Archive for the ‘China’ Category
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 »
With the European debt crisis effecting consumer confidence around the globe, HSBC’s China Purchasing Managers’ Index (PMI) dropped to 47.7, a little bit weaker than last weeks preliminary flash figure. Values below 50 indicates the conditions are contracting and deteriorating.
Today’s figure comes in at a 32 month low. The last time such a contraction was recorded in Chinese manufacturing was during the GFC when world consumers first closed tight their purse strings. At the time, China turned to fixed asset investment as a stimulus to help bridge the gap until the world economies recovered, and started to spend beyond their means again.
China needs to move from a export driven economy to a consumer driven economy, but such a transformation is expected to be slow. John Lee, an adjunct professor at Sydney University last week told the Weekend Australian Financial Review one option to counteract falls in manufacturing could be to ramp up fixed asset investment in infrastructure, property and heavy industry. The AFR even used Lee’s own wording, “they’ll continue to build stuff they don’t actually need.”
One heavily publicised fixed asset investment has been China’s empty cities. In December 2009, we wrote about Ordos, in Inner Mongolia, a city designed and built to home 1 million people, only no one lives there, only cash. It was a place to speculate in China’s property bubble and park your money. House prices only go up. The writing was on the wall, and reports in the last couple of weeks suggest the bubble has finally burst. Real estate prices in Ordos is now 3,000 yuan per square meter, down57 percent from 7,000 yuan per square meter during the boom period.
Last month was witness to some large and dramatic changes in China’s property market, with a wave of real estate agency closures due to plummeting turnover and developers slashing apartment prices by 20 to 30 percent. While China’s Premier Wen Jiabao said China is targeting a “reasonable correction” in the property market and wouldn’t be relaxing measures designed to cool speculation in China’s property market, The People’s Bank of China has today lowered banks reserve ratios by 50 basis points, in a bid to free up an estimated RMB 396 billion to be pumped into China’s slowing economy.
“The move by China to reduce the reserve requirements last night is interesting, it indicates they are getting a bit nervous over there,” commented Robert Pavlik, chief market strategist at Banyan Partners in an article featured on Market Watch.
Time will tell if China can escape unbruised from this latest world crisis.
» China to Lower Reserve-ratio; PMI Falls to 49% – Business China, 1st December 2011.
» China PMI surveys shows manufacturing contracting – Market Watch, 1st December 2011.
» Stay cautious as bubbles burst amid tighter money – The Hong Kong Standard, 1st December 2011.
» Flash of Gloom in China’s PMI The Wall Street Journal, 23rd November 2011.
Posted in Australian economy, China | 6 Comments »
The last month have seen some large and dramatic changes in China’s property market. A wave of real estate agency closures in Beijing and Shenzhen and falling prices has many Chinese believing the real estate market has reached all time highs and is now finally correcting. Recent weeks have seen numerous reports of angry buyers storming property developer show rooms, after some developers were forced to drop prices as much as 20 to 30 percent to shift ever rising inventory.
According to New Tang Dynasty Television, turnover of existing homes in Shenzhen fell to 2,000 last month, down 80 percent over the the same time last year and has caused agencies to close due to the dramatic drop in sales. Beijing News said there is now 120,000 unsold properties on the market in Beijing. Home Link China published a report showing 177 real estate agencies have closed in Beijing in October.
China’s Premier Wen Jiabao said China is targeting a “reasonable correction” in the property market, indicating he won’t be relaxing measures designed to cool speculation in China’s property market. According to a Credit Suisse survey conducted in October of 200 Chinese residents, 53 percent of respondents believe property prices to fall. The same question asked in June, July August and September returned results of 14, 12, 14 and 18 percent respectively showing a dramatic shift in future expectations for property prices in the country.
In Australia, The Australian Newspaper has picked up on China’s problems citing comments from analysts that a downturn in China’s property market could have knock of effects for commodities. Yao Wei, a China economist at Societe Generale said “On the global economy, the biggest impact would be on the commodity sector.”
