Tag Archives: real estate

Don’t Say I Didn’t Warn You!

1 Dec

So we wake up this morning with the news that the official PMI data shows a contraction in Chinese manufacturing activity for the first time since February 2009. This follows the HSBC survey published a couple of weeks ago which similarly illustrated a contraction. In this context it’s easier to understand the reduction in RRR yesterday afternoon. That reduction added some $63bn of liquidity to the Chinese economy.

Clearly the Government sees that the economy is not in for an easy ride. I mean after steadily raising the RRR in 12 steps since January 2010 from 15.5% to 21% (a record), and then leaving them since June 2011, this is a watershed moment. While commentators yesterday lauded the move as the PBOC’s attempt to steer the economy to a soft landing I would prefer to describe the move as follows: A long running policy of loose monetary conditions led to an influx of speculative capital. The change in direction (i.e. to tightening in Jan 2010) combined with a huge acceleration in housing construction has killed the boom, created distress and the PBOC is now waking up.

Initial loosening is generally greeted with joy (note markets were buoyed somewhat way before the announcement of combined central bank activity yesterday to put a band aid on the Euro crisis). However, within time the market will see that the damage that precipitated the change in monetary policy is too big for a gentle loosening. As such I expect Chinese economic conditions to continue worsening (today’s PMI data is one example), and the PBOC to take more agressive moves to loosen credit conditions. This will heighten the impact on those assets that were tied to the prior boom. In this case I would expect damage to significant parts of the EM equities, fixed income, and commodity complex, in addition to pain in the domestic real estate market. Don’t say I didn’t warn you.

Also note – there’s a chance this could spill over to the banking system.

PS – some additional color on the PMI data. New orders 47.8. Export orders 45.6. Note that the export sector’s value added accounts for only 10% of GDP (yes – only 10%). As such, domestic weakness is most likely to be the driver of GDP deceleration in the coming months. Index of finished goods inventory rose to a record high. Tobacco, transport equipment and petrol were above 54. Below 43 were textiles, chemical fiber and plastics, and ferrous metal. The biggest losers were electrical machinery and special purpose equipment.




The Party is Over

30 Nov

In recent blog entries I’ve tried to draw your attention to the problems facing the Chinese economy:

Things are Getting Messy

A Hard Landing

In case you had any doubt that the party is over in China, read the missive below published on Bloomberg yesterday….


Shanghaied Home Buyers Take to Street as Cuts Shatter Dreams

2011-11-29 16:01:00.0 GMT

By Bloomberg News

Nov. 30 (Bloomberg) — Danny Deng and his bride-to-be dreamed of their lives together as they walked through the showroom for a Shanghai housing project almost three months ago.

Pooling his own and his parents’ savings, a loan from his boss and a 1.1 million yuan ($172,000) mortgage, he bought an apartment and secured his fiancee’s hand.

On Nov. 19, Deng faced off a ring of security guards three rows deep wearing camouflage and carrying shields as he joined more than 100 homeowners rallying in front of the development’s sales office. His transformation from newlywed to street protester came after China Vanke Co. slashed prices for future buyers at the Qinglinjing complex, erasing about 20 percent of the value of his three-bedroom unit overnight.

“If I’d paid for it all myself, the price cut wouldn’t bother me as much, but there’s a lifetime of my parent’s blood and sweat in it,” said Deng, a 30-year-old electrical systems salesman. “Developers’ profits are outrageous. The price they set when the housing market kept going up was far more than the real value.”

Deng’s anger underscores the dilemma facing China’s government as it tries to cool the property market. If policies such as increased down payment requirements don’t go far enough, it risks a housing bubble; if it pushes too hard, it may provoke the ire of a new generation of middle class “fang nu,” or housing slaves, in a reference to the lifetime’s work needed to pay off debts.

Homebuyers Stung

Demanding Vanke, China’s largest publicly traded property developer by market value, compensate them or cancel their contracts, Deng and his fellow picketers on that rainy day are among homebuyers stung as prices reverse. Urban residential values have risen 155 percent nationwide since reforms 13 years ago created a private residential market in the communist nation.

Prices in Shanghai almost quadrupled over the past decade.

In October, hundreds of homeowners demonstrated outside the offices of China Overseas Property Group Co. over cuts at another project in Shanghai, according to the Chinese-language New Century Weekly. There have also been Chinese newspaper reports of similar protests in Beijing and the industrial city of Shenzhen near Hong Kong.

