2019-07-31

Worries Over Indebted Developer as Govt Restrains Housing Market

Developers rolled in profits in the first part of 2019, but debt levels remain high and the government crackdown on home prices could cool the industry in the second half of the year.

This article focuses on Beijing Capital Development. The firm cleared 100 billion yuan in sales in 2018, but it has a very high debt ratio.

In the Sogou translation below, "The First Shares" is a mistranslation of 首开股, Beijing Capital Development.

iFeng: 楼市调控刷屏:高负债房企存隐忧 京城“地产一哥”净负债率超180%
Sogou: High Debt Housing Enterprises Exist Hidden Worries Beijing Real Estate First Brother Opens First Net Debt Ratio Over 180%
Hundreds of Billions of Sales Can't Cover Hidden Worries of High Debt

In 2018, the first shares entered the ranks of 100 billion housing enterprises for the first time.

According to the data, in 2018, the first-time shares achieved a total contracted area of 3.7756 million square meters, up 27.97% year on year. The contracted amount was 100.727 billion yuan, up 45.58% year on year.

In the first quarter of this year and the first half of this year, the first shares still maintained the momentum of last year. The company announced that in the first half of 2019, the company realized 40.39 billion yuan in sales revenue.

However, whether the sharp increase in sales can ease the company's high debt ratio still worries the market.

In fact, throughout 2018, the asset-liability ratio of the first shares has increased. According to the annual report, in 2018, the asset-liability ratio of the first joint-stock company was 81.58%, an increase of 0.97 percentage points over the previous period, with a net debt ratio of 166.33%.

According to Wind data, the asset-liability ratio of the first shares in the first quarter of this year was 81.40%, and the net debt ratio was more than 180.70%, far higher than the regional housing enterprises such as Beijing urban construction, beichen industry and Beijing energy real estate, and far higher than the industry average.

Data show that Vanke's net debt ratio was only 31.66% in 2018, the leading real estate industry.

"In 2018, the asset-liability ratio of real estate listed companies remained high. The average asset-liability ratios of Shanghai, Shenzhen and mainland real estate listed companies in Hong Kong were 69.03% and 75.16% respectively, up 0.65 and 0.81 percentage points from the previous year." The TOP10 Research Report of Listed Housing Enterprises of China Index Research Institute shows that due to the good sales performance in 2018, the average effective asset-liability ratio of listed housing enterprises is 50.32% and 56.70%.

Compared with the above data, it can be seen that the debt ratio of first-time shares is obviously too high in both Beijing region and all listed housing enterprises, and there are considerable hidden worries.

As a matter of fact, the issue of first opening shares has attracted more attention in the market. Reporters noted that the first shares also admitted frankly in a recently released clarification announcement about a media report: the company's net debt ratio is at a relatively high level in the industry, and improving the structure of assets and liabilities will be a major concern of the company in the future and need to be effectively solved.

"Borrowing the New and Returning the Old" is under great pressure

In the context of the policy of "no speculation in housing", the sales of real estate companies are expected to slow down in the second half of the year as a whole. It is quite difficult for the initial shares to continue to grow significantly, which will tighten their capital chain and increase the pressure of "borrowing new and returning old".

The reporter noticed that the sales volume of the first stock plan in 2019 was the same as that in 2018, and the target was 100 billion yuan, which meant that the company's sales growth slowed down significantly. Data show that the company's inventory turnover rate was only 0.03 in the first quarter, far lower than last year's annual report of 0.17.


At the same time, the company's financing pressure is prominent. At the end of May, the company announced that it had raised 2.25 billion yuan through two rounds of financing. At the beginning of July, the first shares announced that the company plans to issue corporate bonds not exceeding 6 billion yuan in private to repay loans from financial institutions or for other purposes.

Some people in the industry pointed out that the relatively high operating mode of the joint venture project of the first real estate has also restricted its performance. Data show that 14 of the 16 parcels of land acquired by the first share in 2017 are jointly owned land. In 2018, the first shares directly took part in winning 6 homesteads, of which 5 were jointly owned.

Coincidentally, the company recently gave a set of data in the above clarification announcement: as of the end of 2018, there were about 170 subordinate enterprises with initial shares, of which more than 60% were cooperative and joint venture project companies.

In this regard, some analysts pointed out that joint land acquisition also puts enterprises in the dilemma of declining equity ratio, low gross profit and weak initiative. This may be one of the reasons why the gross profit rate and net profit rate of the first shares sold in 2017 and 2018 are obviously lower than the average level of mainstream listed housing enterprises. In the long run, it is not conducive to the sustainable development of enterprises.

Housing Crackdown Widens in July, Dalian Launches Price Controls

The Politburo reiterated that housing will not be used to pull economic growth higher yesterday. Cities have also been tightening policy this month, with the latest being Dalian. It passed strict pricing limits after home prices increased 1.2 percent in June. A day earlier, Hefei held a meeting with roughly 40 developers as it also tries to clamp down on rising prices.

This month also saw Kaifeng cancel buying restrictions after 20 percent discounts failed to boost sales. the city then reversed the policy days later, leading some to slam the government for eroding public trust: Social Mood: Frequent Housing Policy Changes Eroding Public Trust

Suzhou also tightened. SCMP: Suzhou tightens property curbs for the fourth time in 2019 as overheating home market has defied policies to cool prices

The news hit property stocks on Wednesday. STCN: 楼市调控刷屏!地产股应声大跌,半天蒸发500亿!有龙头暂停拿地. One firm has suspended land purchases:
The news said that R&F Real Estate issued a notice to suspend the land acquisition

In fact, some housing companies have been exposed to choose to suspend land acquisition.

According to a recent report by China Construction News·China Real Estate, on July 26, R&F Properties issued an internal document “Notice on Requiring Regional Companies to Ensure Sales Tasks”. The document clearly stated that in the second half of 2019, the land acquisition work was suspended in principle, and many times it was mentioned that it was necessary to promote sales and collect funds. Among them, “to achieve the project's sales target as the first priority, and to maximize the project revenue based on ensuring sales volume” has been emphasized.
As I've pointed out before, first in January of this year, China cannot unleash a large stimulus without risking another speculative housing boom. The country is trying to deleverage (or was, the word was removed from that Politburo statement) and deal with a slowdown in growth, yet still these cities are dealing with the risk of rapid home price increases because capital is finding its way into the sector. Failure to control real estate creates a dilemma, which is why China is trying to quarantine the sector from the credit market. If it cannot, then it has to choose to let credit inflation run into real estate or tighten overall credit growth to stem the real estate sector, risking the rest of the economy.

East Money: 房价只准跌不准涨,但跌不能超5%!大连加码楼市调控发布限涨令
Sogou: House prices are allowed to fall but not rise, but they cannot fall more than 5%
Price cannot be changed within 6 months. After 6 months, you can apply to lower the application price, but the price shall not fall more than 5%.

Recently, the Dalian Municipal People's Government Office issued a report on strengthening the real estate market regulation work notice, to increase the regulation of the property market.

The circular requires that all real estate all items must be declared pre-sale price, right accept commercial accommodation house price. According to regulations, relevant departments of developers under the guidance temporarily suspend their online sign filing qualifications.
Dalian is one of several cities that have started ramping up housing restrictions.

STCN: 房价涨得太快!又一城市设定房价"涨跌停板",还有城市对房企开刀
After cities such as Xi 'an, Luoyang and Hohhot increased their prices too fast, Dalian and Hefei also stepped in!

On July 30, Dalian issued a price limit order, setting a "limit on the rise and fall" of house prices, which not only limits the rise of house prices, i.e. the pre-sale price shall not be higher than may, the price shall not be adjusted within 6 months, and after 6 months, only a downward adjustment can be applied, but also limits the fall of house prices, i.e. the downward price shall not exceed 5%.