China turned to fixed asset investment such as building apartment buildings, office towers and under utilised roads after the Global Financial Crisis caused demand for its manufactured products to diminish almost overnight. Since then, property has been seen as a pillar of the China economy. If China’s insatiable demand for commodities come off the boil, then Australia could experience a single speed economy – slow, very slow.
» China property dip may have global effect – The Australian, 13th November 2011.
» In One Month, There’s Been A Major Shift In The Chinese Property Market – Business Insider, 12th November 2011.
» The Waning of China’s Real Estate Industry – China Forbidden News, 8th November 2011.
Posted in Australian economy, China | 3 Comments »
Over the past 18 months we have reported on numerous attempts by the Chinese Central Government to try to cool their overheating property market, using measures such as restricting citizens from purchasing multiple homes, increasing interest rates and increasing bank reserve ratios. In the past two months, these measures have started bearing fruit with the China Real Estate Index showing house prices have fallen for two consecutive months and has caused some speculation that China could start loosen these measures.
But to the contrary, Premier Wen Jiabao said China is targeting a “reasonable correction” in the property market. He told a state council conference, the government should continue with it’s tightening measures for the rest of the year.
» China Residential Prices Fell in October – The Wall Street Journal, 1st November 2011.
» China’s Property Stocks Decline as Wen Pledges to ‘Firmly’ Maintain Curbs – Bloomberg, 31st October 2011.
Posted in China | 10 Comments »
According to data from the People’s Bank of China (PBOC) and published by the China Daily, new property related loans including loans provided to property developers and new home buyers fell to 992.3 billion yuan between January and September, down 42.8 percent compared to the same time the year earlier.
Quarterly statistics show a continued trend down. In the January to March quarter 509.5 billion yuan of loans were written, followed by only 281.7 billion yuan in the June quarter and 201.1 billion in the September quarter.
The Central Government has been working to cool the overheating property market in China using interest rate rises, increases in bank reserve ratios and limits to the number of houses citizens could purchase.
Zhang Dawei, a senior researcher with the Centaline Property Agency Limited told the China Daily “Home sales are falling and inventories building up. Real estate developers, especially those small and medium-sized firms, are under unprecedented pressure.”
The reduction in demand for loans is having a flow on effect on prices with some apartment developers having to drop prices by as much as 36 percent in order to move inventory. For owners who have just brought, falling property prices is causing anger and protests in the streets.
The Wall Street Journal reported a group of about 400 home buyers in Shanghai demonstrated about falling property prices outside of a showroom of China Overseas Land & Investment Ltd. During the demonstration, some owners trashed the showroom.
In another case in the Jiading District, 30km from Shanghai homeowners smashed a glass door and sprayed graffiti over the walls of the Moco showroom of property developer Longfor. Some of the graffiti accused Longfor of being a swindler, while other walls read “Get rid of Longfor” and “Pay my money back.”
» Falling housing loans add to home builders’ woes – China Daily, 29th October 2011
» Home prices decline in suburbs – China Daily, 25th October 2011.
» China developer warns on price falls – Financial Times, 25th October 2011.
» Homeowners protest price cuts in Shanghai – Market Watch, 25th October 2011.
» Shanghai owners protest as developers slash prices – Taiwan News, 26th October 2011.
» Protests hit China as property prices fall – Agence France Presse, 27th October 2011.
Posted in China | 5 Comments »
Zhang Zhiwei, chief China economist at Nomura Holdings Inc has told Bloomberg, China’s property market may be reaching “Tipping Point”.
The China central government has been trying to cool rampant speculation in the property for some time. According to data from the government, prices of new homes declined in 16 of 70 cities in August from the month prior. Bloomberg cited data from the Beijing Times indicating land prices in Beijing fell 76 percent in August compared to the month earlier. In Guangzhou it fell 53 percent.
