Ordos -- Time to double down

Nearly two years ago I highlighted the city of Ordos, China and how it appeared local municipalities and investors were building an empty city with no hope of a positive return on investment.

Fast forward to present day and the same reporter made a return visit to see what has changed. While there have been a few people moving in, residential construction continues at the usual Chinese breakneck pace.  The new video show the same empty boulevards but with more skyscrapers being built in the background.

(direct link to Youtube video)


Melissa Chan provides more details in here blog entry

She interviewed the same person, Mr. Chovanec, as last time and he provides the reasons why supposedly rational people would invest in an empty city and expect a positive return.  Mr. Chovanec provides more examples of bubble behavior in China in a recent blog entry titled This is What a Bubble Looks Like

China's response to the Great Financial Crisis of 2008 was to tell the banks to lend, and they did. The resulting excessive credit growth just exacerbated the already imbalanced situation brewing in their country.  When the next monetary event comes with Greece's default I will not be around (metaphorically) to see if they will be able to 'fix' the problem again.

Google maps link to Ordos

The Swiss choose inflation, but the Chinese do not?

The Swiss central bank recently announced it would print any amount of francs required to maintain a peg of 1.20 Swiss francs to one euro.  The response was... massive

Euro / Swiss Franc

A multi percent move in currency markets is exceedingly rare. I'm not going to spill many electrons going over why the Swiss decided it was time to fix their currency as it has been a hot topic over the last 48 hours.  The WSJ and Economist have already written about it at length.  

So why bring up the topic? Because the Chinese have been doing it for years and the dots need to be connected.  I recently commented on the threat of China 'dumping' US Treasuries and how this was not the problem everyone thought it would be.

In both the Swiss and Chinese case you have a country forcibly keeping their currency away from the market clearing price for differing reasons; the Swiss exporters are getting killed while the Chinese desire to keep their workshops fully staffed by forcibly underpricing their currency.

Whatever the reason the result will be the same -- an explosion of  domestic currency and loan demand eventually forcing up demand and inflation.  The WSJ's title on the Franc peg is The Swiss Choose Inflation  Why does one not think the same will happen in China? Chovanec has highlighted the constant struggle to contain inflation in China from both a massive increase in lending and an artificially underpriced currency. 

In both cases the Swiss Franc and the Chinese Yuan will eventually find their market clearing prices regardless of central bank manipulation, either by currency price appreciation or by domestic inflation.

edit: FT links China and Switzerland as well:
http://ftalphaville.ft.com/blog/2011/09/07/671121/what-will-switzerland-do-with-all-those-euros/

Weekend linkage

Here's some weekend reading/listening for you.  I really should do this more often so you can see what I'm looking at:

Saudi Arabia going ahead with building 16 nukes:  Even after Fukushima they have decided to go ahead.

Why didn't Fukushima #2 (Daini) meltdown as well?  Very interesting ideas as to why the second power plant complex did not have the problems #1 (Daiichi) experienced.  It may be merely luck and location or it may be the newer powerplant designs.

Nuclear regulatory issues.  Obviously a very large problem as a 'captured' regulator can allow serious problems to develop.

Carmen Reinhart discusses financial repression in developed economies.  If you think short term rates will rise shortly I think you are wrong.  Financial repression is a broad term but a clear example is keeping short term interest rates below inflation (a negative real rate) This slowly inflates away the debt problem.  Will America and Western Europe be able to pull it off?

China's empty cities, again -- A more recent article on Ordos' empty new city

China's debt writeoffs are just the beginning -- The opera of excessive credit growth and very lax underwriting standards is starting to get to the good part.

More on China's empty cities

One problem with satellite photos is you don't know what has happened since taken. One may legitimately posit an apartment complex that looks empty in the image may now be filled to capacity and teeming with life.  A recent expose by a journalist on the ground demolishes those theories.

http://www.sbs.com.au/dateline/story/about/id/601007/n/China-s-Ghost-Cities
Watch the video and see the numerous empty towers of apartments. It's a pre-made ghost town.

Here's one insta-city I found a few weeks ago: Chenggong aka Kunming

What is most impressive about the apartment complex shown is how they built the entire place without adding any roads yet.  Hopefully they'll get around to it. Zoom out and look around (both north and east) and you can see the scale of this new city.  Like the video above almost all of this new Chenggong appears unused.

