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

[GRG55]

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

Here's Andy...

Highlights mine.

QE: The Numberless Oblivion

By Andy Xie 10.10.22 17:13

"If you print a trillion, I'll print a trillion" – and other instances of behavior leading the world toward high inflation and political instability


The world seems full of smoke ahead of a world currency war. The weapon of choice is quantitative easing, a.k.a. QE. If you print a trillion, I'll print a trillion. Of course, he and she will too. No change in exchange rates after a trillion? Let's do it again, QE2. If you listen to people like Geithner, the end of the world is quite near. Rich people everywhere are buying gold for a little peace of mind, not just the Chinese. They are literally trucking it by the ton or two home. When currency values vanish in a QE melee, at least the rich have the gold to stay rich.

If you listen to American pundits, politicians or government officials, it's all China's fault. China is far from perfect. Its currency policy certainly isn't. But it is not the cause for the world's ills. The U.S. is by far the biggest source of uncertainty and the initiator of the QE war. Its elite created the biggest financial bubble since 1929, even removing regulations designed to prevent it, and left the U.S. economy in shambles after its burst. The same people want to find a quick cure to hold onto their power.

Unfortunately, there is no quick cure.

The U.S. has cut interest rates to zero and run up the budget deficit to 10 percent of GDP. It's a shock-and-awe Keneysian policy. But, after a few quarters of strong growth, the economy is turning down again, and the unemployment remains close to 10 percent. And this figure would be much higher, close to 20 percent like Spain's, if it included the underemployed and those who have stopped looking for work.

The stimulus has failed.

How should one interpret the result? If you were Paul Krugman, you would say it wasn't enough. Of course, if 20 percent of GDP in budget deficit and another round of QE still don't work, he would say not enough again. You can never prove Krugman wrong. Such a smart fellow.

The second interpretation is that it takes time for the economy to heal. No economy recovers so quickly after a bubble that big. During this prolonged and massive bubble, resources have become so misallocated that it takes time for regeneration. In particular, when the labor market is misallocated, it just can't correct itself quickly.

Hence, when an economy is in a misallocated state, a stimulus kicks up growth through its own power but can't get the multiplier effect for the economy to sustain growth beyond.

The third interpretation is that it's China's fault. Yes, China's exports to the U.S. rose sharply during its stimulus-inspired pickup, i.e., the stimulus partly went to China. But, whose fault is it? Apple makes all the iPhones in China, because it costs under US$ 20 each, even after the massive wage increase for Chinese workers. Apple's gross margins are 30 times the processing cost that goes to China. Maybe Apple is an extreme example. But, the fact is that China's exports to the US are American goods that retail for 3-4 times of the factory-gate prices. American companies want to make the goods in China to satisfy the stimulus-inspired demand.

People like Geithner would argue that China should raise the currency to force American companies to move production back to the U.S. I suppose that that is how the whole yuan appreciation idea may work. But, at what exchange rate would the American companies want to do it? American wages are ten times China's. Should China increase its currency value ten times?

Of course, the American pundits wouldn't put it that way. They would talk about China's trade or current account surplus and the rising forex reserves, the prima facie evidence of currency manipulation. I don't want to deny that the rising forex reserves are a problem that China must tackle with. But, it is a separate issue from the US economy.

The solution isn't yuan appreciation either.

Everybody knows China has a massive savings rate of around half of its GDP. It's a simple equation that the current account surplus is equal to savings minus investment. If the current account surplus is a problem, it is either insufficient investment or excessive frugality. China's investment is over 40 percent of GDP. Even casual observers would find China's investment too much. Are Chinese people too frugal? The household income is probably under 40 percent of GDP. How could they be the source of the gigantic savings?


The problem is China's political economy. The government sector raises money through taxes, fees, monopoly franchises and high property prices. The property sales were 14 percent of GDP. If the price is normalized, i.e., halved, the household sector would have 7 percent of GDP more. The household savings rate is roughly one third. That would boost domestic demand by nearly 5 percent, wiping away the whole current account surplus.

China's education and healthcare systems are quite scary to the people. They are very creative at squeezing the household sector. The teachers need gifts on holidays. There are lots of holidays. Hospitals eye patients on how much money they can be squeezed out of and provide services accordingly. China's household sector is squeezed, punched upon and kicked at everyday. For the masses it is a joke that they have too much money to fund the current account surplus.

China's current account surplus is mainly due to its political economy. The gray income is vast, possibly 10 percent of GDP. Such money normally goes offshore. But, because the dollar is weak and China's property market is sizzling, the money stays in China and goes disproportionately into the property market. Unless the gray income is reduced through anti-corruption campaigns, the current account surplus won't go away.

The current account surplus is half of the forex reserve story. The other half is hot money. Overseas Chinese are the main source. Chinese property and the dollar are their most important foreign assets. As the dollar weakens, they have poured money into China, especially into the property market. Hedge funds and other speculators have also poured money in through buying offshore Chinese assets. Hot money into emerging economies is always a bubble. I can't recall an exception. This one will prove the same.