Shen Jianguang an economist with Mizuho Securities Asia Ltd told Bloomberg “sharp declines in property sales and prices are likely in the next two to three months,”
In another article, Bloomberg reports :
Chinese developers face an “increasingly severe” credit outlook, which may force them to cut prices and turn to costlier funding sources as sales weaken, Standard & Poor’s said.
A 30 percent decline in sales may leave many developers facing a liquidity squeeze, S&P said after conducting stress tests of the nation’s real estate companies. Most developers would be able to “absorb” a 10 percent sales drop next year, the credit rating company said.
“The worst isn’t over for China’s real estate developers,” S&P analysts led by Frank Lu wrote in a report today. “Developers are bracing themselves for slower sales and lower property prices ahead.”
But Real Estate is not the only problems facing china. Also laden with debt and experiencing a fresh global downturn in demand, bosses of manufacturing businesses are fleeing, leaving employees and debts of hundreds of million yuan behind. Wenzhou, in China’s east has seen seven local business owners flee.
One such owner on the run is He Fulin, who headed up the Zhejiang Center Group. With 3,000 employees, the group is one of China’s biggest eyeglasses manufacturers.
» Subprime crisis sweeps Wenzhou as bankrupt bosses flee – Shanghai Daily, 23rd September 2011.
» China’s Squeeze on Property Market Nearing ‘Tipping Point’ – Bloomberg Businessweek, 23rd September 2011.
» China’s Developers Facing ‘Increasingly Severe’ Credit Outlook, S&P Says – Bloomberg, 27th September 2011.
» Developers at risk if China home sales ease: S&P – Market Watch, 27th September 2011.
Posted in China | 4 Comments »
Last month we wrote about signs that China’s construction bubble could be on the verge of bursting. There were concerns of large and mounting debts held by LGFV (Local Government Finance Vehicles) for empty office towers, residential real estate and other non performing infrastructure investments.
Two days after we wrote the post, China’s National Audit Office came clean with figures indicating local government debts totalled 10.72 trillion Yuan ($1.66 trillion USD) at the end of 2010. Ratings agency Moody’s has this week suggested China may have understated this debt by as much as $541.6 billion.
But huge debts in China’s real estate and infrastructure sectors may be just one problem. In the post last month, we wrote :
During the last decade, the Western world, fuelled by easy and abundant credit was spending beyond their means. Household consumption was surging along, and China was in the front seat to capitalise on the moment. However, like many other economies, things turned sour in 2008 with the onset of the Global Financial Crisis (GFC). Exports practically dried up overnight for the manufacturing superpower.
A consumer sentiment report conducted by Boston Consulting Group of 21 countries show consumers around the world are intending to cut back on discretionary spending in the next 12 months. The report shows 53 percent of consumers in Greece and 50 percent in Britain plan to make cuts to their discretionary spend. Not surprisingly, Australians, who have some of the highest levels of household debt in the world was in third place with at least 48 percent planning to cut back. 44 percent of consumers in the USA, Europe, and Canada, 42 percent in India, 26 percent in China and 19 percent in Russia plan to cut back.
The survey sure doesn’t paint a very prosperous position for world growth as consumers around the world start to de-leverage from one of the biggest debt binges in history.
» China’s local government debts exceed 10t yuan – China Daily, 27th June 2011.
» China understating local govt debt: ratings agency – The West Australian, 5th July 2011.
» Aussie consumers among the world’s most cautious – The Australian, 7th July 2011.
Posted in Australian economy, China | 8 Comments »
The second bailout of Greece has been in the lime light for the past couple of weeks. While Fitch rating’s Andrew Colquhoun said today that Australian and Korean Banks are the most exposed in Asia to the European debt crisis thanks to our dependence on offshore borrowing, is there another crisis brewing around the corner with bigger implications for Australia?
While Eurozone members are bailing out Greece, its believed the China central government has been bailing out its Local Government Financing Vehicles (LGFV) to the tune of 2-3 trillion yuan.