Take a look at the photos from this area. (Panoramio link) and see all the buildings going up and completely empty roads.  There's just too many completely empty homes and roads devoid of life.

ht:  Also Sprach Analyst

Copper roundup

To follow up on my previous copper post here is some additional articles:

One trader (suspected to be JP Morgan) held nearly 90% of the outstanding copper on the LME in late 2010
WSJ December 21, 2010

As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny.
The latest example is in the copper market, where a single trader has reported it owns 80%-90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion.

As is implied in the article, having just one party hold such a huge portion of the outstanding asset is just an invitation for manipulation. For some reason the LME states controls are in place to prevent abuse but I'm a bit skeptical.

I am not the first one to comment on China and their bonded warehouses' providing a convenient 'hiding spot' for excess copper.  Ft.com December 21,2010

As Reuters noted, the London/China arbitrage window was after all firmly shut during the period:

The November inflow was a surprise to many market watchers  given that the arbitrage window — buying from the London Metal Exchange and selling to Shanghai — was shut for much of  last month, Beijing Capital Futures analyst Xiao Jing said.

And, as they also noted:

But trade and warehousing sources in China said the London Metal Exchange and Shanghai arbitrage had stayed closed last month and thatshould have prompted importers to store some arrivals of refined copper in bonded warehouses.

Bonded material can be shipped out to the international  market easily or imported into China after the 17 percent  value added tax is paid.

Finally, something I suspected but had no 'proof''.  Chinese traders may be using copper and other base metals as a cheap funding source as well as a currency play.
From Ft.com March 9,2011

To reiterate: that’s Chinese companies using copper as collateral for financing deals — also known as a somewhat ingenious nationwide inflation hedge (in the event copper prices continue to rise).Let’s just say it’s a bit like living off a loan taken out against your house. The loan won’t be a problem because you believe the price of your house will only go up.
And while that remains your view, there’s no reason not to double up. Buy even morehouses for the sole purpose of transforming cold hard cash — not inflation proof — into an asset which can continue to be monetised via ever depreciating bank loans.
Magic.
That is, of course, until copper prices stop rising.

It's all fun and games until the party stops and the margin calls start.  Just think about how much chicanery occurred during the US housing boom.  You don't think games like that are being played in China?

This is not the copper you are looking for

Edit: A followup to my bearish copper case was posted on 09/27/11

Copper has had quite a run, but is it legit?  Numerous experts are calling for continued strength in the commodity as well as continued supply deficits.  I offer a contrary opinion.

There are several fundamental reasons for this alternate opinion and we'll go over them.   From a technical standpoint copper as well almost all other commodities has been on a tear upwards ever since the announcement of QE 2.  Recent events in the Middle East have slowed the rise in prices and higher oil prices may dent future economic growth worldwide so forces may be aligned to drive copper down in the near future.

Chinese Copper Demand
Copper is traded worldwide on several exchanges and as such provides an opportunity to see where prices (and by implication demand) are higher.

China is commonly cited as a source of continued copper demand.  If this is so one would think copper sells at a premium to elsewhere in the world.  This is not the case and copper has been selling at a discount to the LME (London Metal Exchange) for several months.  As you can see here the last time couple times Chinese copper was cheaper worldwide prices stopped going up.  (ht news-to-use.com )

One can see the real time arbitrage price difference on Bloomberg. While the arbitrage values do swing between positive and negative, since mid July the arbitrage price has been negative.  Take a look at the long term trends and you'll see periods of negative arbitrage have coincided in the past with lower future prices as well as increasing inventory levels.


Inventories

One of the common bullish themes is how copper has been in a deficit for several years and will continue to be so in the future. A long term inventory chart provides some clarity.  Longer term copper inventories have been both lower and higher than today.  While right now copper inventories are dropping on a year over year basis the last inventory peak was in early February 2010 and as you can see inventories tend to trend in one direction or another for a period of several months.  Right now we are on an upswing. Copper inventories (LME, SHFE,  Comex) bottomed mid December and have risen nearly 130,000 thousand tonnes since then and are rising at over one thousand tonnes a day right now.

Furthermore the number of cancelled warrants continues to drop and has remained well below 20,000 for several weeks now.  A low cancelled warrant number is an indication of fewer lots of copper coming out of inventory for delivery.