I think China's currency is overvalued. China's money supply has exploded in the past decade, rising from 12 to 70 trillion yuan. No currency has not experienced depreciation after a such a prolonged bout of money growth. China's industry has risen tremendously to justify part of the growth. But, a massive amount is in the overvalued property market. When it normalizes, the money flows out and the currency depreciation pressure happens. We should see this within two years.

What is right isn't important for now. What is politically expedient is. Americans want a quick cure for its economic difficulties. It wants to devalue the dollar to achieve it. If it could force China to increase its currency value, then the yen, euro, and all the others would go up in tandem. The U.S., one fourth of the global economy, could export out of its problem.

The problem is that all the others won't follow this program. China could not move up its currency value too much. Otherwise, it would trigger hot money outflows, a total collapse of its property market and the banking system with it. China is between a rock and a hard place. It is trying to achieve a soft landing of its property market by incremental tightening steps while the currency appreciation expectation keeps the hot money from leaving. The combination may support a multi-year gradual adjustment, giving the banking system time to raise capital.

Japan isn't in a position to appreciate the yen much. Its industries have lost competitiveness to Germany's or even the U.S.'s. Its industries haven't had a global hit product for years. Germany and the U.S.'s auto industries are gaining over Japan's. It's hard to see how the yen could go up a lot. The BoJ is vulnerable to political pressure. It doesn't have a good track record. If it lets the yen to destroy Toyota, Honda, etc., it's hard to see how it could remain independent. Hence, it will resort to QE to hold down the yen.


The euro is surging by default. The ECB seems to still be talking like the Bundesbank. But, its position can't last through the next sovereign debt crisis. When the euro is high, some economy, not Germany or France, will get into a crisis mode. It may join the QE crowd too.

The UK doesn't need persuasion to embrace QE. It is like a big Hong Kong, all about stir-frying stocks and properties. When the bubble bursts, it doesn't have much else to do. Devaluing the currency seems to be the only way out.

Korea is small but always tries to join the big leagues. It is big in automobile, electronics and petrochemicals. Its government doesn't need convincing to watch over the exchange rate. Recently, it has been "investigating" financial institutions for undesirable practices in the currency market.

The mild Brazil is fired up too. Over the past decade, it allowed the market to double its currency value. Brazilian people are grateful for the low inflation as a result. But its growth rate is quite low, not good enough for a developing economy, leaving alone the vaunted status of one of the BRICs.

It seems that nobody wants to appreciate. Most major economies will do something to keep their currencies down. That is checkmate for the U.S. Without devaluation benefits on rising exports, QE just leads to inflation, first through rising oil prices. The American people are suffering from declining housing prices and high unemployment. If the gasoline price doubles from here, the country may not be stable. How would the elite react? Probably more of the same.

The world is heading towards high inflation and political instability. Another global crisis is a matter of time. The first sign would be a collapsing treasury market. The Fed is controlling the yield curve through its QE program. It would be irrational for other investors to play the game. The only reason to stay in is that the Fed won't let the market fall. But, the underlying value is evaporating with rising money supply and the inflationary consequences. When all the investors realize this, they will all run for the exits. The Fed won't be able to stop the stampede. If it prints enough money to take over the whole market, people with freshly minted dollars would surely want to convert the money into other assets. The dollar would collapse too.

The world seems on course to another crisis in 2012.

The same people who caused the last crisis are still in charge. They'll get us into another. Iceland is taking its ex-prime minister to court for causing the banking crisis. Worse fates await the people who are causing the next crisis. China used to chop off the heads of its failing ministers at the capital's vegetable market. Maybe we should bring back the practice and globalize it.

[GRG55]

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

China's perplexing property boom

It is notoriously difficult to get a handle on China’s property market – the bears talk about imploding ponzi schemes, while the bulls cite the pace of urbanization and the comparatively low amount of leverage most Chinese have on their properties.

More worrying, say the analysts, is the amount of potentially duff loans that have been dished out to China’s local governments which threaten to weaken China’s banking system, which is scrambling to recapitalize at the moment.

I came across a particularly spectacular example of local government largesse last week when I was in Linyi, a city of 10m people in Shandong province which is a massive wholesaling centre and was playing host to China’s Red Games...

[Rajiv]

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

China Shows How To Do A Stress Test: Tells Banks To Imagine 60% Property Collapse

you think the European stress tests were too weak, you'll probably appreciate what China is doing with its banks.

Bloomberg:

China’s banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets, a person with knowledge of the matter said.

Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, the person said, declining to be identified because the regulator’s requirement hasn’t been publicly announced. Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent.

Beyond the strenuous conditions, there's another aspect of this that's interesting, and that's the effect that there wouldn't appear to be an imminent crisis that necessitates some showy event. Regulators quietly told the banks obviously (otherwise it wouldn't just be coming out now), and it seems they really want to know what the results would show, rather than have a result that they can hold up as evidence of "transparency."