“This is certainly sending a very alarming signal,” said Cheng Li, a senior fellow at the Brookings Institution in Washington. “If property prices really go down, there will be a serious political crisis led by the middle class.”

Customer Anxiety

China Vanke, in an e-mailed response to questions, said that while it understood customers’ anxiety, prices were set by supply and demand.

“In a market correction, it’s hard to avoid that both sides, developers and homebuyers, will be affected,” the company said.

Residential property prices fell from the previous month in

33 cities of the 70 measured in October, the worst performance this year, after the government imposed restrictions on mortgages and loans to developers.

Analysts at Credit Suisse Group AG say prices may fall 10 percent this year and another 10 percent in 2012. Huang Yiping, a Hong Kong-based economist at Barclays Plc, said the drop would be between 10 to 30 percent in the next 12 months.

In an indication of how seriously the government is taking the matter, a Nov. 21 commentary by the official Xinhua News Agency said that such protests are “a social phenomenon that cannot be ignored,” before adding that their appeals aren’t supported by law.

Middle Class Power

China’s emerging middle class represents a potent new force that may number as much as 243 million, said Li of the Brookings Institution. On a growing number of issues from housing to the environment they are voicing their opposition online and on the streets.

Another Xinhua article argued that some price declines could be beneficial, enabling more people to afford a home.

Also at stake is the pace of economic expansion in one of the world’s few growth engines. Property directly accounts for

12 percent of China’s gross domestic product even before taking into account building materials, furnishings and appliances, according to a July report by the International Monetary Fund.

A drop in real estate prices could undermine the value of the collateral for about 40 percent of the loans issued by China’s biggest banks, the IMF said after a November survey of the lenders.

Price Move ‘Danger’

Falling land values may also impact local governments which depend on them for one-third of their revenue, said Wang Yi, a Beijing-based real estate analyst at Goldman Sachs Group Inc.

“The government thinks they have everything under control and can set the bottom,” said Du Jinsong, head of property research for Credit Suisse. “The danger is they may do more than enough, and it may be too late to stop a bigger fall.”

Questions over China’s housing policy are “overshadowing”

China’s economic outlook, the Paris-based Organization for Economic Cooperation and Development said Nov. 28. A day earlier, Xinhua reported Chinese Vice Premier Li Keqiang as saying the government should continue tightening after some observers, including scholars at Renmin University of China in Beijing, suggested the government would start lifting restrictions next year.

Residential property-related companies are already suffering on the stock market. China Vanke, based in Shenzhen, is down 25 percent this year in Shanghai trading, while Soufun Holdings Ltd., owner of China’s biggest real-estate website, has dropped 36 percent.

For Deng, the pain is more than financial. Tears swell in his eyes as he recounts the moment his father handed him access to his life savings of 360,000 yuan to help make the down payment.

Gnawing the Elderly

The gift made Deng consider himself a member of the “ken lao” generation, meaning to gnaw on the elderly.

“I was depressed, uncertain, touched and a bit ashamed,”

he said, asking not to be identified by his full Chinese name because of the personal nature of his story. “I had been proud and didn’t think it was their business. But when the moment really came, I knew it was impossible to manage only by myself.”

Deng had moved to Shanghai three years earlier from a small city in the north to be closer to a girl he met in college. When talk turned to marriage, his girlfriend insisted they buy an apartment first, he said.

“At my age, I should get married and I should have my own home whether or not I can afford it so that I can be the same as my classmates,” Deng said.

Raise a Child

Deng saw an ad on Soufun.com for pre-sales of a project called Qinglinjing, meaning “Clear Forest Path,” that was being constructed near a soon-to-be built subway station next to the future home of the Shanghai Disney Resort. Deng and his girlfriend visited a showroom to walk the wooden floors of the replica 96-square-meter (1,033-square-foot) apartment, planning how they would fill its two bedrooms, living room and study.

“We loved it,” Deng said. “It suits us for the next three to five years because we plan to raise a child soon.”

The snag was its 1.7 million yuan price tag. Chinese policy requires a minimum 30 percent deposit. Deng had saved 70,000 — not enough. That’s when he called his parents, then borrowed another 50,000 yuan from his boss, and secured a loan of 1.1 million yuan paying as much as 7.8 percent interest from Agricultural Bank of China, he said.

