GDP Growth Could Fall Below 7% in Q1, First-Tier Land Revenues Cut in Half

China's State Council released several policies moves aimed at boosting GDP growth:

iFeng: 国务院三招救实体经济 一季度GDP面临“破7”风险

In the first quarter GDP data will be released on the occasion, steady growth once again usher in the new measures. Yesterday, the State Council, "three arrows shot" corporate burdens, including cleanup SheQi administrative fees, the national coal-fired power tariff cut, cut iron ore resources in the proportion of tax collection. This series of policies to reduce the cost of corporate expenses to help companies tide over the difficulties faced in the first quarter GDP next "breaking 7" background risk, and promote economic growth "trilogy," The introduction also shows the current central steady economic growth determination.

The Xinhua report doesn't mention the fear of falling below 7% GDP growth:

The Chinese government announced a package of relief measures Wednesday to stimulate businesses and prop up the real economy against increasing downward pressure.

The State Council, China's cabinet, decided to cut industrial electricity prices and resource taxes on iron ore as well as eliminate "capricious" official fees for firms during a weekly executive meeting.

The move is the country's latest effort to tackle an economic slowdown amid concerns of a possible slip in the first quarter.

Reuters: China to cut iron ore tax in new blow to glut-hit prices

China has moved to prop up its struggling iron ore industry by slashing taxes, potentially expanding a global glut and undermining a strategy by mega miners to drive out high-cost competitors

Meanwhile, first-tier city land revenues have been cut in half.

iFemg: 一线城市土地出让金接近“腰斩” 地方财政有压力

China continued to cool the property market has also led to the adjustment of the land market steadily decline. Even in the property market is relatively strong first-tier cities, the land market transactions and transfer payments still showed a larger decline.

Central Plains real estate market research report released on the 8th, since the first quarter of this year, Beijing, Shanghai, Guangzhou, Shenzhen and four first-tier cities 117 land transactions, land transactions with a total construction area of ​​11.32 million square meters, both of which are lowest point in nearly three years. Among them, the four cities a quarter of the land transfer 93.5 billion yuan (RMB), fell 47 percent from a year earlier.

Earlier research institutions released a statistics also reflect the land market downturn.

Middle finger hospital data show that from January to March, China's total 300 cities land transfer was 406.8 billion yuan, down 43%.

During National monitored 40 cities, only Xiamen and 6 other cities saw land transfer increases, more than 30 cities saw land sales fall. The 10 cities with the largest sales decline all fell more than 75 percent. Midwest City land deal more in the doldrums, Xining, Guiyang year decline in the forefront.

Elsewhere, ANZ sees new policies lifting home prices 5% in first-tier cities, but is still looking for sub-6% GDP growth in 2015.

China’s Big Cities To Win From New Property Rules

The property market easing measures could provide some modest support to growth in the remainder of the year. While we have revised down Q1 GDP growth downward to 6.9% from 7.3%, we revise up our Q2 GDP forecast to 7%, from 6.7% previously. Overall, we maintain our full year GDP forecast at 6.8%, but see modest upside if the property market recovers stronger than expected.

Drop In Imports Reflects Deep Seated Problems

Popular economics blogger Yu Fenghui discusses the latest import data here: 进口大幅下挫反映深层次问题. He questions whether some of the jump in exports might be capital flowing around currency controls, in addition to increased demand from the U.S. The main reason for weak imports is the weak economy:

The main explanation is still not flourishing domestic demand and consumption, indicating that the domestic purchasing power is still weak. China's economy has entered a new normal circumstances, get up domestic consumption, China's economic growth will not ease the downward pressure. Especially in the first two months of imports in February fell dramatically illustrate the grim economic situation in mainland China are being renewed. In fact, just two months of imports in the doldrums, from the second half of last year after the import has been in a weak condition, behind China's economic growth momentum is waning concentrated reflection. Must pay sufficient attention.

He concludes by saying the space for the central bank to operate is very small during an economic downturn. The proper response is fiscal policy. In the current case, he calls for a broad and comprehensive cutting of taxes.

Chinese Import Volumes Fall, Crude Import Surge is Over

The headline story is Chinese imports and exports tumble mostly due to plunging commodity prices. This is not untrue, but a look behind the numbers shows volumes fell as well.

First, here's the trade data broken out important regions and countries.

Here's the breakdown of some of China's main imports. Left hand side shows the volume, amount ￥100 M, and average price per ton or unit. Right hand shows the year-on-year change of all three. I highlighted the quantities in red.