That's not to say there aren't concerns about Chinese banks -- there are. But the government actually would like to measure that problem, rather than paper over it.

[jk]

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

i wonder if there are any data about more transparent but related markets, like vancouver or australia.

[Rajiv]

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

Another gem from Israel's Financial Expert - China’s Shark Loan Ponzi Finance- As Ponzi Schemes Collapse the Chinese Government Fears Civil Unrest

From The Secret Engine Behind China’s Housing Bubble- The Ponzi Shark Loan Finance

This is how this Ponzi scheme works:

Local governmental officials that are demanded from the government to produce double digit GDP growth numbers give real estate developers permits to build housing projects in return for bribes. They also get bribes in return for allowing the shark loan companies to operate under their jurisdiction. Some of them are active partners in shark loan businesses. For example, a party secretary of legal affairs, that controls the public security bureau, which is a court and prosecutor division of government in Yanking city, in She Kiang province tired to run abroad using a passport in 2009 after he found out he can’t repay 60million Yuan. Every scheme has a ring leader whose job is to collect money from all the participants in the ponzi scheme. When some of these ponzi schemes blow up, the party leaders always get bailed out first, and some even ask local business owners to lend them money, and then bail out their own personal fund. After that the ring leader turns himself in and gets protection from the local government.

Most of the funds that are collected in this classic ponzi finance go to local land purchases and real estate development. Part of the funds are used in order to pay back the rolling loan. The short term interest rate in this black market is very high and ranges between 20%-150% annual rate. The sources of the ponzi funds are diverse, as ordinary citizens, banks with corrupted bank officials, and state enterprises play the game.


This month, another Shark Loan Ponzi Scheme Collapsed in Huang Qiao Town In Jiangshu Province

China daily economic news reported:


Huang Qiao Town which is located in Taixing County, Jiang Shu Province is known as “No 1 town in North Jiangshu” According to the article, a few months back, expensive cars were roaming over the streets. But now after the collapse of a giant ponzi scheme supported by 9 so called “Mark Organizations” (local name for shark loan ponzi schemes), many cloth shops, and barber shops (in China, many so called barber shops are in fact brothels) are closed, and the expensive cars are gone. Town residents are posting their shops and cars for sale to pay back shark loans.

The collapse of this ponzi scheme at the town level, is a sign that even the bottom part of the hierarchy of the Chinese society was exposed to these schemes. This exposes the pervasivness and seriousness of the shark loan problem. more and more locals participated in this get rich quick frenzy since normal business profits and wages simply are not enough to make ends meat .

The collapse was triggered by the actions of one of the female ring leaders that turned herself in after she found out she can’t afford to pay the high interest rate anymore.

Though all the “ Mark Organizations’ are run by independent ring leaders, their funds are connected . As a result, after the exposure of her failure, 9 ring leaders are now under police custody. The locals even have a song for this shark loan frenzy:

People die for money

While birds die for food

They cracked down on the loan sharks

And now tens of thousands are in panic.

According to reports, 80 percent of families in Huang Qiao were involved, and major ring leaders include government officials and their relatives, housewives, teachers, shop owners, home decorators, and barber shop owners (a nickname for brothel owners)

Some interesting anecdotes regarding this scheme:

1. As Local houses were all sold out, the ring leaders went to Shanghai, Nanjing, and Jiangyin to “flip flop” real estate(Buy and sell real estate in less than 1 month in order to make a quick profit)

2 One ring leaders has 19 real estate projects all over china, with a total value of 20 million

3 Expensive cars roaming the streets, owned by ring leaders and newly rich kids.

4 Gold purchases by ring leaders

5 local Gambling, drugs, prostitution flourish.

6. The bidding procedure for “Mark Organization meeting”:

“Mark Organization Meeting” is basically an auction. During the meeting, the participating bidders will compete by promising high interest rates. The final winner is the man who offers the highest interest rate. He then will use the collected funds to speculate in the real estate market, or lend the money to real estate developers, home buyers and basically anyone in need for a loan. If everything works out, the locals get their money back with the promised interest…

This is a link to an audio of a recording made of such an auction.


You can read more (with the use of google translate) at this link of a local Huang Qiao Internet chat room that has a ponzi scheme topic. Please notice that news coverage is strictly controlled and censored, so not everything that is quoted in this article will appear in the forum.
You can read even more at this Huang Qiao Local forum. Many posts have been deleted, but even from what is left there is evidence of local riots and gathering, demanding government help.

From this thread, that was written in Feb 2010, it is clear that some residents were worried for a while. It asks the government to crack down on the loan sharks, but apparently no action was taken. To understand how pervasive these shark loan schemes are in Huang Qiao, please read this local internet BBS forum poll, were 44 reported that they participated in the ponzi schemes by themselves. The pool mentioned that only those who directly participated in the “ Mark Organization Meeting” by themselves shall say yes, if only relative and family member participate, they shall count as no.


