Yes Virginia...It's a Bubble...

[touchring]

Re: Yes Virginia...It's a Bubble...

This cracked me up. I guess we now know how the wealthy Chinese get all their money out to purchase properties in cash worldwide.

I wonder if that means the up and coming Chinese are the only buyers of local properties?

A friend of mine 4 months ago was in the process of buying an apartment/condo in Beijing with his dad (he is an economist here in the US at a university and a Chinese immigrant). He had to go to the Chinese embassy to fill out some documents etc.

I asked "what happens if the Chinese property market collapses?" Especially after this massive run up in the last 5 years.

He said "the Chinese property market never goes down, wages are rising and millions are coming from the countryside into the city."

We shall see.

Multiple risk factors, any of which can bring down a property bubble:

1. Tangshan style earthquake.
2. Middle East oil shock/crisis.
3. War with Vietnam over South China Sea territory.

[GRG55]

The Politburo and PBOC Blink. Again.

...Even the much vaunted "centrally planned world beating" Chinese economy is having difficulty figuring out how to get off the mercantile + cheap-credit investment driven growth model treadmill. Too many vested interests, too much corrupt money being made.

So there's every reason to believe they'll just keep coming back to it over and over again until something finally breaks...

China Growth Push Risks a Debt Spiral

July 15, 2014

On the eve of the release of China’s second-quarter gross domestic product figure, which is expected to rise 7.4 percent, credit figures show a policy shift toward supporting growth in lieu of controlling a surge in debt and shadow banking.

China’s new loans in June reached 1.08 trillion yuan ($174 billion), compared to 860.5 billion a year ago, while analysts in a Bloomberg News survey had predicted just 955 billion yuan. Aggregate financing, also known as total social financing, reached 1.97 trillion yuan, well above the highest analyst estimate—1.55 trillion yuan—compared to 1.4 trillion yuan in May.

“The government has been concerned more about stabilizing growth recently,” and the credit numbers are a “confirmation of credit easing,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia in Hong Kong, told Bloomberg News. “It’s offsetting the tightening from previous months.”

In order to encourage more lending without moving to a a full-scale easing policy, banking authorities have cut bank reserve requirements and loosened loans to small enterprises and to projects in agriculture and affordable housing. Meanwhile, China’s 30-some provinces have been pursuing stimulus programs, too.

Hebei, for example, has pledged to spend 1.2 trillion yuan ($193 billion), equivalent to 42 percent of the province’s GDP last year, in areas that include railways, power projects, and housing, said the Hebei Daily in a report posted online on June 26.

The northeastern province of Heilongjiang said it will “step up the construction of important infrastructure projects,” spending 300 billion yuan over the next two years on infrastructure and mining, according to a June 23 government statement. And the southern province of Guangxi will invest 630 billion yuan over three years on 166 infrastructure projects, according to a statement issued on July 4.

The renewed efforts to support growth are fanning renewed fears about the perils of too-rapid growth in debt. China’s local governments had accumulated 17.9 trillion yuan ($2.96 trillion) in debt as of June 2013, up 63 percent since the end of 2010 and much faster than the economy’s 40 percent expansion...

[GRG55]

Re: Yes Virginia...It's a Bubble...

And like all good bubbles it goes on much longer and inflates to a much greater extent than anyone could have imagined.

Is it finally the beginning of the end? Maybe. Maybe not...

China’s riskiest property market just collapsed. Is this how it starts?

February 25, 2013 at 11:05 am

The real estate market in Phoenix Island, a development project in the Chinese island province of Hainan, was so inflated, so outrageously expensive and unsustainable, that it became known as the Dubai of China. With its palm tree-lined streets, glimmering high-rises and ostentatious sports cars, it even looked a little like Dubai. And now, also like Dubai but maybe more in the vein of south Florida, the Phoenix Island real estate market that drove so much local economic growth has imploded...

China's Cities Struggle to Sell Apartments as Prices Slide

July 18, 2014

Shanghai

More bad news from China’s housing market. Apartment prices fell in June in all but 15 of China’s 70 largest cities.