Remember how China was buying oil like crazy in December? That apparently stopped in January. Crude oil imports were down 0.6% from last year by tonnage, but down 41.8% in value thanks to plunging prices. No wonder the Saudis slashed prices for Asian buyers.

The drop in copper imports by tonnage was 22.7%, and the yuan value fell 31.1%, i.e. 2/3 falling imports, 1/3 falling prices. Aluminum imports fell 50%. Auto imports fell 10% even though tariffs started coming down. Coal imports by tonnage fell 53.2%.

As I've pointed out a few times here, the data really deteriorated in the past few months, but anyone watching the headline figures with front-loaded growth in 2014 will be surprised by the slowdown that comes at the start of 2015. The curtain is about to be pulled back, and the bulls are not going to like what they see.

Source: 2015年1月我国外贸进出口同比下降 量减价跌是主要因素

Update: On the export side, China is Puking Steel

China Begins Car Imports Through Shanghai FTZ

From Bloomberg in November: China Poised for Testing Parallel Car Imports in Shanghai

China said it will step up preparation of a trial program for parallel car imports in Shanghai’s free-trade zone, a move that could lead to lower prices for foreign brands in the world’s biggest vehicle market.

The government will adjust rules and speed up work on carrying out a direct-import test program in the zone, the State Council said in a statement dated Oct. 23, which was posted on the central government’s website today. The government didn’t say when the program will start.

Under the trial, cars would be brought into China without going through a brand’s distribution network, usually leading to lower prices. Cheaper parallel imports would pressure carmakers to cut their prices in the China, according to brokerage Sanford C. Bernstein.

The test is beginning and this Chinese article estimates that prices could fall by 20 percent. 上海自贸区启动平行进口汽车试点 进口车望便宜20%

Parallel imports of automobiles and the price difference between the 4S shop, depending on model, usually the higher the price, the greater the difference. Typically 15% -20% cheaper. Some have been relatively low price of imported cars, probably the difference in the 10%, or even less than 10%.

The article also has this table of car prices in China and overseas, which shows that some luxury brands sell for well over 100% markups in some cases.

The net effect of this policy is great news for Chinese consumers, but will give Chinese automakers pressure at a weak point.

Three more FTZs are due to launch in March: Guangdong, Fujian, Tianjin FTZs to Launch

Chief Economist at Haitong Sees Real Estate Cycle Low in 2017

Echoing what Michaal Pettis has said about Chinese growth rates, Li Xunlei says that slower growth rates are good for China. If GDP growth stays high, a financial crisis will be closer and closer.

Lee Xunlei: Chinese economy is basically in a downstream process, and is far from the bottom. In terms of overall growth expected this year, about 7.3 percent, next year will be lower. There are three factors that may cause the Chinese economy to continue to slow down: The first is the aging of the population, and the second is the debt ratio of the whole society is relatively heavy, need leverage, it is impossible to have good growth in investment. The third is the Chinese technological progress is slowing.

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

On real estate:

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

李迅雷：中国房地产危机或在2017年 难避免

Loan Demand Slumps in Q3

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

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

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

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

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

All data from the PBOC.

China's rebalancing is coming

The local governments may break Beijing's rules, but Beijing is serious about reform. An editorial in today's Beijing Times explains why economic growth will be slower. This is the first time I've seen an article like this in a general audience newspaper. Economic papers have written these stories, but it's not often we see it discussed outside of the financial realm. It comes a few weeks ahead of the National People's Congress, when power will officially transition to Xi Jinping and Li Keqiang. The editorial covers growing debt burdens for local governments, bubbles and the need to turn away from double digit growth targets.

经济军令状勿成盲目增长护身符

Japanese firms accelerating exit from China

Two of the hottest words in Japan are "China risk" and "shed Sinicization" as Japanese firms shift their manufacturing base from China to Southeast Asia. Japanese firms are looking to Malaysia for rare earths and Myanmar as a potential market. Some firms are also moving production of value-added products back to Japan.

The impact for China should be limited unless the Japanese help start a trend. This wouldn't be the doing of the Japanese, rather economic weakness and other factors would make investors wary about China. Having seen the Japanese rapidly pull out and open new operations in neighboring countries, other foreign investors would have less of a psychological hurdle once they started thinking about such a move.