Big Danger of Civil Unrest

The first sign was a murder in “Tai Xing” ( Huangqiao is a town of Tai Xing city, the murder’s home town). Apperantly, the owner of the Kindergarden were massacre occoured participated in a ponzi scheme.
The locals in this province are outraged and they are trying to organize protests and riots against the government and the ring leaders of the ponzi schemes. Many posts in the forums are attempts by locals to organize demonstrations. Since the internet is heavily censored in China, many victims of the schemes are posting these letters on every street corner in the town. They demand that the government will take action, and that the ring leaders will be put in jail. They of course demand their money back as well…
The ring leaders are trying to calm things downs, by handing out letters to local residents and posting them on street corners.

Bellow you can see the letters that were written by the residents and the ring leaders.

The local government fears civil unrest, and has posted this warning on every street corner.

A translation of the letter:

To the residents of Huang Qiao

Currently, the collapse of the fund chain has become a hot topic of all over town. A small minority of people with the intention of trying to disturb social stability, are stirring up the water, and are using the governments name to start rumors in order achieve personal benefits. In order to clarify the truth, the town government issues this open letter:

1. Huang Qiao Shark Loan ( Mark Organization Meeting” ) is a private matter, it is illegal, and the interest is not protected by law

2. People who participate need to expect to lose money.

3. All Mark Organization Meetings will be closed and all the debts will be settled peacefully, by negotiation, in order to minimize the loss.

4. The police will get involved in certain Mark Organization meeting, when the ring leaders are reluctant to pay

5. The public security agency will harshly punish those who are trying to stir up social unrest, spread rumors, cause “muddy water”, and make trouble for the government and social stability.



To get updates on China’s Shark Loan Ponzi Finance please FOLLOW US.

For more articles on the subject please visit China Shark Loan.

[GRG55]

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

Hmmmm, it would only take a couple of people about a week to knock on enough doors to get a good statistical sample and find out if this is true or not.

Do you think they would make it through the week before being encouraged to either leave the country or being allocated a cell in detention?

[we_are_toast]

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

More from Xie:

Hmmmm, it would only take a couple of people about a week to knock on enough doors to get a good statistical sample and find out if this is true or not.

[GRG55]

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

More from Xie:

Aug. 3, 2010, 8:30 p.m. EDT

Fear empty flats in China's property bubble

Commentary: Even worse than price bubble is quantity bubble of vacant flats

By Andy Xie

BEIJING (Caixin Online) -- How many flats in China are sitting empty? The media recently floated a story -- denied by power companies -- that 64.5 million urban electricity meters registered zero consumption over a recent, six-month period. That led to a theory that China has enough empty apartments to house 200 million people.

Statistical transparency is lacking in this area, so the truth about empty apartments remains under wraps. Publishing accurate data should be of the highest priority, since the size of the nation's unused apartment stock is perhaps the most important measure of the extent and seriousness of China's property-market bubble. Indeed, it's a grave concern for policy making, since unpublished data may indicate not only a price bubble but a quantity bubble burdening the market...

...What especially distinguishes China's property bubble, however, is an unprecedented amount of living space. This huge stock of empty flats equals the nation's quantity bubble.

Quantity bubbles are less common than price bubbles, and they don't last as long. Rising supply usually exerts downward pressure on prices, although an influx of money can hold up prices even when supply is rising...

...One useful figure for analysts is China's living space per capita. Surveys in most cities suggest the average living space is between 28 and 30 square meters per person. We don't know which population segment these surveys cover; they certainly don't include migrant workers. And we don't know if empty flats are counted.

Based on this limited data, however, we can confidently conclude that China does not have a housing shortage. Moreover, its per-capita living space is higher than in Europe and Japan. Indeed, if we adopt Japan's standard, China already has sufficient urban housing space for every man, woman and child in the country.

Far more important than general data, however, are the housing figures pointing to a huge quantity of empty flats apparently being held only for speculation...

...We should fear China's quantity bubble. And we should be terrified by the potential for a massive amount of new, speculative inventory that could come on line this year and next.

Right now, tight credit is holding back the market, and supply is piling up on the developer side as inventory. The government's tightening squeezed buyers of second and third homes, and transaction volumes across the country collapsed. What I've learned from intermediaries is that most property demand now falls into restricted categories, i.e., speculative.

It's reasonable to assume, therefore, that the supply would be close to 15% of GDP in value this year and in 2011. That's because when the policy is relaxed -- as most expect -- speculation will probably revive and lead to a doubling in the total value of speculative inventory.

Chances are good that policy makers will indeed relax policy. In some cities, banks are already loosening a bit. A key reason is that local governments have a lot of debt -- commonly five times more debt than revenue -- and could get into financial trouble without a decent level of property transactions...

...China's housing oversupply isn't surprising. Excess supply reflects the under-pricing of capital, and China's system is structured to increase supply quickly. But rising prices alongside rising vacancy rates are surprising. Normally, speculators are spooked by high vacancy rates. But China's phenomenon is unique for at least four reasons:

1) A sustained negative real interest rate has led to a falling demand for money and rising appetite for speculation. Greed and inflation fears are working together to form unprecedented speculative demand for property.

