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

[GRG55]

Re: In Search of Goldilocks...

China to Nullify Financing Guarantees by Local Governments

March 8 (Bloomberg) -- China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.

The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as soon as this month, Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China, Yan said March 5.

China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on local- government borrowing, estimated at about 24 trillion yuan ($3.5 trillion) by Northwestern University Professor Victor Shih, could trigger a “gigantic wave” of bad loans as projects are left without funding, Shih said this month.

“Beijing’s fiscal situation probably isn’t as good as it looks at first glance,” said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong. “Perhaps at some stage the central government is going to have to bail out the banks or the regional governments and take it on its own balance sheet.”...

That last part sounds familiar...:rolleyes:

China May Face ‘Massive’ Bank Bailouts After Stimulus Program

March 13 (Bloomberg) -- China may be forced to bail out banks that made loans for local-government projects under the unprecedented stimulus program unleashed in 2008, according to Citigroup Inc. and Northwestern University’s Victor Shih.

In a “worst-case scenario,” the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan ($350 billion) by 2011, Shen Minggao, Citigroup’s Hong Kong-based chief economist for greater China, said yesterday.

“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said Shih, a professor who spent months researching borrowing by about 8,000 local government entities...

...Citigroup’s Shen said officials may keep monetary policy loose for longer than they should, boosting asset prices and building up overcapacity, to avoid the “squeeze” on investment vehicles that would trigger bad loans and bailouts...

...Su Ning, a deputy governor at China’s central bank, said March 8 that a “fairly high proportion” of total lending last year went to the funding vehicles. Chinese banks extended a record 9.59 trillion yuan of new loans in 2009. Su sees “a big risk” from local-government guarantees for money borrowed to fund infrastructure projects that may not generate returns, he said in Beijing...

[Starving Steve]

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

The Americans still do not understand that China's economy is real; it's based upon EXPORTS and SAVINGS and PRODUCTION and MANUFACTURING. That economy is growing at 8% per year, and compounding too. So, there is plenty of room for China's real estate to go up in price.

It is very difficult to communicate with Americans to-day because they just don't face the facts around them. With a few exceptions like GE and Siemens, American companies know very little about the power of manufacturing, producing, exporting, and saving money for the future.

Contrast China's real estate mania to the bubble in California real estate. When you can drive thru Silicon Valley during rush hour at 105 kph ( 65 mph ), where are the jobs that are needed to support the over-priced housing market there?

Instead of pointing fingers abroad, Americans had better reflect inward about their own bubbles and the inflationary policies of their U.S. Federal Reserve Bank.

[GRG55]

Another Alternate View - Stephen Roach

From the Calculated Risk blog:

Wednesday, March 10, 2010

Bubbling over in China?

From CR: There are so many reports of a housing bubble in China, I asked a friend living in China for his thoughts ... this is his view:

From Michael Kleist in Shanghai:

News of soaring housing prices in China, which are now hovering around late 2007 peaks, naturally invites talk of bubbles and excessive speculation. More so, since the 2007 highs led to a humbling drop in prices for homeowners and investors in 2008. Are things heading that way again in 2010?

Not necessarily.

Another alternate view...this time from Stephen Roach:

[Commentary from the ZH site]:

Stephen Roach "Unlike The US Which Lets Bubbles Get Out Of Hand, That's Not The Case In China"


The chairman of Morgan Stanley Asia Stephen Roach blasts China skeptics, "The idea that [China] is an overheated economy is very much overblown," in this Bloomberg TV interview. Roach, who despite his global skepticism, continues to see China as a source of growth despite the numerous flashing warning signs. One area of ongoing concern - protectionism "As we go toward the mid-term elections in the US, the protectionist drumbeat is something to take seriously." When looking purely at China, Roach notes that "the dynamic needs to shift from the export sector to 1.3 billion Chinese consumers. They need to build a safety net, they have to come up with new sources of job creation, and they have to provide stimulus to their rural population which numbers roughly 850 million people. Since 2000 between 15 and 20 million rural citizens have moved into urban settings, that's like two New York cities per year. The lack of a safety net is a profound drag on Chinese consumption." Good luck with creating a safety net that big. Yet despite that Roach takes a direct stab at Chanos, and concludes that the "fears of a bubble are vastly overblown, in China. The demand for shelter, the demand for office space in a nation that does rural-urban migration 15-20 million people per year, that demand is there. No country has such demand for urban dwellings and urban office space... The Chinese authorities are on top of it. Unlike the US, which lets bubbles get out of hand, and distorts the economy, that's not the case in China."...

[GRG55]

An Alternate View From the Inside...

From the "Where There's Smoke, There's FIRE" file...