The dog that did not bark
A most interesting news article ran across Bloomberg late last year regarding Shanghai and bonded warehouses.

http://www.bloomberg.com/news/2010-12-08/copper-trading-in-shanghai-may-reverse-drop-on-bonded-inventory-tax-waiver.html

Why provide this option of delivering copper from 'non official inventory' warehouses if it did not already exist?  While getting hard numbers about how much hidden inventory exists is nearly impossible, this rule change leads one to believe there is significant supply available, otherwise why provide the option?

Furthermore the 'movement' of inventories into and out of the official stockpiles occurs rather easily.  In January aluminum inventories went up 100,000 tonnes in one day.
http://traderightuk.wordpress.com/2011/01/10/now-you-dont-now-you-see-it/  100 thousand tonnes is a LOT of material. The largest ships in the world move 150 thousand tonnes of cargo to give you a sense of the mass involved.

Just because you can't see the copper (or aluminum) doesn't mean it is not there.  There are other quantitative numbers showing us there is a lack of demand in China such as the the lower relative price as well as a lack of imports.

Both refined and scrap copper imports have leveled off over the last few years and do not show a sustained rise in imports as one would expect if China is truly the voracious eater of copper as people have posited. 

Four dollar copper does wonders for encouraging more supply.  Heck, there's even supply developing underwater.  Nautilus minerals is currently building an underwater 'mine' and if they can pull it off the potential is huge.  

Furthermore a  little corruption goes a long way.  There's a 17% VAT tax on copper in China.  Does one honestly believe there is no skirting of the law?  A truckload of copper would be an easy thing to 'misplace' at a large import facility.  

Betting against the house
Looking at copper futures over the past several years one can see (green line) how commercial traders have never been this short as they have been during this recent run up in price. Remember when you are buying copper right now the person selling probably has more information about copper prices than you do.

Avoiding Imperial Entanglements and Bernankflation
Almost all commodities have been on an tear upwards since Ben Bernanke announced QE 2 in late 2010.  The results have come home to roost however as higher food prices may have been the spark that set off the political unrest in the Middle East.   Higher oil prices from the riots and regime change in Tunisia, Egypt, and Libya have people wondering who is next and what will that do to oil supplies.  Oil prices are now well above $100 a barrel and that price shock has yet to be fully realized throughout the world economy.   To hedge my short base metals position I'm also long precious metals and this combination has worked out well recently.  Continued tension in the oil producing nations will most likely keep gold rising and depress copper prices as people grow concerned about future economic growth.

Alternative learning annex
For those of you who can't stand looking at data and trying to understand the nuances of localized supply and demand I have created a short video explaining the high points of this post.




http://www.xtranormal.com/watch/11071592
http://www.youtube.com/watch?v=OoFQQlBWcOk (YouTube version)



Further reading:
Bearish calls:
http://finance.fortune.cnn.com/2010/11/17/chanos-vs-china/?iid=EAL

More supply on the way:
http://in.reuters.com/article/2011/02/11/idINIndia-54814820110211
http://www.reuters.com/article/2011/01/13/chile-codelco-investment-idUSN1328075420110113?feedType=RSS&feedName=everything&virtualBrandChannel=11563 -- 16 Billion for Codelco alone

Other base metals not doing so hot on a fundamental or technical level.
http://agmetalminer.com/2011/01/10/zinc-outlook-2011-part-one/

Financialization of commodities and correlation to equity markets.
http://macromon.wordpress.com/2011/02/10/sarkozy-and-g20-to-crackdown-on-food-specs/
http://agmetalminer.com/2011/02/28/copper-in-a-dip-or-on-the-slide/

Data:
http://www.cochilco.cl/english/productos/estadisticas.asp - Long term copper stats from Chile

Chinese copper imports:
http://www.bloomberg.com/apps/quote?ticker=CURIIQTL:IND
http://www.bloomberg.com/apps/quote?ticker=CNIVCOPP:IND

The author is short base metals and long precious metals.