日本企业加紧“脱中国化” 制造基地向东南亚转移

Spooked by China, Japanese companies looking to Cambodia

Steel prices continue to sharply rebound in China

Chinese PMI falls below 50; 5 banks earn more than 272 Fortune 500 manufacturers

Chinese PMI hits 9-month low

The official purchasing managers index (PMI), dipped below the 50 mark – where a reading above 50 indicates growth – to 49.2 in August from 50.1 a month earlier.

Advance warning of manufacturing industry hollowing out, 5 bank's profits exceed 272 companies (报告预警制造业空心化 5银行利润超272家企业)

272 manufacturing firms account for 42% of revenue in the Fortune 500, but only 25% of profits. The 5 largest commercial banks earned 5% of operating income and more than 30% of net profits. These numbers have changed considerably over the past 5 years as manufacturing profits decline and bank profits steadily rose, and this had led to fears that the manufacturing industry is being hollowed out.

In some respects, the decline of the manufacturing sector is the natural result of economic development. In contrast, the rise of the banks is entirely a story of the 2008 global financial crisis and stimulus plan, executed through the banks. It is the banking sector that should scare economists, not the manufacturing sector.

Ghost city of Ordos borrowing from private investors to fund expansion

Even though the city has seen business drop 70-90%, it is still expanding!

Caixin looks at the city in Tall Order in Ordos: Giving a Ghost City Life. The main problem for the city today is falling coal prices, not the real estate bubble. Were energy prices to pick up, the city could at least start digesting the inventory, but instead business has ground to a halt.

One property developer said 70 percent of all downtown construction projects have been halted. "Capital chains are broken," he said. "There's no money."

A city construction bureau official said small property developers "have suspended almost all work" on apartment buildings. "Those that are still working are either government companies or subsidiaries of large energy groups."

First-quarter, new apartment sales in one district fell 93 percent from the same period 2011, the government said, to the equivalent of a few dozen apartments of average size.

...Delivering a separate but more serious blow to the government's treasury has been a recent slowdown for the coal industry. Coal sales accounted for more than 60 percent of the city's GDP and 50 percent of government revenues in 2008.

Coal prices have been falling since April, and hundreds of area mines have been affected.

Government is funding real estate development through state owned companies, including the energy firms. This gets to what Michael Pettis describes in his book The Volatility Machine: Emerging Economics and the Threat of Financial Collapse. These firms are all pro-cyclical: their profits come directly from energy prices, the government revenue comes from the energy sector, and they are investing their capital in real estate whose value is tied to the health of the economy. It is going totally bust now as coal prices tumble, joining the real estate sector in deep recession. The entire economy will collapse because instead of investing in counter-cyclical assets, they have bet everything on pro-cyclical investments. They are the exact opposite of diversified.

It gets better though. Since the city is running out of cash, they've started borrowing from private investors:

Banks have dramatically scaled back property lending. The Ordos branch of China Construction Bank, for example, has stopped lending money to property developers, a bank employee said. And only major enterprises qualify for local loans from the Industrial and Commercial Bank of China, a source said.

A source at another state-owned bank said there is little room left for new lending in Ordos. So far this year, the Big Four state banks have issued more than 10 billion yuan in local loans, mainly to coal and power companies.

"There were almost no loans to property companies and for local infrastructure projects," the source said, adding that his bank "seldom cooperates with urban development companies," which function as financing platforms run by the local government.

Urban development companies in Ordos have raised billions of yuan through bonds and trust products in recent years. Since 2009, for example, the Dongsheng City Development Group has lined up some 10 billion yuan.

But debts are rising. The Dongsheng group's liabilities grew to 14 billion yuan late last year from 634 million yuan in late 2008.

And credit has tightened since the central government started strengthening its oversight of government financing platforms in 2011. "There are fewer new loans this year and no plans for new bond issues," said a city government official.

...To get around the lack of bank credit, the city has borrowed money from private firms. The Dongsheng group, for example, borrowed about 2.7 billion yuan from several private companies in the region last year, according to the group's financial report.

Revenues are still officially rising for the Ordos city government, which reported taking in 23.6 billion yuan in the first half, up 8.9 percent year-on-year.

City officials have launched aggressive plans to build another 600 kilometers of expressways, 14 industrial parks and 18 power transformer substations. They budgeted 150 billion yuan worth of private and government investment this year, up from 107 billion yuan last year and 80 billion yuan in 2010.

This is pyramid finance at its finest. The entire Ordos economy and financial system could collapse like house of cards if coal prices sink.

