Some more China property news -- Speculation at a turning point?

I'm not talking about Greece for now as the situation is so fluid and even if they get IMF/Euroland funding it is going to still be a nasty long haul for the Greeks . . . . On to China.

A good article regarding property speculation occurring in the 'boonies' of China, not only the main cities. From Chovanec:

I’ve heard experts insist that it’s purely a top-tier phenomenon, but the evidence of my eyes and ears tells me that similar market dynamics have taking hold all across China . . .
Note several familiar trends I’ve been mentioning all along: people buying multiple apartments they have no intention of occupying; up-front cash purchases; funds channeled into real estate due to lack of investment alternatives; a property market that far outstrips the local economy in size and energy; reliance on construction as a job-generator; and buyer psychology approaching obsession.

The recent clampdown on property speculation appears to have already tamped down prices and reduced the enthusiasm of some buyers.  From Chinadaily:

As new policies released by the Chinese government are effectively cooling down the real estate market, a rush to return purchased properties are emerging in many major cities, mainly led by speculators, the National Business Daily reported on Thursday.

Finally something that is a bit more opaque but possibly as powerful.  The state's rhetoric against property hoarding and speculation by officials (corruption) appears to be heating up.  This is much harder to determine as I'm not an expert China watcher. As such I don't know how important this is but reading the tea leaves it may be part of a larger strategy. From BusinessInsider:

In the commentary, entitled “To Solve The Populace’s Housing Difficulties We Must Root Out Self-Enrichment By The Powerful”, the author attacks corruption as the root cause of the failure to provide enough affordable, subsidized housing. And without a massive increase in the supply of affordable, subsidized housing, the government will not succeed in cooling down housing-related tensions that now threaten social stability. . .
The central government has staked a huge amount of credibility on cooling the real estate market and resolving housing difficulties for the masses. Skeptics will rightly say that Beijing has tried this before, several times, and never successfully reined in the web of interests and corruption that distort China’s real estate market. This time I think will be different, as the central government likely believes that housing related issues are the biggest threat to social stability in China.

 
If China decides to institute an annual property tax, like we have in America, the rush to the exits will be massive.  Until then it will be hard to precisely determine if / when the top is in.

Chinese property prices already falling?

I've previously mentioned the new restrictions on property purchases in China. It appears they are already deflating prices.

From China Daily

The average price of second-hand houses in Beijing's Tongzhou district has dropped from 21,500 to 18,500 yuan per square meter, a decrease of 13.4 percent since the government issued stricter rules to curb speculation, the Beijing Times reported Wednesday.

Prices of some projects even plunged 25 percent, the report said.
Beijing Centaline Property predicted that housing prices in Tongzhou district will continue the downward trend and fall below 16,500 yuan per square meter by May.

It's only one bit of data but interesting nonetheless . . .

China getting smacked tonight

At the end of Shanghai's morning session the main index is down 2.1+%

Shanghai 300

It appears the recent rules designed to curb property price speculation have bitten hard, from ChinaDaily:

According to real estate research institute China Index Academy, among the 35 cities it monitors, 21 experienced a fall in transactions last week, with Hangzhou suffering the biggest drop of 72.6 percent. Property sales in Beijing, Shanghai and Shenzhen fell 45.5 percent, 32.9 percent and 63.9 percent respectively over the previous week.

It will be interesting to note if this is just a pause that refreshes or if the Chinese consumer realizes the gov't will keep twisting the screws tighter until they get home prices to calm down. 

The Shanghai property index can be a useful indicator to watch.  If you notice it lead (or coincided with) all the previous major up and down trends from the last 3 years.

[edit: now down 3+% and breached low of Feb 3, 2010.  This is not a good technical sign ]

Greece -- The government subprime bomb continues smoldering

Bond yields continuing blowing out in Greece.  The question becomes what will trigger the explosion or defuse this situation???  Here's a synopsis from the articles mentioned below. I suggest you read both.

German Chancellor Angela Merkel is trying to wait on any decision until after the May 9 regional elections.  If the elections go poorly this could make it worse for Greece.

There are court challenges prepared for the bailout from Germany to Greece readied and it appears there may be a ruling from the German constitutional court in early May as well.

While I haven't found any news reports, I wonder how the Italians, Portuguese, and Irish think about bailing out the Greeks?  Their economies are a total mess as well and any resistance from these countries will also fan the fires.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7632366/Maastricht-madhouse-fuels-EMU-wide-contagion-from-Greece.html

http://www.ft.com/cms/s/0/47b429f4-5091-11df-bc86-00144feab49a.html

As I mentioned on the comment bar to the right, the official declaration for aid by Greece only helped their bond market for one day.

