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

[santafe2]

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

I've come across some interesting analysis in The Economist over the last week or so with regard to the cost of real estate in China. The first article talked about the fall in real estate values over the last year in China, (about 5%), and capital outflows to Hong Kong. Yuan held in Hong Kong banks has grown from ~$13B US equivalent in 2010 to ~$150B. The Hang Seng index is also up almost 20% over the last 6 weeks. This may or may not be directly related to mainland outflows but it's certainly coincident.

What I found most revealing in these articles is the relative value of real estate. When looking at Chinese real estate through different value filters it offers starkly different views. To keep the chart clean I've narrowed the comparisons to China, Australia, Canada and the US. There's a link at the bottom of the post if anyone wants to look at other markets. When viewed through the lens of growth, China and Australia are clearly moving up much faster than the US or Canada. It almost makes the Canadian housing bubble look provincial.



But if you change the filter to focus on the cost of real estate vs. local income, we see a completely different outcome. When viewed through the lens of income growth in China, Chinese real estate is very inexpensive compared to Australia or Canada.



And if we take a 3rd view of real estate cost, the competitive view, we begin to see why real estate costs in China have begun to fall. As any real estate investor knows, the local value of real estate is always compared to rents. If the monthly cost of owning real estate is a lot more than renting, one of two things will happen, rents will move up or real estate values will fall. When viewed through this filter it can be seen that the Chinese market is somewhat over valued but the Australian market is very problematic and the Canadian market is in deep trouble over the next few years.



There are several economic levers that may be pulled over the next few years in China and depending on which ones you believe will be thrown, you can argue that Chinese real estate is a bargain or that it is over valued. It looks to me like the over supply of product is causing the contraction in prices more than a raw over valuation.

http://www.economist.com/blogs/daily...l-house-prices

[GRG55]

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

If the US$ loses value, commodities priced in that currency will rise.

But I think we may see the opposite happen...commodities down, dollar up (and yuan down as China falters)...

Tick, tick, tick...

If China Sees Capital Outflows Now, What Happens in Crisis?

10:01 AM MDT
April 23, 2015

Here’s another Chinese puzzle. Economic growth, while slowing, is still 7 percent and the stock market is on a tear. Yet money is leaving the country.

That’s a turnaround for an economy that’s been a magnet for foreign capital during the boom years of the past decade. Why the outflow? A property bust, squeezed corporate profits and the end of a multi-year currency upswing are giving investors fewer reasons to pile in. At the same time, President Xi Jinping’s crackdown on corruption gives more reasons for the nation’s rich to squirrel some of their wealth abroad.

All of this is happening as China moves ahead with initiatives making it easier to move money in and out of the country. While far from levels seen most recently in countries such as Russia, the trickle of cash now exiting China raises a warning flag for what could happen during any domestic financial crisis, as China works to deleverage its economy.

“We have both a booming stock market and capital outflows, which is counterintuitive,” said Jean-Charles Sambor, Asia-Pacific Director at the Institute of International Finance in Singapore. “The downside risk would be to have broad-based outflows if the macro story deteriorates further or the stock exchange collapses, which would create a confidence crisis.”...

...One measure released by SAFE on Thursday showed that a net $23.8 billion left the country in March, the most in at least a year. Foreign-exchange reserves slid the most on record in the last three months, fueling speculation the central bank was forced to sell some of its dollar holdings to support China’s currency, the yuan. In the final quarter of last year, the capital account posted its widest deficit since at least 1998.

One trigger to accelerate the outflow could be a steep correction in stock prices that spurs domestic investors to seek safety in overseas assets. The Shanghai Composite Index has soared about 90 percent over the past six months as the central bank cut interest rates and took steps to revive lending growth...

...Then there’s the currency risk. In the case -- unlikely for now -- that the yuan is allowed to weaken substantially to boost exports, that could trigger the unraveling of carry trades estimated at $1 trillion...

...“If there is an economic crisis, my guess is that the fear-driven outflows could rise sharply, putting immense pressures on the PBOC’s foreign reserves,” said Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former IMF economist. “But the foreign reserves are there for a reason, precisely to meet this contingency.”

While regulators like SAFE keep a tight grip on how money can leave the country, investors cook up methods to sidestep the rules. One favorite option has been the use of fake invoicing for overseas trade or services that were never transacted. Collier of Orient Capital Research estimates that the deficit for outward over inward services almost doubled to $198 billion in 2014...

[touchring]

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

It's difficult for us to understand but too much growth and consumer spending is not always a good thing.

The law of diminishing marginal returns.
It's like when London or NYC banker earns too much, life becomes meaningless.


http://www.reuters.com/article/2015/...0N20H820150411

(Reuters) - China will limit visits by residents of the southern city of Shenzhen to neighboring Hong Kong, local media and politicians said on Sunday, following recent tensions in the former British colony caused by growing numbers of mainland visitors.


Shenzhen authorities would soon restrict its residents to one visit to Hong Kong per week, from an unlimited number of daily trips, said Michael Tien, a Hong Kong member of China's parliament, the National People's Congress.


