China housing market inventory

Mixed Signals on Real Estate's Blind Corner

More than 500 excited shoppers patiently queued late into the night October 25 for a chance to buy a deeply discounted condominium home in a remote section of Shanghai's Pudong District.

the deep price cuts drew a lot of buyers into the market, so does it mean the housing market will stabilize?

Yet broader, third-quarter earnings reports from real estate companies around the country painted a darker picture. Among 49 real estate companies listed on the Shanghai and Shenzhen bourses that reported quarterly results as of October 25, combined housing inventory had climbed 140 percent between June and September, and homes worth about 531 billion yuan altogether were still waiting for buyers. In addition to this mounting backlog of inventory, the companies' financial reports pointed to deteriorating cash flow.

Slowing sales always lead the price reductions. Inventory is growing and developers are using price cuts to get out. This is similar to a bank run, when everyone tries to get their money out before the bank collapses.

Company executives decided that "whoever reduces prices first can absorb latent demand first," the source said. "What's important now is to survive. We'll consider damage to the brand later."

This section is optimistic:

Some experts say "survival" had nothing to do with the big developers' price-cutting strategy. Xue Jianxiong, an analyst at data cruncher China Real Estate Information Corp., said the companies simply sensed a marketing opportunity, and then seized it. Unlike smaller developers, the nation's big guns are less interested in making money on specific projects than maintaining stable turnover and cash flow nationwide.
The government has been pressuring developers to hold down home prices. So rather than wait for what could be more forceful policy action, developers decided to "reduce prices first" in order to "grab demand and take the money," said Li Guoping, chairman of real estate adviser Top Consult. "Price reductions later may be ineffective."
More significantly, big developers have changed market expectations. According to the Longfor source, the government's market-control measures are expected to continue until the end of 2012. Thus, he said, the company will have to work hard to maintain financial stability through what could be a slow period for business.

This is just wishful thinking. If the market hasn't turned, consumers won't wait around to buy homes and there won't be further price cuts. If the market has turned, these firms are going to the wall and some will not survive.

"We see the market trending toward falling sales, especially in big cities, and prices have begun to gradually decline," Vanke Vice President Xiao Li told investors during an October 25 conference call. "We think even those potential buyers who can buy homes will choose to wait because they're hoping prices will continue to fall."

That gradual decline may turn into a waterfall, if only because China doesn't exist in a vacuum: the European and U.S. economies are headed back into recession.

Guo Jianbo of Shenzhen Inland International Real Estate, a consultant, told Caixin some developers may sit on the sidelines in coming months while their competitors cut prices. They would rather wait and hope for a market turnaround that lets them sell at the high prices they really want. But waiting is risky, as government policy will ultimately determine market direction, up or down. "If macroeconomic policy doesn't change," Guo said, "there will be a domino effect of house price reductions."

If we think in terms of Elliot Wave, the first wave down is the initial selling wave, which has probably started. There's a bounce, and then all those developers on the sidelines start trying to sell and that leads to the third wave, the big selling wave when everyone looks to unload as they realize the decline isn't over. Also, if they wait for the government, they're dead. The government cannot control the economy, the upcoming problems are too big for any government to handle. (Excepting inflation, the government could decide to devalue the yuan to support housing and banking.) The government looks competent because its policies were enacted during rising social mood and anything even mildly ineffective can look like it works in an economy growing at 9% per annum. When the market and social mood turn, almost nothing they do will work.

Jefferson County chooses to file bankruptcy

Jefferson County, Alabama, Votes to Declare Biggest Municipal Bankruptcy

A provisional agreement with creditors that commissioners approved in September included $1.1 billion in concessions and called for sewer-rate increases of as much as 8.2 percent for the first three years. The county, which encompasses the state’s largest city, Birmingham, couldn’t get signed commitments from creditors, Commission PresidentDavid Carrington said today. In addition, the 25-member legislative delegation for the county was unable to unite behind bills needed to implement the tentative settlement.

Notice the theme here. There was a deal on the table. Some of the politicians didn't want the deal, as this October 13 story shows: Jefferson County Democratic Lawmakers May Derail Debt Deal

The Democratic half of the Alabama Legislature’s 25-member Jefferson County delegation opposes a settlement with holders of $3.14 billion in debt, throwing the deal in doubt, according to three lawmakers.