More base metal linkage

Some more base metal background information:

New Aluminum capacity coming online in the gulf, which makes sense. Considering electricity costs are a large part of the cost structure, getting close to low price energy makes sense.  Pity the high cost AL producer.
http://www.thenational.ae/apps/pbcs.dll/article?AID=/20100412/BUSINESS/704129895/1005

Substitution effect for copper, aluminum and plastic.  High prices in copper create demand destruction as other products are used.
http://www.indiainfoline.com/Discuss/Blogs/Copper-mania-redux/544390

Zambia copper production update:
http://www.reuters.com/article/idUSLDE62F11Y20100316

General copper overview as compared to CRB, industrial production, and the BDI
http://www.datadiary.com.au/2010/03/26/commodity-markets-going-up-or-down/

China importing copper
http://agmetalminer.com/2010/04/09/copper-prices-strong-despite-china-subdued-buying/

Have a good weekend.

Some evening linkage

Glad to see Mr. Faber is coming around to my opinion on China's coming bubble popping. :)

http://www.creditwritedowns.com/2010/04/marc-faber-symptoms-of-a-bubble-building-in-china.html


A video on strategic defaults from pbs.org



HT  -- http://www.ritholtz.com/blog/2010/04/strategic-defaulters/

Greek rates go crazy
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7621289/Escalating-Greek-default-fears-rock-Europes-debt-markets.html

Money Money + Money --> Money supply update

Money supply figures continue their decline on an abolute and/or relative basis depending upon how you measure it.  M2 + Institutional Money Market Funds (the only series left from M3) continues declining on a year over year basis, M2 on its own continues to decelerate.  Once the MBS purchases by the Fed finally settle I think the first derivative will continue to decline on both series.

Copper data dump

I've been building up some copper related links.  Here it is:

Majority of Chile's export currency comes from copper
http://www.businessweek.com/news/2010-02-15/chile-copper-exports-doubled-in-january-on-price-gain-update1-.html

LME is rasing storage rates on inventory.  Why do this if there is a paucity of material?  High demand raises prices, low demand lowers prices
http://agmetalminer.com/2010/02/12/lme-rent-increases-could-prompt-flood-of-metal-taken-off-market/

Good overview of Copper fundamentals
http://www.wildebeests.net/2010/03/02/investing-in-copper-what-you-need-to-know/

Commodities as a financial asset.  While the article is about Aluminum the same mechanism is under way in copper, oil, etc.
http://seekingalpha.com/article/190993-a-slow-motion-cornering-of-global-commodities-markets


From March 2,  2010 Fast Money
The folks on the desk suddenly noticed copper inventories in China surging.  I'll have more on this later but the trend has reversed declining and is starting to work back up again . . .  Copper discussion starts around 5:25 and goes to 10:40

Copper inventories going up in China. 

A good article and reference on cancelled warrants:
http://agmetalminer.com/2010/03/18/when-cancelled-copper-warrants-aren%e2%80%99t-what-they-seem/


Copper mine strike in Mexico deemed illegal, the cops may be brought in to bust the strike.
Mine is partially owned by Southern Copper, produced 166k tonnes in 2006
http://www.reuters.com/article/idUSN113373720100212
http://en.wikipedia.org/wiki/Cananea_mine#Economy

China tightening rules on home purchases

Recently China has tightened rules regarding home sales:

Banks can refuse loans on 3rd homes.  (wow, THIRD HOMES)
Down payments on second homes have been increased from 40 to 50 percent.
Mortgage rates have been increased.
Developers can no longer take deposits on unfinished homes without proper approval and other rules designed to mitigate keeping housing supply off the market.

China Daily article  2010 April 19

Bloomberg article 2010 April 20


Let's see if this works  . . .

A contrary opinion on HELOC's and banks

I recently posted an article about the concern HELOC's may have on bank capital positions. Here's a contrary opinion from another blog I follow, Calculatedrisk

The following report is from housing economist Tom Lawler:
In a House Financial Services Committee meeting today on “Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program, spokespersons from BoA, Citi, JPMorgan Chase, and Wells Fargo explained the potential dangers of broad principal reductions, as well as tried to dismiss the silly claim that many second mortgages have “virtually no value” because so many borrowers with seconds have total mortgage balances at or exceeding the value of the home collateralizing those mortgages. Below are some observations on BoA’s and Chase’s testimony.

I'd read the whole article as it provides some counter points to my previous post. 

