Archive for the ‘China’ Category
Under the front page headlines of Guarding the global economy’s biggest risk, the Weekend Australian Financial Review provides us a chilling insight to the cracks emerging in China’s unprecedented property bubble.
The Financial Review’s Angus Grigg writes
Security guards, wearing army green, provide the first hint of trouble. An even dozen of them line the stairs leading to a sales office on the fringes of this coastal city in eastern China. It’s a tunnel of camouflage, which prospective property buyers must pass through before entering the main building. And that’s just the outside security detail.
Inside, a further 31 uniformed guards stand stiffly around the perimeter, while 10 bulky men in plain clothes occupy all the available chairs. It’s hardly the ideal environment to buy an apartment in the 23-tower development under construction next door.
In a desperate move to offload properties, developers have been slashing 30 per cent off sale prices – overnight.
This has created a raft of buyers who have lost all their life savings and are now underwater, even though their apartments won’t be complete for another 18 months. Many are starting to protest in the streets, and this has lead New Century to bring in security guards by the bus load.
Negative equity, usually associated with Ireland or Florida, is a phenomena almost never seen in the 30-year history of private property ownership in China. Guan and the 700 other buyers in the “Noble Garden” development are in this situation because New Century began slashing prices on March 21, in a bid to clear excess stock.
While the developer refused to talk to the Australian Financial Review, buyers speculate New Century, like a growing number of developers are going bad and need liquidity quick smart.
You can read the entire story here:
» Guarding the global economy’s biggest risk – The Australian Financial Review, 5th April 2014.
Posted in China | 12 Comments »
The ABC’s Four Corners has tonight beamed the BBC’s doco on How China Fooled the World to the Australian public.
How China fooled the world, reported by Robert Peston and presented by Kerry O’Brien, goes to air on Monday 31 March at 8.30pm on ABC1. It is replayed on Tuesday 1st April at 11.00am and 11.35pm. It can also be seen on ABC News 24 on Saturday at 8.00 pm, on ABC iview or at abc.net.au/4corners.
» How China Fooled the World – ABC, Four Corners, 31st March 2014.
Posted in China | 5 Comments »
Reuters is today reporting, “Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong, and some are knocking up to a fifth off the price for a quick sale, as a liquidity crunch looms on the mainland.”
Norton Ng, an account manager at a Centaline Property real estate told Reuters, “Some of the mainland sellers have liquidity issues – say, their companies in China have some difficulties – so they sold the houses to get cash.”
» As credit tightens at home, Chinese sell Hong Kong luxury real estate – Reuters, 19th March 2014.
Posted in China | 14 Comments »
According to Bloomberg, Zhejiang Xingrun Real Estate Co. has collapsed with 3.5 billion yuan (USD $566.6 million) of debt. The collapse comes just days after China’s Premier Li Keqiang said China will “confront serious challenges this year” and warned to expect a wave of bankruptcies.
» China Developer With $567 Million Debt Said to Collapse – Bloomberg, 18th March 2014.
» China facing fresh ‘ghost town’ crisis after developer collapse – Sydney Morning Herald, 18th March 2014.
» China property default threat stirs ghost town fears – The Australian Financial Review, 18th March 2014.
» Chinese Property Developer Defaults on Loans – The Wall Street Journal, 18th March 2014.
» Looming property default in China raises fears of broader crisis – The Telegraph, 17th March 2014.
Posted in China | 3 Comments »
Following China’s first corporate bond default last week, Li Keqiang, Premier of the People’s Republic of China has warned “We are going to confront serious challenges this year and some challenges may be even more complex.”
The lack of a bailout last week is seen as a turning point for China as it decides on a course between civil unrest and moral hazard. To date, it has always bailed out troubled enterprises to prevent civil unrest, but doing so creates a moral hazard. Both enterprises and their investors have – to date – taken ever greater risks knowing if the worst does happen the government will be there to bail them out. The result, culminating with a warning from ratings agency Fitch last year saying China now has the largest credit bubble in modern history.
Speaking after the annual session of the national people’s congress, Li said China must “ensure steady growth, ensure employment, avert inflation and defuse risks”
“So we need to strike a proper balance amidst all these goals and objectives,”
“This is not going to be easy”
Li said we must prepare for a wave of bankruptcies signalling the end of an era when the People’s Bank of China was only a stone throw away and ready with a bailout.
Li’s comments mixed with a raft of pessimistic data out of China has caused a turbulent week on world markets. It started with data from China showing February exports had fallen 18.1 per cent from the year earlier – the most since the global financial crisis. Economists had expected a rise in the vicinity of 7.5 percent and suggest the data could be distorted by the Lunar New Year. China lending data released Monday night show Shadow Bank Lending practically ground to a halt in January & February.
Bloomberg reported on Friday that “China’s default risk has risen beyond that of Ireland, having been on par with France and Japan a year ago”
“Growing concern over looming defaults led to a surge in demand for CDS as investors seek to insure themselves against a credit-default event,” said Saktiandi Supaat, head of foreign-exchange research at Malayan Banking Bhd. in Singapore. “Plans to rein in shadow financing imply that the government can no longer be counted on for a bailout, hence raising the possibility of more defaults.”
The next potential default is speculated to be “Magic” Property with an investment in an office building in Chongging. Arranged by CITIC Trust, it is expected to come due on the 31st March. However, there are reports the local government has intervened, fearing social unrest after a unit buyer committed suicide when he/she could not obtain the title to the property. A report from the Bank of America indicates, “CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.”
» China’s Li Keqiang warns investors to prepare for wave of bankruptcies – The Guardian, 14th March 2014.
» China’s Exports Unexpectedly Drop Blow to Confidence – Bloomberg, 9th March 2014.
» China Bond Risk Exceeds Ireland as Defaults Unavoidable – Bloomberg, 14th March 2014.
» Markets hold breath as China’s shadow banking grinds to a halt – The Telegraph, 10th March 2014.
» China shadow lending slows sharply – Financial Times, 10th March 2014.