Hefei also heard the news of the increase in the regulation of the real estate market, and adopted "three pauses" and "three strictness" measures against problematic real estate enterprises, i.e. suspension of land supply, suspension of pre-sale and suspension of online sign measures. Strictly control bank loans, pre-sale funds and filing prices.
Since July, various real estate tightening policies have been issued intensively. According to statistics, real estate is regulated more than 40 times a month, reflecting that "stabilizing expectations, land prices and housing prices" is still the main content of the policy. After the meeting of the political bureau of the CPC central Committee reiterated that "housing will not be speculation" and made it clear for the first time that real estate will not be used as a short-term stimulus to the economy, it is expected that the regulation of the property market will continue to be strict in the second half of the year.
Hefei's "Three Suspension" and "Three Severity" to Problem Housing Enterprises

Following Dalian's increase in regulation, Hefei has also received news of regulation of the property market.

Securities dealers Chinese reporters learned from Hefei Housing Authority that on July 30, Hefei Housing Authority and other seven departments jointly held a city-wide real estate market stability control work conference, in which about 40 major development enterprises participated.

The meeting proposed to take timely measures to suspend land supply, pre-sale and online signing for development enterprises that triggered three or more group visits and group complaints and did not have effective solutions. In addition, for problem-prone enterprises, strictly control bank loans, strictly control pre-sale funds and strictly control filing prices.

At the meeting, the contradictions and disputes arising from the delivery of commercial housing and the group visits and complaints caused by these conflicts and disputes occurred in more than 10 enterprises such as contemporary home buyers and Beijing Commercial Company since the beginning of this year were reported. The prominent problems in planning and design, sales promotion and housing quality in the development and construction of real estate were pointed out.

At this meeting, Hefei Housing Administration Bureau requested to "make three rules" with various real estate development enterprises.

In response, Guo Shiying, an analyst at Zhuge Fang's data research center, believes that the focus of the Hefei meeting is to standardize and stabilize the market. We will further prevent and resolve all kinds of contradictions and disputes in the real estate market through strict investigation of all kinds of illegal behaviors of real estate development enterprises, thus stabilizing the real estate market. For housing enterprises that have triggered three or more group visits and have not been effectively disposed of, they are restricted from taking land and selling from the land side and the selling side. The meeting also strictly controlled bank loans, pre-sale funds and filing prices, from the financial and price side. Many aspects strictly control the behavior of housing enterprises and stabilize the market.

Yan Yuejin believes that the expression of "three pauses" mentioned in Hefei policy is a zero tolerance attitude towards this group of visits, and the relevant responsibilities need to be borne by the relevant housing enterprises. In the actual process, many developers ignore the demands of property buyers and ignore the rights and interests of the masses, which can not solve the problem of housing transactions, but also easy to form greater social contradictions. Hefei this time requires developers to form a relatively clear solution, time limit and standard of solution, which is worth learning and learning from relevant cities.

Yan Yuejin also pointed out that in the second half of this year, some housing enterprises may meet the peak of housing delivery, and some real estate projects may have some quality problems. Recently, housing enterprises need to conduct a major overhaul and internal inspection of housing quality, otherwise it is really easy to cause various group visits and complaints. Only by truly protecting the interests of property buyers can the stability of the transaction order be promoted, and the related real estate enterprises will not face the embarrassment of being unable to take land and sell it.
Real estate regulation exceeded 40 times in July

Since July, various real estate tightening policies have been issued intensively. In the last week alone, Suzhou, Luoyang, Hohhot, Dalian, Hefei and other cities have successively increased the regulation of the real estate market, and Kaifeng's cancellation of the sales restriction has been suspended. In addition, the regulatory authorities have continuously tightened the financing of housing enterprises, including trust loans and overseas bond issuance.

According to statistics from Zhang Dawei, chief analyst of Centaline Real Estate, real estate regulation has exceeded 40 times in July and continues to maintain a high level.

"In 2019, the real estate market regulation will be mainly relaxed in the first quarter, and housing will not be sold until the Politburo meeting in April. From the second quarter to July, the real estate policies around the country will be mainly tightened. In recent July, various tightening policies have appeared frequently, mainly to rectify chaos. " Zhang Dawei said that from the cities that issued the regulation policies, the main cities are those with obvious price increases. Such cities are mainly concentrated in the first and second tier cities, and the price of housing has remained at a high level recently, which shows that "stabilizing expectations, land prices and housing prices" is still the main content of the policies.

On July 30, the Political Bureau of the Central Committee of the Communist Party of China made it clear that it would adhere to the position that houses are for housing, not for speculation, implement a long-term management mechanism for real estate, and not use real estate as a short-term stimulus to the economy.

This is after the two Politburo meetings at the end of last year did not mention real estate. On April 19 and July 30, it was mentioned twice in a row that real estate would not be sold. It was further confirmed that real estate control would continue to be tightened. Zhang Dawei believes that under the circumstances of a small spring in the market and fluctuations in some areas, it will be a blow to the real estate speculators and also conducive to the stability of the market to mention twice in a row whether to live or not.

According to the China Index Research Institute, despite the economic pressure in the first half of the year, real estate regulation still reflects the strict tone and the central government's policy of not speculating on housing and stabilizing expectations. The most fundamental impact is that the local government will be more cautious in dealing with the regulation of real estate, avoiding the use of real estate as a short-term stimulus to the economy, and the land finance will be affected to some extent. In particular, regional policies with excessively large fluctuations in land prices will be further tightened. The two-stage financing policy of supply and demand will remain tight.

A First for China: Employment Tops Agenda as Jobs Becoming Difficult to Find

Another takeaway from the Politburo economic meeting: a new focus on employment.

iFeng: 中央定调下半年中国经济 传递三大重磅民生信号
Sogou: China's Economy Sends Three Major Signs of People's Livelihood

Two of the three related to housing, as discussed in the prior post No Major Stimulus, No Housing, No Deleveraging, China Will Rely on Tax Cuts and Parking Lots to Hit 2H GDP Target

The third is employment.
Employment

-Implement the Employment Priority Policy


The meeting called for the implementation of the employment priority policy and the employment of key groups such as college graduates, migrant workers and retired soldiers.

Employment is the source of income and the greatest livelihood. This year, for the first time, China has put the employment priority policy at the macro policy level. The employment target set is to create more than 11 million new jobs in cities and towns, with the unemployment rate in urban surveys at about 5.5% and the registered unemployment rate in cities and towns within 4.5%.

In the first half of the year, 7.37 million new jobs were created in cities and towns nationwide, fulfilling 67% of the target tasks for the whole year. The unemployment rate surveyed in 31 major cities and towns was 5.0%. Obviously, the employment situation is generally stable.

However, as judged by the Ministry of Human Resources and Social Security, looking forward to the next period, the employment situation is still complicated, the total employment pressure is still relatively high, the structural employment contradictions are even more prominent, some industries and enterprises are facing pressure to stabilize their posts, and some workers are finding employment more difficult.

Zhang Ying, director of the employment promotion department of the Ministry of Human Resources and Social Security, said on July 25 that stable employment growth, together with relevant departments, will improve the policy system of industry, trade, investment and other policies conducive to employment promotion. We will improve the implementation mechanism of the employment priority policy, comprehensively push forward the implementation of policies such as social security fee reduction and unemployment insurance refund, encourage enterprises not to lay off workers, reduce layoffs, and support enterprises to absorb employment.

Xu Hongcai believes that stable employment is the first of the "six stable" jobs. The meeting emphasized that employment is the priority. The logic behind this is to stabilize income through stable employment, thus achieving the goal of stable consumption.

The meeting also proposed to dig deep into the potential of domestic demand, expand and expand the final demand, effectively activate the rural market, and use more reform methods to expand consumption.

Chang Yang, a senior economist at China-Thailand Securities Research Institute, said that reforms in education, medical care and old-age care will be further intensified, especially the opening up at home, which will strongly stimulate consumption and create new economic growth points.

