Here We Go Again: Chinese Land Sales Soaring

The past 20 years of economic history has been a series of ever larger credit bubbles. There was organic growth alongside credit bubbles in the run-up to the first 2007 peak, mainly in China and emerging markets. Since then, the U.S. economy has grown slower than it did during the Great Depression. China has also experienced a series of credit bubbles following it's massive stimulus effort in 2008. Each time, the real estate and financial sector showed signs of weakness, the yuan depreciated (or was defended at great cost in forex reserves and reversal of economic reforms), and another wave of credit growth bought time at the expense of an even larger bubble. And it's happening again.

First a little history. The last major economic slowdown was in 2014-2015. The government started loosening credit about 6 to 9 months before global markets would bottom in February 2016, perhaps because of global coordination by central bankers. MW: Did central bankers make a secret deal to drive markets? This rumor says yes China had blown a massive stock market bubble that peaked in 2015. Shenzhen home prices started rising that summer as capital chasing the stock market bubble fled back to real estate. With credit loosened, it became another bubble. By summer 2016, the evidence was clear. See: Reform Can Wait: 4 Trillion Stimulus All Over Again as SOEs Pour into Land Market.

State-owned companies featured prominently: Ministry of Finance Owned Cinda Real Estate Becomes Land King. By early 2017, the government again declared that SOEs should exit the real estate market (having said the same thing for going on 5 years already).

Land prices climbed past the value of finished homes in some cities, which analysts described as "flour costing more than bread." See: Flour More Expensive Than Bread: Second Tier Land Prices Soar 180 pc. Analysts also sounded the alarm because prior speculative land bubble presaged downturns in the sector and the economy. See: Land King High Tide in 2007 and 2010 Preceded Downturns

By the summer of 2018, the government was in the middle of a deleveraging campaign. Land Market Frozen, Local Govts Have One Mission: Control Home Prices At the same time, the U.S. dollar was showing signs of strength, the Federal Reserve was reducing its balance sheet and global equity markets were about to take a tumble.

Fast forward to coronavirus and various governments, including China, going back to the inflationary credit-bubble strategy. As warned here and elsewhere, China's coronavirus stimulus flowed straight into the real estate market. A month ago it was reported businesses had taken government aid and speculated in real estate. See: Analyst Warns Shenzhen Home Prices Could Fly Out Of the Universe

Now the government is again warning about soaring land sales and credit flowing into real estate. iFeng: 50城土地出让额1.6万亿 警惕房企变相融资拿地

Recently, the overall land market in the country has continued to heat up, high-priced plots in hot cities such as Shenzhen, Guangzhou, and Beijing continue to appear, and the turnover has rapidly increased.

...Centaline real estate data shows that Beijing, Hangzhou, Shanghai and other cities have exceeded 100 billion yuan in land transactions this year. Among them, Beijing is 113 billion yuan, the land transfer amount is the highest, Hangzhou is 109.7 billion yuan, and Shanghai is 10.147 billion yuan.

At the same time, the total land transfer in 50 typical cities was 1.6 trillion yuan, up 12% year-on-year. Among them, 27 cities exceeded 20 billion yuan, and 49 cities exceeded 100 billion yuan. The above data have refreshed the records of the same period in recent years.

...The planned construction area of ​​land transfer in 23 cities exceeds 10 million square meters, and the three regions of Chengdu, Chongqing and Suzhou exceed 20 million square meters. Among them, the total planned construction area of ​​land transfer in Chengdu is 27.7017 million square meters, Chongqing's total is 23.355 million square meters, and Suzhou's is 23.334 million square meters. In the first-tier cities, the total planned construction area of ​​land transfer in Beijing is 35,643,300 square meters, with an average premium rate of 18.61%.

The scale of land transfer and transaction premium rate in hotspot areas such as Hangzhou are relatively high. On May 27, Hangzhou Xiaoshan District collectively transferred 5 residential sites with a total planned construction area of ​​14395 square meters, with a total transaction price of 6.618 billion yuan. Poly, Shunfa, Jingrui and other housing companies successfully won the bid. Among them, Hangzhou Zhongyu Enterprise Management Co., Ltd. won the plot of XSCQ 14405-04 in the Ningwei unit of Xiaoshan District with a total price of 1.334 billion yuan. The floor price was 21722 yuan per square meter, and the premium rate was 27.78%. Hangzhou Zhongyang Enterprise Management Co., Ltd. won the plot of Ningwei unit XSCQ1405-18 at a total price of RMB 800.9 million, with a floor price of RMB 21,521 per square meter and a premium rate of 26.59%.

...Watch out for disguised financing

In order to alleviate the pressure on cash flow, repay debts due, and pay the funds needed for land acquisition, housing companies have become more active in financing this year.

According to data from Centaline Real Estate, as of May 27, bond financing by housing companies has continued to blow up. Since this year, bond financing has reached 307.6 billion yuan, an increase of approximately 25% year-on-year. The total amount of industry financing in the whole year of 2019 was only 580 billion yuan. Among them, the total amount of financing in the real estate industry in April reached 97.1 billion yuan, setting a record for the monthly amount of financing in recent years. Since May, housing financing has continued to operate at a high level.

From the perspective of financing interest rates, the financing interest rates of companies such as Vanke A and Gezhouba are as low as 2%. Compared with the previous 6% -10% corporate bonds, the recent interest rate of housing companies has continued to fall.

According to data from the Shell Research Institute, a total of 18 domestic and foreign bonds were issued by real estate companies last week (May 16 to May 22). The financing (including plans) amounted to approximately 17.04 billion yuan, and the amount of financing increased by 137%. Benefiting from active financial policies, the domestic bond market has entered a period of active periods.

Barring major economic reforms, credit will not grow without real estate speculation or infrastructure development in China. The same pattern is repeating again, but the lifecycle of these bursts is growing shorter. Without synchronized credit bubbles around the world, China will likely slam the brakes on this move early. If not, the foreign exchange markets may do it. USDCNY is near completion of a major basing pattern that points to a quick rally of roughly 5 percent, with far larger gains looming.

More globally, it remains to be seen if this is a turning point for central banks and markets, or merely another rope-a-dope on commodity and emerging market bulls. This is not the start of a healthy growth cycle as seen in the early 2000s. The Asian Crisis and Chinese bank bailout paved the way for a new credit cycle, while the U.S. pumped up an unhealthy housing bubble in the wake of the doctom bear market. This time, China is starting from a position of peak prices in real estate and the U.S. at a peak in stocks, while credit is at its peak the world over. The case for commodities is stagflationary growth as investors flee financial assets for real assets amid currency devaluation.

China is stuck in the same dilemma as it has been going all the way back to 2008: let home prices run and risk currency devaluation, or cut credit growth and risk an economic downturn. In the past two cycles, the government clearly held the line on credit growth. This time it has signaled a desire to let credit run hot in response to the coronavirus pandemic. This greatly increases the risk for an "unexpected" (by mainstream economists and financial markets) depreciation of the yuan in the next couple of years. Or next week given the growing geopolitical tensions.