Posted in China | 5 Comments »
As widely anticipated, troubled Shanghai Chaori Solar Energy Science and Technology Co. failed to make the scheduled interest payment on a bond this Friday, 7th March 2014. Chaori could barely scratch together five percent of the 89 million yuan due. Unlike Credit equals Gold No 1 no one stepped up to bail out Chaori.
While small, some describe this as a “Watershed” or “Bear Stearns” moment.
The default in the PV Solar Cell Manufacturer is expected to mark the first of many onshore bond defaults for China that will occur in industries suffering from overcapacity such as steel, nonferrous metals, coal, renewable energy & of course real-estate. The near default of Credit equals Gold No 1 on the 31st January resulted from a trust holding bad loans to and equity in coal miner Shanxi Zhenfu Energy Group who collapsed in 2012 and had since ceased production.
Some analysts, including ones from Bank of America, call Friday’s default a “Bear Stearns moment” signalling the start of the Chinese shadow banking crisis, much like Bear Stearns was to the US subprime crisis.
Overnight Copper prices posted the biggest decline since 2011 in heavy volume caused by concerns of slowing growth in China from rising debt and defaults.
The default is expected to accelerate the number of individual bond holders who have been assessing risk and seeking out “less risky” investments such as Australian & Canadian Real Estate. On February 11th, Canadian Finance Minister Jim Flaherty announced the axing, effectively immediately, of a 28 year old visa scheme attracting wealthy foreigners to Canada. On the other hand, the Abbott Government is set to expand our residency visa scheme to the Chinese in what some suggest may cause an even greater housing bubble and further destabilise the already distorted Australian economy at a time when the Reserve Bank is sounding alarm bells.
» Watershed moment for China markets with Chaori Solar bond default – The Sydney Morning Herald, 7th March 2014.
» China Gets 1st Onshore Bond Default as Chaori Doesn’t Pay – Bloomberg, 8th March 2014.
» China Bear Stearns Moment Seen by BofA in Solar Default – Bloomberg, 7th March 2014.
» Copper tumbles after China bond default – The Financial Times, 7th March 2014.
» Shunned Chinese buyers to turn from Canada to Australia – The Sydney Morning Herald, 24th February 2014.
» Visas for wealthy to be expanded – The Australian Financial Review, 8th March 2014.
» Credit equals Gold No 1. – Who Crashed the Economy, 29th January 2014.
» GFC2 – Will it be made in China? – Who Crashed the Economy, 30th June 2013.
Posted in Australian Housing, China | 19 Comments »
China Wealth Management Product Credit equals Gold No 1 narrowly missed default on the 31st January 2014 with a mysterious saviour bailing the fund out and averting an emerging crisis in China’s troubled shadow banking system.
Time is now running out for Shanghai Chaori Solar Energy Science and Technology Company who has announced it can not pay the 89.8 million yuan interest payment owning on its Chaori bond due this Friday, 7th March.
» China’s Chaori Solar poised for precedent-setting bond default – Reuters, 4th March 2014.
» China Is Headed For Its First Domestic Bond Default — And Here’s Why That’s A Good Thing – Business Insider, 5th March 2014.
» First China Onshore Default Looms as Chaori to Miss Payment – Bloomberg, 5th March 2014.
Posted in China | 1 Comment »
The BBC in the United Kingdom has aired a program this week titled “How China Fooled the World – with Robert Peston”
It re-enforces many of the posts we have made over the years and is well worth a watch.
» How China Fooled the World – with Robert Peston – The BBC.
» Credit equals Gold No 1. – 29th January 2014.
» GFC2 – Will it be made in China? – 30th June 2013.
» Fitch says China credit bubble unprecedented – 18th June 2013.
» Concerns on China’s property bubble – 4th March 2013.
» China property bubble close to ‘Tipping Point’ : Zhiwe – 28th September 2011.
» China’s chief auditor warns of mounting debt – 26th June 2010.
Posted in China | 9 Comments »
A last minute bailout will see the 700 investors in a 3 billion-yuan wealth management product (WMP) called Credit equals Gold No. 1 recouping their full principal minus some interest averting an emerging crisis in China’s troubled shadow banking system – for now.
The product, issued by one of China’s largest “shadow” banks – China Credit Trust Co, was widely expected to default on the 31st January 2014 after the marketer, Industrial and Commercial Bank of China (ICBC) said it had no plans to use its own money to repay investors. The product, promising 10 per cent yields consisted solely of bad loans to and equity in coal miner Shanxi Zhenfu Energy Group who collapsed in 2012 and has ceased production.
“A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,” said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. “delaying the first default means risks are snowballing,” he said.
Tight secrecy surrounds the details of the mysterious saviour, but the Financial Times reports on China media’s belief that the bailout involved ICBC, China Credit Trust Co and the government.
It is estimated roughly 4 trillion yuan of trusts will mature this year, with many expected to have repayment problems.
» GFC2 – Will it be made in China? (Wealth Management Products) – Who Crashed The Economy, 30th June 2013.
» ICBC Offers Clients Option to Recoup Funds From Trust – Bloomberg, 28th January 2014.
Posted in China | 18 Comments »
On the 18th of December 2013, the U.S. Federal Reserve finally announced it would begin to taper or wind down QE3 – an $85 billion a month shot in the arm to keep the economy afloat after the worst recession since the 1930s.
Starting in January 2014, the Fed will wind total purchases down a notch to $75 billion a month. Depending on how the economy reacts, the Fed will continue to cut in each meeting throughout the year. Fed chairman Ben Bernanke said “If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do, probably at each meeting, a measured reduction” in purchases. However, if the economy slows, Bernanke says they will consider skipping a reduction in a meeting or two, or if the economy accelerates could taper a bit faster.
Reactions are mixed. Some believe the Fed will have difficulty removing the stimulus fast enough to prevent inflation, while many others believe the only reason there are signs of growth in the U.S. economy is due to the sheer size of QE3. Take it away, and the unsustainable, fragile economy will quickly falter.
Opinions also vary as to why the Fed has announced the taper. While some believe the U.S. economy is showing good progress. Others some warn QE3 has only served to create more asset bubbles – namely a stock and new housing bubble, but has done little to improve the broader economy and support job growth. And now the Fed needed to act decisively to prevent these bubbles getting much bigger.