What can explain why lawmakers, with a deal on the table, would toss it away and declare bankruptcy? It doesn't hurt that the deal was politically unpopular, including tax hikes to pay for it, but then, can you think of a bailout anywhere that is popular? That's why the last paragraph of this CNN story, quoting an analyst, is so completely wrong: Jefferson County, Alabama to file for largest municipal bankruptcy

Wilson White, an expert on municipal bonds who has written several books on the subject, said the situations in Harrisburg and Jefferson County aren't cause for concern about the wider muni-bond market. "Both relied on unusual financing agreements that got them into trouble," he said. "It isn't an economic problem -- it's a financial problem, because they did some things that they're sorry they did."

No. It's a social mood problem. It doesn't matter how they got into debt, what matters is that more governments at all levels will be pushed to the brink as social mood takes markets lower, and this will also increase public opposition to bailouts and deals, making bankruptcies more likely.

Socionomics Alert: Euro breakup, for real

There are a few stories out. The first one I want to draw attention to is not the most important, but just shows social mood extremely clearly. U.S. Stocks Extend Declines on Concern Nations May Exit Euro

Merkel’s Christian Democratic Union party wants to make it possible for European Union members to exit the euro area, Handelsblatt reported in a preview of an article to be published tomorrow, citing unnamed participants in the discussion.

I don't think this is the big news that sank markets, but it helped. However, look at what I posted on August 28 of this year: Germans Reject United Europe The post consisted solely of a news item in Der Spiegel, translated using Google. CSU wants to banish debt of euro zone countries

In coping with the euro crisis is the CSU after SPIEGEL information on collision course with Chancellor Angela Merkel (CDU). In a policy paper for a meeting of the Presidium of the party with European experts on Monday intends to CSU collect red lines for the euro rescue. "A permanent and unlimited liability joint and transfer union would mean a pooling of financial policy and change the character of European countries associated decision," says the paper, the CSU General Secretary Alexander Dobrindt and Vice President of the Bavarian Parliament, Reinhold Bocklet, have written. Instead, calls for the CSU ", means an insolvency procedure for sovereigns and banks in the euro zone." Debt notorious sinners are to leave the monetary union. "Is not a Member State willing to meet the convergence criteria permanently, there is the possibility of leaving the euro zone," it says in the paper.

What's the difference in the two stories? The CSU is the Bavarian branch of the CDU. The news is that this idea has spread, but its been publicly discussed at least since August.
The big story of the day is that France and Germany have been discussing a smaller eurozone. French and Germans explore idea of smaller euro zone

"We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don't want to be part of the club and those who simply cannot be part," the official said.

As predicted, by socionomics and the declining social mood.
Social mood is also negative in Germany, but the media seldom cover it because Germans do not protest like the Greeks. Here's an article from Der Bild, a tabloid in Germany. Merkel's cash-All (Google translation)

But millions of workers are frustrated. Because: In our household, there is hardly any scope. The billion guarantees for bankrupt countries of Europe more and more pressing. For tax cuts is Chancellor Angela Merkel (CDU) provides just six billion euros. Rescue the planet burns in Merkel's money-all our hopes for relief? Read how big the giant planet in comparison to others is: With 233 billion euros in debt guarantees for sinners outshines everything else in the planet household universe.

A comparison of tax cuts versus bailouts and other spending programs leaves many Germans quite angry about the situation and with Merkel's performance. Is a breakup coming? I would bet on it.

There she goes...

I didn't think the euro would drop today, but this morning I seriously considered opening a new short position because for the first time in weeks, I was convinved that the larger downward trend would soon resume. I just thought I had some time. Italian politics (Berlusconi out), French politics (austerity plan), italian bond yields, trader sentiment (Tim Knight was losing some confidence again), plus technical signals all were converging as coincident signals.
One thing I always remember is that there are always new opportunities to make money. Preservation of capital is more important than missing a move. And something tells me, there are a lot more downward moves in the euro to come.

On day YUM acquires Little Sheep, reports of unsanitary conditions hit media

YUM's acquisition of Little Sheep (0968.HK) has been cleared by regulators, but the media has launched an attack on the hot pot chain for unsanitary conditions. It's the big story of the day on the news service for QQ after a reporter in Guangzhou visited one of the restaurants.
小肥羊的卫生“黑幕” (Little Sheep's sanitary "dirty tricks")
Some things include oil residue on plates and cooking implements, reusing dishwater, not wearing gloves while handling food. Chinese consumers are extremely concerned about food safety and fast food companies are seeing more and more scrutiny. I doubt this will be enough to affect YUM"s stock, but look for English news today or tomorrow if the story grows.

Watch out for falling governments

Berlusconi to resign after parliamentary setback Prime minister George Papandreou resigns for new coalition governmentWho's next?