鄂尔多斯寓言

Chinese online retailers launch price wars

E-commerce price wars escalate in China

Started by Suning in April, the first round of price wars involved major business-to-customer (B2C) retailers including Guomei, Dangdang, TMall, and Jingdong Mall. The second round of wars was waged by Jingdong Mall in June on its founding anniversary.

The third round of price wars is quick on the trigger after Suning announced recently to allocate one billion yuan RMB in August on the occasion of its third anniversary to further compete on price.

The average price cut will be around 30 percent during the sales promotion period, said Li Bin, executive vice-president of Suning.

An employee with Suning Branch in eastern China's Zhejiang Province said the discounts are so attractive that Suning's workers are awaiting to cash in on the opportunity.

Late today, Dangdang announced it was joining the war, which starts tomorrow:

当当李国庆：手机电脑家电全面迎战 (Mobile phones, computers, home appliances, we will meet the enemy everywhere head on)

Chinese steel magnate flees debt; solar industry headed for bankruptcy

Only one week ago I wrote in Capital fleeing China; China must float the yuan and slash taxes:

Get ready for more stories of fleeing businessmen who shut down their companies overnight.

Now we have the first story:

Tangshan steel mill owner flees debt of ￥1 billion 河北唐山民营钢企老板被疑跑路 欠款或超十亿元

Chen Zhiqiang, chairman of two privately run steel companies in Hebei and Xinjiang, is suspected of fleeing with over 1 billion yuan still outstanding to creditors of Baoqiang Steel Co. and Xinjiang Jifeng Iron & Steel Co. Two months ago Chen won an award for being an "outstanding private entrepreneur with integrity," but now owes 300 million yuan in private loans and 700 million yuan in bank loans. A Baoqiang Steel creditor said that "a factory in Xinjiang had its funding cut off and Chen Zhiqiang was unable to repay his bank loans, causing him to go into hiding."

H/T Caixin.

The Baoshan Steel Index broke 900 last week and has continued to slide. The last time the index was this low was in 2009, but output is far greater in 2012. That paves the way for far greater losses and even more bankruptcy.

The steel sector isn't alone. Solar may also be headed for bankruptcy, another victim of a central government push to increase output.

Sun Setting on China's Solar Sector

In the face of a new government coming to power October 2012-March 2013 and the capital hole facing the solar industry, we believe support at the provincial level—where it has been most prevalent—is at risk. Historical support may have been underpinned by banks' refusal to take losses, but we believe the tables will turn as banks balk at new investment in an industry suffering from steady cash burn and the need for massive future capital investment.

Even as bankruptcy law exists in China, we believe the dynamics of China's command economy make this a less-viable option. While the collapse in profits and cash flow may leave some with no other option than failure, we believe the most viable solution may be recapitalizations, in which banks swap debt for equity, enabling: 1) banks to creatively avoid a write-down; 2) companies to eliminate interest expenses; and 3) provinces to maintain employment. The trade-off, though, is equity dilution that destroys value for current shareholders.

With debt of $3.4 billion translating into a bloated 7.4 times net debt-to-equity, LDK Solar (ticker: LDK) might be considered insolvent by traditional measures at Western banks. While Jiangxi province's support has held firm, a free-cash-flow drain of $1.2 billion in 2011 and the need for further capital investment long term to maintain share leave it with few ways out.

The report goes on to list Suntech (STP) as at risk for bankruptcy or recapitalization.

The macro effect of recapitalization will be overcapacity and deflation. Solar makers around the world will face a new bankruptcy threat as Chinese firms wipe out their debts and maintain production.

Also:

“A gross margin of 4.5 percent indicates a loss, for sure, in the second quarter,” said Meng Xiangan, vice chairman of the Chinese Renewable Energy Institute.

According to Meng, gross margins for China’s ten leading photovoltaic makers were all below 10 percent in the first quarter, led by Canadian Solar, who earned a gross margin of 7.7 percent but still reported a loss of around 20 million U.S. dollars.

What’s worse, cash flows in Chinese solar makers are even tighter as many have rolled their debts over to 120 to 180 days, according to investment firm Helix Investment Management.

These companies can no longer obtain long-term financing.

Speaking of deflation, China continues to disinflate: China's CPI growth slows to 1.8 pct in July

So much for the stealth stimulus

A flurry of big government projects announced in the past two months racked up an impressive ￥4 trillion in value, but hardly any of the plans are coming to fruition.