2) A massive amount of gray income is seeking safe haven. China's gray income of various sorts could be around 10% of GDP. In an environment of rising inflation with a depreciating dollar -- the traditional safe haven -- China's rising property market is becoming a preferred place to park this money.

3) Few people in China have experienced a property bubble. The property crash in the 1990s touched a small segment of society, such as foreigners and state-owned enterprises. Geographically, it was restricted to the country's freewheeling zones in Hainan, Guangdong and Shanghai. Most people didn't even know there was a property crash. This ignorance has led to a lack of fear that's now turbo-charging greed.

4) Speculators think the government won't let property prices fall. They correctly surmise that local governments rely on property deals for money and do all they can to prop up prices. But their faith in government omnipotence is misplaced. At the end of the day, the market is bigger than the government. The government can delay, but not abolish, market forces. Nevertheless, faith in government is replacing fears of a downside, and speculative demand will continue to grow as long as credit is available...

[GRG55]

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

I’ll Tell You When Chinese Bubble Is About to Burst: Andy Xie

April 26 (Bloomberg) -- “My maid just asked for leave,” a friend in Beijing told me recently. “She’s rushing home to buy property. I suggested she borrow 70 percent, so she could cap the loss.”

It wasn’t the first time I had heard such a story in China. Some friends in Shanghai have told me similar ones. It seems all the housemaids are rushing into the market at the same time.

There are benefits to housekeeping for fund managers. China’s housemaids may be Asia’s answer to the shoeshine boy whose stock tips prompted Joseph Kennedy to sell his shares before the Wall Street Crash of 1929.

Another friend recently vacationed in the southern island- resort city of Sanya in Hainan province and felt compelled to visit a development sales office. Everyone she knew had bought there already. It’s either buy or be unsocial.

“You should buy two,” the sharp sales girl suggested. “In three years, the price will have doubled. You could sell one and get one free.”
How could anyone resist an offer like that?...

Looks like the maids are in good company.

[Anybody remember what happened when General Motors got into subprime mortgage lending? ]

State-Owned Groups Fuel China’s Real Estate Boom

Published: August 1, 2010

WUHU, China — The Anhui Salt Industry Corporation is a state-owned company that has 11,000 employees, access to government salt mines and a Communist Party boss.

Now it has swaggered into a new line of business: real estate.

The company is developing a complex of luxury high-rises here called Platinum Bay on a parcel it acquired last year by outbidding two other developers to win a local government land auction.

Anhui Salt is hardly alone among big state-owned companies. The China Railway Group is developing residential complexes in Beijing after winning the auction for a huge piece of land there.

Likewise, the China Ordnance Group, a state-led military manufacturer best known for amphibious assault weapons, paid $260 million for Beijing property where it plans to build luxury residences and retail outlets.

And in one of China’s biggest land deals yet, the state-run shipbuilder Sino Ocean paid $1.3 billion last December and March to buy two giant tracts from Beijing’s municipal government to develop residential communities.

All around the nation, giant state-owned oil, chemical, military, telecom and highway groups are bidding up prices on sprawling plots of land for big real estate projects unrelated to their core businesses...

...Land records show that 82 percent of land auctions in Beijing this year have been won by big state-owned companies outbidding private developers — up from 59 percent in 2008.

A recent study published by the National Bureau of Economic Research in Cambridge, Mass., found that land prices in Beijing had jumped by about 750 percent since 2003, and that half of that gain came in the last two years...

[GRG55]

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

Hard choices as China's boom fades

July 13, 2010

Australia's export prices remain about as good as they have been in a century, but the peak is now behind us. What we have seen in the past few years is as good as it will get.

Last week alone iron ore spot prices fell 9.4 per cent and Brazil-China freight prices fell 20 per cent. China's trade figures showed iron ore imports fell 14 per cent last month, measured year-on-year, after rising an average 8.4 per cent each month until May.

Given that China bought 70 per cent of the world's iron ore exports last year, and Australia's iron ore exports this year will be worth about $US50 billion, it is not hard to see that the huge Chinese tail wind for Australia's national income is no longer blowing like it was.

The underlying reason for Australia's once-in-a century resources boom was that China's heavy industry sector has been growing much faster than its overall economy. The boom was inflated by distortions in the economy linked to China's hybrid market-authoritarian form of government.

Now a series of command-economy edicts has flipped this pattern around. Steel production has been falling in absolute terms for two months and the rate of decline accelerated through June. That was despite a surge in exports as mills pocketed export rebates before they are scrapped today...

...Many of those challenges will be outlined tomorrow at the Australian National University's China Update conference.

Zhongxiang Zhang will look at China's efforts to reduce fossil fuel consumption, and its equally serious challenges. Last year China installed more wind power turbines than any other nation. And yet, in the first quarter of this year, 60 per cent of wind power generation capacity was wasted because it was not hooked up to the grid.