The only thing for certain is after such a large and prolonged stimulus, the result to global stability of the tapering will be a wildcard this year – Anything could happen.
China Economic Growth Model “Unsustainable” – Deputy Finance Minister Wang Bao’an
The other global wildcard for 2014 is China and has far greater implications for Australia. Last year we raised the question if the second stage of the GFC would be made in China and if WMPs would replace CDOs as the buzz word in this crisis. (GFC2 – Will it be made in China? – June 30th 2013)
At the time, a credit freeze in China had caused the Shanghai Interbank Offered Rate (Shibor) – a measure of the cost of commercial banks to lend to each other, to surge. After a couple of days of abstaining, the People’s Bank of China (PBoC) was forced to intervene and inject liquidity into the market. Only two weeks prior, ratings agency Fitch warned China’s credit bubble was now unprecedented in modern world history.
In the days before Christmas, and not long after the Fed taper was announced, it was happening again with lending benchmark rates hitting the highest levels since the June crisis. Once again, the PBoC came to the rescue injecting 29 billion Yuan to provide short term relief. Minsheng Securities Macroeconomics analyst, Zhang Lei told the Global Times “The cash injection can only ease the problem in the short run, Banks will face tight liquidity until mid-2014, as an increasing number of financial instruments will be maturing in the first half of next year.”
The concern is a plethora of loans taken out by State owned Enterprises (SoEs) to fund public infrastructure and real estate investments, many empty or under utilised and with low returns – if at all. The projects are an attempt to keep economic growth chugging along, but at some stage the debt must be refinanced.
In an rare and unusual stand, China’s Deputy Finance Minister Wang Bao’an wrote an article in the latest issue of Qiushi, a bi-monthly political theory periodical of the Central Committee of the Communist Party of China saying China’s current economic growth model is “unsustainable.” He described the Chinese economy as “high input, high resource consumption, high pollution, high growth” with “low output, low efficiency, low profit, low tech”.
In a recent column for the Project Syndicate website, billionaire investor George Soros believes the biggest risk in the World Economy now is China – you can forget the USA. No doubt we will see more in this space as the year progresses.
Back home, trends are somewhat clearer barring any external shocks. The Australia Dollar is expected to continue falling this year resulting in broad price increases on imports. The RBA said it will be comfortable with 85 cents. One of the world’s largest investment firms, BlackRock, believes the dollar could fall to 80 cents this year (Aussie dollar headed for US80¢ with RBA to cut rates again, says BlackRock – SMH.) A crisis in China could push it below 80.
After an approximate 15 per cent fall since April, already we are starting to hear the odd whinge about petrol prices at $1.65 litre. Most Australian’s have taken the overpriced Australian dollar for granted without a second though – cheap petrol, cheap electronics, cheap apparel even cheap overseas holidays. The depreciating dollar is coming as a shock. It’s not so much of a case of prices are getting expensive, but a case that prices were abnormally cheap and are just returning to where they should have been had we not had a resource boom. In December, we quoted from Professor Ross Garnaut’s latest book – “No developed country has experienced as large a sustained appreciation in its real exchange rate as Australia has through the China resources boom,” “In turn, this means that no developed country has ever successfully worked through such a fall in the real exchange rate and associated contraction of incomes.”
The other shock will be income growth or rather the lack thereof. Treasury’s chief economist David Gruen told a conference in November last year, “Our estimates say that if we achieve productivity growth similar to its long run average, the next decade will see the slowest income growth in Australia for half a century by a lot.” This comes from an expected decline in Australia’s terms of trade and is consistent with views from the International Monetary Fund (IMF) and the Australian Productivity Commission. (Slowest living standards growth in ‘our lifetimes’ – SMH)
The Australian Bureau of Statistics (ABS) Wage Price Index for the September 2013 quarter reported an seasonally adjusted 0.5 per cent increase, the second lowest increase since the introduction of the Index in 1997. Over the year to September, wage growth was 2.7 per cent, the lowest annual rate since 2000 (Tech Wreck).
Late last year an Organisation for Economic Co-operation and Development (OECD) report (House prices, labour costs leave economy vulnerable: OECD – AFR) showed Australia had the largest appreciation in relative unit labour costs in the OECD effectively putting Australia at a competitive disadvantage to the world. This coupled with the high cost of living and constrained discretionary spending from Australia’s housing bubble (High housing costs make Australia’s economy uncompetitive – ABC) and household debt overhang is expected to see unemployment continue to accelerate this year.
All eyes will also be on the May budget after the Mid-Year Economic and Fiscal Outlook (MYEFO) showed a substantial deterioration in the domestic economy. During the boom years, Australia’s wealth was squandered on various tax relief’s. Cuts will now need to be made placing Australian households under even more pressure.
Finally, there seems little scope for double digit house price growth the experts are once again predicting (annual tradition around the holiday period). As per the Australian headline, House prices [are] at the mercy of the budget (outside of an external shock). In the article, Dr Andrew Wilson talks some sense, “Nothing will stop a housing market quicker than a declining business cycle and that’s certainly what we have the prospects for in NSW and Victoria,” “Rising unemployment will cause lower wage growth, which reduces the capacity of buyers to borrow.”
What are your predictions for 2014?
» Slowest living standards growth in ‘our lifetimes’ – The Sydney Morning Herald, 21st November 2013.
» Low wage growth, job fears hold inflation down – The Australian, 18th November 2013.
» Aussie dollar forecast to fall to 80 cents in 2014 – The ABC, 31st December 2013.
» U.S. and China: When the giants unwind Commentary: Withdrawal of stimulus could well cause a fresh crisis – Market Watch, 30th December 2013.
» Vice-minister calls for new economic growth model – China Daily, 3rd January 2014.
» China tries to deal with its mountain of debt – The Sydney Morning Herald, 30th December 2013.
» House price growth at mercy of budget – The Australian, 1st January 2014.
» China move calms credit concerns – The BBC, 24th December 2013.
Posted in Australian economy, Australian Housing, China, US economy | 15 Comments »
Generation Y, Kev wants you on board.