That was the largest number of cities to see prices slide since January 2011, when the government changed how it measures the sector.

Prices in Shanghai and Guangzhou both declined 0.6 percent, while in Shenzhen they dropped 0.4 percent, China’s National Bureau of Statistics announced in a statement released today. The worst performer was Hangzhou, the capital of Zhejiang province, where prices were down 1.7 percent. The price drop comes amid a glut of excess apartments following years of runaway construction...

...In an attempt to spur sales, cities are loosening property restrictions put in place when the market was still hot, reported the official Xinhua News Agency on July 18. Over the past few weeks, Hohot, Inner Mongolia, and Jinan, Shandong, began allowing nonresidents to purchase homes and made it easier to get mortgages. On July 14, Nanchang, Jiangxi, followed suit, dropping restrictions limiting purchases in several of its districts.

Changzhou, Jiangsu, which is facing a particularly serious glut, ran a front-page ad on its state-owned newspaper Tuesday exhorting its citizens to jump back into the property market. “Now is the best time to buy a home, as realty prices will not fall any further,” declared the Changzhou Daily... [----]

...Growth in residential real estate investment in recent years has been twice as fast as gross domestic product growth and now amounts to 10.4 percent of the economy, or 5.89 trillion yuan ($949 billion), up from less than 2 percent of the economy in 1997...

[jk]

Re: Yes Virginia...It's a Bubble...

if chinese real estate goes down, do you think it will take vancouver with it? or the reverse? more eagerness to go offshore? in terms of real estate, should we start to think of vancouver as part of china instead of part of canada?

[Milton Kuo]

Re: Yes Virginia...It's a Bubble...

if chinese real estate goes down, do you think it will take vancouver with it? or the reverse? more eagerness to go offshore? in terms of real estate, should we start to think of vancouver as part of china instead of part of canada?

Every person I have ever spoken to who was born in an Asian country believes that real estate never goes down and I would be amazed if real estate in China goes down and stays down. If I remember correctly, real estate in Hong Kong dropped nearly 50% around the late 1990s. Real estate prices in Hong Kong today have since eclipsed the highs of the last millenium and the general consensus is, "See? Real estate never goes down. There are corrections but they are great opportunities to buy."

I suspect that part of this belief is due to the fact that many people in Asia have experienced currency destructions in their lifetimes caused either by war or due to incompetent management of the currency.

In some ways, the real estate market in the U.S. over the past decade-plus is looking more Asian. As of today, the bursting of the housing bubble 2006 - 2008 looks like a mere correction. All one had to do was hang on and wait for the recovery (and profits) to return in short time. The only real estate that is down for the count is stuff that is obviously the equivalent of swamp land in Florida: houses in places no one lives and houses in very bad neighborhoods such as Compton.

If there is a housing crash in China, I would think that Chinese money initially will fly back into China to buy the corrections and thus temporarily lessen the amount of money going to the UK, US, Canada, Australia, etc. real estate markets.

[GRG55]

Re: Yes Virginia...It's a Bubble...

if chinese real estate goes down, do you think it will take vancouver with it? or the reverse? more eagerness to go offshore? in terms of real estate, should we start to think of vancouver as part of china instead of part of canada?

Interesting questions.

I have never believed that the two are as interconnected as many Canadians might wish to believe. At this point I think the Canadian property market, especially Vancouver, is more vulnerable than mainland China. It is possible that an over-leveraged and slowing productive economy in China might result in business owners there liquidating non-business assets to service loans, including offshore property.

My sense is that private capital in China has few alternatives available to it...a situation I first noticed living and working in the Middle East and parts of Africa. In all these places the State has a huge direct involvement in the economy, and large swathes of it are blocked to private investment in order to protect the government owned companies from competition. This results in private capital being concentrated in very few alternatives, generally immature domestic stock/capital markets and domestic property development, giving rise to repeated speculative cycles in both if a country/region is "getting richer"; the Persian Gulf and China being good examples.