"It will definitely happen," Tien told Reuters. "I have heard from very reliable government sources." Local media said the travel curbs could come into effect as early as Monday.


The development comes after a groundswell of discontent in Hong Kong toward rampant growth in the numbers of mainland Chinese visiting the already densely populated city.


Shenzhen is just a short train ride from Hong Kong.


Some 47 million mainland Chinese visitors streamed into Hong Kong last year, more than six times the population of the former British territory that returned to Chinese rule in 1997.


While the tide of mainland tourists has powered the local economy, by spending freely in luxury shops, malls, restaurants and hotels, they have also been blamed for pushing up shop rents and property prices, as well as emptying local stores of daily necessities such as baby milk formula and cosmetics.


Travel industry executives say political tensions in Hong Kong including pro-democracy demonstrations last year and recent protests against mainland Chinese shoppers in local malls, when some Chinese were harassed, have discouraged tourists from mainland China. The travel industry had spoken out against the imposition of any curbs on mainland visitors.


The Hong Kong government wouldn't confirm the move, saying any announcement would come from Chinese authorities. But it acknowledged, in a statement, that it had proposed to Beijing concrete measures to adjust visas that currently allow permanent residents of Shenzhen multiple-entry to Hong Kong.


There was no immediate response from the Shenzhen government and no official confirmation of the new travel limits.


While it's not clear to what extent the new travel restrictions will impact Hong Kong, Shenzhen's proximity and affluence has made it a key source of Chinese shoppers in the city for years.


Hong Kong's retail sales fell 2 percent in the first two months of the year, stoking concerns of a more protracted retail slowdown due to a drop in mainland tourists.

[GRG55]

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

Looks like they need to hustle up that conversion from investment spending to a consumer economy...and get all those fisherfolks to start spending money on holiday flights from the nice airports.

http://www.reuters.com/video/2015/04...eoChannel=2602

China: Enjoying the warmth from the FIRE


Bankers to China's Rescue

Financial intermediation surge vs real estate weakness

11:22 PM MDT
April 15, 2015

A more granular look at China's slowdown shows its stock market boom and increasing sophistication in financial services helped save the economy's bacon last quarter.

Financial intermediation surged 15.9 percent from a year earlier, the standout performer among the nine industry groups including real estate, transport and farming outlined by the statistics bureau. Construction and 'others' were the only other two to beat the economy's 7 percent expansion pace.

"The outsize contribution of the financial sector to growth underlines the dilemma facing Beijing as it attempts to tamp down a credit bubble without cratering growth,'' said Bloomberg economist Tom Orlik. Booming brokerage fees, banks bringing off-balance sheet lending onto their books, and growth in a more sophisticated financial sector may be behind the surge, Orlik said.




Real estate slowed to 2 percent, deepening its drag on the economy, while farming, forestry and animal husbandry expanded just 3.2 percent from a year earlier. In a worrying sign for domestic demand and the rebalancing thesis, hotels and catering services rose just 5.3 percent.

While Premier Li Keqiang is seeking to spur services and consumption to take over from debt-fueled investment growth, a nation of stock speculators driving brokerage commissions probably isn't what he has in mind.

[vt]

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

This is why the corporate executives and up and comers get paid so well; they get better drugs

http://observer.com/2015/04/nootropics/

[don]

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

courtesy of Jesse's Cafe

[GRG55]

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

if the u.s. political system wasn't broken we'd be ramping up infrastructure - steel, concrete, etc - while china was slowing down. both for our own good, and as the renewed engine of the global economy. i guess we need some more bridges to collapse, have the grid go down a few more times over ever wider areas, and watch more coastal cities get torn apart or flooded.

Neither USA domestic steel production nor domestic cement production have recovered to the levels of output just prior to the financial crisis.

Probably the housing bubble that drove those previous peaks.

[jk]

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

if the u.s. political system wasn't broken we'd be ramping up infrastructure - steel, concrete, etc - while china was slowing down. both for our own good, and as the renewed engine of the global economy. i guess we need some more bridges to collapse, have the grid go down a few more times over ever wider areas, and watch more coastal cities get torn apart or flooded.

[GRG55]

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

...Misallocation of capital? In China? Perish the thought...

Last updated: April 16, 2013 5:32 pm

China local authority debt ‘out of control’

By Simon Rabinovitch in Beijing

A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash...

Looks like they need to hustle up that conversion from investment spending to a consumer economy...and get all those fisherfolks to start spending money on holiday flights from the nice airports.

http://www.reuters.com/video/2015/04...eoChannel=2602

[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...

HT "0C"

We Traveled Across China and Returned Terrified for the Economy

1:18 PM MDT
April 9, 2015

China’s steel and metals markets, a barometer of the world’s second-biggest economy, are “a lot worse than you think,” according to a Bloomberg Intelligence analyst who just completed a tour of the country.
What he saw: idle cranes, empty construction sites and half-finished, abandoned buildings in several cities. Conversations with executives reinforced the “gloomy” outlook.

