH/01398.HK Head of Information Services who also told reporters that temporarily can not contact the relevant service personnel can not confirm this.

Bank of Communications [ 0.23% funding research report ] (601328.SH/03328.HK) headquarters today for great wisdom stakeholders agency responded by saying, "There has not been a specific notification to the central bank caliber messages prevail."

As of press time, the Agricultural Bank of China [ -0.80% funding research report ] (601288.SH/01288.HK), China Construction Bank [ -0.24% funding research report ] (601939.SH/00939.HK) the relevant departments have not yet given a formal response.

Another close to the central bank's authority is on the great wisdom news agency said, SLF by financial institutions initiated. Currently, not lack of liquidity, the central bank does not need to take the initiative to put substantial liquidity. If it is five lines simultaneously active application SLF, and apply the amount is 100 billion yuan, it seems unlikely. Next, the central bank is indeed possible to carry out SLF, but if the central bank to carry out SLF, but also reflect the structural orientation, will not be the flood irrigation of conduct SLF.

On the 16th evening news that the central bank last two days on five lines 500 billion yuan SLF (Standing lending facilitation), for a period of three months, each the size of each 100 billion. The message quoted broker who said the message is basically true.

Market participants believe that, SLF similar nature of the monetary base put 500 billion yuan, the approximate overall drop quasi 0.5 percent, short-term easing of monetary policy normalization.

SLF (Standing Lending Facility) refers to the standing lending convenient operation, typically used for a long period of financial institutions to meet the large demand for liquidity. SLF maximum period of three months, currently 1-3 month operating mainly; genus unconventional central bank operations, and half by the financial institutions according to their liquidity needs of the application. Operating content is not instant publicly announced before the first quarter of the monthly balance of each quarter. Interest rates based on currency regulation and control needs, integrated to determine payment methods.

2014-09-16

Tan Yaling Sees More Dollar Strength

Key points from her article this week (Google translated):
Especially economic optimism data show a solid basis for the exchange rate, including employment rates, productivity and inflation rate seems to favor a stronger exchange rate

......Especially as debt sensitive period in September, the U.S. Treasury Department released data show that the size of the country's budget deficit this year in August to $ 129 billion, slightly lower than the previous estimate of $ 130 billion, when compared to August 2013 recorded a $ 148 billion deficit is reduced by about 13%. Data also show that the first 11 months of the 2013-14 fiscal year, America's total deficit of $ 589 billion, down from $ 755 billion over the same period of fiscal year 2012-13, which is also for the same period since the 2007-08 fiscal year the minimum size of the deficit before that massive economic crisis since. American economic improvement of the situation is reflected in all aspects of economic and financial, to give the dollar adjustment to bring up the full argument and reason. U.S. debt problems delayed hype has strong design and strategic factors.

...... Such as Italy, the third time since the 2008 recession, which many neighbors still trying to recover from the debt crisis of the same. To this end the EU finance ministers and the European Central Bank president Mario Draghi will be more focused on the European Central Bank 's latest move assist the economy and avoid deflation, which form a large negative pressure on the euro, the euro is the flow, adapt to technical requirements significantly. Coupled with then German economy is strong growth in the second quarter, subject to industrial output and construction support, but economic growth may be slowing after. Germany's central bank believes that more and more signs that economic growth is slowing.

This part shows the Chinese thinking on the U.S. dollar:
Strong dollar is not the price factor status and role, but the institutional and market factors, increased supply of dollars is the purpose of expansion and monopolize all global markets, the dollar market opportunity and the environment is the key.

Printing the dollar as part of a market share strategy: Triffin's dilemma from the opposite side.

She sees a rebound in foreign currencies coming, but dollar strength will continue.

From Hexun: 谭雅玲:美元上行加快存在汇率变化设计

China Real Estate of Affiars

Recent stories from Mingtiandi.

SOCAM SLASHES CHENGDU PRICES BY 30% IN SCRAMBLE FOR CASH
Socam Development, an affiliate of Shui On Land cut prices by 30 percent at a housing project in central Chengdu last week as the troubled real estate company struggles against slumping sales and falling prices.

YUEXIU PROPERTY PLANS $495M RIGHTS ISSUE IN CHINA CASH CRUNCH
Yuexiu Property announced last week that it plans a HK$3.84 billion ($495 million) rights issue, becoming the second major Chinese real estate developer in a week to turn to the equity markets as slowing home sales continue to squeeze the country’s property companies.

CENTURY 21 REAL ESTATE NOW SELLING HOUSES ON ALIBABA’S TAOBAO
Century 21 China, which is a franchise of the well-known US chain, last month joined a number of other large real estate agencies in pulling their listings from China’s biggest real estate website, Soufun.com. The boycott of the giant real estate site was sparked by disputes over what the agencies termed unfair pricing by Soufun.

In the announcement of its new tie-up with Taobao, however, Century 21 only wanted to talk about the future.

Hubei Expands Real Estate Bailout

The centerpiece of the policy is a 30% discount on interest rates for first time home buyers. Can they do that? As covered in Chinese Cities Call for Easing of Mortgage Credit, Bankers Laugh, interest rate policies are under the purview of the PBOC and the central government. Unless they approve of the move, these are merely suggestions for the banks, who will promptly ignore them.

The plans also call for reduced taxes and fees for first-time and smaller home buyers. These policies aren't new and have been introduced in other provinces this summer.

湖北发布“鄂六条”救市 首套房贷利率打7折

Hangzhou Prices Still Falling; Some New Homes Down Nearly 50%

One property was selling for ¥17,000 in January, now it is selling for under ¥12,000.