Canada has few such restrictions to capital, including foreign capital. The property bubble dynamic in Canada, especially Vancouver, may have been catalyzed by Chinese capital spilling offshore (with the discrete approval of the Chinese authorities as I have posited in the past), but I don't think it bears other resemblance to what is going on in Chinese property markets.

The psychology of an established and rapidly expanding bubble seems well entrenched among the local Canadian population, our bankers, realtors, property developers, real estate lawyers and our municipal, Provincial and Federal politicians. "Buy before the Chinese own it all" and "Buy before foreign money prices you permanently out of the market" are two of the storylines used by the Canadian property interest cohort to maintain the belief system needed to keep the game going. This post on another thread is illustrative of how pervasive that has become:
http://www.itulip.com/forums/showthr...373#post283373

This link to a recent post on Garth Turner's blog presents some statistics of buyer distribution on Canada's west coast. People who really think it is Chinese money driving the current insanity may be a bit surprised at these numbers:
http://www.greaterfool.ca/2014/07/16/the-gullible/

VancouverGoingUp was "right" in that he/she recognized better than many of the rest of us just how powerful a force was behind promoting that belief system, and how long and how large the resulting bubble might become. We should have given him/her more credit...after all he/she was an integral part of it. Unfortunately recognizing nascent bubble psychology and riding those waves has now become a core investment strategy in the past couple of decades.

[touchring]

Re: Yes Virginia...It's a Bubble...

I suspect that part of this belief is due to the fact that many people in Asia have experienced currency destructions in their lifetimes caused either by war or due to incompetent management of the currency.

One belief is that governments won't allow real estate to crash as government officials are personally vested and are the biggest players. Instead, they will just keep inflating away. This maybe true in the short to medium term, but there are events that governments can't control, e.g. another Tangshan style earthquake, Middle east oil crisis, etc.

Another belief is that China's economy is going to take over the world and the non-stop propaganda (by both local and even foreign media.

If there is a housing crash in China, I would think that Chinese money initially will fly back into China to buy the corrections and thus temporarily lessen the amount of money going to the UK, US, Canada, Australia, etc. real estate markets.

We might be able to learn what happened in Singapore during the Asian financial crisis in 1997 when buyers of properties in Malaysia and Indonesia liquidated their Singapore property for emergency back home, e.g. free their husbands in debt jail, etc.

I believe that the same will happen with Chinese investors in Western markets if they are as leveraged in their businesses as we have read in the news.

It's good to study what happened to the Singapore and Hong Kong real estate markets in the aftermath of the AFC as there are great similarities to what is happening today.

[GRG55]

Re: Yes Virginia...It's a Bubble...

Capital misallocation? Too much inefficient, high cost capacity? Nah. That couldn't happen in China, could it?
Imagine all that cheap labour, lax environmental rules and cheap capital, and still not able to compete with the bloody Aussies

And so much for that budding "special relationship" with Russia designed to smack the Yanks. Make no mistake about it, when it comes to resource deals China is going to screw over Russia just like it was one of those illiterate west African kleptocracies.

China to again levy coal import tariffs after nearly a decade


SHANGHAI, Oct 9 (Reuters) - China, the world's top coalimporter, will levy import tariffs on the commodity after nearly a decade, in its latest bid to prop up ailing domestic miners who have been buffeted by rising costs and tumbling prices.

The sudden move by China to levy import tariffs of between 3 percent and 6 percent from October 15 is set to hit miners inAustralia and Russia - among the top coal exporters into the country...


China Coal Tariffs Add to Pressure on Producers in Australia


Oct 10, 2014 12:01 AM MT

China will reintroduce import tariffs in its latest effort to support money-losing domestic miners, according to a statement published yesterday on the Finance Ministry website. This follows the government’s move last month to ban the import of lower-quality coal and an announcement asking power utilities to reduce coal imports...

...About 13 steelmaking coal mines in Australia are producing at a loss, putting them at risk of closing, though most producers, including larger ones such as BHP’s venture with Mitsubishi, are profitable, Wood Mackenzie Ltd. estimated.

More than 70 percent of China’s miners are unprofitable, and half are delaying or cutting wage payments after domestic power-station coal prices fell amid overcapacity and sluggish demand, the China Coal Industry Association said in July.