During Kevin Rudd’s comeback leadership victory speech he had a message for our young generation:
Before I conclude, let me say a word or two to young Australians.
It’s clear that many of you, in fact too many of you have looked at our political system and the parliament in recent years and not liked or respected much of what you seen.
In fact as I rock around the place talking to my own kids, they see it as a huge national turn-off.
Well, I understand why you’ve switched off; It’s hardly a surprise.
But I want to ask you to please come back and listen afresh.
It is really important that we get you engaged, in any way we can.
We need you, we need your energy, we need your ideas, we need your enthusiasm, and we need you to support us in the great challenges that lie ahead for the country.
And with your energy, we can start cooking with gas.
The challenges are great, but if we are positive and come together as a nation we can overcome each and every one of them.
After 22 years of consecutive growth fuelled by unsustainable fiscal “prop-ups” and distortions, the current generation is faced with an unattainable housing dream and an uncertain future. To put those 22 years in perceptive, Professor Ross Garnaut says “Between the recession of 1990-91 and now, mid-2013, Australians have enjoyed the longest period of economic expansion unbroken by recession of any developed country ever.”
Distortions from our home grown housing bubble and the record levels of household debt currently present in Australia has spilled over into the broader economy. When combined with the end of the mining boom, it is causing youth unemployment to sky-rocket. For the first time in decades, this generation is starting to struggle to get a job, let alone provide their own shelter – something even Generation X struggles with today. And with both sides of politics continuing to pursue any avenue possible to keep our miracle economy from collapse and expanding for yet another consecutive year, it’s no surprise our younger generation is disillusioned in the system.
Without government intervention, there is little doubt the Australian housing market would have collapsed in 2008 in parallel with other over extended housing markets around the globe. At the time, The Courier Mail reported “STRESSED home owners and investors are flooding the market with thousands of houses but agents say they can’t find any serious buyers for some properties.” The number of homes listed for sale was surging. Prices were falling.
First Home Owners’ Boost
This trend remarkably reversed when a month after Lehman Brothers filed for bankruptcy and among the backdrop of a global “systemic meltdown” caused by irresponsible lending and excessive household debt levels, Prime Minister Kevin Rudd announced the First Home Owner Boost (FHOB). For first home buyers purchasing an existing dwelling, the FHOB was a $7,000 “boost” to the existing $7,000 first home buyers grant first introduced on the 1st July 2000 to offset the GST. To help stimulate new residential building, first time buyers building a new home would get an extra $14,000 boost.
The rumour mill contains unverified reports suggesting the 2008 stimulus package prepared by Treasury to combat the GFC didn’t include a First Home Owners’ Boost. Rather, Treasury had proposed more prudent saving through the First Home Saver Account (FHSA). If the reports are right, it was our Politicians that dreamed up and implemented this gem called the ‘Boost’.
These rumours do bode well with Treasury Executive Minutes stating “The FHOB was announced 14 days after the FHSAs became available as part of the Government’s first stimulus package designed to counter the effects of the global financial crisis. This short-term stimulus was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market. Contrary to this measure, the FHSA is designed to encourage saving over the medium to long term.”
And to bring forward purchases, it did. By October 2009, 190 thousand first home buyers buckled under the temptation of free money, and took up the offer. A small portion went through the agony of losing their homes in the years that pursued. The lure of free money and no appreciation for the size and serviceability of today’s mortgage was far too great.
Open the Foreign Floodgates!
At the time of the GFC, Australian household’s carried more household debt as a percentage of household disposable income than their American household counterparts. To cover all bases and ensure there wasn’t a devastating collapse of the housing market like in the United States, the government also “streamlined” the administrative requirements for the Foreign Investment Review Board (FIRB). As part of these changes, temporary residents (e.g. Chinese) could purchase Real Estate in Australia without having to report or gain approval from the FIRB in a bid to help support the market. It was sold to the Australian public as allowing the FIRB to concentrate on larger issues in the ‘National Interest’.
By March 2010, the media was flooded with articles (Australia for Sale) on Australian’s being outbid by an army of Chinese residents, effectively pricing Australian’s out of their own housing market. But the ‘streamlining of administrative requirements’ actually meant no records were kept, or more specifically it would seem that these foreign temporary residents no longer needed to lodge applications with the FIRB. There was public outcry and no real data to support just how big or small this issue actually was.
The outcry had grown so intense, that on the 24th April 2010 the government buckled and a tightening of foreign investment rules relating to residential property was announced, complete with a package of new civil penalties, compliance, monitoring and enforcement measures. The government even went to lengths to set up a 1800 hot-line for residents to report suspicious property buyers and help calm an outraged public.
The press release by the former Assistant Treasurer, Nick Sherry said “The Rudd Government is acting to make sure that investment in Australian real estate by temporary residents and foreign non-residents, is within the law, meets community expectations and doesn’t place pressure on housing availability for Australians.”
Kev’s Property Portfolio
Five years on, the unsustainable stimulus measures implemented in 2008 is wearing thin. Credit growth for mortgages is at near 37 year lows despite interest rates sitting at 53 year lows. Gaping cracks are now starting to appear in the China miracle and the “mining boom is over” according to Rudd. Many metrics now have the economy in a worst position than during the depths of the GFC.
And Rudd is now back as Prime Minister.
For the shafted generation, already disillusioned by Australian politics, it begs the question, what surprise now? What can be pulled out of the hat?
Their concerns are not unwarranted when on Tuesday, News Limited publishes a story titled, “Rudd’s luxury property portfolio miles from Struggle Street”
With a $10 million dollar portfolio of homes in Canberra, Brisbane and on the Sunshine Coast, can Rudd really be trusted to make decisions in the best interests of Australia?
Or more precisely, how soon before the next housing stimulus package will be announced? How big can this bubble get?
Howard & Costello
But, Rudd can’t be given the credit for creating or nurturing Australia’s housing boom, only for pulling out every stop possible to save it. Rudd had in fact inherited a housing bubble “too big to fail”, when Labour rose to power in November 2007.
The Liberal’s Howard and Costello had more to do with creating the housing bubble.