China to execute loan shark; home prices down and wages up

Developer gets death sentence for fraud
Mainland home prices to fall 'by up to 30pc'

"The market will likely experience policy-induced correction by 10 per cent to 30 per cent in the coming year, which should impact economic growth but is unlikely to lead to financial meltdown," Barclays analysts led by Huang Yiping said in a report yesterday. Premier Wen Jiabao reiterated on Sunday the government's decision to continue its tightening policy in the real estate sector and let property prices "fall to a reasonable level".

Nobody can accurately predict how falling home prices will affect the economy. Subprime was "contained" in the U.S.
Factory bosses protest at pay rise

If the pay rise - which will vary from region to region - is implemented, the minimum wage will have risen over 42 per cent in 10 months. Lau said the proposal to raise wages could not have come at a worse time as Hong Kong exporters expect overseas shipments to drop up to 30 per cent, depending on product type, in the year to June 30.

Rise of nationalism in Europe

Far right on rise in Europe, says report

The study reveals a continent-wide spread of hardline nationalist sentiment among the young, mainly men. Deeply cynical about their own governments and the EU, their generalised fear about the future is focused on cultural identity, with immigration – particularly a perceived spread of Islamic influence – a concern.

"We're at a crossroads in European history," said Emine Bozkurt, a Dutch MEP who heads the anti-racism lobby at the European parliament. "In five years' time we will either see an increase in the forces of hatred and division in society, including ultra-nationalism, xenophobia, Islamophobia and antisemitism, or we will be able to fight this horrific tendency."

The second comment is interesting. One thing I look for is where social mood interacts with fundamentals and reality. Social mood declines, but it's the places with weak fundamentals or established movements that are most likely to see rapid changes. In the case of Europe, Muslim demographics are on pace to swamp the natives in some countries, with Holland among the worst cases. Thus, as I've said before, nationalism and anti-immigration are, at this moment, rational reactions to the excessively open policies reached during the last rise in social mood and one place to look for a very strong reaction. By the time the government enacts rational policies, the public may be well on it's way to the other extreme.
Also, the left is absolutely bankrupt and will be unable to stop the rise of the right. Look at the statement from this leftism MEP, who says there will be a rise in "Islamophobia and antisemitism." Except the most radical actor so far is Anders Behring Breivik, who killed dozens of young leftwing political activists in Norway, including some members of the Palestinian Fatah. The rise of antisemitism in Europe is directly correlated to Muslim immigration and left-wing parties are anti-Israel. On top of that, Breivik wasn't just coincidentally killing people who dislike or actively support killing Israelis. Right-wing radical Breivik wrote pro-Israel comments in his manifesto and he chose his targets in part for this reason.
Social mood is declining. Young, male Europeans are turning anti-immigrant in response to mood and they are mainly concerned about Muslim immigration. Those who turn anti-immigration or just consider it, will find a lot of information and arguments that justify at least some reductions in immigration or changes to current policies. What they will hear argued back at them, is that they are Jew-hating xenophobes. This doesn't make one lick of sense, and that's why I say the right has nothing to stop it. It's just a matter of time and building support, the left burned out its ideology at the peak in social mood.

Ethnic conflict coming to America?

It Can’t Happen Here!

Friday, thousands in Moscow, giving Nazi salutes and carrying placards declaring, “Russia for the Russians!” marched through the city shouting racial slurs against peoples from the Caucasus.

In Nigeria, Boko Haram, which is Hausa for “Western education is sacrilege,” massacred 63 people in a terror campaign to bring about sharia law. Seven churches were bombed.

Sunday, The New York Times reported that Uzbeks in Kyrgyzstan are suffering “horrific abuse” following last year’s pogrom.

Ethnic nationalism, what Albert Einstein dismissed as “the measles of mankind,” and religious fanaticism are making headlines and history.

Welcome to the new world disorder.

What has this to do with us? Perhaps little, perhaps everything.

Could ethnic strife be in America's future?

Wenzhou bosses return

Has the crisis in Wenzhou been halted? A couple stories report bosses returning, factories reopening, government crackdown on violence and an end to the panic. 温州15位跑路老板恢复联系 部分企业已恢复生产
温州15名“落跑老板”回心转意 部分企业已复产

China too maintain tight real estate policy

Now we're going to see how much of a bubble exists. Wen Pledges Property-Tightening Resolve

"I will especially stress that there will not be the slightest wavering in China's property-tightening measures—our target is for prices to return to reasonable levels," Mr. Wen said. "The property-tightening measures have been ongoing for two years, and some major policies have already been rolled out, especially this year's construction of 10 million public housing units, which will temper pressure on prices, and slow demand (for private housing)."

First real estate volume slows, then prices. We are just seeing the start of a slowdown in home prices, if the bubble bursts, 2012 should see a double-digit decline.