China and the threat of 'dumping Treasuries'

A recent Wikileaks article has exposed the Chinese mentioning their large holdings of US Treasuries while in conversation with the US as a not so subtle hint to back off on various international activites by the US, specifically selling arms to Taiwan.
From AFP (2011, Feb 21)

China's clout -- gleaned from its nearly $900 billion stack of US debt -- has been widely commented on in the United States, but sensitive cables show just how much influence Beijing has and how keen Washington is to address its rival's concerns. An October 2008 cable, released by WikiLeaks, showed a senior Chinese official linking questions about much-needed Chinese investment to sensitive military sales to Taiwan.
 "In that regard, the recent announcement that the United States intends to sell another arms package to Taiwan increases the difficulty the Chinese government faces in explaining any supporting policies to the Chinese public."
His comments came days after the Pentagon notified Congress it was poised to sell $6.5 billion worth of arms to China's arch rival Taiwan.

China's massive holdings of US debt have not escaped the public's notice either.  Even Saturday Night Live spoofed the relationship. (email readers may need to click through to see the video)

Link to SNL video


My response to China:
Bring It.
I dare you.
I double dog dare you.


One must ask how the Chinese have amassed such a huge wad of our currency and thus our debt when considering my dare to the Chinese. In short, the Chinese forcibly keep their currency undervalued by constantly intervening in the exchange markets.  They are doing so to keep their exports 'cheap' and their export factories busy.  They need invest all those US dollars in something so they end up in our Treasury bonds and bills.  Their huge holdings of our debt is a direct result of their mercantilist trade policies.

If the Chinese do not want to keep buying our debt the can very easily do so by not intervening in the currency markets, but I doubt they will do so in a dramatic fashion. Their low skill low wage factories cannot compete without an under priced currency.  The Chinese are slowly raising the Yuan but it is a challenge for them to wean themselves off the Faustian bargain they created.

Paul Tudor Jones of Tudor investments dedicates 14 pages to a discussion as to how the undervalued Chinese Yuan has created severe imbalances worldwide.  I suggest you read the whole letter  Mr. Jones' letter (2011 Feb 14)

Failure to address this issue - as one of the primary causes of the intractable unemployment currently plaguing the US -- has led to a series of second-best policy options . . . Indirectly, the peg has exacerbated the United States' large fiscal deficit while enabling our elected officials to delay the difficult spending adjustments that are inevitable.

So China, yes, you can threaten to stop buying our Tbonds.  We would pay a little more for our home mortgages but it would also staunch the flow of manufacturing jobs out of America.  You however would see a massive number of people thrown into unemployment and most likely a repeat of Tiananmen Square.

Your move.

China's reserve ratio raising is finally starting to bite

China recently raised the bank reserve ratio requirement again and it looks like this time it's really starting to bite. 7 day repo rates (what banks charge each other for a 7 day loan) spiked up just before year end but they aren't falling back down as I had alluded to in my previous post. 

7 day Chinese repo rate
3 month Chinese repo rate

As you can see from the 7 day repo rate chart the spikes have been getting larger at the end of each quarter, hinting at banks scrambling to find enough cash for their books at quarter close.  While the rate has dropped  in the 7 day, the 3 month has u-turned and is going back up near its pre-12/31 closings.  The Chinese stock market has been going down recently and this removal of cash from the system may be the reason.  If one continues to observe high bank repo rates it does not bode well for the Chinese stock market or the whole commodity/reflation/Australia trade in general.

Portuguese recycling & Iceland recovery -- Why the Chinese and Japanese are buying EU debt

The recent news of both China and Japan buying EU debt provides a very interesting window into the various motivations of investors.  While most investors are leaving the PIIGS debt markets, China and Japan appear very willing to invest.  Why?  It appears the Asian nations' motivations are different than return of principal.  Both are exporting nations and if more European trading partners are forced into austerity measures of higher taxes and lower government spending their own export industries will suffer.

American policy makers should be mindful of this when negotiating with China. It may appear they have the upper hand when looking at their massive foreign exchange reserves, but China also needs our markets to keep their factories running.

Unfortunately Portugal looks to be the next domino to fall, Asian assistance notwithstanding.  FT's blog lays out the timeline I have previously alluded to: It appears once a PIIGS' bond yield pierces the 7% level a bailout eventually follows.