Only last weekend, Former Prime Minister John Howard was rallying Liberal constituents in a Coalition rally at the Melbourne showgrounds. He told loyal supporters, he had left the economy to Labour in 2007 with no net debt.
But the same can’t be said for household balance sheets.
While Howard and Costello had the reins of the Australian economy, household’s packed on significant amounts of household debt. Some of the drivers was poor policy such as the 50 per cent capital gains discounts which when used in conjunction with negative gearing, really started to fuel speculation in housing markets. Other poor policy could include change of legislation to enable self managed super funds to leverage into the housing bubble.
www.nicholsoncartoons.com.au – 25th Sep 2002
But Australia wasn’t the only country in the world to experience a significant housing bubble caused by an abundance of cheap credit, hence some of the blame should sit with Howard and Costello’s failure to act on the household debt problem. And have a feel for our regulators, trying to instil sanity and protect the public from irrational government decisions. ASIC is currently overwhelmed with rouge “super” spruikers encouraging SMSF to speculate in leveraged property. Last month, one insider told ABC’s The Business, it’s a “ticking timebomb.”
The bigger the bubble gets, the harder it becomes to pilot a soft landing. By the time Rudd inherited the housing bubble, it was too big to fail. And when Lehman Brother’s collapsed, Rudd pretended everything was a-okay domestically – “As Prime Minister I will not sit idly by and watch Australian households suffer the worst effects of a global crisis we did not create.”
It’s no wonder younger generations have given up on politics. Can you really blame them?
» Rudd’s luxury property portfolio miles from Struggle Street – News Limited, 2nd July 2013.
» The stampede into property by self managed super funds is a risky business – The ABC, 17th June 2013.
Posted in Australian economy, Australian Housing, China, First Home Owners' Boost, Foreign Investment Review Board, Negative Gearing, Unemployment | 28 Comments »
Since the GFC, Australia has literally bet the house on China. We have put all our eggs in one basket. And like Australian housing, you shouldn’t become complacent on the China miracle either.
Throughout much of last decade, many western households around the world spent more than they earned. China’s low cost emerging manufacturing sector was the primary benefactor of this unsustainable global spending spree.
This quickly changed during the GFC when debt bubbles started bursting, and global consumption rapidly declined. Demand for Chinese manufactured goods dried up and inventories soon started to pile up.
To prevent collapse, Beijing embarked on a massive 4 trillion yuan economic stimulus program. But, additionally, it told local governments to spend like mad and they did this off balance sheet, though SOEs (State Owned Enterprises) and LGFV (Local Government Finance Vehicles). This set the foundations for a large fixed asset investment boom to follow. The beneficiary this time was us, via the Mining boom.
One of many photos published by Foreign Policy on June 21st 2013.
China built apartments, office towers, shopping centres, roads, transport infrastructure etc. Most were superfluous, would sit empty and with no cash flow, and create future issues when the debt comes due for refinancing.
Like other significant credit bubbles, the trick is to quickly move on the debt to the unsuspecting to reduce your risk before it blows up. China’s lenders created Wealth Management Products (WMPs). I love the name – it simply sells itself. Zero Hedge explains:
“The so-called ‘Wealth Management Products’ that are discussed widely and yet little understood are basically higher yielding vehicles pitched to a greater-fool retail audience with the goal of reducing banks’ risk at the behest of the PBOC. Of course that is not how these stuffed-to-the-gills-with-risky-development-projects deals are pitched to the investing public but they have allowed banks (and implicitly local governments) via the infinitely virtuous loop below to fund any and all things construction-based… until now.”
This has now been going on for a decade, but at an rapidly accelerated place in the five years since the GFC. About twice a year, pictures emerge of a new ghost city similar to the much publicised city of Ordos in Inner Mongolia.
Last week it was Foreign Policy’s turn to publish photos of the district of Chenggong, a 41 square mile city built 11 miles South of Kunming in China’s Yunnan province. The new city designed to house 1 million by 2020 includes 15 university campuses.
Two weeks ago, Ratings agency Fitch warned China’s credit bubble is now unprecedented in modern world history. The Sydney Morning Herald reported, “China’s shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.”
Prior to the Fitch warning a fortnight ago, the China central bank – The People’s Bank of China (PBOC) had always stepped up to provide extra liquidity when the banks and shadow banking system was under pressure allowing the problem to continuously snowball. But what happens when one day, the PBOC decides not to step up to the plate?
We came close to this last Wednesday week (19th) when the Shanghai Interbank Offered Rate, or Shibor surged and credit markets in China began to freeze over. At first the PBOC was nowhere to been seen, spooking financial markets around the world. Commentators started talking of a Lehman style collapse. The cause was believed to be a massive withdrawal of deposits in early June, including maturing wealth-management products (WMPs). Could investors be getting cold feet? Why would you not want to reinvest?
The PBOC was forced to intervene a couple of days later, once again saving the banking sector – for now. But it warned the days of easy money are over. Credit markets in China has loosened a little but still remain tight, and this is expected to have the intended impact of curbing growth going forward.
The question remains, not if, but when will the big credit crunch come.
The consequence for Australia is likely to be more severe this time. Australia has depended on mining to keep household incomes elevated and mask the effects of high household debt, caused from a significant housing bubble. As mining and the domestic economy slows, jobs are being lost.
Albert Edwards from Societe Generale says “Australia is a leveraged time bomb waiting to blow” and makes comparisons to the US subprime crisis caused in part from (CDOs) collateralised debt obligations blowing up.
“It is not a CDO, but a CDO squared. All we have in Australia is, at its simplest, a credit bubble [household debt] built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China.”
On Wednesday night after a leadership challenge, Prime Minister-Elect Kevin Rudd delivered the following in his leadership victory speech:
“We have a great future, but that future is not guaranteed. In recent times I’m been thinking a lot about the state of the global economy,”
“There are bad things happen out there. The global economy is still experiencing the slowest of recoveries.”
“The china resource boom is over. China, itself, domestically is showing signs of recovery.”
“And when China represents such a large slice of Australia own economy, our jobs and opportunities for raising our living standards, the time has come for us to adjust to the new challenges.”
“New challenges in productivity. New challenges also in the diversification of our economy.”