No Major Stimulus, No Housing, No Deleveraging, China Will Rely on Tax Cuts and Parking Lots to Hit 2H GDP Target

I'm exaggerating, but I'm not sure by how much because urban parking lots were named specifically as one of the growth strategies for the second-half of 2019.

Politburo document at 财新:中共中央政治局召开会议 不将房地产作为短期刺激手段
A breakdown at iFeng: 中共中央政治局会议首现五个新提法 释放一系列政策信号
Sogou translation of iFeng article: The First Five New Terms of the Political Bureau Meeting of the CPC Central Committee Released a Series of Policy Signals

I will paste the entire translation below, but here is the relevant section:
Regarding the expansion of investment, the meeting mentioned "stabilizing investment in manufacturing industry, implementing short-board projects such as renovation of old urban districts, construction of urban parking lots and cold chain logistics facilities in urban and rural areas, and accelerating the construction of new infrastructure such as information networks."
There main takeaways are as follows. One, no major stimulus. Tax cuts are the stimulus being provided, monetary policy will provide "rational liquidity." However, the word deleveraging did not appear as it has in prior economic policy statements.

Two, no reliance on housing speculation. See Caixin: China Vows to Support Economy Without Property Stimulus
Top policymaking body states for the first time that the property market will not be used for short-term stimulus, departing from previous stimulus methods
Finally, there was discussion of "urban agglomeration," which is a continuation of recent efforts at building megacities. "Urbanize" the urban areas, concentrate labor and use the technology industry to drive growth. That's more of a long-term policy though. (One that will further lower fertility rates.) In the short-term, it looks like China will rely on shovel ready projects such as parking lot construction to hit their GDP target.

Other coverage

Bloomberg: China’s Politburo Vows Action on Trade, Tweaks Stimulus Policy
Nikkei Asian Review: China's Politburo pledges action to keep economy moving

Full Sogou translation:
The meeting of the Political Bureau of the CPC Central Committee is the best window to observe the direction of macro policies. The meeting of the Political Bureau of the CPC Central Committee held on July 30 made arrangements for the economic work in the second half of the year, and a number of new ideas emerged. These new formulations have released a series of important policy signals.

First, the macro policy tone remains unchanged, with the first mention of "reducing taxes and fees"

Signal: Do not engage in strong stimulus, and increase the amount to fulfill the promise of a 2 trillion yuan tax cut for the whole year.

The meeting proposed: "We should implement a positive fiscal policy and a sound monetary policy. Fiscal policy should be strengthened to improve efficiency and continue to implement the policy of reducing taxes and fees. Monetary policy should be moderately tight and maintain reasonable and sufficient liquidity. "

From this, we can see that the macro policy tone will remain unchanged in the second half of the year. Compared with the politburo meeting held in April, fiscal and monetary policies added two suffixes: "continue to implement the policy of reducing taxes and fees" and "maintain reasonable and sufficient liquidity".

Li Chao, chief macro analyst of Huatai Securities, told reporters of Shanghai Stock Exchange: "The emphasis on efficiency improvement and tax and fee reduction in the July meeting compared with April means that the policy is still based on bottom-up."

He analyzed and said that the monetary policy continued the expression of "moderate tightness" in the April meeting and judged monetary policy according to economic growth and inflation trend. The core of the current policy is still to solve the problem of aggregate demand through supply-side reforms.

Tang Jianwei, chief researcher of the Bank of Communications, said in an interview with reporters from the Shanghai Stock Exchange newspaper that the fiscal policy emphasizes the continued implementation of the fine tax reduction and fee reduction policy, of which the word "fine" has not been mentioned before. It is expected that the tax reduction and fee reduction will be stepped up in the second half of the year to accelerate the implementation of the promise of nearly 2 trillion yuan in tax reduction and fee reduction for the whole year.

Two, the first mention of "multi-purpose reform measures to expand consumption" in the transformation of old urban residential areas included in the short board

Signal: The focus of stabilizing investment is still on stabilizing infrastructure.

This meeting made a series of specific arrangements to expand domestic demand, which was not common in previous politburo meetings.

Among them, aiming at expanding consumption, it is proposed that "the potential of domestic demand should be dug deep, the final demand should be expanded, the rural market should be effectively started, and more reform measures should be adopted to expand consumption."

Compared with previous politburo meetings, "more reform measures to expand consumption" is a new formulation. Tang Jianwei said: "The sluggish consumption growth is largely related to the low growth rate of residents' income and the imperfect social security system. These needs to be realized through the reform of income distribution system and social security system, so as to really promote consumption growth."

The latest data from the National Bureau of Statistics show that in the first half of the year, consumption increased by 8.4% year on year, 0.1 percentage point faster than in the first quarter. During the same period, the national per capita disposable income grew by 8.8% in nominal terms and 6.5% in real terms after deducting price factors, slightly higher than the GDP growth rate. Regarding the expansion of investment, the meeting mentioned "stabilizing investment in manufacturing industry, implementing short-board projects such as renovation of old urban districts, construction of urban parking lots and cold chain logistics facilities in urban and rural areas, and accelerating the construction of new infrastructure such as information networks."

It is worth noting that this is the first time that the renovation of old urban districts has been incorporated into the short-board project. Previously, the state's document on the short board for infrastructure construction has been referring to the renovation of shantytowns, not the renovation of old residential areas.

Since this year's government work report proposed to vigorously upgrade old urban residential areas, in April the Ministry of Housing and Construction and other ministries jointly issued the "Notice on Doing Well the Work of Upgrading Old Residential Areas in 2019". Recently, the executive meeting of the State Council has also deployed many times to promote the renovation of old residential areas.

Li Chao said: "The renovation of old residential areas is the key to stable investment in the future. This meeting has more emphasis on its role of supplementing the shortage. It is expected that the central government in this field may increase its financing support."

Tang Jianwei also pointed out that apart from stabilizing investment in manufacturing, the meeting also mentioned the renovation of old residential areas and new infrastructure such as information networks. In line with the previous policy of allowing special bonds as capital, it is expected that the focus of stabilizing investment in the second half of the year will remain on stabilizing infrastructure.

Three, adhere to the "housing does not fire", emphasizing "not to use real estate as a short-term means to stimulate the economy."

Signal: Real estate regulation will not be relaxed in the short term.

The meeting mentioned: "Insist on the position that houses are for living, not for speculation, implement a long-term management mechanism for real estate, and do not use real estate as a short-term stimulus to the economy."

The meeting reiterated the keynote of "no speculation in housing", but compared with previous politburo meetings, it clearly emphasized for the first time "not to use real estate as a short-term stimulus to the economy".

"The statement further clarifies the market role of real estate, that is, real estate should not be a tool to stimulate the economy. Localities still need to strengthen the concept of consumer goods, that is, houses are for living, not for speculation." Yan yuejin, director of research at the think tank center of yi ju research institute, said in an interview with the Shanghai stock exchange newspaper that when developing real estate business in various places, more consideration should be given to the consumer demand behind the real estate, instead of making too many links with economic stimulus, etc.

Zhang Jun, chief economist of Morgan Stanley Huaxin Securities, told Shanghai Stock Exchange newspaper reporters: "The statement of real estate policy shows that the key to stable growth in the year is to supplement the shortage of infrastructure. Loosening real estate regulation is obviously not an alternative policy in the government policy toolbox."

He believes that China's current urbanization rate is still relatively low in developed countries, and there is still much room to encourage reasonable real estate consumption. However, in the short term, with high housing prices and certain bubbles in some cities, there will be no directional changes in real estate policies, and more importantly, the policy of implementing policies based on cities will be maintained. In view of the current low inventory level, it is estimated that the probability of a sharp slowdown in real estate investment growth in the second half of the year is unlikely and may stabilize at a low level. Housing prices have remained stable as a whole. Due to different control policies and stock levels in different cities, there may be ups and downs.

Four, the year twice mentioned scientific board, the first mention "improve the quality of listed companies"

The meeting proposed: "Scientific Innovation Board should stick to its position, implement a registration system with information disclosure as the core, and improve the quality of listed companies."