Greek bond yields widen further

Greek bond yield widened further today, blowing past the pre bailout highs.  The attached chart does not show today's print which was 7.61% 

Goldman Sachs' news has overwhelmed the news cycle while Greece slowly sinks . . .

Some Friday Links -- Fun for all. A physics lesson tossed in as well.

Been busy with tax day but here's some links and comments . . .

Greece 10 year bond yields keep rising and are very close to piercing pre bailout yields. 
Some German profs are preparing a lawsuit.  -- Telegraph.co.uk
Has Greece hit the Chandrasekhar limit and just doesn't know it yet?  Once you go passed the limit there is no turning back.

Some back and forth on strategic defaults fueling consumer spending:
Pro Tinfoil: Creditwritedowns
Anti Tinfoil: The Big Picture

Creditwritedowns pulls together a lot of subjects and puts a nice bow on top describing a theory I agree with:  We are in a balance sheet recession that will not produce a strong rebound and will take a long time to reconcile.  I posted the Koo and Chanos videos recently but Mr. Harrison does more work tying it all together. 

Total copper inventories have now risen for 2 weeks straight and are close to penetrating their recent peak level; LME inventories have dramatically slowed their decline and Shanghai inventories hit new highs today.  Copper's getting smacked today.  I'll write more about this soon(tm).

Inflation update - - The slow slide continues

Inflation numbers were just released and continue to show the slow slide downwards in core CPI numbers.    I modified the chart to highlight core CPI.  As you can see it is still trending downwards along with the housing subcomponent. 

Core CPI touched the 1% yoy level in 2004.  Considering the direction of core CPI we may penetrate that lower level soon(tm)

Housing CPI is still deflating and I don't see that changing anytime soon.

While headline CPI is still higher than core I don't foresee it rising too much more without putting a serious dent in the economy.  $150 oil helped knock the economy over last time and if oil prices continue to rise it will start to crimp the economy again.

German legal threats may ruin Greek aid

As I mention on the side bar to the right the German courts may not approve of aid to Greece.  Here's the details (Reuters)

Greek 10 year spreads widened Tuesday and Wednesday after the weekend announcement of aid to Greece.  If this trends keeps up bond spreads will very quickly be wider than before the aid announcement.

I have no idea how much longer this can go on.  The IMF may swoop in and provide their share of the funding immediately or a political showdown in Germany may resolve the lending issue.  Even if aid does arrive will it do any good?  They are so far in debt that some sort of default / currency depreciation (that means leaving the euro) may be the only solution.

ht Credit Writedowns

China lending continues to slow

China lending continues to slow down after the dramatic increase beginning December 2008.  Chinese banks take lending orders from the Government so this is not a suprise to the powers that be in the Middle Kingdom. 

Considering the peak lending was November of last year it may take several more months for the slowdown to work its way through and finally start to be felt 'on the ground'

Will the lending slowdown be enough to tamp down on rising property prices?  Or will they raise interest or reserve rates?  Inflation and growth in China are on the hot side right now so they may be forced to tamp on the brakes a little harder than just slowing lending.

As I have mentioned previously the peaks and valleys of bank lending have coincided rather closely to the peaks and valleys of the Shanghai stock exchange (the local exchange, not etf's like FXI)  This time around Shanghai peaked (so far at least)  in early August, preceeding peak lending by several months.   I'm wondering if this connection will hold again . . .


Additional reading:
China daily - Lending slowdown
China daily - Chinese banks will need more capital.  Considering all the money they lent out more capital will be needed to provide future leverage

Popular media discovering where all those delinquent mortgage payments are going

I was going to blog about this yesterday afternoon but fundmymutualfund yet again scooped me on the entry and added his usual commentary to the matter.  As I have implied before the money NOT going to paying a mortgage is just being spent by Joe and Jane Consumer. 

Diana Olick of CNBC:

Okay, so 7.9 million Americans are not paying their mortgages.

Are we really thinking about the implications of that?
I've already reported studies that show Americans are now far more likely to pay their other bills first before their mortgage (which is a big turnaround historically speaking.)
That means they pay off their credit cards, cable bills, car loans in place of their home loans. Some are forced to, while others are doing so strategically. Don't get me started again on strategic defaults...
Paul Jackson, publisher of Housingwire.com, wrote a fascinating article last week that put this into real cash perspective.
First he describes a case study of someone who applied for the government's Home Affordable Modification Program.
The person had an $1,880.00 monthly mortgage payment on which they'd defaulted, but said person's monthly bank statement showed payments to a tanning salon, nail spa, liquor stores, DirecTV bill with premium charges, and $1,700.00 in retail purchases from The Gap, Old Navy, Home Depot, Sears, etc.
Writes Jackson:
Even if you assume that just half of the current 7.4 million currently delinquent mortgages fit this sort of ’spending profile’ (that is, they are spending their mortgage) and you assume a $1,000 median monthly mortgage payment for most U.S. homeowners — you get a $3.7 billion boost per month to consumer spending. It’s certainly enough spending to matter in the overall scheme of things.