Changsha is the best example: the city announced an ambitious ￥800 billion investment plan, but at the end of June, the city had only spent ￥5.6 billion, and that amount was less than one-third of the plan for this year. (长沙8000亿投资计划：上半年重大项目仅完成56亿元)

内地部分省市投资超速惹学者质疑

Capital fleeing China; China must float the yuan and slash taxes

China is bleeding capital along with other emerging markets and a crisis is on the way for countries with fixed exchange rate regimes. As I've argued before, one of the features of a currency peg is that it must be defended and any sign of weakness can invite losses as people lose faith in the currency.

Here is Andy Xie in Keeping the Economy Afloat

There are similarities between China today and Southeast Asia fifteen years ago. China could learn from the latter's experience and control the financial risk in today's uncertain environment.

Between 1992 and 1996 the low U.S. interest rate prompted a massive amount of hot money to flow into Southeast Asia. The money was mainly lent to the region's banks, which lent the money out for investment in commodity industries and property speculation. The tide reversed in 1997. It triggered massive devaluation and economic contraction.

When faced with capital outflow pressure, Southeast Asian countries used their forex reserves to defend the exchange rates. Like China today, they had controlled exchange rates. They had plenty of forex reserves when the outflow pressure began. But, after defending the exchange rates for an extended period of time, they couldn't back down from the policy until depletion of the forex reserves forced them to devalue. Some countries even borrowed considerable amounts from the International Monetary Fund to continue the wrong policy. All they achieved was subsidizing capital flight.

That is what the PBOC has been doing for much of the past 9 months: entering the market to halt the slide in the renminbi. The offshore renminbi rate is higher than the mainland rate, opening a small profit window for arbitrage, but also signaling that there's heavy selling of renminbi.

Why might they be doing it?

Without forex reserves, these countries couldn't support their financial systems. The financial collapse brought massive economic contraction and widespread suffering. If these countries had floated their currencies at the first sign of outflow pressure, they wouldn't have suffered as much.

The irrational, costly and sustained defense of fixed exchange rates had much to do with who was taking money out. It was the ruling elite taking their gray income out. This political force may partly explain why these countries were so resolute in defending their exchange rates.

I don't think this is as good an explanation for China, where there are strong political reasons to defend the exchange. Domestically, China wants to be seen as a strong economy with a rising currency. Internationally, it is worried about upsetting trade partners, specifically the EU and the United States.

Float the Yuan Now
China's forex reserves are massive in absolute amount. But they cannot really be all deployed. If the forex reserves fall by one-fifth, it may trigger panic. China's monetary assets are many times the forex reserves. A panic could exhaust the reserves quickly. Even if the government institutes tougher capital control to slow the outflow, as what occurred in 1998, the resulting confidence collapse could do considerable damage to the banking system.

Bingo. China cannot go back on the internationalization and reform of the renminbi. It halted the appreciation during the 2008 crisis, but if they reverse course now, it will be seen as a China-specific problem that causes international, but most importantly, domestic speculators to flee the currency and banking system.

How bad is the economic bubble? Andy lays out how it will come apart:

China experiences overcapacity in most industries. Rising costs have further weakened businesses' ability to earn profits. The economy has been disproportionately dependent on land appreciation as the source of profit. From banks to loan sharks, the financial sector is highly dependent on land appreciation for sustaining lending margins. Commodity industries have been subsidized by commodity traders who earn profits from loan-sharking to property developers. Equipment suppliers depend on local governments' ability to pay. That depends on land sales. Of course, this model of sustaining profitability is a bubble. As the bubble bursts, profitability will be squeezed all around. Sustaining investment through increasing other sources of financing won't change this story.

When businesses see shrinking profitability, they are likely to shrink businesses. If there is no hope for any profitability, they may liquidate and, in many cases, emigrate. In addition to declining profitability, businesses also feel the squeeze from local governments that try to increase revenues elsewhere after losing most land sales. That squeeze is frightening. It has the potential to squeeze out all the past profits of the existing businesses. So for many closing down and leaving is the best option.

Get ready for more stories of fleeing businessmen who shut down their companies overnight.

Andy Xie closes with this advice:

If China wants to incentivize businesses and households to keep money at home, the government should cut taxes substantially and shrink the state sector with numerical targets and timetable. Otherwise, capital outflow is likely to continue.