[jk]

Re: Yes Virginia...It's a Bubble...

in another 3 months, this thread will celebrate its 5th anniversary. it's amazing how long these things can go on.

[Polish_Silver]

Coal Australia vs China

Capital misallocation? Too much inefficient, high cost capacity? Nah. That couldn't happen in China, could it?
Imagine all that cheap labour, lax environmental rules and cheap capital, and still not able to compete with the bloody Aussies

. . .

China to again levy coal import tariffs after nearly a decade

I suspect that direct labor is a small part of the total price of coal. I suspect the real difference is that Australia has much better coal fields.

It's a good point that Australia remains competitive in this area, even with higher labor and environmental costs.

But I don't hear that apple is making Ipads in Australia or New Zealand.

I am also wondering if highly capital intensive projects run a sort of "kleptocracy risk" in china. I don't think there's much market for hot electronics manufacturing equipment. But for heavy equipment, there just might be.

[GRG55]

Re: Yes Virginia...It's a Bubble...

China's growth slowest since global crisis, annual target at risk

BY JAKE SPRING AND XIAOYI SHAO
BEIJING Tue Oct 21, 2014 3:14pm EDT

(Reuters) - China grew at its slowest pace since the global financial crisis in the September quarter and risks missing its official target for the first time in 15 years, adding to concerns the world's second-largest economy is becoming a drag on global growth...

...China's gross domestic product grew 7.3 percent in the third quarter from a year earlier, official data showed on Tuesday, the weakest rate since the first quarter of 2009.

That was slightly above the 7.2 percent forecast by analysts but slower than 7.5 percent in the second quarter, and even then some economists were surprised.

"It's hard to square the GDP print with the industrial production numbers for the quarter," said Andrew Polk, economist at the Conference Board in Beijing, one of the more pessimistic research houses on the Chinese economy.

"There are confusing things going on. You have credit growing at the slowest pace since 2002. You have real estate investment slowing on a monthly basis and you have industrial production averaging slightly above 8 percent on a quarterly basis, slightly down from Q2. With that being the most reliable component of GDP on a quarterly basis, 7.3 percent seems a bit high to me."...

[GRG55]

Re: Yes Virginia...It's a Bubble...

Chinese home prices fall for fifth month in Sept, year's gains lost

Fri Oct 24, 2014 1:42am EDT

Sept home prices fell for 1st time y/y in nearly two years

* Prices down 1.0 pct on month, fifth straight fall
* New home prices fell m/m in record 69 cities
* Sales improved on easier mortgages


BEIJING/HONG KONG, Oct 24 (Reuters) - Chinese home prices fell for a fifth straight month in September, wiping out gains scored in the past year and raising expectations the government will have to implement more economic support measures to cushion the blow.

The monthly falls left average home prices in 70 major Chinese cities down 1.3 percent in September from a year earlier, the first such drop since November 2012.

New home prices fell month-on-month in a record 69 of the 70 major cities, up from 68 in August. Only the southern city of Xiamen saw stable prices last month, National Bureau of Statistics (NBS) data showed.

The worst performance was in the eastern city of Hangzhou, where prices sagged 7.6 percent in September from a year before.

The decelerating property market, which accounts for about 15 percent of China's economy, has crimped demand in 40 sectors ranging from steel to cement and furniture.

"The property downturn is still the main drag on the economy," Wang Tao, an economist at UBS in Hong Kong, said in a note...

[For anyone here that remains under the delusion that "China is different", what follows should sound hauntingly familiar ]

In late September, China cut mortgage rates and downpayment levels for some home buyers for the first time since the 2008/09 global financial crisis, its boldest step yet to energise an economy increasingly threatened by a sagging housing market...

...And even if prices do stabilise, developers will remain reluctant to start new projects until a glut of unsold homes is worked off, depressing demand for raw materials and keeping pressure on labour markets...

...Meanwhile, Chinese developers are turning to offbeat marketing gimmicks and give-aways as they battle to shift their massive inventory, including resort stays for buyers.