Wen Warns of Bank Risks, Pledges Property Crackdown

...

From the Calculated Risk blog:

Wednesday, March 10, 2010

Bubbling over in China?

From CR: There are so many reports of a housing bubble in China, I asked a friend living in China for his thoughts ... this is his view:

From Michael Kleist in Shanghai:

News of soaring housing prices in China, which are now hovering around late 2007 peaks, naturally invites talk of bubbles and excessive speculation. More so, since the 2007 highs led to a humbling drop in prices for homeowners and investors in 2008. Are things heading that way again in 2010?

Not necessarily.

Let’s start with the news in the papers. See the WSJ today: China Property Prices Surge

It’s clear the housing market in China has been hot, topped by February’s 10.7% YoY increase in prices. In fact, housing prices have been rising for 9 straight months YoY in China, which coincides to some degree with the government’s massive stimulus package that took effect first quarter 2009.

Certainly there is some speculation inside these numbers, as there would be in any hot property market. The government has shown enough concern on this point, and overheating in general, to tell banks last month to curtail lending and increase reserve rations.

But the bigger reason for rising home prices in China may simply be due to an imbalance in supply and demand...

...What we are seeing today is that with fewer homes on the market after a nearly 2 year lull in building, the prices have continued to climb.

This imbalance will likely even out as the homes started in 2009 become available for sale. Most likely, this will result in a stabilization of prices but not a bursting bubble because it’s not even clear there is a housing bubble in China.

Certainly there isn’t a mortgage credit-related bubble. The majority of homes in China are purchased with down payments between 30-40%, which is required by the banks, and nearly 25% of homes are purchased with all cash...

...Still, it is clear that prices in tier 1 cities such as Beijing, Shanghai, and Shenzhen in the south have risen to amazing levels for China. Flats in downtown Shanghai can sell for RMB150,000 (US$ 22,000) per square meter with exclusive homes in prime locations commanding even higher prices. To get a new home for under RMB18,000 (US$2,640) per square meter certainly requires a trip to the suburbs and only a hope of being near a subway line...

30 to 40% down payments, with less desirable [off subway line] suburban prices at $250 per sq ft? Either the Chinese are already a lot richer than most people in the USA, or there is something going on here that requires an explanation. They aren't paying these prices working in a factory for a buck an hour...:p

[friendly_jacek]

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

My wife owns a piece of property in Peru. The value has doubled in the last 18 months and has tripled in the last 3 years.

Seems to me that housing bubbles are simply another industry that we've exported to emerging market nations.

People in emerging markets used to pay cash for real estate. When mortgages become widespread, real estate will appreciate a lot. This can go on longer than expected and it's dicey to predict when it pops, unless governments are gutsy to pup the bubble themselves.

[we_are_toast]

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

My wife owns a piece of property in Peru. The value has doubled in the last 18 months and has tripled in the last 3 years.

Seems to me that housing bubbles are simply another industry that we've exported to emerging market nations.

[friendly_jacek]

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

No wonder that Marc Faber and other gurus are calling China's economy a fraud.
If this thing bursts, there will be some deflation (OK, we can call it disinflation) before more inflation.

[GRG55]

Re: In Search of Goldilocks...

In search of the ever elusive Goldilocks economy...not too hot, not too cold...

The monetary and fiscal juggling act going on in China is getting progressively more difficult...

China to Nullify Financing Guarantees by Local Governments

March 8 (Bloomberg) -- China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.

The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as soon as this month, Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China, Yan said March 5.

China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on local- government borrowing, estimated at about 24 trillion yuan ($3.5 trillion) by Northwestern University Professor Victor Shih, could trigger a “gigantic wave” of bad loans as projects are left without funding, Shih said this month.

“Beijing’s fiscal situation probably isn’t as good as it looks at first glance,” said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong. “Perhaps at some stage the central government is going to have to bail out the banks or the regional governments and take it on its own balance sheet.”...

That last part sounds familiar...:rolleyes:

[GRG55]

In Search of Goldilocks...

From the "Where There's Smoke, There's FIRE" file...

Wen Warns of Bank Risks, Pledges Property Crackdown

March 5 (Bloomberg) -- Premier Wen Jiabao warned of “latent risk” in China’s banks and pledged to crack down on property speculation as the government faces the consequences of flooding the economy with money to drive growth.

“The domestic economy still faces some prominent problems,” Wen, 67, said in a speech in Beijing to the National People’s Congress, similar to the U.S. State of the Union address. He also cited excess capacity in manufacturing and weak support for rural-income growth.

Wen’s comments reinforce concern that banks made loans during the record 9.59 trillion yuan ($1.4 trillion) credit boom that are in danger of going bad...

In search of the ever elusive Goldilocks economy...not too hot, not too cold...