Social mood and the movies: Santa will kill you!

In 1984, a movie titled Silent Night, Deadly Night starred an axe murderer dressed as Santa Claus.

After his parents are murdered, a young tormented teenager goes on a murderous rampage dressed as Santa, due to his stay at an orphanage where he was abused by the Mother Superior.

The movie was picketed by parents and chased out of the box office. Reviewers as well as the public were critical:

To protest the film, critics Roger Ebert and Gene Siskel read the credits out loud on their television show saying, "shame, shame, shame" after each name.

With the advent of the Internet, media has factured and many independent producers can make unpopular movies and release them through other channels. However, a newer Santa slasher film has received very positive reviews. Rare Exports: A Christmas Tale (2010)

It's the eve of Christmas in northern Finland, and an 'archeological' dig has just unearthed the real Santa Claus. But this particular Santa isn't the one you want coming to town. When the local children begin mysteriously disappearing, young Pietari and his father Rauno, a reindeer hunter by trade, capture the mythological being and attempt to sell Santa to the misguided leader of the multinational corporation sponsoring the dig. Santa's elves, however, will stop at nothing to free their fearless leader from captivity.

The reviews at Rotten Tomatoes are 90% positive, with the audience (at Rotten Tomatoes) rating at 71% positive.

According to socionomics, horror movies are more popular during periods of declining social mood. 1984 was in the midst of a major bull market, 2011 in the midst of a major bear market. Has this influenced the public's attitude towards a slasher Santa? Or, since many people probably haven't heard of this newer movie, is it just a result of changes in the entertainment industry? I for one doubt there would be as much protest had the movie run a big marketing campaign, but that is speculative. Note that in the early 1980s, horror movies were still popular. Also from the page about Silent Night, Deadly Night:

Opened on the same weekend as A Nightmare on Elm Street, and briefly out-grossed the latter by around $161,800 before profits fell about 45% by the second weekend.

However, one can view this as a hangover from the previous era, as industries and social mood do not shift on a dime, but change trend. Perhaps the failure of the slasher Santa signaled the waning of horror. Robert Prechter noted that horror as a genre was waning in 1985 in his Popular Culture and the Stock Market (PDF; sign up for free account with Socionomics.net to access).

Will Italy break apart?

There's a north-south divide in Europe and on in Italy too. As in Belgium, there is already some groundwork laid for secession in Italy, so it is one of the more likely places that could see political devolution.

Arrivederci, Roma

For the austerity demanded of Italy to deal with its debt crisis is adding kindling to secessionist fires in the north, where the Lega Nord of Umberto Bossi, third largest party in Italy, seeks to lead Lombardy, Piedmont and Veneto, with the cities of Turin, Milan and Venice, out of Italy into a new nation — Padania.

The north has long resented Rome, Naples and Sicily, seeing them as lazier and less industrious. Bossi, who calls himself “Braveheart,” after the Scottish hero of the Mel Gibson movie, sees northern people as Celts who are ethnically different and separate from the rest of Italy. The Northern League belief that people of Southern Italy caused their debt crisis, bringing on austerity, mirrors the belief of much of Northern Europe that Italy and Greece do not deserve to be bailed out.

What countries will be most affected by a hard landing in the Chinese economy?

H/T China Tells.

Euro shorts decline, as does euro

China developer "price cut wave"; price declines reach third tier cities

New apartment prices are being cut 30% in Shanghai. Prices are also falling in Beijing, with industry leader Vanke (万科) cutting some prices by just under 20%. There's talk that Vanke's price cuts could lead to a wave of selling, but it looks like the wave is already forming.

Below are some Chinese articles, with a roughly translated headline and my summary/comments.

万科再降价：楼市价格拐点已经发生? (Vanke cuts prices again: has the real estate prices already turned?)

1926亿存货压顶 万科全线降价？！ (192.6 billion in inventory Vanke cuts everything?!) This article discusses Vanke moving quick to offload property. The firm does a high turnover and with sales slowing, lower prices will move units. If a major slowdown in commencing, this also allows the firm to sell ahead of the competition, though the article doesn't explore this angle.

开发商“储粮过冬” 不缺钱也降价自保 (Real estate developer's "winter grain", not short on cash but cutting prices to protect themselves) This one is interesting because one of the developers (Fantasia; 1777.HK) discusses how the action of the individual firms to protect themselves can lead to a self-fulfilling deflationary cycle as developer cash is pulled out of the real estate market. The bubble is both a demand and supply driven phenomena, for example developers bid up land prices at auction.