This is the second time this year that the Politburo meeting mentioned scientific innovation board. Earlier, at the politburo meeting in April, it was mentioned: "to promote the healthy development of the capital market through key system innovation, scientific innovation board should really implement the securities issuance and registration system with information disclosure as the core."

Five, the first mention of "enhance the function of urban agglomeration"

Signal: The idea of urbanization has changed from small towns to strong big cities.

The meeting also proposed: "Deepen the reform of the system and mechanism, increase the vitality and power of economic development, accelerate the implementation of major strategies and enhance the functions of urban agglomerations."

Compared with previous politburo meetings, "enhancing the functions of urban agglomerations" is a new formulation. Zhu Zhenxin, executive director of the Financial Research Institute, said: "The document of the Development and Reform Commission at the beginning of this year is already very clear. It aims to build urban agglomerations and strengthen big cities."

At the beginning of April this year, the National Development and Reform Commission issued the "Key Tasks for New Urbanization Construction in 2019", which, while making it clear that large cities will fully liberalize their settlement restrictions, publicly mentioned "shrinking cities" for the first time. The document pointed out that small and medium-sized shrinking cities should lose weight and strengthen their bodies, change the inertia of incremental planning thinking, strictly control the incremental, revitalize the stock, and guide the population and public resources to concentrate in urban areas.

Li Chao also believes that the key to improving the functions of urban agglomerations and optimizing the construction of urbanization lies in large cities driving small cities. "In order to get rid of the dependence on the real estate policy, the way is to trigger the technology cycle. The development of science and technology cycle can only rely on big cities, not small cities. At present, the urbanization idea pays more attention to the effective flow of high-skilled and high-quality population, and promotes the optimal allocation of production factors of high-skilled labor force through the attraction of high-skilled and highly educated talents in large cities. "

Contrarian Headline Indicator on Ethanol Producer

Reuters: U.S. ethanol industry nearing breaking point: Green Plains CEO

Another Low Volatility China Play

China Unicom (CHU).

Cheap Put Play on Deflationary China Crisis

2019-07-29

274 Chinese Developers Have Gone Bankrupt in 2019

In China, 274 out of 97,000 registered developers at the end of 2018 have gone bust this year.

iFeng: 超200家房企破产 系楼市精细化大势所趋
Sogou: The bankruptcy of more than 200 housing enterprises is the trend of refinement of the real estate market
The survival of the fittest really pushes China's real estate market into an era of value growth dominated by quality.

China's top real estate companies have the largest revenue in the world. According to the Fortune 500 recently released, the five real estate companies on the list (Evergrande, Country Garden, Greenland, Poly and Vanke) are all from China. In addition, according to the statistics of the national industrial and commercial bureau in 2018, the number of registered real estate developers in China reached 97,000. However, at the same time, data show that 274 real estate enterprises nationwide issued bankruptcy announcements as of July 24, 2019, of which 3 were on July 24 alone.

More than 200 housing enterprises have left the market. According to statistics, most of them are small and medium-sized enterprises. First of all, this is due to a major change in the policy environment. Since the central government established the policy of "no speculation in housing", real estate regulation has lasted longer and has been more intensive than in previous rounds. The entry threshold has been raised in all aspects such as the qualification for purchasing a house and the interest rate on loans for purchasing a house. This has created a squeezing effect on the previous demand dominated by some investments. The control on the demand side has changed the relationship between supply and demand in the real estate market, and a large number of home buyers have also entered the wait-and-see period. For housing enterprises, this means that the sales cycle is prolonged, the pressure of capital chain test is increased, and the small and medium-sized housing enterprises with weak capital pressure resistance are undoubtedly facing severe tests.

At the same time, due to the impact of soaring housing prices in the past few years, both the primary and secondary markets have a tendency to overheat. High land prices in some areas have led to repeated record-breaking land auction prices. At the same time, a high turnover model has been adopted to maximize profits. However, as the real estate policy and the demand for house purchase are getting colder, developers are facing challenges in this development inertia and the inventory of land and buildings is increasing. Sales are blocked, which makes it more difficult for small and medium-sized housing enterprises to collect funds, further exacerbating the shortage of funds.

In addition, the debt pressure brought by developers' high land prices has also become an important reason for some housing enterprises to withdraw. However, before this, small and medium-sized housing enterprises had more financing through trust, bonds and other channels under the condition of limited traditional financing and credit channels. Recently, the China Banking Regulatory Commission has regulated the relevant businesses of banks, trusts and other institutions in the real estate industry. The small and medium-sized housing enterprises are the ones most affected by this.

More than 200 housing enterprises left the market as a result of the triple changes in policy, market and industry. At present, from the overall base, the proportion of more than 200 housing enterprises is still small, but with the deepening of regulation, more housing enterprises, especially small and medium-sized housing enterprises, may face the fate of being eliminated by the industry in the future.

In fact, this is also the beginning of the increase in the concentration of the real estate industry, which is conducive to the long-term development of the market. In the past 30 years or so, China's real estate market has enjoyed three dividends of the times, namely, population migration, urbanization and rapid economic development, thus achieving rapid growth. However, at the same time, there are also a series of problems such as the uneven quality of enterprises and practitioners, the low quality of housing development brought about by extensive management, and the unfinished buildings.

The market clearing of housing enterprises that do not have comprehensive development and operation capabilities is more in line with the future trend of China's real estate market towards fine-grained and large-scale operation. It can also enable the real estate industry to realize the survival of the fittest through reshuffling, stop repeating the previous relatively chaotic and disorderly situation, and truly promote China's real estate market to enter an era of value growth dominated by quality.

2019-07-28

Canadian Dollar vs Australian Dollar as US-China Trade War Proxy

The Canadian and Australian economies both have major resource components, but Canada is far more tied to the health of the U.S. economy, while Australia relies more on commodities exports to China. Both are believed to have housing bubbles and bears are circling. Looking at the currency cross, it appears the Canadian dollar is poised to break out of a basing pattern.

The Canadian dollar also appears in a potentially bullish formation versus Chinese yuan, while Australian dollar looks at risk of breaking down.

2019-07-27

Emerging Markets Ready for Downturn

FYI: Most of these patterns could be easily invalidated by a sharp rally next week, but a downturn in EMs would conform with my macro outlook.

August has been a historically bad month for emerging markets. Indonesia is a worst-case example of this with both August and September negative for the Indonesia ETF (EIDO). It has a limited history though. EEM goes back farther and it too is historically negative in August. I do not place much stock in seasonality, by the way, but I do believe one should pay attention when "the stars align."
The blue lines are major support/resistance going back to 2011 and 2007 peaks.
The China ETF (FXI) could resolve bullish or bearish, but the gap between the support and resistance is only 5 percent.
India ETF (EPI) has broken its uptrend.
Brazil (EWZ) could stand to rally given its more localized issues, but it too has experienced a failed breakout.
Malaysia (EWM)
South Korea (EWY) isn't an emerging market, but its also experience a failed breakout, negative for EMs considering it is highly reliant on trade and China.
Emerging market local currency debt has broken out, but this was partially driven by falling interest rates. A strong dollar rally would turn this into a failed breakout as well.
Mexico (EWW) could be bottoming on extreme negative sentiment, but in context of everything, a breakdown is possible.
U.S. Dollar Index Bullish ETF (UUP) hit a new 52-week high on Friday.
Finally, here are a number of currencies. Many sport basing patterns similar to the broader U.S. Dollar Index and trade-weighted USD. There will be no significant breakdown in emerging markets without a major breakout in the dollar.

Not the Tax Cut: Some Chinese Provinces Report Declining Tax Revenues

More signs of a slowing economy visible in fiscal data that shows revenue slowdowns accelerating, with some provinces and local governments tipping into revenue contraction. In a vacuum, it's not surprising to see falling revenues following a tax cut and a major economic slowdown. What makes this story curious is China reports GDP growth above 6 percent. The fiscal situation makes it look more like an economy on the cusp of a nationwide recession.