Luckily for China, that is exactly the plan of Xi Jinping, Li Keqiang, and Wang Yang (see: Liberals aim to unleash new wave of reform). Now we will see who is really in charge: can the rising leadership push through reform or will China go through another costly 2008-style stimulus that benefits the state industries controlled by CCP insiders?

Also see: Chinese hoard dollars; China's dollar short position; China's foreign currency loan-to-deposit ratio sinks again; China's 3000 wealthiest households lost nearly $100 billion

China launched ￥4 trillion stealth stimulus in May

So says Lang Xianping on his Weibo account. He says the central government launched the stealth stimulus in May, which would help make sense of the June uptick in housing and PMI. Local governments have been furiously implementing the stimulus: Changsha (Hunan) has an ￥829 billion stimulus spread across 195 projects. Xian is planning 9 more subway lines, in addition to the 6 already in operation or planned, which will combine for a total 15 lines and 550 kilometers of rail. Guizhou suddenly announced ￥3 trillion spread over 2300 tourism related projects.

Lang Xingping closes by saying this is like giving a terminally ill patient a shot in the arm, after a period of excitement, [the economy] will sink into an even deeper crisis and the bill for these chaotic investments will be paid by the common people.

See China Cities Roll Out Stimulus as Changsha Targets $130 Billion for English coverage.

郎咸平

中央政府五月悄悄推出新四万亿之后,一如所料,地方官员也开推政绩工程,疯狂建设。例如,长沙自行推出高达8290亿元的195个项目，西安要在规划的六条地铁之外再建9条地铁，贵州竟要投资3万亿发展旅游。这情况就好比给病入膏肓的病人猛打强心针,最终会在短暂兴奋后,陷入更深危机,这些乱投资又得老百姓买单。

China's 3000 wealthiest households lost nearly $100 billion

China's wealthiest 3000 households lost roughly $93 billion in wealth in the past year, with much of the losses blamed on falling stock prices. Most of the list is made up of Internet and real estate company founders.

The top table is the 2012 top 10 wealth figures, with 2011 on the bottom. The first category is their name, the second is their company, the third the percentage of wealth in equities and the last their total wealth. For 2012, I calculated the percentage decline in wealth for those who stayed on the list. Some of the companies on both lists are Sany, Baidu, Suning, Evergrande and Tencent.

Lang Xianping warns: China repeating Hong Kong's mistakes; affordable housing bubble will destroy real estate and trigger Hong Kong-style recession

Governments are slow to act and almost always close the barn door well after the horses are gone. There's unrest from the public over high home prices, but the government let the bubble rip after 2008 to keep the economy humming. Now, slowly developing plans for affordable housing are hitting the market just as it turns over. Lang Xianping sees disaster and its hard to disagree, although he does neglect to mention the Asian Crisis. That said, governments do often end up acting pro-cyclically (boosting the economy when it is already booming, slowing it when it is already in recession), thus affordable housing policy may simply be a good sell signal. Below is my rough translation of his article:

Real estate market is a half step from collapse; government housing is the biggest bubble

We are a only a half-step away from a Hong Kong style recession, because of the three mistakes made by Hong Kong, we have already made two-and-a-half.

First, the government monopoly on land development rights, intentional creation of a property market volcano, public finances critically reliant on land, makes real estate into an economic pillar.

Property rights were always government owned and leases were the main source of government income. The higher the property prices, the bigger the government revenue. People today realize, the pre-handover British run Hong Kong government stoked the property bubble for short-sighted gains, just as these past few years local governments have been falling all over themselves to pillage land profits.

For a long time, real estate was the champion of the economy, the financial services sector also relied on real estate. Relied to what degree? I break it into three levels:

The first level: economic dependence. In 1997, real estate and related value added industries accounted for 40% of GDP, the whole economy revolved around the sector. Long-term real estate investment accounted for two-thirds of fixed asset investment.

The second level: public finance dependence. Government revenues depended on long-term leases and other real estate taxes.

The third level: financial dependence. Real estate shares were always the biggest stocks, accounting for one-third of market capitalization. Real estate shares and property prices pulled each other and shared fortune or disaster. Real estate and banking were also mutually dependent, developers and residential mortgages always accounted for at least 30% of total bank loans.

Now let's contrast that with China's economic data:

The first level: economic dependence: In 2010, real estate investment accounted for 46.6% of fixed asset investment.