Reminds me of Jim Chanos' "Dubai times 1000" quip.

“China’s metals demand is plummeting,” wrote Kenneth Hoffman, the metals analyst who spent a week traveling across the country, meeting with executives, traders, industry groups and analysts. “Demand is rapidly deteriorating as the government slows its infrastructure building and transforms into a consumer economy.”...

Ah yes, the elusive "consumer economy". Apparently the preferred article for consumption has shifted from empty apartments to Shanghai & Hong Kong listed stocks.

...Deteriorating economic data has led traders and analysts to speculate that China’s central bank will act to revive growth. The bank has said it will keep an “appropriate balance between loosening and tightening” of interest rates. It has cut interest rates twice since November and lowered lenders’ reserve-requirement ratios once.

Economists are forecasting 7 percent growth in China for this year, in line with government targets and down from 7.4 percent in 2014, according to the median of 59 estimates compiled by Bloomberg. That’s about half the last decade’s peak rate of 14.2 percent in 2007.

The slowing steel and metals activity suggests the outlook could be grimmer.

“There is a big fear this is going to get worse before it gets better,” Hoffman said in an interview. “It’s as bad as the data looks, if not worse.”

[jpatter666]

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

I've heard good stories from travelers to Lijiang and Dali and that the natives are friendly. I actually planned to go to Shangrila and further up the off beaten track but changed to Sichuan due to personal reasons.

I think the key to traveling to China is to avoid the domestic tourist seasons.

We were in Shangri-la in mid-May 2011. The old town was interesting but it was still cold. Cost a fortune to do just about anything there beyond the old town (travel to any of the parks, etc).

In 2014 (?) there was a big fire which burned up much of the old town which was a shame.

[touchring]

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

Dali was wonderful. Even Lijiang was fairly reasonable during the day. Late at night it became different.

Any major city (Kumming) was a pain because the traffic made everyone crazy.

I've heard good stories from travelers to Lijiang and Dali and that the natives are friendly. I actually planned to go to Shangrila and further up the off beaten track but changed to Sichuan due to personal reasons.

I think the key to traveling to China is to avoid the domestic tourist seasons.

[Polish_Silver]

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

Cultures differ across China. You'll be surprised with what you will find in West China especially in small cities.

I dislike huge crowds, metropolitan cities and polluted air. My experience in Shanghai 10 years ago wasn't good and in my short trip of 2 days, I saw a scuffle in the busy street, a near fight at the airport and a policeman using a small stick to hit a migrant worker. But this was 10 years ago.

A book like this certainly represents a different culture, a fundamentally different family structure and social behavior.

[jpatter666]

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

Cultures differ across China. You'll be surprised with what you will find in West China especially in small cities.

I dislike huge crowds, metropolitan cities and polluted air. My experience in Shanghai 10 years ago wasn't good and in my short trip of 2 days, I saw a scuffle in the busy street, a near fight at the airport and a policeman using a small stick to hit a migrant worker. But this was 10 years ago.

Dali was wonderful. Even Lijiang was fairly reasonable during the day. Late at night it became different.

Any major city (Kumming) was a pain because the traffic made everyone crazy.

[GRG55]

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

BARRON'S TAKE

Profit Growth Shrivels for China’s Big Four Banks

Bad loans, narrowing interest weigh on profits. Why ICBC and Bank of China hold up better than ABC.

March 27, 2015 4:39 a.m. ET

China’s slowing economy is really starting to take its toll on the country’s biggest banks.

Sector leader Industrial and Commercial Bank of China, or ICBC ( 1398.HK ), was the latest to announce wan fourth-quarter results. The world’s largest bank by assets saw quarterly profits decline year-over-year for the first time since 2009, with net income falling 3% from a year ago to 55.4 billion yuan, or RMB0.15 a share. That missed the mark of the RMB58.2 billion analysts had forecast.

“Strong topline growth and tight operating cost control was offset by surging bad loan provision costs,” writes Bernstein analyst Wei Hou, who maintained his overweight rating on ICBC.

Rival Agricultural Bank of China, or ABC ( 1288.HK ), also felt the drag, with the lender’s fourth-quarter earnings falling 5% from a year earlier. Bank of China ( 3988.HK ), the other of the big four Chinese banks to have announced results recently, fared slightly better with fourth-quarter earnings up 5% compared to a year ago.

Amid the tougher times, all three banks had cut dividend payout to 33%...

...Of the three banks that had reported earnings so far, ICBC and Bank of China appear to be in a better position than ABC to weather the tougher conditions, although the going isn’t likely to get any easier for any of the big banks this year. China’s slowing economy looks set to continue plaguing loan books, while Beijing’s interest rate cuts are expected to eat into net interest margins.

Bad loans had swelled last year for all three of ABC, Bank of China and ICBC. The manufacturing sector, which is usually among the hardest hit in a slowing economy, was a common weak spot. However, because ABC’s loan book has higher exposure to the manufacturing sector than that of ICBC and Bank of China, the lender had suffered a sharper spike in bad loans...