时代在线:全国财政收入增速持续收窄,上半年支出破12万亿
On July 16, the Ministry of Finance announced the fiscal revenue and expenditure in the first half of 2019. The data shows that in the first half of 2019, the national general public budget revenue was 10,784.6 billion yuan, a year-on-year increase of 3.4 percent, a decrease of 7.2 percentage points over the same period last year.

At the press conference, Liu Jinyun, director of the Treasury Centralized Payment Center of the Ministry of Finance, explained to the national fiscal revenue in the first half of the year that due to the tax reduction and fee reduction policy, the growth rate of fiscal revenue in the first half of the year was reduced, especially with the implementation of the new VAT policy. The national general public budget revenue growth for the quarter was only 0.8 percent.
Notably, the 3.4 percent YTD increase is down from May: China's fiscal revenue up 3.8 pct in first five months. The economy is slowing.
According to the data released by the Ministry of Finance, the national general public expenditures in January-February, January-March, January-April, January-May, and January-June increased by 14.6%, 15%, 15.2%, 12.5%, 10.7% respectively. In the same period, the national general public budget revenue was 7%, 6.2%, 5.3%, and 3.8%, respectively.

Overall, in the first half of this year, the year-on-year growth rate of fiscal expenditure has slowed down, but it is still significantly higher than the growth rate of revenue during the same period.

Tang Jianwei believes that the current gap between revenue and expenditure growth is large, and there is definitely pressure on fiscal balance. However, in the context of this year’s central government’s proposal to achieve “six stables” through the counter-cyclical adjustment of policies, the fiscal balance should not be the focus of fiscal policy when the proactive fiscal policy is to be further “strengthened”.
VAT taxes are also falling after the initial tax cut hit.

JRJ: 全国财政收入增速放缓 弥补减税缺口成焦点
Such a large-scale reform has achieved immediate results: according to the data of the State Administration of Taxation, the overall net tax reduction was 221.8 billion yuan between April and May this year alone.

However, the landing of the policy has also had a significant impact on fiscal revenue: in January-February, January-March and January-April this year, domestic VAT revenue increased by 11.3%, 10.7% and 12.4% respectively. With the formal declaration of enterprise value-added tax under the preferential tax policy in May, the growth rate of domestic value-added tax revenue fell to 6.8% from January to May and further fell to 5.9% from January to June.

"The large-scale tax reduction reflects that fiscal policy is increasing its effectiveness." In an interview with Times Weekly, Yang Zhiyong said that although tax cuts and fees will affect fiscal revenue in the short term, they will play a role in broadening the tax base in the medium and long term, boosting the release of economic vitality, and in the long term they will enhance fiscal revenue and high-quality development capability.
The U.S. under President Reagan slashed taxes and there was no dip in revenue, in part because the U.S was coming out of a recession. China is supposedly growing its economy faster than 6 percent in real terms, let alone nominal. Revenues should be slowing less than the tax cuts, not more than the tax cuts.
Some provinces and local governments report falling fiscal revenue.

Yicai: 首个地方上半年财报公布,北京财政收入同比降2.5%
In the first half of this year, Beijing's general public budget revenue was 317.09 billion yuan, down 2.5% year-on-year, with rare negative growth, hitting a new low in recent years.

The main reason for the negative growth of Beijing's fiscal revenue is the impact of large-scale tax cuts and tax reductions.

In terms of major taxes, Beijing’s first-largest tax value-added tax in the first half of the year was 98.82 billion yuan, up 6.1%, an increase of 5.2 percentage points from the same period of the previous year. This is mainly because the new VAT rate policy entered the first in May. During the tax period, the effect of tax cuts began to appear gradually.

...However, it is worth noting that the general public budget revenue in the first five months of Beijing fell by 4.4% year-on-year, while the decline in the half-year data has narrowed. According to the budget report at the beginning of the year, Beijing expects that the general public budget revenue for the whole year is expected to increase by 4%.
财新:社论|如何看待减税降费带来的收支缺口
The annual target of tax reduction and reduction of nearly 2 trillion yuan has been completed more than half. However, the growth rate of fiscal revenue has slowed down markedly. Some provinces have even experienced negative growth in fiscal revenues. The financial impact of grassroots governments has been even greater. Some regions in the less developed regions of the central and western regions have even had large financial gaps.
What must China do to generate positive growth? Only what it has failed to do for a decade: reform.
The rationale for tax reduction and fee reduction is the famous “Laffer curve”: tax cuts can stimulate corporate investment and promote economic development. After the tax base is expanded, even if the tax rate is low, government revenue can increase. However, tax cuts can reduce the burden on enterprises, but they do not necessarily activate the economy. The effect depends on a series of deep institutional factors. If structural reforms fail to keep up, tax cuts may lead to the most unsatisfactory situation: the economy continues to decline, fiscal revenues and expenditures are further unbalanced, and business operations have not improved fundamentally. In order to make the tax reduction and fee reduction measures effective, the Chinese government should spend more energy to comprehensively deepen the system reform, accelerate the pace of state-owned enterprise reform, break the administrative monopoly, expand market access, improve the business environment, and effectively strengthen the entrepreneurial and innovative activities of private enterprises. stand by. The potential growth rate of China's GDP is declining. This is not only a problem in the development stage, but also a consequence of institutional constraints. This is an insurmountable "iron gate" for tax reduction and fee reduction.
财新: 减收缺口如何补
In the first half of this year, the national tax reduction and fee reduction was 1,170.9 billion yuan, making fiscal revenue only increase by 3.4% year-on-year, lower than the expected growth rate of 5%. Provinces such as Beijing, Chongqing, Guizhou, Xinjiang, Gansu, Qinghai, and Jilin even experienced negative growth.

  This situation is expected. Shortly after the end of the "two sessions" in the country, the Ministry of Finance issued a document requesting all localities to do a good job in budget management of revenues and expenditures, multi-channel open source to make up for revenue reduction, and hardening budget expenditure constraints to ensure the implementation of tax reduction and fee reduction policies.

  “Just like living at home, what should I do when I am in trouble? I have to sell valuable things, but I have to tighten my pockets.” A local financial department told the Caixin reporter.

For local governments, the easiest way is to make a fuss about state-owned assets, or sell state-owned assets such as factories and administrative institutions, or increase the profits taken from state-owned financial institutions and state-owned enterprises. The second is to recover the balance carryover funds and increase the coordination of various funds.

The problem is that the decline in fiscal revenue caused by tax cuts and reductions is long-term, and the measures commonly used to fill the gaps in the localities are mainly concentrated on the income side, and some of the income is one-off and not sustainable.

Another Sign of Negative Mood: Tumbling Fertility

CNA: CDC confirms US fertility rate fell to 'all-time low' in 2018
The Centers for Disease Control and Prevention confirmed Wednesday that the US fertility rate continued to fall in 2018, to an all-time low. The report confirms provisional figures released in May.

“The 2018 general fertility rate fell to another all-time low for the United States,” researchers with the CDC's National Center for Health Statistics wrote in a July 24 report.

...According to the early statistical release from the NCHS in May, the total fertility rate, or average number of children born per woman, stands at 1.7, well below the demographic replacement bar of 2.1.
And immigration is going to be severely restricted or outright banned, as it was the last time similar conditions and social mood coincided. I still believe the U.S. is likely to become a net emigrant country because of deportations once negative mood really gets going. The country is more than 20 years into a mood downswing and both major political parties are still pushing peak social mood immigration policies, with many pushing extremist open borders. The public reaction is going to overshoot in the opposite direction. Consider that the U.S. set up concentration camps for Japanese, Italians and Germans in the 1940s. Granted it was wartime, but the numbers were far smaller as percentage of the overall population. The "experiment" being performed on America is going to end badly.