The second level: public finance dependence: In 2010, property transfers hit a new high; the growth rate hit a new high, increasing 70.4%. Land transfer payments accounted for 76.6% of local government revenue, a new high, and this unprecedented scale reflects the local government finances' extreme dependence on real estate.

The third level: financial dependence. Real estate loans account for 20% of total loans, reaching 9 trillion yuan total; add in related real estate loans, mortgages and other credit, and it reaches nearly half of loans, about 20 trillion yuan. If we add in credit outside of the system, such as trust loans, real estate may account for as much as 60% of total credit.

Second, ignore negative interest rates, encourage capital into the false property, stock and manufacturing boom.

At the beginning of the 1990s, Hong Kong had negative real interest rates. Bank deposits were below 10% inflation rates, forcing people to look for investment opportunities to avoid seeing their savings consumed by inflation. However, the British run Hong Kong government adopted a laissez-faire attitude. From 1992-1994, "mansion" prices ferociously rose 600%, top rate office buildings rose 250%, Sha Tin and other non-downtown, mid-range properties gained 300%. The government issued many restrictions on property speculation, but all it did was cause a slight pullback.

However, the British Hong Kong government's "last governor" Chris Patten was consumed by politics and ignored the negative interest rate problem. This caused the boom in the high-end properties to spread to middle and low income housing. In the first part of 1997, the property market threw off two years of losses and rallied to new highs in the autumn. From the day of the handover on July 1, 1997, property prices rose another 80%, and a 40 square meter apartment cost two to three million Hong Kong dollars.

Where are we today? Also ignoring negative interest rates and the plight of ordinary people. Property taxes are good, buying restrictions are fine, but this doesn't do anything to resolve the problem of ordinary people looking for an inflation hedge. The most serious inflation issue is the difference between deposit and loan rates. One year deposits pay 3.5%, loan rates are 6.56%, the official inflation rate is 7.9% (all data is as of the time of writing). What does this mean? It means your deposits lose money, your loans lose money, but no bank loses money. Of course, the inflation rate is nowhere near that low, and don't think you can earn money by borrowing, because if you're borrowing for anything other than a home, the floating rate is 40%, which is to say, you may not even be able to borrow at 70-80% interest. Everybody know current Wenzhou interest rates? According to national news, monthly rates exceed 10%, which means annual rates exceed 120%. Only mortgages are relatively low, lower than the real interest rate, so this policy is in fact forcing you to buy a home to hedge against inflation.

Third, the recession is before your eyes, but for political gain, the housing market is suppressed.

On October 8, 1997, Hong Kong Chief Executive Tung Chee-hwa released a policy report called "Building Hong Kong for a New Era," later called the 85,000 homes policy. It had three goals: every year construct at least 85,000 public and private homes; within 10 years 70% of Hong Kong residents would own their home; reduce the wait for public housing to three years. At the time Tung Chee-hwa announced the policy, annual new private home supply was only 20,000, supposing the policy was implemented, public and private housing would be four times supply, it'd be a wonder if the market didn't crash.

What's worrying is that we are very close to Hong Kong's absurd "85,000"!

In 2011, through new construction, renovation, purchases, long-term leases and other methods, Beijing plans to create 200,000 units of affordable housing, provide 20,000 homes with rental support and complete 100,000 units of affordable housing. At the same time, Beijing started applications for public rental housing, audits, etc., and more than 10,000 homes were approved before the end of 2011. But is everyone aware of the 200,000 units idea? In each of the past five years, Beijing has increased housing supply by about 100,000 units. So Hong Kong used a 4:1 double punch to kill the property market, if Beijing implements the plan, it will use a 2:1 double punch!

What about Shanghai? In the latest 5-year plan, Shanghai plans to build 130 million square meters of housing, 60% of it affordable housing. In other words, Shanghai is planning a 1.5:1 double punch.

Furthermore, I want everyone to pay attention to the above 1.5:1 and 2:1 numbers, I think they are wrong, because the central and local governments keep revising their plans, the current version calls for 36 million affordable homes, including 10 million that began construction in 2010. What's the idea? In 2010, the completed residential housing was 612 million square meters, non-residential real estate was 222 million square meters, for 834 million square meters total. If the 10 million affordable homes that started construction in 2010 have an average area of 75 square meters, that would mean 750 million square meters total. For 36 million total units, that's 2.7 billion square meters. In other words, it's really a 3.5:1 strength crack down on the real estate market. And you should know, the Hong Kong real estate market didn't collapse when the affordable housing was completed, rather it collapsed not even several years after construction began.