Huang Yiping will look at the price distortions that fed China's heavy industry boom, including cheap industrial land, cheap energy and cheap capital...

...Over-construction will continue so long as officials receive great financial incentives and few political and legal disincentives against bribery and stealing land. State-dominated heavy industry will continue to over-produce so long as the services sector is stunted by politically powerful state monopolies...

...''While the private business community is realising the importance of cultivating the government for larger profits, it is the government itself, its cronies and government controlled [state owned enterprises] that are quickly forming strong and exclusive interest groups,''...

[Rajiv]

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

Also Ken Rogoff on Bloomberg - China Property Market Beginning Collapse That May Hit Banks

China’s property market is beginning a “collapse” that will hit the nation’s banking system, said Kenneth Rogoff, the Harvard University professor and former chief economist of the International Monetary Fund.

As China’s economy develops, “especially at the speed it’s growing, it’s going to have bumps,” said Rogoff, speaking in an interview with Bloomberg Television in Hong Kong. He also said that while recoveries across the global economy are “very slow,” the danger of a return to recession isn’t “elevated.”

Rogoff’s concern echoes that of investors, who sent China’s benchmark stock index to its worst loss in more than a year last week. China’s data have been a focus because the nation has led the global recovery from the worst postwar recession.

The Shanghai Composite Index tumbled 6.7 percent last week, recouping some of those losses today on speculation recent losses were excessive. The gauge was up 1.9 percent at 2,409.42 as of 3:09 p.m. local time.

In the U.S., the world’s largest economy, the benchmark Standard & Poor’s 500 index capped a ninth day of declines in 10 sessions on July 2 after a government report showed fewer private-sector American jobs were created in June than forecast.

Chinese authorities intensified a crackdown on property speculation after announcing the economy expanded at an 11.9 percent annual pace in the first quarter, the most since 2007. Measures have included raising minimum mortgage rates and down payment ratios for some home purchases. Officials may also start a trial property tax, according to state media.

Sales Dive

The efforts have contributed to a slump in real-estate sales, while prices continue to climb. The value of property sales dropped 25 percent in May from the previous month. The increase in prices, at an annual 12.4 percent in May according to a government survey of 70 cities, was down from a 12.8 percent advance in April.

“You’re starting to see that collapse in property and it’s going to hit the banking system,” said Rogoff, 57, who also serves on the Group of 30, a panel of central bankers, finance officials and academics led by former Federal Reserve Chairman Paul Volcker. “They have a lot of tools and some very competent management, but it’s not easy.”

Premier Wen Jiabao’s government has been trying to cool the economy to alleviate the threat of asset-price bubbles. The central bank has told lenders to set aside more money as reserves, and targeted a 22 percent cut in credit growth at banks this year, to 7.5 trillion yuan ($1.1 trillion).

Growth Outlook

Economists at banks from Goldman Sachs Group Inc. to BNP Paribas SA and China International Capital Corp. have lowered their gross domestic product forecasts for China in recent weeks. Goldman last week cut its growth forecast for China this year to 10.1 percent from 11.4 percent because of the government’s monetary tightening measures.

Property prices will probably fall in some regions of China in about three months, said Xu Shaoshi, minister of Land and Resources, according to a Securities Times story yesterday. Values are now stagnant, Xu also said, according to the report.

Rogoff’s view clashes with that of Stephen Roach, chairman of Morgan Stanley Asia Ltd., who said last month the property boom isn’t a bubble. While portions of the market such as high- end apartments are overheating, residential demand will remain robust as rural Chinese migrate to cities, he said in a radio interview in Hong Kong with Tom Keene on Bloomberg Surveillance.

30% Drop

Standard Chartered Plc analysts forecast a drop in property prices of as much as 30 percent in China’s big cities in the second half of 2010 compared with levels of mid-April. Such a loss wouldn’t impair the banking system because values typically fluctuate much more in the country than in advanced economies, said Jinny Yan, an economist at the bank in Shanghai.

China’s financial regulator said June 15 that it saw growing credit risks in the real-estate industry, warning of increasing pressure from non-performing loans. Risks associated with home mortgages are rising and a “chain effect” may reappear in real-estate development loans, the China Banking Regulatory Commission said in its annual report.

The record credit expansion last year helped propel earnings at the nation’s lenders, with financial institutions reporting 668.4 billion yuan of combined profits in 2009, a 15 percent gain from a year earlier, according to the CBRC.

Bank Capital

China’s five largest state-controlled banks have announced plans to raise as much as $54.5 billion of capital by selling bonds and shares after they extended record loans last year to support a government-led stimulus plan.

Agricultural Bank of China Ltd., which is in the midst of a $20.1 billion initial public offering in Shanghai and Hong Kong, told investors yesterday that real-estate loans are among the biggest risks facing the industry.

Weaker growth in China, as well as decisions by developed countries to tighten fiscal policy, may slow the global economic recovery, which Rogoff said is unlikely to slide into a so- called double-dip recession.