Channel 9′s 60 Minutes will tonight air a segment on Chinese ghost cities. It will claim “vast new megacities bigger than London or New York are shooting up all over the country at a rate of 20 a year.” Tune in at 7:30pm.
» Presenting Chinese Wealth Management Product’s Infinite ‘Risk’ Loop – Zero Hedge, 24th June 2013.
» Haunting photos of China’s latest ghost city – Macrobusiness, 24th June 2013.
» The Empty City – Foreign Policy, 21st June 2013.
» China’s credit bubble is unprecedented: Fitch – The Sydney Morning Herald, 18th June 2013.
» Fitch says China credit bubble unprecedented in modern world history – The Telegraph (UK), 16th June 2013.
Posted in China | 10 Comments »
Ratings agency Fitch has warned China’s credit bubble is now unprecedented….
» Fitch says China credit bubble unprecedented in modern world history – The Telegraph, 16th June 2013.
» China’s credit bubble is unprecedented: Fitch – The Sydney Morning Herald, 18th June 2013.
Posted in China | 14 Comments »
Last Monday, we briefly reported on new regulations being introduced by the Chinese Government to help curb rampant property speculation and help put a lid on China’s property bubble. The shock move created jitters in world stock markets, including wiping approximately $21 billion from Australia’s resource lead bourse.
The Chinese Central Government has made repeated attempts over the past two years to rein in property speculation, but house prices have recently showed signs of moving in the wrong direction. As a result, on the 1st of March, the Government introduced further measures including the re-introduction of a 20 per cent capital gains tax, but failed to provide any dates for when the tax will come into play. This uncertainty has property investors flooding real estate offices in a bid to sell their empty investment properties before the capital gains tax comes into effect.
The Shanghai Daily reported Deovolente researcher, Lu Qilin saying “The latest announcement by the central government to implement a 20-percent capital gains tax on existing home transactions has had an immediate impact on the local market.”
Forbes reports on data from the Beijing Municipal Commission saying 9,400 homes were sold in Beijing last week, up 279.5% from the same time last year. Existing home sales have tripled last week in Beijing.
It is still earily days and it is unclear what longer term effect these new measures will have on the Chinese property market and what this will mean for Australia. Many Chinese investors purchase brand new homes as a place to park their wealth. They do not rent these premises out for fear tenants cause wear and tear, hence devaluing the property. In August 2010 we reported on data showing 64.5 million urban electricity meters recorded zero electricity consumption over a 6 month period indicating empty apartments suitable for housing over 200 million Chinese. This followed a report earlier that year from China Reality Research suggesting almost a fifth of all recently sold apartments were kept vacant.
If a capital gains tax frees up these empty homes for first home buyers, then it could be expected the sales of new homes and apartments, built using some of Australian resources to come under significant pressure.
» Selling Frenzy In China As Gov’t Slams Housing Bubble With Tax Hike – Forbes, 12th March 2013.
» Planned tax revives housing transactions – The Shanghai Daily, 13th March 2013.
Posted in China | 7 Comments »
1.5 per cent was wiped off the value of Australian stocks today, in part on the news the Chinese government is tightening regulations to help contain China’s Housing Bubble. The Shanghai Composite fell 3.6 per cent dragged down by some construction stocks falling as much as 10 per cent.
Australia has been one of the benefactors of this boom, supplying resources to help build these empty cities.
America’s 60 Minutes has just aired a story on China’s property bubble, dubbed the largest housing bubble in history.
China turned to fixed asset investment to help offset collapsing demand for its manufactured products during the GFC.
» China’s real estate bubble – 60 Minutes, 3rd March 2013.
» China moves to curb property speculation – Macro Business, 4th March 2013.
» Stocks slump on Chinese slowdown fears – The Sydney Morning Herald, 4th March 2013.
» China property bubble close to ‘Tipping Point’ : Zhiwe – Who Crashed the Economy, 28th September 2011.
» Is China’s Construction Bubble ready to Burst? – Who Crashed the Economy, 25th June 2011.
» China extends stress tests to steel & cement – Who Crashed the Economy, 6th August 2010.
Posted in Australian economy, China | 19 Comments »
S&P has reaffirmed Australia’s AAA credit rating for now, but has warned a number of vulnerabilities exist.
One vulnerability is a housing correction due to the “substantial [household] debt mainly due to elevated property prices” in Australia.
The report indicated “The sustainability of high household debt levels has not been tested in an environment of high unemployment for a long time.”
“Australian house prices, relative to household incomes, are also elevated. While there has not been a build-up of aggregate excess supply, the housing market continues to appear somewhat vulnerable to a downturn, in our view.”
Other concerns include Australia’s increasing reliance on overseas funding and Australia becoming increasingly interlinked with China’s growth and business cycle.
» S&P gets positive on Australia – MacroBusiness, 27th February 2013.
» AAA rating vulnerable to debt, house prices: S&P – The Australian Financial Review, 27th February 2013.
» Economy strong, but housing vulnerable: S&P – The Sydney Morning Herald, 27th February 2013.
» S&P rating safe, but foreign debt a worry – Yahoo 7/aap, 27th February 2013.
Posted in Australian economy, Australian Housing, China | 6 Comments »
Wednesday’s decision by BHP Billiton to delay the Olympic Dam expansion could herald the end to Australia’s mining investment boom and commodities super-cycle.
Debate about when or if the boom had peaked started earlier this month when a report from Deloitte Access Economics had forecast a peak for resource sector investment in 2014/15. While commodity prices are unwinding, some argue sustained high volumes mean there is nothing for concern, while others argue falling prices and rising costs will impact profitability and could send some mines to the wall.
Earlier in the week, news broke that BHP Billiton’s major shareholders did not want the $30 billion dollar Olympic Dam expansion to go ahead. On Wednesday, BHP Billiton’s chief executive Marius Kloppers delivered the decision they wanted to hear, along with a profit announce they didn’t – a 35 per cent decline on the back of falling commodity prices.