However even with these 'bailouts' and Euro Central Bank assistance the problem has not been solved. As austerity measures and budget cuts drag GDP down the burden of debt grows ever higher in a nasty feedback loop.
From Satyajit Das:

Cuts in government spending and higher taxes have mired the economy in recession. Falls in tax revenue necessitate increasingly deeper cuts in spending to try to stabilise public finances. In 2010, the budget deficit was forecast at 12% of GDP, even after spending cuts and tax rises worth Euro 14.5 billion   The problems of the banking sector are increasing due to the poor economic conditions. Hitherto largely confined to commercial property, problems are now spreading to the broader economy. Unemployment and lower incomes mean that householders are unable to meet payment obligations on mortgages and other loans. Weak economic conditions have affected businesses, increasing default levels. In the absence of strong economic growth, inflation and a massive devaluation, the peripheral economies, such as Ireland and Greece, may be unable to shrink themselves to solvency. A simple relationship demonstrates the unsustainable position:

Changes In Government Debt = Budget Deficit + [(Interest Rate – GDP Growth) X Debt]

In order to restore solvency, overburdened borrowers must stabilise debt and begin to reduce the level of borrowing. This requires GDP Growth exceeding interest rates, a budget surplus (through spending cuts and/or tax cuts) or a combination of these. EU/ IMF assistance to Ireland was designed to address the high yields on Irish bonds, which curtailed the State’s ability to borrow. But the 5.80% cost of the bailout debt requires an equivalent growth rate and a balanced budget simply to stabilise debt at current very high levels.

Meanwhile the recovery in Iceland provides contrast to the current austerity and higher tax drudgery in the weaker European countries:

The Nordic economy grew at 1.2pc in the third quarter and looks poised to rebound next year. It ends a gruelling slump caused largely by the "New Viking" antics of Landsbanki, Glitnir and Kaupthing, the trio of lenders that brought down Iceland's financial system in September 2008. . .

This has led to vastly different debt dynamics as they enter Year III of the drama. Iceland's budget deficit will be 6.3pc this year, and soon in surplus: Ireland's will be 12pc (32pc with bank bail-outs) and not much better next year . . . 

The pain has been distributed very differently. Irish unemployment has reached 14.1pc, and is still rising. Iceland's peaked at 9.7pc and has since fallen to 7.3pc.

Taking away the punchbowl one way or another, Chinese version

The Chinese sense of humor was evident as they raised short term interest rates on Christmas Day by 25 basis points. (Bloomberg) What is interesting about this Saturday surprise is what happened a few days before with their failed treasury bill auction.

The ministry sold 16.76 billion yuan ($2.53 billion) of 91- day securities, falling short of the planned 20 billion yuan target, according to traders at the lead underwriters of government debt, who asked not to be identified. The average winning yield was 3.6769 percent, according to the traders. That compared with 3.22 percent on the debt of similar maturity in the secondary market yesterday.

Since the Chinese central bank was not able to drain enough cash out of the markets via Tbill sales, they raised interest rates instead.   One possible reason why the Tbill auction was not well received is there appears to be other demands on short term money in the Chinese banking system.  Short term bank repo rates are spiking higher as the year comes to a close. Why buy 3 month Tbills at 3.7% when you can lend out at 5.60% in the 3 month repo market?

As you can see there were spikes in the repo rates just before the end of previous quarter ends and I wonder how much of this current rise is due to squaring the books before year end.  We'll know soon. . .

Inflation update

With the recent rise in interest rates I thought revisiting inflation rates would be helpful.

3 data series on this graph [click to enlarge]:
Blue for total Consumer Price Index (CPI) aka 'inflation'
Red for inflation minus (food and energy)
Green for housing subset

Notice how overall inflation tends to peak at the onset of a recession.
Headline inflation is still very low overall at near 1%
Housing inflation is still negative.
Inflation less food and energy is at a low for this timeline and is trending down.  Yes, we all need to eat and consume energy but both of those items are extremely volatile and stripping them out of the data series can provide additional useful information.

China comes to mind when people speak about energy and food inflation and like almost every other basic commodity the Middle Kingdom overshadows other negative factors such as Europe's continuing austerity drive and our own tepid domestic growth.  To me it appears whichever way China goes the energy, food, metals, etc. complex will follow.

Latest Chinese Lending Stats: Ignore these numbers!