China Will Lose the Trade War, Only a Matter of American Will and Time

One of the falsehoods peddled by China bulls /American bears is that one day China will stop selling junk to the American consumer. The Chinese will consume their own output and the American standard of living will collapse. There is more than a grain of truth in that story, but it ignores a crucial point I've made more than once: Chinese have not built factories for domestic consumption. Chinese output is aimed at foreign markets. The closure of America's market is a loss for companies that focus almost entirely on the U.S. market. To exaggerate, much of China's economy is an American colony, it exists to serve U.S. consumers. If they lose access to those consumers, they are not prepared to sell into other markets, let alone China.

Moreover, the Chinese economy is not as efficient as it seems. It grew into a global power because it leveraged its access to the capitalist, free market industrialized world. Unlike Japan, South Korea and Taiwan, China has not reformed its economy away from reliance on foreign export markets because that requires loosening domestic political control. Instead of reform, it piled on ever increasing amounts of leverage to keep the old economic model running. There would always come a day when the U.S. would reach its limit for running trade deficits, either a political limit or a natural economic limit that would result in currency collapse. There would always be a limit to how much debt China could force into its economy, and how much steel, autos and ghost cities it could build to pump up GDP. And now all of these limits are being reached simultaneously.

NYTimes: China Needs New Places to Sell Its Mountain of Stuff
Faced with severe factory overcapacity at home and tariffs on exports to the U.S., Beijing wants to finish a much-delayed Asian free-trade pact.
No country can absorb the sheer volume of what China sells to American customers. China’s regional neighbors compete against it in a number of industries. And China continues to maintain high tariffs and other barriers to protect its own industries — barriers that would have to drop if other countries were to sign on.

The economic clash between the United States and China has thrown the world trade system out of balance. China runs an annual surplus in manufactured goods trade of almost $1 trillion, meaning that is how much more it sells to the world than it buys each year. Nearly half of that surplus comes from trade with the United States.
Already, the country is plagued with excess capacity for making cars, steel and other staples of global trade. More factory slowdowns and shutdown could lead to job losses and further drag down economic growth.
It's the NYTimes, hence there won't be any sentence about "President Trump was 100 percent correct in saying the U.S. already lost the trade war and that China has more to lose." Yet that is the reality on the ground. Their economy as currently structured cannot win the trade war. It was true in 2008 and it is more true today: China is more similar to the United States in 1929 that anyone wants to believe. The events of the 1930s were not caused by tariffs and other nonsense peddled by globalists seeking to subvert sovereignty of individual nations, but by a massive credit bubble enabled by poorly structured global finances. The British overvalued the pound, this led to incredible amounts of capital flowing into the United States, who in turn financed much of global trade while blowing twin real estate and stock market bubbles. In the 2000s and 2010s, China undervalued the yuan, blew a massive real estate bubble three times over, plus two stock market bubbles, ran up credit faster than any nation in history, and is far less efficient that the capitalist America of the 1920s.

2019-07-26

China Credit Growth and Risk of Financial Crisis

For many years I've been covering China's credit risk and the potential for a yuan devaluation. Back in 2011, when many companies were pouring capital into expanding natural resource production in anticipation of never-ending Chinese demand, I discussed how China was not planning a stimulus to boost demand. It was openly reported in Chinese media, but Western media stuck with the China-bull narrative.

Yuan depreciation/devaluation began as an academic exercise, to rebut the claims of China's currency taking over the world. As the case for depreciation began accumulating, I argued the yuan's most likely path was down. The depreciation of August 2015 was no surprise. I expect much more depreciation before the larger credit cycle completes (in contrast to the ~3 year cycles that began in 2008, 2011, 2015 and 2018).

The crux of the issue has always been China's credit growth and its ability to avoid a credit crisis. I believe they will not allow deflation and default, and instead create more credit that will be made possible by or cause a depreciation in the yuan. I have been wrong on timing because China has been able to defend its currency with draconian capital controls, but those controls are evidence that there is sustained depreciation pressure (outflow pressure) on the currency.

While China does print its own currency, it's citizens do not fully trust it. The yuan is not freely convertible on the world market. Rightly or wrongly, it's perceived value is highly tied to its FX reserves. China devalued the yuan in 1994 following a long period of high inflation. The financial system is still fundamentally tied to the US dollar. Until reserves peaked in 2014, China could let rising exports and dollar inflows provide liquidity for its financial system.

The U.S. dollar is at the center of this story because it is the global currency. When the U.S. dollar is depreciating, commodity prices rise. Agriculture and resource extraction enjoy booms. "Emerging" economies more reliant on those sectors boom. Capital flows in, their currencies rise, their financial and real estate sectors boom, and demand for Chinese imports surges. Chinese Belt & Road investments are profitable. If instead the U.S. dollar climbs higher, the entire system can run in reverse. A U.S. Dollar Index (DXY) breakout above 100 indicates deflationary pressure. If one or more dominoes tip over (the euro, a substantial emerging market currency, global trade, debt defaults anywhere), DXY could run to 110 or 120. Or vice versa. The global economic system does not anticipate a strong dollar and most companies and investors are betting against it.

Which is why I always have the caveat when speaking of China, that a major cyclical peak in the U.S. dollar, an end to the bull market, could alleviate much of the pressure on China's economy. On the flip side, a higher U.S. dollar driven by global deflationary forces could be the thing that causes something to break in China.

And now there are reports that Bank of Jinzhou is ready to blow. ZeroHedge has the hyperbolic headline:

ZH: Chinese Bank With $100 Billion In Assets Is About To Collapse

Reuters: Regulators in China discuss liquidity issues at Bank of Jinzhou - sources
Officials from the local branch of China’s central bank and other regulators recently met financial institutions in Liaoning province to discuss measures to deal with liquidity problems at troubled Bank of Jinzhou , sources told Reuters.
Bloomberg: China's Embattled Jinzhou Bank Courts Investors as Bonds Tumble
Bank of Jinzhou Co. said it is in talks to introduce strategic investors after a report that China’s financial regulators are seeking to resolve its liquidity problems pushed down the lender’s dollar-denominated debt.
Reuters: China Bank of Jinzhou says in talks with possible investors, renewing contagion worry

For full context, in 2014 I posted Liaoning Sounds Warning on Chinese Economy. In short, Liaoning (and the rest of Northeast China) relied on commodity production and related industries such as steel. As these sectors peaked around 2011, Liaoning began relying on real estate investment. By 2014, this model also reached its limit for GDP creation. The economy sank into recession and there was a real risk that the rest of China could tip into a major slowdown or crisis. A few WMPs and trust products defaulted. The yuan would depreciate in August 2015. China would unleash stimulus in 2015. By mid-2016, home prices were up 50 percent in some cities, SOEs were buying land hand over fist, and by late 2016 the decline in FX reserves would stabilize amid extreme capital controls.

At the end of 2015, Bank of Jinzhou IPO'd. Rubber Meets Road: Liaoning Bank to IPO in Hong Kong. From an FT piece linked in that post:
Could a banking crisis erupt in China? The commonly accepted answer among western analysts is no, for the simple reason that China has huge State owned banks that dominate the country’s banking industry. But dig a little deeper and a different picture emerges.

It turns out that within China’s smaller cities, the market share of the big banks fades away. Instead, local banks take over.

...In the city of Jinzhou, population 810,000, the state bank share drops by more than half to 19.4 per cent. Most of the slack is taken up by just one bank, the Bank of Jinzhou, with 62.6 per cent of assets.
I wrote:
My curiosity got the better of me when I saw the bank is growing 50%+ yoy. I want to see how the bank increased assets to over 300 billion yuan with only 90 billion in loans. What are these assets? They're listed as debt securities classified as receivables. A look at the notes: wealth management products. The bank, as of June 30, had 90 billion lent out in normal banking and 125 billion lent out through shadow banking. Also from the notes: the average yield on their assets rose from 6.04% in the six months ended June 2014 to 7.80% in the six months ended June 2015.