Kloppers indicated falling commodity prices and rising costs were to blame for the Olympic Dam decision. There was an escalation in capital expenditure caused by tight labour markets and labour efficiencies, tight supplier marker, high exchange rates and high diesel costs. 140 staff from the Adelaide based Olympic Dam expansion team will lose their jobs, while BHP Billiton searches for a cheaper way to expand Olympic Dam.
The Olympic Dam decision just heightens the debate of the future of the mining boom. Martin Ferguson, Federal Minister for Resources and Energy voiced his opinion on radio saying “You’ve got to understand, the resources boom is over. We’ve done well.” Later, he was forced to clarify that his comments were in the context of commodity prices. Senator Penny Wong says the mining boom still has a long way to run, while Senator Stephen Conroy calls the pipe line of investment “extraordinary.”
It would seem you can’t find the answer in Canberra. But, it could reside in China.
China’s Fixed Asset Investment Bubble
China was the biggest beneficiary when much of the developed world spent more than they earned in the years leading up to 2007. This quickly changed when debt bubbles started bursting, and global consumption rapidly declined during the GFC.
To combat this issue, China embarked on a massive 4 trillion yuan economic stimulus program. Additionally, it told local governments to spend like mad and they did this off balance sheet, though SOEs (State owned enterprises) and LGFV (Local Government Finance Vehicles). This set the foundations for a large fixed asset investment boom. The beneficiary this time was us.
China built apartments, office towers, shopping centres, roads, transport infrastructure etc. Most were superfluous, would sit empty and with no cash flow, create future issues when the debt comes due.
You can read more in the post, Is China’s Construction Bubble ready to Burst? (25th June 2011)
In a post (China’s chief auditor warns of mounting debt) in June 2010 we reported the head of the National Audit Office, Liu Jiayi wrote “The scale is large, and the burden is quite heavy” when referring to SOE debts and North western University Professor, Victor Shih said China could be in for a “pretty large-scale financial crisis around 2012″ if nothing is done to address the issue.
Two months later in a post titled China extends stress tests to steel & cement we reported on 64.5 million urban electricity meters recording zero electricity consumption in a 6 month period suggesting there was 64.5 million homes empty and predictions they could house 200 million people.
Double Dip Recessions
But China wasn’t the only country that thought they were onto a miracle cure. Around the developed world, leaders – including those in Australia, thought they could fix unsustainable debt bubbles with stimulus and an endless number of bailouts. Everything would be right.
But as Europe heads back into recession, China is being dealt another blow to exports – just like in 2007. Trade figures released two weeks ago show China’s exports to Europe have plunged 16 per cent in the year to July. Exports to some Eurozone countries are down as much as 40 per cent. Total China exports were forcast to have grown by 9 per cent, but actually came in at just 1 per cent.
Today, the New York Times reports “the glut of everything from steel and household appliances to cars and apartments is hampering China’s efforts to emerge from a sharp economic slowdown.”
The severity of China’s inventory overhang has been carefully masked by the blocking or adjusting of economic data by the Chinese government — all part of an effort to prop up confidence in the economy among business managers and investors.
But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.
Even the Federal Reserve Bank of Dallas is on the band wagon with an August 2012 Economic Letter titled China’s slowdown may be worse than official data suggest.
Meanwhile, iron ore prices fell through the $100USD barrier today.
» Iron ore price slide will continue, say experts – The Sydney Morning Herald, 24th August 2012.
» China Confronts Mounting Piles of Unsold Goods – The New York Times, 23rd August 2012.
» China exports feel pain from Europe – The Australian, 24th August 2012.
» Australia miners tighten belts as ore prices fall – Market Watch, 23rd August 2012.
» Mining boom running out of steam – The Australian, 2nd August 2012.
Posted in Australian economy, China | 16 Comments »
Measures by China’s central government to cool its once bubbling property market is continuing to yield results with figures from the National Bureau of Statistics (NBS) showing a 17.5 percent drop in the number of home sales in the first quarter this year. According to the bureau, new house prices in 45 out of 70 cities declined in February, while 21 cities reported no change in price. The Beijing Real Estate Association reports prices for new residential houses in Beijing are down 20.7 percent yoy.
China has just reported the slowest economic growth in three years with GDP falling to an annualised growth of 8.1 percent for the first three months of this calendar year.
Late last year, under the headline “Chinese prop up property market,” the Australian Financial Review suggested the Chinese were the only thing keeping Harry Triguboff’s “cement mixers turning”.
This week at the opening of Meriton’s Vantage apartment block in Rhodes NSW, Mr Triguboff said interest rates where too high, demanding the RBA’s governor Glenn Stevens to drop rates, “He has to drop. I can’t believe it’s that high.”
He told the Australian Financial Review, “It got to a stage [last year] where I had 85% of purchasers who were Chinese, and now it’s down to 65%.”
“We’re very happy with Chinese coming here, but we must have our own.”
If we assume there hasn’t been a surge in domestic buyers as interest rates are apparently too high (not the price and leverage required to purchase one), then the figures can only mean one thing. Fewer Chinese are buying Harry’s apartments. Could falling house prices back in mainland China, have the Chinese questioning if property always goes up?
In late 2008, the Rudd Government made administrative changes to Foreign Investment Review Board (FIRB) legislation which could be seen as one measure to encourage foreign buyers to purchase our property and help keep demand up for our ailing property market.
If this is the case, it could be another lifeline gone in the who wants to be a property millionaire game show.
» China Property-Sales Drop Shows Risk of Hard Landing – Bloomberg, 14th April 2012.
» Home prices in most cities stop growing in Feb – China Daily, 18th March 2012.
» Beijing housing prices 21% down in Q1 – China Daily, 9th March 2012.
» Real Estate Investment by Foreign Residents : Top Secret – Who crashed the economy?, 4th January 2012.
Posted in Australian economy, Australian Housing, China | 10 Comments »
In a report released yesterday by Standards & Poor’s, it predicted Australian House Prices could fall by more than 5 percent in 2012 should China experience a soft landing with a GDP growth rate of 8 percent.
Earlier this week China’s Premier Wen Jiabao announced his government would target a GDP growth rate of 7.5 percent in 2012. In China’s 12th five year plan, it has lowered growth to 7 percent during the 2011-2015 period to what S&P term a medium landing.