On Sept. 28, Deng and his girlfriend signed a contract with the developer, happy after winning discounts including 40,000 yuan off for being a member for the Soufun.com website and a 20,000 yuan markdown by collecting 20 stamps on a red “home- passport” issued by Vanke. The end price: 1.58 million, or about 13 times Deng’s annual wage.

The next month, they got married. Paying the mortgage will take up 40 percent of the new couple’s combined salary.

Housing Boom

The new norm for Deng’s generation stems from housing reforms begun in 1998, when then Premier Zhu Rongji privatized state-owned housing provided at low rents to urbanites, transferring home ownership from the government to the families occupying the dwellings. The housing market has boomed ever since, with a brief reversal in 2008 overcome by government stimulus.

Some 290 million city dwellers own their own homes, according to consultants Gavekal Dragonomics in Beijing.

China’s official home-ownership rate of 87.8 percent, which excludes migrant workers, exceeds the U.S. level of 66.3 percent in the first quarter of 2011, according to U.S. census data.

Rising Household Debt

While the property privatization has helped fuel one of the fastest episodes of wealth creation in world history, new buyers like Deng must mortgage their futures to afford a home in China’s swelling cities. The home-buying boom has contributed to a doubling of household debt in China since 2008, though the amount is still far below U.S. levels, according to Dragonomics.

Concerned a bubble was forming, the government this year stepped up measures to curb the market, including limiting home purchases in some cities, raising down payments and warning banks and other lenders to cut back loans to builders. That’s left some developers facing a liquidity crunch, necessitating price cuts to ensure enough sales are made to pay off upcoming debts and payrolls.

“It’s a game between developers and the state,” said Li Yun, an engineer who borrowed 280,000 yuan from his friends and relatives to buy an apartment at the Qinglinjing complex and who joined the protest. “Now that they cut prices so much it pushed homeowners to the frontline.”

Sales Agents Clapped

Zuo Hongxia, mother of a 15-month old baby, said she became a home owner after losing patience waiting for years for prices to come down. She recalled the frenzied scene when she picked her apartment in the same development as agents crowded around urging her to buy and then clapped and congratulated when she nodded agreement.

Just weeks after Deng had signed his purchase contract, he found out about the price cut when he saw a leaflet advertizing apartments in the same development with a discount of 4,000 yuan per sqm. The previous asking price was about 17,000 yuan to 18,000 yuan per sqm, according to Soufun’s website.

Acknowledging he’s unlikely to get the difference refunded, Deng said he’s now pushing for a waiver to management fees or a free parking lot. With talk some people have been detained by police after protesting, he’s also taking precautions, standing on the sidelines with a cap pulled low and bandana masking his face at a separate rally on Nov. 23.

“I didn’t have a choice,” he said of the decision to buy.

“I don’t want to be too different. Otherwise, maybe for a long time, I would be alone.”

A Hard Landing

24 Nov

About 6 weeks ago I wrote a blog entry called things are getting messy. Continuing with the theme of issues in the Chinese economy, I’d like to draw you attention to 2 recent news items.

  1. According to Beijing Business Today, Zhonghong Holdings have HALVED prices of units in their Xiangsu project in Chaoyang (to 11,600 Yuan per square meter from 22,900). This project used to record the highest monthly sales for the firm. In addition, the local Beijing regulator says that month-to-date home sales are down 60% in the city. I don’t really need to comment any more.
  2. There are reports of strikes and unrest in Shenzhen and Dongguan, two export hubs in Guangdong. According to the province’s acting governor, orders are down 9% sequentially.

For those expecting a soft landing in China, these data points suggest (as I’ve said for a while) that they are wrong. This comes of the back of an HSBC Chinese manufacturing index published last week that fell to the lowest level since March of 2009 during the depths of the economic crisis. In my opinion an HSBC index is more credible than the Madoff-esque official figures. (note – I hear that even the  electrical consumption figures are massaged these days!)

This portrait of China should be put in the context of other emerging market economies. While all eyes are on the European debt pantomime, Brazilian and Indian credit conditions have been deteriorating, and EM currencies (led by the likes of Turkey) have continued their slide / required massive intervention to hold them up – such intervention can only help for so long.