These WMPs and whatever else is lumped in here, have been driving profits. "Interest income from investment securities and other financial assets" constituted 19.5%, 27.4% and 42.6% of interest income in 2012, 2013 and 2014. Note that they're investing in these products, in addition to offering them. Page 28 lists risk factors associated with these products. As of June 30, 2015, these assets were almost 70% of total assets.
Bank of Jinzhou was operating a similar model to that of Baoshang Bank and many other smaller banks in China: lending in the interbank market, driving credit creation with "shadow banking" products such as WMPs. The risks of this model were well known years ago, to say nothing about where the money was going (such as real estate speculation).

Reuters: Fitch: Boom in WMPs a Key Risk for Some Chinese Banks
The continued rapid growth in wealth management products (WMPs) invested through Chinese banks could be a key source of credit and liquidity risk for certain financial institutions, says Fitch Ratings. The fast rise in WMPs is closely connected with the continuing growth in domestic credit, and they are accounting for an increasing proportion of funding at Chinese banks - especially mid-tier institutions. Recently released data showed the outstanding balance of WMPs rising to CNY23.5trn (USD3.6trn) at end-2015 from CNY15trn a year earlier, with an average of over 3,500 new products issued every week during the year. Nearly three-quarters of these are non-guaranteed WMPs; and over 60% of funds invested in WMPs come from retail investors, attracted by the higher rates of return than that for ordinary deposits. Importantly, they continued to grow faster than bank deposits, resulting in WMPs equating to 16.8% of system deposits at end-2015, up from 13.6% at end-1H15. As a result, banks with large sales of WMPs relative to deposits could face liquidity and funding pressures in the event of renewed market volatility. Fitch believes that the most common source of WMP repayment is through the issuance of new products, resulting in persistent rollover/payout pressure on banks.
The risks are well known, what was needed was the conditions for a credit event.

China doesn't need a major slowdown to have a financial crisis.

Back in 2015, Steve Keen published Get ready for an Aus­tralian reces­sion by 2017. He was off on the timing for the same reason China didn't end up with a crisis in 2017: global central banks were able to kick the can again. The article has a link to excel file which has a simplified debt model created by Keen.
The model combines credit growth with GDP to get total nominal demand. The economy produces a given amount of goods and services each year, and increased credit (from any source) represents additional demand in the economy. As credit grows in relation to GDP, small changes in credit have huge impacts on this nominal demand figure. If credit is 3X GDP, a 1 percent increase in credit creates as much demand as a 3 percent increase in GDP. If credit grows at 10 percent, that's equivalent to 30 percent of GDP. If GDP grows at 5 percent, the total nominal demand is 35 percent of GDP. Credit is 85 percent of new demand. Even a modest slowing of credit growth can have a huge impact on the economy. In macroeconomic terms, it is the failure of speculative finance.
Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt by the non-government sector. He identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.

The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments. For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower" (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat.

If the use of Ponzi finance is general enough in the financial system, then the inevitable disillusionment of the Ponzi borrower can cause the system to seize up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able to cover interest payments. As with a line of dominoes, collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments.
Fitch was warning that WMPs were paid back by new WMPs back in 2016. The Chinese financial system was showing clear signs of trouble. Since then, it accumulated 3 more years of bad debts.

For a U.S. example, here is total credit growth in the US economy (TCMDO) and total loans and leases at banks (TOTLL). Notice credit doesn't crater until well into the recession, when companies are defaulting. It only takes a small drop in growth to collapse the growth rate as speculative borrowers go bust.

When I run the numbers for China, the figure that tips the economy into recession is 9 percent credit growth. China's total social finance (TSF) growth slumped into the 10 percent range in 2019, down from low teens amid deleveraging efforts. Baoshang Bank went bust and Jinzhou Bank may or may not be on the precipice. Caixin: Exclusive: ICBC Subsidiary Will Lead Restructuring of Embattled Bank of Jinzhou
Troubled regional lender Bank of Jinzhou will attempt to restructure by introducing three strategic investors — China Great Wall Asset Management, and subsidiaries of Industrial and Commercial Bank of China (ICBC) and China Cinda Asset Management — Caixin can reveal.

If credit growth (TSF) slows towards 9 percent, there will be a great risk of financial crisis in China. It's possible officials cannot stop natural forces, but if they can, their most likely tool is more credit. Higher credit growth only makes the problem worse though, unless it accompanies much higher nominal GDP growth achieved through higher price inflation. China doesn't want uncontrolled inflation though. The simplest way to achieve a higher price level without risking spiraling inflation is a one-off devaluation in the currency. Exactly what was done in 1994. Or hope for a U.S. dollar bear market and boom in global credit growth.

2019-07-24

Household Leverage In Xiamen at 96pc, Zhejiang Household Leverage Spikes in 2018

财新: 研报:部分地区居民杠杆率高企 浙江76%厦门96%
Although the national household debt ratio of 52.6% is still in the safe range, the risk caused by regional differentiation is the focus of the market. The report compiled data on the debt ratio of the provinces at the end of 2018. It was found that there were 13 provinces with more than 50%, of which eight provinces exceeded the national average, namely Zhejiang (76%), Shanghai (68%), Guangdong (64%), Gansu (61%), Fujian (60%), Beijing (59%), Chongqing (57%), and Jiangxi (55%). Among the cities with data available, Xiamen residents have the highest leverage ratio of 96%, Ningbo (57%) and Shijiazhuang (54%) are also at a high level.

...Compared with the two reports, Caixin reporter found that the leverage ratio of Zhejiang residents increased by 10.6 percentage points in 2018, surpassing Shanghai to become the highest province, with Chongqing rising by 6.4 percentage points, Jiangxi by 5.8 percentage points, and Guangdong by 4.9 percentage points. Shanghai and Fujian. Ningxia rose by about 2.5 percentage points, while Beijing rose by 0.2 percentage points.

...Guotai Junan report believes that real estate-driven consumer consumer debt is the main reason for the rapid increase in household leverage. The real estate market is booming in 2009, 2013, 2016, and 2017. The debt ratio of residents has risen rapidly. Whether it is resident loans/national income or the loan-to-deposit ratio of the resident sector, it has continued to rise in recent years, and there is a certain risk in the residential sector after the rapid increase in leverage over the past few years.

  “The fast-growing resident debt must be moderated in order to effectively mitigate the risks in subsequent growth.” The report said that the excessive leverage of residents in some areas warned of the necessity and urgency of the transformation of the old and new kinetic energy of the economy, and also restricted the currency. Policy and real estate policy.
The Zhejiang number may be more accurate count of existing debt, not an explosion in leverage, but that would only make it a marginally better figure.

PBoC Injects 1.2 Trillion Yuan in 7 Days

What is the intention? The market smelled a cut in interest rates.
iFeng: 密集释放流动性:央行7天投放1.2万亿 闻到了降息的味道
Sogou: Intensive Release of Liquidity: Central Bank Releases 1.2 Trillion Dollars in 7 Days, Smelling Interest Rate Cut
On July 23, the central bank launched TMLF and MLF operations totaling 497.7 billion yuan, which is basically the same as the maturity of the medium-term lending facility (MLF) of that day of 502 billion yuan.

Obviously, the equivalent continuation of MLF has become the standard operation of the central bank. However, there are still 300 billion yuan of 7-day reverse repos due in the following 3 trading days of this week, and the pressure on the central bank to open the market has not decreased.

It is worth noting that in addition to this, in the six working days since July 15, the central bank has cumulatively invested 710 billion yuan, with a net investment of 521.5 billion yuan. plus this time, it can be seen that the central bank has "full firepower".

With the central bank releasing liquidity so intensively, there are obvious signs that the price of capital has peaked and dropped. On the 23rd, both DR001 and DR007 saw a decline of about 10 BP. Shibor overnight capital price also dropped by 10.78 BP on the basis of 15.72 BP yesterday.