An odd way to start a post but as mentioned in my previous entry it is hard to know how much lending is truly going on in China these days.  The official data shows a decline in the rate of growth in lending and the government appears to be reigning in credit growth by raising reserve ratios. 

This does not tell the entire story. There is a boatload of off balance sheet lending but there are no 'official' numbers for that.
The WSJ (Sept 28,2010 ) recently commented:

A report from Standard Chartered economist Stephen Green estimates that by the end of August between 2 trillion yuan and 3 trillion yuan worth of loans (the banks don’t formally disclose the amounts) were moved off balance sheets–and outside the PBOC’s formal loan data–in this way. Over the same period, PBOC data showed the banks lending out 5.6 trillion yuan, suggesting the banking system has already passed the central bank’s 2010 target for new credit creation. It also means that the tightening signaled by the loan quota never happened.

Standard Chartered is guessing an additional 50+% of unofficial lending this year. Not a small number.  If the bank regulators crack down on this unofficial lending the rate of true loan growth would fall dramatically.

China lending update. Is bank lending speeding up or slowing down?

It has been a while since I have updated you on the bank lending situation in China.   This is not due to me slacking off (I'll admit to a slower pace of posts recently, but I have some good excuses, really)  following this topic.  The data source, People's bank of China, has suddenly been a little more reticent in publishing this data in English and as my Chinese language skills are a bit lacking this data series has languished....

Data released recently shows a continuing trend of official slowing in the rate of loan growth.  I put official in italics because there appears to be some off balance tomfoolery going on. . .

From Caixin Online:

Despite regulatory directives aimed at preventing banks from removing loans off their balance sheets to dodge credit restrictions, China's banks did not slow down their pace in packaging loans as wealth management products.

Banks and trusts cooperated on wealth management products, effectively allowing them to shirk their responsibilities toward credit limits imposed nationwide under the central government's macroeconomic controls.
In the first half 2010, according to trust company reports, the value of wealth management products cooperatively offered by banks and trusts rose to 2.6 trillion yuan, topping the previous year's 1.77 trillion yuan.

This amount combined with the 4.58 trillion yuan in on-the-books, new credit issued by banks in the first half brought total lending in China through June 30 to near the 7.5 trillion yuan limit set by the government for all 2010.

[The 4.58 trillion yuan number matches my data.  Look at the 'wealth management products' value of 2.6 trillion.  Greater than 50%  of the 'on the books official' value of 4.58 trillion.  Continuing . . ]

By charging fees as well as commissions of up to 2 percent, banks earn more than trusts when they jointly market bank-trust products. Moreover, by cooperating with trusts, banks keep customers otherwise unavailable due to credit controls, since off-book business doesn't require bank capital and thus avoids CBRC capital constraints.

When companies start hiding assets off balance sheet it rarely ends well.

If you are wondering where all that money is going, this blog entry by staff at the World bank is stunning. Not only for the information presented but the absolute lack of surprise. (ht Mish)

In Chenggong, there are more than a hundred-thousand new apartments with no occupants, lush tree-lined streets with no cars, enormous office buildings with no workers, and billboards advertising cold medicine and real estate services – with no one to see them.

I went to China in 2003 and I can assure you I NEVER saw a single piece of urban pavement that was not completely full of cars, trucks, bikes, scooters, etc at all times.   I have mentioned empty Chinese cities before such as Ordos. How many more empty cities in China are there? Andy Xie has wrote about this before. Here is his latest article regarding the excess housing stock in China:

What distinguishes China’s property bubble from others is its unprecedented quantity dimension. China just doesn’t have any constraint limiting supply. The current debate about the quantity of empty flats is about the extent of quantity excess. The stock of empty flats measures the size of the quantity bubble. Taiwan experienced a price-cum-quantity bubble in late 1980s. At the time the market quantified the number of empty flats by obtaining data from the electricity supplier on flats without usage of electricity. The stock of empty flats measured this way was about 15% of the total households. Some analysts are trying the same tactic to quantify the volume of empty flats in China. The problem with this methodology is the complexity of China’s housing conditions.  . . . While the data are not accurate, we can confidently conclude that China doesn’t have absolute housing shortage and the per capita space is above Europe and Japan’s level. Indeed, if we adopt Japan’s standard, China already has sufficient urban housing space for everyone in the country, i.e., there is housing for every person in the countryside to move into city. . .  Four unique factors may explain China’s unique phenomenon.