Those economies that fared well through 2008 and 2009 (i.e. EM) are rapidly heading for their down cycle now. For investors it’s time to focus on the US. Recent data has been very positive. The consumer is spending. The only reason GDP growth came below expectations (2% vs. 2.5%) is because in inventory draw down (clearly as positive). House building is beginning to turn around slowly (led by multi-family homes). US corporates are reporting good results, and beating expectations. Don’t get me wrong – it’s not a blow out, and there are likely to be bumps on the way, but the data point to a more robust US recovery than the market is pricing in now.

(PS – maybe the Middle East is a good place to be. The Saudi and Qatari economies seem to be in for business!)

Things are getting messy

3 Oct

For someone who blogs on China, leaving 100 days between entries is inexcusable! What can I say? I’ve been working on increasing my coverage of the Turkish and MENA consumer space for a new product my fund plans to launch. It’s been a lot of effort. In fact, I was in Turkey last week meeting management teams, and am happy to share some of my thoughts with you in upcoming entries. Even though they are not China related, I hope someone will find them interesting! (More to come on that later this week).

Anyway, for a while now I’ve aspired to move to China and to work in the Chinese markets. With that in mind I was speaking to a friend who lived in HK for a number of years. My aim was to price the cost of living and to see at what stage of my career I could make such a move. He told me that in 2005 when he last lived there he rented an apartment for US$5,000 a month.  The details of the apartment are irrelevant. The interesting point is that today the same apartment costs $10,000 a month to rent… and it’s occupied!

A 100% increase in 5 years is surely indicative of a problem. Since hearing this, my attention has been increasingly drawn towards cracks in the China story…

Let’s start with another piece of anecdotal evidence – I love a good story! Last weekend Sotheby’s in HK failed to sell all of its wine on auction for the first time in 17 sales. Anyway…

Last Thursday Reuters carried a story about Chinese entrepreneurs going into hiding to avoid repaying loans. According to the report cash-strapped firms, unable to borrow from banks due to a credit clampdown directed from Beijing, have turned to underground lending markets.  These underground markets are known to have annual lending rates as high as 100% (15x higher than the official benchmark).

Local media reported last week that the bosses of 9 SMEs in Wenzhou had fled town, unable to pay corporate loans.  One such boss is the Chairman of glasses manufacturer Zhejiang Center Group.  In 2008 these guys were hoping for an IPO. According to their website they employ 3,000 people and enjoy annual revenues of ~550m yuan.

The total underground lending market is estimated at about RMB 5bn – that’s about 10% of total Chinese lending. About half of this figure comes from high net worth (HNW) individuals, anxious to put their money to ‘better use’ than make do with the rates received on official deposit accounts.  As the risks of default increase HNW are trying to withdraw their commitments.  Yet the market is getting concerned that HNW are going to take a hit, and stop buying sports cars and luxury goods (not to mention their trips to Macau).

The picture gets complicated when this lending (and the HNW purchases) is removed from the real estate pie. Not only is real estate hit (and my friend’s old rental might come down from US$10,000 a month), but there is US$1.7tr (yes trillion) of outstanding local government debt in China. So what’s the issue – about 40% of local government revenue  comes from land sales, and volumes are down about 30 this year!

In fact, for the first time in five years Chinese housing starts are on the decline as credit becomes increasingly harder to arrange. New developments are being postponed or slowed with banks less happy to lend for construction. In addition, the availability of mortgages has fallen while pricing has increased.

One final tidbit – the average days for accounts reveivable of the largest 300 Chinese stocks stood at 48 days in 1H11 – that compares with a decade average of 39 days. Apart from bein g a sign that SMEs are finding it harder to pay their suppliers, that’s going to impact the price of borrowing as well as cash flows. Yes this has happened before, but it was always in an environment in which RRRs were decreasing – today they are increasing.

So with the interconnected nature of financing, real estate, SMEs, HNW, employment, and Government revenues – things are about to get messy.

Inflation & Bubbles – THE issues of 2011?

6 Dec

Could a bubble in Chinese real estate, and Chinese inflation be THE issue for global markets in 2011?…

“Many see China’s monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning”. This is a quote from a report by Tim Ash, head of Emerging Markets at RBS.

In fact RBS go further, and recommend CDS’s on China’s five-year debt. They do not forecast a default mind you, but make the recommendation as insurance against the “fat tail risk” of a hard landing, with potential consequences across Asia.

We’ve all seen the recent inflation news coming out of China. Official figures put inflation at 4.4% in October and 5% last month. However, with the price of veggies increasing around 20% last month, you’d be hard pressed to find anyone who totally accepts the official numbers.