Rich nations will reduce their primary budget deficits, excluding interest payments, by 1.6 percentage points next year, the most since the Organization for Economic Cooperation and Development began keeping records in 1970, according to JPMorgan Chase & Co. economists. The budget squeeze will lop 0.9 percentage point off growth in 2011.

Double-Dip Risk

“The bad news is the recoveries are very slow,” Rogoff said. At the same time, “the fact that we’re not growing super fast, doesn’t necessarily say well therefore we’re about to enter something worse.”

In the aftermath of a financial crisis, “you don’t get a typical recovery” with a so-called “v-shaped” trajectory of surging output after a decline, he said.

By contrast, Nobel laureate Paul Krugman, a professor of economics at Princeton University, wrote in a June 28 column in the New York Times that the global economy is in a depression caused by a “failure of policy.” Krugman blamed governments for moving to reduce budget deficits rather than focusing on lowering historically high unemployment levels.

Rogoff reiterated his criticism of China’s exchange-rate policy, saying that the June 19 announcement of a resumption of “flexibility” in the yuan was a “master stroke” because it removed the issue from the Group of 20 summit later that month.

China’s history of counting on overseas demand to drive its development needs to change, and it’s unrealistic to expect its export growth will be maintained “at the pace it’s been doing,” Rogoff said. “It’s impossible. At some point they have to redirect their strategy” for economic growth, he said.

[Rajiv]

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

Another article - A Look at Zhejiang Province, One of the Main Centers of China’s Real Estate Bubble

Of the first 100 private firms ranked by sales and assets in 2009 in, 70% of them are in the real estate business. These companies were originally engaged in a variety of industries, but due to the thin profit margins in the manufacturing business (which is a direct result of government subsidies and currency intervention that caused over expansion and mal-investments in the manufacturing sector) more and more of them began to divert their activities to the real estate business.

From an article in China's Daily Economic News:

In the latest 2009 list of private enterprises in Zhejiang real estate represented more than 70 percent of the companies. The report of Zhejiang Administration for Industry, Federation of Private Enterprises in Zhejiang Province, is based corporate annual sales, revenue, operating income, net assets, and tax payments, The report found that in these 100 private enterprises in Zhejiang Province, in addition to the two real estate companies, four construction companies, there are more than 60 private enterprises involved in real estate development and other areas of the industry.

Wenzhou, a private business owner told reporters: "Now the rich are doing real estate, we all feel priced out of the market because of speculator groups.Ningbo is a garment producer in Ningbo Tianyi Square business district. The clothing brand is selling the old business, in order to move into the real estate business. From the hundred private enterprises in Zhejiang Province that are included in the survey, only 30 are not involved in the real estate development business , while the remaining 70 companies have at least part of their activities in the real estate market. The list includes” the Younger four.

The group started back in 1992 by investing in real estate development, and have activities in Ningbo and Suzhou, were they develop apartments, villas, commercial buildings and other types of property. They own over 3 million square meters. With the booming real estate industry in recent years, Younger activities extended to the Yangtze River Delta real estate development business area. In July 2007, Younger won the a large auction for land in Hangzhou, in return for 1.476 billion yuan, which is 15,712 yuan for a square meter. That set a record for Hangzhou.

In 2009, Younger home buyers set up a holding company, Group Chairman Li Rucheng hopes Younger home buyers will help the company turn into a larger brand in the next ten years.Li Rucheng CEO at Oaks group which ranked 13 in the survey, has operated the mobile phone industry, automobile industry, and medical industry. In 2005, they started investing in the real estate industry. In fact, as early as 2000, Oaks Properties Limited was established, with an headquartes in Ningbo, Nanchang, Tianjin, Chengdu and other of for real estate development. The mainland richest man. Zong, which is also list in Forbs 500, said his businesses that don’t have a core business in real estate, will never engage in the sector. "Even if there exists a profit opprutinty , I am not jealous, I have lost a lot of opprutinties in life. But there is no doubt that the profitability of real estate today is far more than the general manufacturing sector.

Of the hundred private enterprises in Zhejiang in 2009, total manufacturing were 24% lower year on year. The number could be worse but a lot of the enterprises from last years live, which were traditional manufacturing enterprises didn’t enter this years list. All the enterprises that entered this year’s list were from the housing construction and real estate industries. The number of companies in the list that their main activity is real estate rose from four in 2002 to 27 in 2009. Sales of of the real estate companies were up 66% YoY.

”Group 1”, is one of the big winners in this year’s list. The group was once a simple textile manufacturer but is now engaged in real estate development and property management. It’s net profit grew 12 times. Analysts pointed out that the high profit margin involved in the real estate is the simple motive for the change in activities of so many companies. Zhejiang private enterprises started joining the real estate development business in two occupations, first around 2000 when the policy of liberalization started, and second, in 2005, after manufacturing profits start being diluted, and private enterprises had to find a secondary path to make a money or risk going out of buisness.