In the past, high home prices were the biggest bubble in the Chinese economy, now affordable housing is the biggest bubble. What I want to say is, this is the real estate market's life or death moment, move forward another half step and there's a bottomless abyss, I hope we don't repeat Hong Kong's fatal mistake!

Source: 郎咸平：楼市距崩盘只差半步 保障房是最大泡沫


Lang Xingping made news in late 2011 when a recording of a private lecture went public (and viral in China). Here's a news story with English subtitles from last year, when Lang made headlines with his "China is in a depression" speech.

Chinese government hurting for income?

Sleeping taxes awaken. “休眠税”醒了 The article is in Chinese and it discusses dormant taxes that are not currently enforced. If real estate cools or worse, contracts, local governments will lose a major source of revenue (land sales).

China to hike the poverty line

谁是中国的穷人, or, Who are China's poor?

在2010年国家统计局统计公报中，这条线划在了年均纯收入1274元，按此计算，年末贫困人口为2688万。日前，中国扶贫开发协会执行副会长林嘉騋在接受《人民日报》海外版采访时表示，今年的贫困线或将上调至1500元，贫困人口总数“再回到九千多万甚至上亿都有可能”。“中国有上亿穷人”，这一事实并不令人惊讶。对照世界其他国家，中国政府发布的贫困线标准一直被认为严重偏低，导致不少人“被脱贫”。国务院总理温家宝就曾公开表示，如果按照国际标准计算，中国仍有1.5亿贫困人.

Google Translate version (edited due to glaring translation errors):

National Bureau of Statistics 2010 communique, the line drawn in the average annual net income 1274 yuan, the figure was 26.88 million at the end of poverty. Recently, the China Association of Poverty Alleviation and Development, executive vice president of Chia-mare to accept the "People's Daily " Overseas Edition interview that this year's poverty line or will be raised to 1,500 yuan, the total number of poor people "go back more than ninety million or even 100 million Are possible. ""China has over 100 hundred million poor ", a fact not surprising. Control of other countries, the Chinese government's poverty line has always been considered a serious low, resulting in a lot of people "were out of poverty. " Premier Wen Jiabao had said publicly that, according to international standards, China still has 150 million poor people.

如此悬殊的差异使得中美两国穷人的生活基本不具备可比性。根据两位美国学者的研究，在美国政府定义的穷人家庭中，46％已购买并拥有自己的房子，他们平均每家有一个门厅、三个睡房、一个半浴室、一个车库；73％的家庭拥有汽车，其中近三分之一有两台或以上的汽车；美国穷人的孩子，不仅没有营养不良问题，而且他们获得的营养物质和中产阶级家庭的孩子一样，都超过了需要的标准，乃至普遍超重。

但在中国，贫困线之下的人们是真正的绝对贫穷。一些国际比较的研究结果显示，与其他国家相比，中国的贫困线标准几乎是世界最低的。2011－2015年，越南农村贫困户标准为人均年收入480万越南盾以下，折合人民币约1500元，而2010年越南人均GDP为1162美元，仅是中国的四分之一。

因此有人提出，中国的贫困线更应该叫“活命线”。北京大学政府管理学院教授顾昕就认为：“可以断言，生活在我国低收入标准之下的民众，都处于绝对贫困甚至赤贫的状态；而生活在贫困标准之下的民众，应该处于极端赤贫的状态。”

Google Translate version:

This disparity between the two countries makes the basic life of the poor are not comparable. According to two American scholars, the definition of the U.S. government in poor families, 46% have purchased and have their own house, they average house has a foyer, three bedrooms, one and a half bathrooms, a garage; 73% families have cars, of which nearly one-third have two or more cars; American poor children, not only did not malnutrition, and their access to nutrients and middle-class children, more than the required standard, even the generally overweight.

But in China, people below the poverty line is the real absolute poverty. International comparative study showed that compared with other countries, China's poverty line is almost lowest in the world. 2011-2015, the Vietnamese standard of rural poor households to 4.8 million VND per capita income below RMB 1500 yuan, and GDP per capita in 2010 was $ 1,162 in Vietnam, only a quarter of China.

It was thus that China's poverty line, more should be called "survival line." School of Government, Peking University, Professor Gu Xin to think: "It is certain that standards of living under the low-income people in our country, are in a state of absolute poverty or extreme poverty; and standard of living below the poverty population, extreme poverty should be at the extreme the state. "