The monetary and fiscal juggling act going on in China is getting progressively more difficult.

China’s Wen May Struggle to Meet 3% Inflation Target

March 6 (Bloomberg) -- Premier Wen Jiabao may struggle to keep inflation at his 2010 target of about 3 percent, after banks flooded the Chinese financial system with money to drive the nation’s economic rebound.

Inflation may peak at 4.4 percent during the year, according to the median forecast of 14 economists surveyed after Wen gave the goal in a speech to lawmakers in Beijing yesterday.

“Three percent is a fairly aggressive target and it suggests that the government will need interest-rate increases and price controls to achieve it,” said Ma Jun, a Hong Kong- based chief China economist at Deutsche Bank AG.

China will need to raise benchmark interest rates as early as this month to curb inflation expectations and prevent the interest on bank deposits being outstripped by price gains, according to Standard Chartered Bank...

...A reporter at a press briefing in Beijing today asked central bank Governor Zhou Xiaochuan what tightening measures would be used to meet the inflation target. Zhou said it was very difficult to forecast economic indicators at the start of the year and monetary policies would need “dynamic adjustment.”

“Premier Wen’s report has also specially stressed the need to keep policy flexible,” Zhou said. The central banker also said China needed to be “very cautious” in timing its exit from special policies...

...The premier indicated no roll-back in the fiscal stimulus that spurred a rebound, targeting a budget deficit of 1.05 trillion yuan, or 2.8 percent of gross domestic product, to help sustain economic recovery. The ratio is similar to last year’s, according to the Ministry of Finance, with the projected deficit including 200 billion yuan of local-government bonds...

Days of "special" yuan policy numbered-China c.banker

BEIJING, March 6 (Reuters) - China flagged on Saturday it will let the yuan resume its rise at some point as it unwinds the super-loose policies it has been pursuing to prop up the world's third-largest economy...

..."Practice has shown that these policies have been positive, contributing to the recovery of both our country's economy and the global economy," Zhou told a news conference.

But he added: "The problem of how to exit from these policies arises sooner or later."

China would have to be careful in withdrawing the extraordinary stimulus it has provided since late 2008.

"If we are to exit from these irregular policies and return to ordinary economic policies, we must be extremely prudent about our choice of timing...

************************************************** ************************************************** ***********************

"Hello Ben...Wen here..."

"Doin' fine, thank you. How's the weather in D.C.?"

"Yah, it's pretty good here too. Just this morning my wife commented that ever since you Americans stopped buying stuff, and wiped out half our manufacturing base, the air in Beijing is much better"

"I agree, that Greek thing really is a tragedy. But it took the attention off us for a change, eh..."

"We'd love to help, but I'm not sure there's much we can really do for them Ben; we have a strict no interference policy when it comes to the affairs of other nations, as you know. However, we did make an all cash offer to buy Santorini from them...it would make a great naval base don't you think."

"Listen, the reason I'm calling is about this Exit Strategy thing. It's suddenly become the hot topic on the cocktail party circuit over here, and I need your advice on how to handle it without actually doing anything. That wealth creation system that you and Greenspan cooked up is working wonders over here, and we certainly don't want to mess it up."

"Okay, so I shouldn't be afraid of talking up the phrase 'exit strategy' every chance I get...so everyone thinks we have a plan..."

"But at the same time you think I should sprinkle the conversatiion with lots of explicit cautions about a 'fragile recovery'...to maintain cover for the helicopter dump?"

"And never let anybody ever pin me down on the timing of any 'exit strategy'..."

"Publicly urging the banks to exercise prudent lending sounds like a great way to divert attention and change the subject. Our journalists aren't any smarter than yours, that's for sure."

"Thanks Ben. Always informative whenever we talk. See you at the G20 in June. Oh, tell the Canadians we're happy they've come to their senses and plan to hold this one in Toronto...that seal meat and dog sled thing was a bit much."

"Our love to Anna and the kids..."

[GRG55]

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

China Regulator Said to Seek to Curb Third Mortgages

Feb. 2 (Bloomberg) -- China’s government, seeking to stem property speculation, told banks to raise interest rates on third mortgages and demand bigger down payments for such loans, a person with knowledge of the matter said.

The China Banking Regulatory Commission warned lenders of the risks associated with “hot money” flowing into the property market, the person said, requesting anonymity because the agency hasn’t published the measures. Mortgage defaults in China are rising, the person said without giving figures...

...Lenders extended 952 billion yuan ($139 billion) of home loans in the first nine months of 2009, a fourfold increase from a year earlier, according to the People’s Bank of China.
The PBOC doesn’t break out second or third mortgages.