[GRG55]

Re: Yes Virginia...It's a Bubble...

So much for that home grown consumer society strategy

Is China temporarily reverting to what it used to be? A market of a Billion people. Most with no disposable income.

Unilever Posts Slowest Quarterly Sales Growth Since 2009

Oct 23, 2014 3:42 AM MT

Unilever (UNA), the maker of Surf and Rin laundry detergents, reported the slowest third-quarter revenue growth in five years as its main growth engine, personal care, sputtered amid a sharp drop-off in China...

...Sales in China plummeted 20 percent as big retailers in that market ran down inventories of Unilever products worth 100 million euros ($126 million), finance chief Jean-Marc Huet said. China’s deceleration weighed onemerging markets, which account for about 57 percent of the company’s revenue...

...China’s difficulties lowered underlying sales at the maker of Dove body wash by as much as 0.8 percentage point, Huet said...

...The inventory backlog in China will continue in the fourth quarter and be “largely complete” by the end of the year, Unilever said in its statement, though James Allison, head of investor relations, told analysts that it’s “very difficult to be absolutely sure of that because our visibility across China is not that great.”...

...Nestle SA (NESN), the world’s biggest food company, said last week it saw a “pulling back” of inventory in China. Other countries aren’t experiencing this so-called destocking, Huet said: “It’s China and China only.”...

[GRG55]

Re: Yes Virginia...It's a Bubble...

So much for that home grown consumer society strategy

Is China temporarily reverting to what it used to be? A market of a Billion people. Most with no disposable income.

Unilever Posts Slowest Quarterly Sales Growth Since 2009

Oct 23, 2014 3:42 AM MT

Unilever (UNA), the maker of Surf and Rin laundry detergents, reported the slowest third-quarter revenue growth in five years as its main growth engine, personal care, sputtered amid a sharp drop-off in China...

7 December 2014Last updated at 23:08 ET

China trade data well below expectations

Trade data from the world's second largest economy, China, came in well below expectations on Monday, heightening fears of a sharper slowdown.

China's exports rose 4.7% in November from a year ago, compared to market forecasts of a 8.2% jump.

Imports fell 6.7% in the same period against predictions of a 3.9% rise.

The surprise slump in imports led the trade surplus to hit a record $54.5bn (£35bn), the highest in 14 years.

While the trade surplus, which is up 61% compared to last year, will add to economic growth in the fourth quarter, it does suggest the government needs to step in to stimulate growth, said Dariusz Kowalczyk, economist at Credit Agricole.

"[Imports fall] is partly a reflection of lower commodity prices and base effects, but these two factors cannot fully explain the weak import number and we have to assume that poor domestic demand has played a part," he said.

"We expect a reserve requirement ratio cut in December, introduction of reverse repos this week, and another rate cut in the first quarter."...

[GRG55]

Re: Yes Virginia...It's a Bubble...

I read your post earlier jk, and noted the 2012 date reference, which is consistent with Xie's various interviews and writings for the past couple of months at least.

However, I listened to the roughly nine minute Bloomberg HK interview [available on AOL Video here] and he does say that property developers could "get trapped" this year. Summary of the interview:

• Liquidity still plentiful so China will still see reasonable growth in 2010, but perhaps not as quick as last year;
• Domestic investment is overheating, particularly in property, despite the fact that the overall economy with its large export sector cannot grow very fast [due to employment situation in the USA];
• Monetary policy needs to be tightened before the domestic investment bubble gets out of hand;
• In the wake of the US Budget and deficit announcement yesterday, expects US Treasury yields should rise significantly this year. Expects that China will continue to buy US Treasuries, but will need a higher yield to buy the same or more "There is a price for everything";
• Situation in China driven mainly by the property market and local government investment, both of which were "blown up" by excessive bank lending. Chinese government now in a dilemma as cutting back lending too fast will halt this growth, but doing nothing will create a bigger bubble and inevitable crash;
• Xie estimates that new property sales in China in 2009 rose to 14% of GDP, which he called "unprecedented", rental yields are 2% to 3% and described the amount of sold but vacant property as "humongous". Said "There is a bubble and property prices may be 100% overvalued";
• Property bubble in China differs from the bubbles in the USA and Japan as it involves new property, not existing property. Possibly half of local government revenues come from property sales and this is why land sales at record prices continue as revenue raising activity despite efforts by Beijing to cool things off.
• Lending conditions for buyers of second and third flats have been tightened considerably. This market is dominated by speculators. Difficult to see this demand continuing this year. Developers paying record prices could get trapped this year. After 7 years of rising prices [up 10 to 20 times depending on location] developers believe that land prices only go up, and that may not be the case this year, and some could "lose big money";
• Thinks the resource sector story will be much more long lasting than other stories, like the "economic recovery story" or the "property story". China has a "huge resource shortage" and "huge foreign exchange reserves" so a significant amount of money will be put into the resource sector. "It's not just a 2010 story...it will last for the next few years. This is the only story I have faith in"