Other scenario’s tabled in the S&P report was a house price fall of greater than 10 percent if China’s GDP growth was 7 percent and a collapse exceeding 20 percent if China experiences a hard landing with GDP growth falling to 5 percent.
With the Australian banking sector having a large exposure to residential house prices, the report titled “China Soft Landing Would Moderately Impact Australia’s Housing Market” was one of three reports released on Wednesday. S&P is also focusing closely on the RMBS and LMI providers with reports titled “Australian LMI Providers Likely To Stand Firm Amid China Jitters” & “A Soft Landing In China Is Unlikely To Affect Australian RMBS”
» Lower GDP target is healthier – China Daily, 9th March 2012.
» China drop to hit house prices hard – The Age, 9th March 2012.
» S&P Articles Analyze Impact Of China Slowdown On Aust Sectors – Reuters, 7th March 2012.
Posted in Australian economy, Australian Housing, China | 23 Comments »
It was December 2008. Three months earlier Lehman Brothers had collapsed – credit markets have frozen over. Two months earlier, Prime Minister Kevin Rudd announces the First Home Owners’ Boost, designed to save the housing market, or at least temporary, by encouraging first home buyers to bring forward their purchases and help prop up ailing demand.
By now Australian houses prices had come off 4.7 percent. During all the panic, the Rudd Government announces legislation to ‘streamline’ some of the administrative requirements for the Foreign Investment Review Board (FIRB). According to the Government, the changes would enable the FIRB to concentrate on larger issues in the ‘National Interest’.
But as the Australian public would later learn, this streamlining of administrative requirements really translated into the opening up the floodgates to allow temporary foreign residents such as students to buy property of any value in Australia, effective from the 18th December 2008. Previously they could only spend up to $300,000 on their primary place of residence in Australia.
With the housing market oversupplied, and demand dwindling, many questioned the timing of the announcement. Was it just another measure to save our already highly inflated housing market? If it was, you have to admit it was a genius scheme. Domestically, mortgage approvals had fallen off a cliff. Why not enlist the help of foreigners? It was cheaper, a lot cheaper, than giving first home buyers free money.
By March 2010, the Australian media started asking for data on just how many foreign residents were buying houses in Australia. There were endless reports each weekend of Australian’s being outbid by an army of Chinese residents, effectively pricing Australian’s out of their own housing market. But the ‘streamlining of administrative requirements’ actually meant no records were kept, or more specifically it would seem that these foreign residents no longer needed to lodge applications with the FIRB. There was public outcry and no real data to support just how big or small this issue actually was.
The outcry was so intense, that on the 24th April 2010, a tightening of foreign investment rules relating to residential property was announced, complete with a package of new civil penalties, compliance, monitoring and enforcement measures. The government even set up a 1800 hot-line for residents to report suspicious property buyers and help calm a heated public. It was sold to the Australian public as a reversal of the changes made in December 2008. But some are not convinced.
The problem is, there is no longer any transparency in the sector.
Only on Friday, The Sunday Age’s Property Reporter Chris Vedelago vented his frustration on a Freedom of Information (FOI) request to access this information. He quote’s the government response in his article – ‘‘Around 19 documents have been identified as potentially falling within the scope of your request. Given the nature of the documents I envisage that most, if not all, of the documents will be exempt from release,’’
You must admit, it doesn’t portray a good image of the government. As Chris writes, the FOI wasn’t targeted at troop movements in Afghanistan, the prime minister’s private schedule or the names of ASIO’s anti-terrorism informants? “No, it was a request for some basic facts and figures about the state of foreign investment in Australia’s residential real estate market.”
What do they have to hide? Is there a loop hole in their legislation?
A day after Chris’s article, The Courier Mail reported under the headlines “Foreigners outspend locals on Queensland residential property in 2011″ that foreign buyers’ had spent $334.2 million on residential property in Queensland. Based on research by Colliers International, foreign Chinese increased their spending on Queensland real estate by 50 percent over the year prior, to $106.8 million.
While the figures presented in the article didn’t quite tally, about 70% of the sales were as investments with the other 30% for owner occupiers.
The Weekend Australian Financial Review printed a two page story in the December 17-18, 2011 edition under the headlines of “Chinese prop up property market”. It writes “While vast tracts of the Australian property market suffered the staggers this year, the Chinese kept Harry Triguboff’s cement mixers turning.” If you don’t know, well known billionaire Harry Triguboff AO is managing director of Meriton Apartments, regarded as Australia’s largest property developer. According to the article, 70% of Meriton’s sales are to Asians notably the Chinese.
Justin Wang, founder of Property Investors Alliance told the AFR, “If you sell to demand overseas, then you will find the settlement is not certain. I think the [Australia] government should kept a tight policy and not open the door to overseas investment. It’s very dangerous. The big danger is lots of speculators come here and if something goes wrong, it will crash.” According to figures from BIS Shrapnel and published by the AFR, Justin has 8 percent market share of new apartment sales in Sydney, selling 600 apartments a year, with 95% of them being Chinese.
Justin’s comments makes you wonder what happens when foreign Chinese residents find out that perpetual growth in real estate is not guaranteed and prices can and do fall? – just like what mainland China is experiencing now. Will this cause these investors to abandon Australia, or will it have the opposite effect and they flock here to a ‘strong and stable economy’. What ever the result, we can only have a guess at what the consequences will be without accurate and transparent data on foreign investment in Australia’s real estate market.
And has anyone noticed the Sydney Morning Herald is now reporting on Chinese house prices, down for the fourth month.
» Australia for Sale – Who Crashed the Economy, 27th March 2010.
» Foreign investment is overheating our property market – The Punch, 10th April 2010.
» Australian Federal Government gets tough on foreign ownership rules – News Limited, 24th April 2010
» Secret government business – The Age, 30th December 2011.
» Foreigners outspend locals on Queensland residential property in 2011 – The Courier Mail, 31st December 2011.
» China’s house prices fall for fourth month – The Sydney Morning Herald, 4th January 2012.
Posted in Australian economy, Australian Housing, China, Foreign Investment Review Board | 8 Comments »