The CBRC also said capital flows into Chinese assets have increased “noticeably” as investors engaged in so-called carry trades, according to the person. A carry trade involves borrowing in a country with low interest rates, converting the money into a currency where borrowing costs are higher, and lending the funds at a higher rate.

Almost 40 percent of buyers of luxury residential properties worth more than 10 million yuan last year in Shanghai were from overseas, the person said. The CBRC found one case where 38 foreign citizens who never entered China managed to take out mortgages from a bank in Shanghai through their agents and lawyers, without providing necessary documentation, according to the person.

From the "Where There's Smoke, There's FIRE" file...

Wen Warns of Bank Risks, Pledges Property Crackdown

March 5 (Bloomberg) -- Premier Wen Jiabao warned of “latent risk” in China’s banks and pledged to crack down on property speculation as the government faces the consequences of flooding the economy with money to drive growth.

“The domestic economy still faces some prominent problems,” Wen, 67, said in a speech in Beijing to the National People’s Congress, similar to the U.S. State of the Union address. He also cited excess capacity in manufacturing and weak support for rural-income growth.

Wen’s comments reinforce concern that banks made loans during the record 9.59 trillion yuan ($1.4 trillion) credit boom that are in danger of going bad...

Bad loans. Imagine that...:rolleyes:

...Wen indicated no roll-back in the fiscal stimulus that spurred a rebound, targeting a budget deficit of 1.05 trillion yuan ($153 billion), or 2.8 percent of gross domestic product, similar to last year’s ratio. The projected deficit includes 200 billion yuan of local-government bonds.

Wen affirmed a goal of 8 percent growth this year, the same target that has been exceeded for the past five years, and said China aims for 3 percent inflation and a “basically stable” currency. The premier reaffirmed a moderately loose monetary policy and a proactive fiscal stance.

The government “must not interpret the economic turnaround as a fundamental improvement in the economic situation,” Wen said.

Wen reiterated pledges that the government would restrain speculation in the housing market and curb land hoarding and excessive price gains in some cities, using tools including tax and credit policies...

That's Mandarin for "I love the smell of monetary napalm..."

...“Latent risks in the banking and public finance sectors are increasing,” the premier said...

Sounds like "Subprime is contained...with Chinese characteristics"...;)

[jk]

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

the problem is the difficulty of timing the bubble's explosion combined with career risk or business risk. jeremy grantham has addressed this explicitly in his letters on occasion. everyone knows bubbles go farther and longer than bubble-identifiers expect. in the meantime, sitting it out or - god forbid- shorting it, risks underperformance. you get fired or you lose business. if chuck prince refused to keep dancing, the board would have fired him and replaced him with someone who could deliver more "performance." managers, like grantham, who refuse to play lose customers who take their accounts elsewhere- after all, who wants to pay management fees to stay in cash?

this represents a huge advantage for the perspicacious and patient individual investor. no one can fire you from managing your own assets. and only you can decide to replace yourself with a less patient, and less insightful manager.

[GRG55]

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

Certainly that's the view espoused in Buffett's last newsletter -- the bankers have way too much carrot and not enough stick.

For all the flack that Buffett has [legitimately] taken recently, I have to agree with you...that part of Berkshire's letter to shareholders is worth highlighting.

[jpatter666]

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

Yes...Chuck Prince's "we're still dancing" comment mere moments before it all came crashing down.

Is the system really so bastardized that the penalties for trying to avoid the inevitable problems exceed the consequences of riding over the cliff? Or are the personal rewards for banking insiders just so, so lucrative that it doesn't matter, and who's going to discipline them anyway...certainly the bank shareholders haven't learned a damn thing...just look at the idiotic statements coming from long-time [and long suffering] Citi shareholder Prince Alwaleed.

Certainly that's the view espoused in Buffett's last newsletter -- the bankers have way too much carrot and not enough stick.

[GRG55]

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

The comment that if you're in the financial industry you have no choice but to play musical chairs until the music stops comes to mind.

Yes...Chuck Prince's "we're still dancing" comment mere moments before it all came crashing down.

Is the system really so bastardized that the penalties for trying to avoid the inevitable problems exceed the consequences of riding over the cliff? Or are the personal rewards for banking insiders just so, so lucrative that it doesn't matter, and who's going to discipline them anyway...certainly the bank shareholders haven't learned a damn thing...just look at the idiotic statements coming from long-time [and long suffering] Citi shareholder Prince Alwaleed.

[WDCRob]

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

It's almost as though the financial system is unwilling, or unable, [would be interested in your views as to which it is] to make any material adjustments to its exposure in these obviously pending bubble collapses...until they happen.

The comment that if you're in the financial industry you have no choice but to play musical chairs until the music stops comes to mind.