Are Chinese authorities finally about to end "the dilemma"? Will they stay the course and replace ballooning off-balance-sheet debt with structured municipal bonds? Or will they once again get cold feet in the face of a potential drop in property markets and reverse course "temporarily"? Only time will tell.

China Tightening Curbs on Opaque Local Debt Spurs Market Tumble

Dec 9, 2014 6:46 AM MT

Bloomberg News


China stepped up efforts to curb the expansion of opaque local-government debt, sparking a tumble in riskier bonds and fueling the stock market’s biggest retreat in five years.

Bonds rated below AAA or sold by issuers graded lower than AA are no longer allowed for use as collateral in short-term loans obtained through repurchase agreements, the nation’s clearing agency for exchanges said yesterday. Notes issued by local government financing vehicles paced losses in lower-rated debt today, while the nation’s benchmark stock index sank 5.4 percent as some investors sold liquid assets as an alternative source of cash.

While the change caught traders off guard, authorities in the world’s second-largest economy are trying to rein in the use of lightly-regulated LGFVs as they promote the development of a more transparent municipal bond market. Fitch Ratings Ltd. estimates local government liabilities have climbed to about 30 percent of gross domestic product as cities and provinces take on debt to sustain growth amid the nation’s weakest annual expansion since 1990.

Investors had “under-priced the credit and liquidity risks,” said Ken Hu, the Hong Kong-based chief investment officer for Asia-Pacific fixed income at Invesco Ltd...

...Such debt has boomed in China in recent years as an indirect method for provinces and cities to fund infrastructure and construction projects. A law initially passed in 1994 had banned local governments from selling bonds, forcing them to set up thousands of LGFVs. That law was revised in August, laying the legal framework to let regional authorities raise funds directly.

Premier Li Keqiang is allowing local governments to sell debt themselves after the last state audit showed 17.9 trillion yuan ($2.9 trillion) of regional liabilities in June last year, up 67 percent from the end of 2010. China experienced the first default in its onshore bond market in March...

...The Ministry of Finance started to allow the cities of Shanghai and Shenzhen as well as Zhejiang and Guangdong provinces to sell municipal bonds in 2011 as part of a trial program. It added Shandong and Jiangsu provinces in 2013.

This year, the trial expanded to Jiangxi province, Ningxia region, and the cities of Beijing and Qingdao, as the ministry started to require disclosure of basic financial information and credit ratings. The development of China’s municipal bond market is vital in reducing risks from local government use of off-balance-sheet debt,Standard & Poor’s said in a May report.

“Local governments may seek new channels to raise funds,” said Zhang Li, a bond analyst at Guotai Junan Securities Co., the nation’s third-biggest brokerage. “China may expand its municipal bond trial, allowing more local governments to issue debt on their own next year.”...

...LGFVs sold 125.8 billion yuan of bonds in November, the least since January, according to data compiled by Bloomberg. Issuance has totaled 1.5 trillion yuan this year versus 903.7 billion yuan in 2013, the most since Bloomberg started tracking the data in 1999.

“Because low-rated bonds can’t be used for repurchases on the exchange, this will force many financial institutions to deleverage,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. “When there’s a liquidity issue, all bonds are sold off.”