To sum up the program as described by fundmymutualfund:

So for newer readers here is the 'game' as I've outlined many times.


1.Home'owners' default.. many of which are owners only in practice (not putting a dime down on their home).
2.That money once used to pay mortgages can now go into the economy as a form of permanent stimulus via consumption. Back in November I figured the number to be akin to the spring 2008 Bush stimulus - but instead of a 1x benefit, it's a permanent stimulus.
3.The banks drag feet on foreclosures because to make their balance sheet look good they will only take so many foreclosures over in any 1 quarter. Since the FASB (accounting board) rule change, they can do this since they don't have to mark the mortgages to reality - they can pretend... until of course the actual foreclosure. So the majority of mortgages on their books are still at "their discretion" and only the % they foreclose on, do they have to mark to "market" (i.e. reality). Hence the 6 months foreclosure now turns into the 18+ month foreclosure.
4.The market could care less about losses for large banks or the reality of the balance sheet because the US government stands behind all major banks... they are too big to fail. So the banks have nothing to worry about. Buy financial stocks - they are risk free, like Treasuries.
5.In the meantime Ben Bernanke will keep rates at 0% so the banks can "out earn" the losses. [Apr 20, 2009: How Banks Will "Outearn" Their Losses] Borrow from Fed at 0%, invest in anything (stocks, bonds...heck even do some loans), and make the spread. Use that 'free money' to offset foreclosure losses.
Presto magic!

So tell me what you think will happen to consumer spending when those 10% of people with late mortgages finally get kicked out of their homes and the banks are finally forced to realize the loss on the loan?  You wonder why the banks are not lending?  Extend and pretend only works so long. . .

A veteran's view on short term interest rates pinned at zero

While I disagree with Mr. Koo's prescription for getting out of Japan's mess (more stimulus) his battlefield view of what happened and why Japan is going on 20+ years of malaise should not be discounted:



(ht: Pragmatic Captialist)

Jim Chanos on China and Rogoff on Excessive debt

Here's 2 interviews for your digestion.  Jim Chanos last night on Charlie Rose regarding China and Mr. Rogoff on how excessive debt growth eventually gets you into trouble.  I reccommend (again) you read the book "This time is different" by Rogoff & Reinhart

Charlie Rose Interviews Jim Chanos

Charlie Rose Interviews Kenneth Rogoff

Consumer credit continues dropping

Consumer credit continues falling.  The rate of decline appears to have stabilized but this means consumer credit continues to contract with no anticipated point of stabilitzation.

Longer term a deleveraged consumer is good news.  Getting there is not pleasant, whether it be from consumer paydowns or bank writing off debts.  As I have mentioned before the decline in consumer credit and debt prevents a strong recovery.  Not only is the added impulse of new debt (and thus spending) missing but the additional drag of debt reduction is still present.

After the inventory bounce recedes in the next 2 quarters GDP growth will remain muted in my opinion.

Watching the Greek tragedy -- 10 year Greek bond rates

The Greek Tragedy is not over, even with 'assurances' by the EU and IMF they stand ready to help.  If you'd like a front row seat to events and watch what everyone else is watching I suggest you keep an eye on 10 Greek bond yields.  While yields spiked and fell back earlier this year they have begun creeping upwards.  If they continue upwards this will eventually precipitate another risk-off selloff in the markets.

The recent debt auctions by Greece have been met with lower bid / cover ratios and lower foreign participation. 

Non-domestic investors accounted for 80 percent of purchases of the first bond in January, 77 percent of the second, and 57 percent of the third. Reuters

While the Greek issue has slid back off the front burner it has not been resolved.  Abrose Evans-Pritchard has an interesting blog post about this very issue recently and his conversation with Carmen Reinhart regarding the slow motion trainwreck that is Greece:

But I digress. Professor Reinhart said Greece cannot hope to escape from its debt trap under the current EU austerity plan. The cure of devaluation is blocked by EMU membership. The restrictive monetary policy of the European Central Bank — a contraction of both M3 money and lending to firms, record low core inflation — must inevitably unleash deflationary forces in Club Med states already trapped in credit busts.
A country can in theory deflate its way back to competitiveness by an `internal devaluation’, ie relative wage cuts, in this case by 20pc to 25pc . . .