This phenomenon in recent years continued this year, with rapid development of real estate, while private enterprises in manufacturing saw their profits continue to decline. A private enterprise boss said to the "Daily Economic News" said: "A few years ago second and third tier cities became the objective of local government, who wanted to develop the areas, and thus we could lower the price to get the land. We could buy the land and resale it for a large sum of money. , Now a lot more companies make even more profits. The money that we earned can return to manufacturing, and we can continue to invest in expansion even in face of a slowdown.”From 1998 to 2005, the gap between the gap between the gross profit margin in real estate investment abd that of manufacturing was only two percent. However, since 2006, this gap began to widen, and it stand today at 30%.

Zhou Dewen Wenzhou from SME's Association, said: "A lot of Private Enterprises in Zhejiang are relying on the real estate expansion to continue. They are making a lot of money while the traditional manufacturing industry has profits of 5%, it is 1%, or even zero.

Zhejiang University professor Zhao Hang, director of the Institute of Health said:
"The pursuit of profit determines where the capital goes. The Manufacturing costs, raw materials, and labor costs have increased, while the prices of the products did not increase. In addition, because the exchange rate issue, the price of exports fell. While in the real estate market, land is a scarce resource, China is in an urbanization process designed to determine that the real estate business will remain profitable.”

This survey can tell us a lot about the real estate frenzy, since those are big domestic private firms, and those SME’s , as I wrote before, are relying on shark loans in order to develop their real estate projects while and in fact the average china household also lives on this huge bubble. (See: Special Report- The Secret Engine Behind China’s Housing Bubble- The Ponzi Shark Loan Finance )


The real estate market sucked the majority of capital of China’s households, corporations and banks. When this bubble bursts consumption will drop like a rock as mortgage delinquency rates will skyrocket. Now, almost all major banks count on ever-lasting raising housing prices. If China's households will loose confidence in the banks, China's growth and consumption story could end bitterly.

Read more at How to profit from the coming collapse of China

[GRG55]

Re: In Search of Goldilocks...

"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..."

LOL. Who could have guessed...

Greece selling islands to pay debt

2010-06-25 17:34:18

BEIJING, June 25 (Xinhuanet) --Greek government is selling a number of the islands including a part of Greece's top tourist destinations Mykonos to pay some of its staggering national debt, media reported on Friday.

“I am sad – selling off your islands or areas that belong to the people of Greece should be used as the last resort,” said Makis Perdikaris, director of Greek Island Properties, according to the report of The Guardian. Some of the real estate could bring in millions of euros.

The government expected that the sale or long-term lease of some islands will attract investment that will generate jobs and taxable income. The Private Islands website lists 1235-acre Nafsika, in the Ionian sea, on sale for 15 million euro, the report said...

[Danielvr]

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

China's housing market has all the signs of a bubble, but I doubt if price-to-income ratios apply there. In the west, every worker is a potential home owner. In China, demand is limited to a small but rapidly growing elite of party officials, entrepreneurs and executives. In those circles, the ratios are probably lower, leaving more room for expansion.

[Rajiv]

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

Also this article from New Geography - "China's Housing Bubble: Quality Research Required"

It is extremely difficult to find reliable reporting on the intensity of the housing bubbles across China, but this article from the China Post of June 1, 2010 "Economist sees housing market bubble", appears to be realistic.

It states that in 2009 the average house price to average annual household income in China was 9.1 times earnings and that it rose to 11.15 during the first two months of 2010. Beijing and Shanghai are reported to have exceeded 20 times average household earnings during early 2010. These figures are from Yao Shujie, head of the School of Contemporary Chinese Studies at the University of Nottingham.

The article noted that last week, Chinese real estate services company E House China released figures suggesting that house prices to incomes nationwide in 2009 were 8.03 times incomes, but those in Beijing, Shanghai, Hangzhou and Shenzhen were over 14 times household incomes.

Recently, Wendell Cox of Demographia, working with the South China Post, estimated that the Median Multiple (median house price divided by median household income) for Hong Kong was 10.4 – as reported in this New Geography article Unaffordable Housing in Hong Kong. Because sufficiently reliable data is now available from Hong Kong, it will be included within the Annual Demographia International Housing Affordability Surveys going forward.

As the Annual Demographia International Housing Affordability Surveys clearly illustrate, house prices do not exceed three times gross annual household incomes in normal markets.

Rather remarkably, in researching and reporting on the China Housing Bubble, there has been no discussion of the land ownership differences of China and western countries.

Freehold land is not available in China. The land is leased for a remarkably short term of 70 years. Instead of conventional ground leases in the west where ground rentals are paid, Chinese Local Governments demand an upfront payment of capitalized rental. On this basis, the land interest should be a wasting asset over the term of the lease.

Rather remarkably – this appears not to be the case in China, where the buying public have convinced themselves (no doubt with encouragement from real estate agents and developers) that at the end of the term of the ground lease, Local Government will simply “gift” the land to home owners!

On the sound income to house price measure, China’s housing bubble is clearly the worst in the world. When the unsatisfactory and uncertain land ownership issue is factored in as well, it is particularly concerning.