1) Sustained negative real interest rate has led to declining demand for money and rising appetite for speculation. Greed and fear of inflation are working together to form unprecedented speculative demand for property.
2) The massive amount of gray income looks for a ‘safe’ haven. China’s gray income of various sorts could be around 10% of GDP. In an environment of rising inflation and depreciating dollar-the traditional safe haven, China’s rising property market is becoming the preferred place for this money.
3) China’s masses have no experience with property bubble. The property crash in the 1990s touched a small segment of the society. Foreigners and state-owned enterprises were involved. Geographically, it was restricted to Southern freewheeling zones like Hainan and Guangdong and Shanghai. Most people in China don’t know that the country had a property crash. Lack of fear is turbo-charging the greed.
4) Speculators believe that the government won’t let property price fall. They correctly surmise that local governments all depend on property for money and will try every effort to prop up its price. But, their faith in the government omnipotence is misplaced. In the end, market is bigger than government. Government behavior can delay, not abolish market force. Nevertheless, this faith in government is removing the fear over the downside. Hence, the speculative demand just grows with credit availability unchecked.

When this bubble goes pop you better have some popcorn and a good seat because the explosion will best any action film explosion sequence.

Chinese property developers cut prices.

From Chinadaily:

BEIJING - More property developers have began to cut prices and adjust their business portfolios to cope with sluggish transaction numbers due to government tightening of the real estate sector.   According to Li Wenjie, general manager of property agency Centaline China's North China Region, most Beijing developers have lowered prices by 15 percent on new projects.
Shenzhen-based Vanke, the country's largest real estate firm, made public sale prices of a large-scale project in Beijing over the weekend, with units priced 1,600 yuan ($236) lower than the expected price of 15,000 yuan per square meter.

Shanghai-headquartered Shimao Group just launched an upscale residential project called "Royal Garden" in Beijing's Central Business District area at a price of 65,000 yuan per sq m. The average price of similar projects nearby has been close to 70,000 yuan per sq m.

Of course the article quotes real estate firms spinning the lower prices but as I have mentioned previously first volume slows and then the price cuts start.  Is the beginning of the end or just the end of the beginning? 

Late Night Linkage

Postings have been light due to some business related demands.  Here's some links to my recent reads from the last few days.

Humor
Vuvuzela -- Will it blend? Youtube

Gold
Telegraph - did BIS gold swap spook the markets?

China
From Chinadaily - Property restrictions continue.
Chinadaily - Home price appreciation slows.
Chinadaily - Rate of lending slows in China.

Residential
From CalculatedRisk - A Chapter 13 bankruptcy can wipe away a 2nd lien.

Commodities
From FT -- The financialization of commodities.

LNG
From Hellenicshipping - A lot of spare LNG ships standing idle.

Lumber
Globe and Mail - Canada exporting lumber to China.

Sovereign debt
CalculatedRisk - How much debt is there and what is the probability of default?  It's a multi part series. Good stuff.
GMO - White paper on defaults in history. Very good. Intend to write longer blog post about this.

BP / Oill spill
WSJ - BP has replaced old cap, trying new one in an attempt to stop leak.  (This is at least 24 hours old.)

Euro
Telegraph - Legal challenges to bailout of Greece.
WSJ - Moody's downgrades Portugal.

Debt
Annaly - The debt deleveraging continues.

Late Night Linkage

Some links of stuff I've been reading recently:

http://alephblog.com/2010/07/05/watch-the-state-of-the-states/

Canadian home sales falling.  Prices next?
http://globaleconomicanalysis.blogspot.com/2010/07/vancouver-home-sales-drop-30-percent.html

A different look at Dr. Copper
http://humblestudentofthemarkets.blogspot.com/2010/07/dr-copper-teeters-over-abyss.html

China home prices
http://www.telegraph.co.uk/finance/china-business/7875713/Chinas-property-market-braced-for-30pc-drop.html

Payroll number may take a header next month due to birth death model
http://jessescrossroadscafe.blogspot.com/2010/07/note-to-mish-bls-added-145897-imaginary.html

Greece -- Default now or later? Good reads.
http://www.nakedcapitalism.com/2010/07/greece-is-restructuring-debt-now.html
http://mpettis.com/2010/06/what-might-history-tell-us-about-the-greek-crisis/