On a parting note, Professor Reinhart says the only budget deficit that matters in a crisis is the “cash deficit”, and this reached 16pc of GDP in Greece last year — not the 12.7pc officially registered under “accrual” accounting.
As countries near default, they typically find all kinds of way to disguise their troubles, by shifting debts between government agencies and delaying payments.
“In the end, everything comes out of the woodwork. You realize that it is even worse than you thought,” she said.

Greece is seriously behind the 8 ball and faces tough choices with no easy solution.  They can either drastically cut spending and face a severe recession, accept IMF/EU austerity and lending support, or even default and leave the Euro. I think the last option is least likely but I'm not making any bets for a positive outcome regardless of what happens.

Carmen Reinhart has a recent  interesting paper regarding country growth rates declining as debt/GDP levels rise.  I am currently reading the book she co wrote - This Time is Different and the paper is an excellent primer to the detailed description in the book. Read the paper and then consider buying the book.

The pragmatic capitalist also has some video by MIT professor Simon Johnson about the Greeks.

The locals are also fleeing the Greek financial system.  From the Telegraph:  (ht Zerohedge)

More than €3bn (£2.6bn) of deposits held by Greek households and companies left the country in February, while in January about €5bn of deposits were moved out, according to the latest figures available from the Bank of Greece.

Switzerland, the UK and Cyprus have been the largest recipients of the money, with the wealthiest Greeks looking to move their deposits to Swiss banks accounts to escape the more punitive tax measures many fear will be introduced in the wake of the country's economic crisis.

It's never good when the locals start pulling money out of the banks. . . .

Chinese lending update --- Is the peak in?

It's been a while since I last updated you on Chinese loan growth.  Some of that was due to the problems of getting the data out of China. I was finally able to extract the data and it appears the peak in lending is finally in.  March data comes out soon but considering the difficulties of updating this data I thought I'd get you up to date now.

Even with the 'record' lending in the first two months of 2010 both the trailing twelve month total of lending and year over year percent change of total loans outstanding have peaked.

As with every massive increase in lending it ends up on all sorts of places and turns out to be much more prevalent than commonly thought.  Elite Chinese Politics blog (Mr. Victor Shih) has some serious allegations of hidden debt in the local government investment entities that are the analog of the Special Investment Vehicles (SIV's) of our banking bust.  Here's some more reading on the matter at businessinder.com and here.  Of course this is difficult to 'prove' as the Chinese accounting books are not the most transparent but Mr. Shih's work should not be discounted out of hand.  I suggest you go to his blog and read the comments and rebuttals.  It's good stuff. . .

Home loan delinquencies keep rising

From Calculatedrisk  Home loan delinquency rates keep going up.   As I have mentioned before this may be one reason consumer spending keeps slowly rising as people are just not paying their home loans. . .  

All these late paying homes represent a serious overhang of 'shadow' inventory hinted at by several blogs and news outlets. As you can see some portions of the 'shadow' can be quantified.  When this data series finally starts falling we'll hopefully start to see an end of the inventory overhang .  I'm not holding my breath.

Running into the Great Firewall of China

I access data from public Chinese webservers for some of the data I present on this blog.  During the start of the Google/China controversy I began to notice some odd 'errors' as I attempted to access Chinese web servers.  Sometimes I get a simple 'hello!' from the server and nothing else, other times I get a 404 error and other times there is no problem.  

I wonder if the 'Great Firewall of China' as described by the WSJ is working on keeping away the outsiders as well? 

China generally doesn't tell its people when it is interfering with their Web access, unlike some other countries, such as Saudi Arabia, that give explanatory warning messages when users are denied access to forbidden sites.

Instead, China's filtering can look to users like a technical glitch—an error message in a user's browser that makes it seem like his connection to the Internet malfunctioned. Authorities don't discuss the methods or tools they use.

Anyone else running into the same issues? 
Here's one test I just ran:
http://www.pbc.gov.cn/  -- Returns 'hello'
 
http://www.pbc.gov.cn/english/ -- Gives me a 404 error (page not found)
 
Both of those sites have worked on and off for a week or so. If you do a Google search for "people's bank of china" these are the first links you get and the Chinese central bank is not an obscure web site I'm hitting.  There's others web sites that return the same errors... puzzling . . . .

[edit 04/05/10 11:20am pst: I was able to access the above web sites on Saturday and pull the data I was looking for.  Today, Monday, I was unable to do so and received the same error messages.  I'm going to get a packet sniffer and see if the error message / 'hello' comes from the same location as the normal data and see if the Great Fire Wall is somehow blocking me ]