From iFeng:杭州部分楼盘单价直降5000元 恐将续跌至年底

FDI Slumps to 2008 Crisis Levels

Source: Is This China's Scariest Chart?

2014-09-15

Government Planning Failed, Individuals Will Correct

Below is an op-ed by Gu Jun, a professor of sociology at Shanghai University, talking about the empty residential buildings all over the Chinese coast as a metaphor for the failure of central planning. He closes by tying it to Premier Li Keqiang's reform efforts. This op-ed was the top headline in the real estate section of iFeng's website on Sunday.

The title can roughly be translated as "this bubble is on the even of destruction."

Here's is my incomplete summary (not a direct translation):

This bubble is not in Wenzhou, Ordos or Yulin, but on the shore. It is in Dalian , Yingkou, Qinhuangdao, Yantai, Weihai, Qingdao on the Shandong Peninsula, in Huizhou, Sanya and Beihai in the south, where the "ocean view apartment" is on the eve of destruction. Many rushed in to buy homes, but when night falls there are dark, empty buildings. In 2008, in Weihai, Shandong, homes were bought for more than ¥500,000; today they sell for ¥200,000, but there is little interest. There is a price, but no market.

When insiders describe the chaotic development of the coastline, they give three reasons. The first is that the timing wasn't right, and they "over drafted" the coastline's resources. The second is a lack of good planning; the developers moved as a herd and destructive development followed. Third, there was no core industry support, without a healthy ecosystem it could not continue growing. Valuable coastal ecosystems were destroyed, plans for scenic development fell through, now there is only a concrete and rebar forest, in the still of the night there are only a few lonely lights for comfort in this sad and lonely place.

This so called "coordinated" development, where government makes the decisions instead of independent actors, has turned into uncoordinated confusion. The BATs fly overseas (Baidu, Alibaba and Tencent), there is fake packaging scandals and shoreline destruction. Yet people still believe the government can implement the highest reason, they have a superstitious belief in planning, that government will somehow deliver long-term planning for the good of all society. Government is just another interest group though, and in the race to get promoted, officials pushed development to get ahead.

From the official's standpoint, coastal ecology has nothing to do with me; fishermen, farmers and city residents need for a supply chain has nothing to do with me; scenic development needs what type of development and continuous promotion, has nothing to do with me; if the home buyers can even see the ocean, has nothing to do with me. It is the same with the losses in high speed rail, the world's fastest M2 growth, and the investigation of the "tigers" and "houseflies."

With this background, go back and understand Li Keqiang's statement, "Whatever the market or society can do, will be left to the market or society" and the State Council's powerful push to eliminate administrative approval, it is not hard to understand the meaning. Government and planning are the same as human reason, they are imperfect and flawed, waiting for the spontaneous action of countless individuals to correct.

From iFeng: 这个地方已进入泡沫破灭前夜 住宅楼密密麻麻

Google Transltion below.

China Seeks End to Deposit Wars

At the end of every quarter, especially since the cash crunch in June 2013, Chinese banks engage in a quarter end war for deposits to hit regulatory targets. From September of last year: Why Not Spend ¥8 million to Avoid a ¥10 million Fine?
One bank branch president explained that the penalty for inadequate reserves is a ¥10 million fine. He said, why wouldn't I spend ¥8 million to buy deposits and save ¥2 million?

December 2013: Chinese Deposit Wars Back On; Banks Refuse To Move Deposits and Poach Depositors With Enticing Rates

This is coming to an end.

China caps end-month bank deposits to limit window-dressing
Deposits at banks at the end of any given month must not exceed 3 percent of the average daily level during that month, the China Banking Regulatory Commission (CBRC) said in a notice published in its website, www.cbrc.gov.cn, at the weekend.

The notice was jointly issued with the central bank and the finance ministry.

It also banned banks from using interest rates exceeding regulatory limits to attract deposits or using wealth management products to indirectly boost their savings as the end of month approaches.

Lenders that violate these and other new requirements will have part of their business suspended while serious violators will have their ratings downgraded, the regulators said.

Companies Flee The Real Estate Sector Taking Billions With Them

Many businesses went into real estate development post-2008 in order to earn big and easy profits, but now they are beating a retreat as the profits disappear.

"From what we've monitored, this year real estate transactions are up at least 20% from last year, involving more than ¥10 billion," said an official from the China Beijing Equity Exchange.

Wiki:
China Beijing Equity Exchange is an equity transaction bourse and platform run by the government of Beijing for mergers, acquisitions and restructuring of state-owned enterprises.

Recently, a Sinopec subsidiary sold a 25.17% stake in a Henan developer, though it still holds ¥160 million yuan of the firm's debt.

Background: 75 CHINESE STATE-RUN COMPANIES DUMP PROPERTY ASSETS IN 2014
So far in 2014, government companies including China Petroleum and Chemical Corp, China National Chemical Corp, and China Resources Gas Group in the petrochemical sector have all sold off real estate assets.

......In one of the largest divestments of real estate interests by a state-run firm this year, China Petroleum and Chemical Corp — also known as Sinopec — put up its 25.17 percent stake in Henan Huacheng Real Estate for sale, along with RMB163 million (US$26.3 million) in creditor’s rights on sale. While market estimates put the price of the equities at RMB 164 million yuan (US$26.4 million), Sinopec eventually sold its interest for RMB 145 million, an effective discount of 10 percent.

Asked to explain the reason for the subpar pricing, a staff member of Henan Huacheng pointed out that, “This project was transferred quickly because the SASAC long ago issued a decision that non-real estate companies cannot be involved in the property industry, and a petrochemical company is certainly not a real estate firm.”

According to CBEX, there has been more than ¥20 billion in real estate transactions on the exchange this year.


企业加速撤离房地产 超百亿资金出逃