Iran discovers large gas fields
http://www.hellenicshippingnews.com/index.php?option=com_content&task=view&id=109332&Itemid=79

More oil found in North Sea
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7873355/North-Sea-oil-hopes-rise-of-the-biggest-discovery-in-a-decade.html

Libya eyes purchasing stake in BP.  Cue irony.
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7873702/Libya-eyes-stake-in-bargain-BP.html

China building more nukes
http://www.chinadaily.com.cn/business/2010-07/06/content_10069093.htm

BP considering selling assets to pay fines
http://www.bloomberg.com/news/2010-07-05/bp-said-to-consider-selling-colombia-venezuela-fields-to-pay-spill-costs.html
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7866766/China-seeks-9bn-of-BP-assets-in-Argentina.html


Ozzie mine tax revised
http://seekingalpha.com/article/212933-miners-win-as-australian-government-revises-mining-tax

ECRI predicts more frequent recessions in future
http://www.businesscycle.com/news/press/1887/

Steven Keen gets some more press on his Minsky model predicting what will happen next.
http://www.nakedcapitalism.com/2010/07/steve-keens-scary-minsky-model.html

http://www.creditwritedowns.com/2010/07/mandelbrot-fractals-and-the-art-of-roughness.html

Recent jobs report was not good
http://www.thereformedbroker.com/2010/07/03/the-truth-about-those-job-numbers

China's property 'boom'

Patrick Chovanec has a good post on several topics but one passage really jumped out at me:

Even before my plane landed in Changchun, I could tell from just looking at the city out my window that it was in the midst of an incredible building boom. Row upon row of high-end villas and apartment towers were sprouting like crops all along the outskirts of the city. The same image greeted us on our approach to Jilin City by bus — I couldn’t even count the number of cranes rising over half-completed projects. It’s not any one development, it’s a cumulative impression made by dozens of projects, one after another, on a scale that’s overwhelming. Remember, despite the booming auto industry, this is still a relatively depressed and out-of-the-way part of China. I don’t like to use the Dubai comparison — China is not just a dream in the desert — but I was in Dubai two years ago, and the resemblance is creepy.

We visited one luxury residential development up close. I won’t name the developer, not only because they were our hosts, and I don’t want to be ungracious, but also because they don’t really deserve to be singled out. They’re just doing what dozens of other developers are doing, all around them. This particular project, we were told, had 100 buildings (although I only saw about 40 or so on the display model), the last of which had just been completed. Over the past two years, prices had risen from RMB 3,000 per square meter to RMB 6,000. The entire project was 90% sold out. It was clear, though, that it was also completely unoccupied. Row upon row of buildings stood in pristine luxuriousness, with not a resident in sight.

I suggest you read the whole post.
The anecdotal evidence of residential overbuilding keeps piling up . . .

China PMI comes in below expectations. Overnight stock futures down.

The Chinese Purchasing Managers Index (PMI) came in at 52.1 as reported by Chinadaily and looking at the market reaction it was below expectation.

SP 500 overnight futures are down ~0.8%
Gold down
Copper down
Bonds up
You can see delayed CME futures quotes if you want to watch the action tonight.

Clarity on debt levels in China. They are high.

Getting precise numbers out of China is always challenging but data is slowly coming out. . .  From the Telegraph

Chinese provinces are, in some cases, equivalent in size to major European countries and run with a degree of fiscal autonomy. The southern province of Guangdong, for example, has the same population size as Germany. However, provincial budgets have been classified as state secrets until now and this is the first time that China has disclosed the level of local government debt.
Mr Liu said the ratio of debt to disposable revenues at some local governments was over 100pc and in the highest case it was 365pc. . .
Victor Shih, a professor at Northwestern University in the United States, believes the sum in 2009 was 11.4 trillion yuan, equivalent to 71pc of China's nominal GDP.
Mr Shih has warned that local governments have also succeeded in rapidly funnelling large amounts of debt off their balance sheet and into public-private investment vehicles.

ht Metalminer

Hugh Hendry takes on . . . . Everyone

Mr. Hugh Hendry is always fun to watch and even more so in this interview:





He discusses the euro, china, George Soros and the 'axis of financial evil'. 

ht: Zerohedge