...With the capital falling back, the market expects the central bank to lower its standard even more strongly. At the symposium of economic situation experts and entrepreneurs convened by the State Council on July 15, the main leaders stressed that "there are still many tools in the policy toolbox" and "we should adhere to the implementation of active fiscal policies, prudent monetary policies and employment priority policies, timely pre-adjustment and fine-tuning, and make good use of counter-cyclical adjustment tools." "Dredge the transmission channel of monetary policy and reduce the financing cost of small and medium-sized micro enterprises."

However, in the past two years or more, the central bank has been taking measures to reduce the interest rate in the market among financial institutions, such as reducing the interest rate or reducing the interest rate in a targeted way. However, with the progress of time, the effect of the central bank's operation has shown marginal decline, and the market's call for interest rate reduction is increasing.

In addition, Yi Gang, governor of the Central Bank, also talked about the main ideas of the interest rate merger reform in an interview with the media. "The deposit and loan interest rates should be separated."Yi Gang said that the deposit benchmark interest rate will remain for a long time to avoid a deposit war. The pricing mechanism of loan interest rate should be further reformed, and the benchmark loan interest rate should fade out.,The benchmark interest rate for loans is replaced by the quoted market interest rate, and a series of market interest rates such as the Medium Term Loan Facility (MLF) are also referred to.

...Fan Xinjiang, a fixed income analyst at Minsheng Securities, believes that in July, the reverse repo previously put in by the central bank gradually expired and returned to the market. The overall reverse repo stock level in the market dropped significantly from above 6.7 trillion yuan at the beginning of the month to below 5 trillion yuan. Among them, the reverse repo stock of state-owned big banks dropped from above 2.1 trillion yuan to the current low of around 10.7 trillion yuan. The reverse repo stock of stock banks dropped from around 1.2 trillion yuan at the high point to around 0.4 trillion yuan. The contraction of the reverse repo stock between state-owned big banks and stock banks is the main reason for the tightening of the overall liquidity in the market.

Signs of Falling Capital Prices Appear

As the central bank releases liquidity so intensively, the price of capital also shows signs of falling back.

In the inter-bank market overnight repo rate market, there are obvious signs of short-term capital price peaking, with both DR001 and DR007 experiencing a decline of about 10 BP on the 23rd.
Obviously, as the monetary policy easing expectations of the Federal Reserve and the European Central Bank continue to ferment and the Federal Reserve is more likely to implement preventive rate cuts at the end of the month,China's monetary policy operation space has been further widened, and monetary policy is easy to loosen but difficult to tighten, which has become a common consensus in the market..

2019-07-23

Anti-Tourism Rising

Reuters: Top tourism spots crack down as they become victim of own success
The nation generating the most tourists is China - 143 million trips abroad in 2017, while France and Spain receive the most visits - more than 80 million a year.

The boom is down to a fast-expanding global middle class combined with a proliferation of budget airlines and online travel agents which have made travel cheap and easy. A Londoner can fly to the south of France for less than 20 pounds ($25).

"The perception of going on holiday has shifted from being pretty much a privilege to becoming very much a right," said Marina Novelli, professor of tourism and international development at the University of Brighton.
And if the world continues on its current trajectory, the number of tourists coming out of India and China will double or triple.

There will be a bull market in walls.

2019-07-22

China Real Estate ETF TAO

To answer a question, TAO hasn't been a great indicator for Chinese real estate because small and midsized developers have suffered the most (along with SMEs in various sectors). Until now, most of the companies in TAO have benefited from smaller developers' pain.

Social Mood: Frequent Housing Policy Changes Eroding Public Trust

A sign of the social mood in China, here's a hot take on recent government reversals on buying restrictions. It goes so far as to warn government credibility is at risk of becoming a joke:

However, the premise is to fully demonstrate, investigate, revere the market, revere the interests of the public, and not let the credibility of the government become a joke.
iFeng: 取消住房限售又收回,“朝令夕改”影响公信
Sogou: "Cancellation of Housing Sales Restriction" and Withdrawal, "Changing Orders" Affect Public Trust
On July 20, the official website of the Kaifeng municipal government in Henan province issued the "decision of the municipal housing and construction bureau to revoke its decision to adjust the trading time limit for newly purchased commercial housing and to revoke the filing restrictions", deciding not to cancel the three-year sales order for commercial housing. This is only three days after the previous policy was released.

Within 3 days, the policy was withdrawn after it was released. The speed of policy changes in Kaifeng's real estate market surprised the outside world. This "change from day to night" also brings great confusion to buyers and developers.

The Kaifeng authorities certainly have their "difficulties" in bringing about such a result. Since 2017, when Kaifeng issued the "strictest sales restriction order", the tide of foreign real estate speculation funds has ebbed and Kaifeng's rapidly rising housing prices have been curbed. However, at the same time, Kaifeng's property market is also under increasing downward pressure.

According to the official website data of Kaifeng Municipal Bureau of Statistics, in 2018, Kaifeng's real estate development investment (including Lankao) was 24.084 billion yuan, down 12.1% from the same period last year. From January to May 2019, Kaifeng's real estate business income fell 2.7% from the same period last year. Since 2018, Kaifeng has taken 7 land auctions. It is more and more common for developers to offer discounts under various names. Such a gloomy situation not only impacts the local economy, but also has a great impact on the government's fiscal revenue.

This is why Kaifeng took the initiative to lift the sales restriction. However, such a decision seems to be a bit hasty. For example, Kaifeng Housing and Construction Bureau said that "insufficient market research and demonstration have not been carried out, and there is a lack of sufficient pre-judgment and assessment of the possible market impact".



Looking at the whole process of Kaifeng's "cancellation of housing sales restriction" and its recovery, I have to say that the local government is too casual and hasty in formulating policies on the real estate market. Kaifeng's "sales restriction order" has been implemented for 3 years. The "sales restriction order" not only allows the house price to run smoothly, but also gives the local people a stable expectation. The cancellation of the "sales restriction order" will inevitably bring about an impact on the market and the public's psychology, all of which can be predicted and deduced.

The huge economic and social costs brought about by the short-lived decision are incalculable, and will cause certain damage to the credibility of the government. Real estate is a large asset of the public. Changes in real estate market policies affect the vital interests of thousands of households. Therefore, the formulation of the real estate policy should be extremely cautious. The introduction of any policy should not be a "surprise attack" style, allowing people to accept it passively, but should fully listen to people's opinions and reach the greatest consensus. Similarly, the cancellation of a policy should be the same. It must first be submitted to the public for full discussion. This is also the proper meaning of "let the people know the important situation and let the people discuss the important decisions".

Unfortunately, it is precisely in real estate, which involves the most important interests of the public, that changes in relevant policies are quite frequent, and "surprise attacks" have become the norm. Similar to the "policy of one-day tour" which was cancelled and withdrawn, there have been many cases before. For example, in 2011, Foshan untied and restricted the purchase, resulting in a premature death in half a day. In 2018, Hengyang announced the cancellation of the price limit, but the new policy was stillborn before it was formally implemented. In many places, from the introduction of purchase restrictions, to the increase of prices, and then to the cancellation, the market was caught off guard time and again, leaving the public at a loss.

At present, the concept of "no room for speculation" is deeply rooted in the hearts of the people. The most important thing is to ensure the continuity and stability of the real estate market policy. In other words, the real estate policy should be long-term and continuous and should not change overnight. If the policy is stable, the market will naturally be stable, the public expectation will naturally be stable, and the real estate market will naturally gradually move out of the atmosphere of speculation and speculation.

In this regard, it is not only Kaifeng that needs to learn lessons from the "cancellation of housing sales restrictions" and its withdrawal. Other places should also take this case as an important lesson. Changing from one day to the next is a big taboo for the rule of law. Any government decision must be serious. It is not impossible to restrict or cancel the purchase. However, the premise is to fully demonstrate, investigate, revere the market, revere the interests of the public, and not let the credibility of the government become a joke.