I'm keeping my eye on prices in cities other than Shanghai and Beijing, including the smaller third tier cities. These areas can still grow and their development lags the rest of the country. Price declines should be concentrated in the most expensive and overbuilt cities, but if this turns into a major crisis, the smaller cities will also be impacted.

楼市速递大话武汉“降价潮”将在11月来临 （Wuhan price cuts coming in November)

As real estate policy control continues, first and second tier cities have all seen different degrees of discounts, after Shanghai's 30% discount emerged, Beijing, Shenzhen, Guangzhou, Hangzhou, etc. price cuts have continuously grown in number. Wuhan's real estate deals were down in October, following the 34% drop in September. Real estate insiders believe the price cutting wave is coming in November.

在房地政策的不断调控下，一二线城市各大楼盘都出现了不同程度的打折现象，上海涌现出的“7折降价军团”后，北京、深圳、广州、杭州等地降价楼盘不断增多。武汉楼市成交量继9月下跌34%后，10月持续低迷。业内人士认为，武汉楼市“降价潮”将在11月来临。

青岛10月成交量创近三年最低 (Qingdao October contracts hit three-year low)

Here's news from Hebei, a province that surrounds Beijing, but that isn't nearly as wealthy. 河北多市房价跌幅加深，唐山市房价趋于下行 (Hebei multi-city price declines deepen; Tangshan trend is down) In October, price declines reached 1.6% in Langfang, a city that borders Beijing; prices in Tangshan fell 1.3%, while a sample of 7 cities in Hebei saw prices down 0.3%. Prices were flat in several large cities. (These are average prices in each city, not the price for new homes, which are also seeing similar double digit drops.)

地产龙头降声不断廊坊跌幅全国第一 This article says Langfang was the first city to see price declines in China, with prices now below July levels. This article also notes that the price declines are about 1% or less in most cities, but many cities are still seeing price increases including, of all places, the famous "ghost city" of Ordos. However, the article notes that only 40 cities saw rising prices in October, down 14 from September.

银十消逝 保定楼市提前入冬 (Silver October fades, Baoding market enters early winter) This article mentions a phenomena we saw in the U.S. just past the peak: discounts and special deals.

开发商：优惠+打折=真金白银

金九结束，不甘心的开发商纷纷绞尽脑汁在银十创新出形形色色的优惠活动，如力推“特价房”、“买房送家电”、“买房送旅游”、“买房送Ipad”、“买房抽大奖”或不时搞一些演艺活动等噱头纷纷出现，根据新浪乐居保定站统计，10月份，保定市内所有楼盘都推出了优惠活动，而绿城小镇、万和城等楼盘推出了降价幅度不小特价房，最高每平米降价500元

Developers: Deals + Discounts = Real Money

At the close of Gold September, developers racked their brains in Silver October and brought forth all manner of deals such as "Specially Price Homes", "Buy a House, Get Home Appliances", "Buy a House, Get a Vacation", "Buy a House, Get an iPad", "Buy a House, Win a Grand Prize", they also had artistic performances and comedy shows, [the developers] also cut prices, the highest was 500 yuan per square meter.

Baoding has much lower prices than Beijing, but that cut is at least 5% and could be 10% or more depending on the area. Overall, the national average price changes were mixed in October, but prices have declined in smaller cities. The government has said it would keep real estate regulation tight at least until the end of the year. In the next couple of months, we'll see whether this trend turns into a serious real estate crisis, or just another growth hiccup for China. Below is a chart of Guggenheim China Real Estate (TAO).

70 ton double truck bomb in south China; accident during repair

In Fuquan, Guizhou province, there was a double car bomb as two trucks carrying explosives were being repaired. Powerful blast kills 7, injures 264.

If the video doesn't play, you can use this link.

Is democracy in Europe dead?

I saw this article earlier in the day R.I.P. European democracy, 1945-2011. If you think that's an extreme opinion, take a look at this news item, which came out one day after this article.

Referendum turmoil threatens Greek government

The Netherlands' Labor party, whose support the Dutch government needs to pass the European debt deal through parliament, said the move was a "deal-breaker."

We now have foreign governments telling Greece that an election is a "deal-breaker." Welcome to authoritarianism, a.k.a. Brussels run amok.

Developers start price war in China

Price war starts on mainland

Luk said he believed listed developers would take the lead in making deep price cuts since they were under pressure to lock up sales revenue as early as possible to meet their annual sales target before their financial year-ends next month.

I don't believe the cuts are as voluntary as the government, economists and developers make out. They need cash, nobody cuts prices 50% just to show the government that they're carrying out the policy.

Getting a foreign passport is like taking out an insurance policy

Super-rich want to leave the mainland

Half of China's wealthiest want to emigrate.