Now Chinese rulers learned about the dissent caused by inflation during Tianamen in 1989. Once again, in the words of RBS: “Inflation is a redistributive mechanism in favour of the few that can protect living standards, against the large majority who cannot. The political leadership cannot, will not, take risks in that regard.”

As the West melted, China stoked a massive credit boom in an attempt to keep huge growth. The policy has clearly been a success from that perspective. However, increases in credit have led to speculation and price spirals, most notably in real estate. House prices in Beijing are 22x disposable income, and 18x in Shenzen. The US bubble peaked at 6.4x, and has now dropped to 4.7x. Clearly the housing market is coming disconnected from the fundamentals. With data points like this, perhaps though I should just come out and call it what it is: A bubble. As I’ve written in the past – all bubbles must burst.

Recently the IMF pointed out that land sales account for 30% of local government revenues in Beijing. In the long-term fundamentals and prices always coincide. With that in mind I am also concerned about a hole in local government finances once state property taxes begin to wane.

Once the fundamentals gain control, Chinese growth is going to suffer, as private credit in China has reached 148% of GDP compared with 41% for EM overall (though they note that the scale of loans to local governments and state entities is not easy to discern, and the scale of overall credit might be higher).  Fitch and Oxford University have conducted a joint study on the outcomes of Chinese growth falling to 5% (i.e. a de facto recession). They conclude that global commodities would fall by 20%, emerging Asia growth would fall by 2.6%, spreads on EM debt would widen to about 100 points, and Asian stock exchanges could fall 25%. Add to that the risk of political instability. Doesn’t sound pretty!

There’s clearly an issue, and the question is whether the one-party central government has the power to solve it. I am sceptical that they can solve the problem entirely. Firstly, the use of their reserves for internal usage is limited (as was the case when the US had such high reserves as a % of GDP in the 20’s and Japan in the 80’s). Secondly, the warning signs now show that they over estimated their power to control the economy on the other side of pumping out all this credit. This does not mean however, that they are incapable of averting a total disaster.

No more loans till 2011!

15 Nov

There are rumours that China’s 4 largest state banks will not be issuing any new loans to property developers for the last month and a half of 2010.

I’ve also heard that they have not actually approved any new loans since the end of October as they had already met their allotted annual targets.

The 4 banks involved are:

Industrial and Commercial Bank of China
China Construction Bank
Bank of China
Agricultural Bank of China

The authorities are walking a tight rope.  As I’ve written before, when central banks wage a war their decisions tend to fall into two phases. First comes a long line of decisions that have no impact (in the case of Chinese real estate this cycle we have a line of RRR increases, and loan curbs… yet prices are still heading North), and then come one or two decisions with a major impact (most often disastrous) with a more pronounced outcome than intended. It’s like a dam breaking: gradual or slight change is almost impossible. When it comes to reigning in Chinese real estate, we are still in phase 1 – but gird yourself… you don’t want to be caught holding the hot potato!

Zai Jian

The death of Shanghai real estate vs. low market risk

12 Aug

Volatility in the Chinese stock market hit its lowest level this week since April 2007. Check out the graph below.  Seems investors are seeing less risk in Chinese stocks at this time.

Now, data out today shows that new mortgage loans in Shanghai dropped by an massive 98% in July… Yes 98% – that was not a typo.  In the past I’ve described the merits of an authoritarian input to the market – well here’s an example of the dark side of such authoritarian input.  A large decline was expected as the government continued to enact tightening policies this month, and transaction volumes are known to have declines.  However this is  huge and more than an indication that Chinese real estate is in for a hard landing.  Expect spill over, not least in the volatility chart above!

Oh – and check out China’s M2 – also ground to a halt in July. Not a positive sign!

Volatility in the Chinese stock market hit its lowest level this week since April 2007. Check out the graph below.  Seems investors are seeing less risk in Chinese stocks at this time.


Now, data out today shows that new mortgage loans in Shanghai dropped by an massive 98% in July… Yes 98% – that was not a typo.  In the past I’ve described the merits of an authoritarian input to the market – well here’s an example of the dark side of such authoritarian input.  A large decline was expected as the government continued to enact tightening policies this month, and transaction volumes are known to have declines.  However this is more than an indication that Chinese real estate is in for a hard landing.  Expect spill over, not least in the volatility chart above!