During the last decade, the Western world, fuelled by easy and abundant credit was spending beyond their means. Household consumption was surging along, and China was in the front seat to capitalise on the moment. However, like many other economies, things turned sour in 2008 with the onset of the Global Financial Crisis (GFC). Exports practically dried up overnight for the manufacturing superpower.
To counter the effects of the GFC, Beijing embarked on a massive 4 trillion yuan economic stimulus program. In addition, local governments were told to spend and they did this via local government created companies known as SOEs (State owned enterprises) or LGFV (Local Government Finance Vehicles). They invested in infrastructure and real estate projects such as empty apartments and office towers built to keep GDP ticking along. The heightened activity of SOEs in the real estate markets along with reduced lending standards helped fuel a massive investment bubble and credit boom in 2009 and 2010. According to the Royal Bank of Scotland (RBS), “Chinese banks grew their loans by 65% since the beginning of 2009 as credit expansion was the centrepiece of China’s stimulus package during the global financial crisis. Much of these loans were channelled to LGFVs as well as the property sector.”
SOEs were bidding up prices to record levels, with Beijing’s residential land price record broken by SOEs twice within 6 hours on the 15th March last year. This caused the banning of 78 SOEs from any further real estate investments by the Assets Supervision and Administration Commission a couple days later. The commission believed 94 of the 127 SOEs had been investing in residential real estate, when real estate wasn’t even their primary business.
By June 2010, there were growing concern about who was funding this spending spree. In the post, China’s chief auditor warns of mounting debt on the 26th June 2010, we reported on Liu Jiayi, head of the National Audit Office who wrote in an annual audit report “The scale is large, and the burden is quite heavy” when referring to SOE debts. According to China’s banking regulator at the time, outstanding loans to local government financing vehicles soared 70 percent in 2009, hitting 7.38 trillion yuan at the end of that year. As infrastructure projects continue to burn cash with little return on investment, Mr Shih suggests China could be in for a “pretty large-scale financial crisis around 2012″ if nothing is done to address the issue.
But, with little ROI and a cooling property market, Beijing has been forced to inject 2-3 trillion yuan into the LGFVs. David Cui of Bank of America-Merrill Lynch Global Research indicates that “LGFV loans are at 10 trillion yuan by the government’s estimate; the ones with no cashflow support”, suggesting a second bailout may not be too far away.
Societe Generale has just released a 50 page report titled “Chinese construction bubble – Preparing for a potential burst.” Using a variety of data (cement consumption, elevators, skyscrapers, roads, railroads etc), it sets about determining if the construction bubble is myth or reality. It believes Chinese construction is ahead of the development curve in a number of areas, but while there is early signs of weakness it can’t find any immediate trigger for a downturn.
According to the report, 60 percent of new elevators manufactured in the world are fitted to buildings in China. The number installed has grown substantially from 10,000 in 1990 to more than 300,000 in 2010, representing a compound growth rate of 20% that “looks unsustainable in the mid-term”. Consumption of cement by China in 2010 exceeded 1,800 million tonnes, accounting for 55% of world demand. Average consumption per head is 1,400kg, four and a half times about the average ex-China consumption of 300kg.
Societe Generale then turns to figures on the delivery of excavators, loaders and bulldozers from the China Construction Machinery Association (CCMA). While demand has been strong up to March, deliveries are starting to fall. Excavators sales are down 65% for the month of May and down 12% over the year. It also reports “In addition, the sales volume of loaders and bulldozers also saw sharp drops May, with that of loaders falling 45% from March, the largest drop since 2001.” It believes a reason for the decline could be from financing constraints.
Fitch’s Senior Director of Financial Institutions, Charlene Chu, told Bloomberg today “We are pretty concerned about a big problem with bad debt over the next few years associated with local governments, property and all of the excesses that have been built up since the stimulus of 2008″.
“If we have a downturn in the Chinese property market it would have a significant impact on the banking sector,”
» Exclusive: China to clean up billions worth of local debt – 31st May, 2011.
» Fitch Says China Property Downturn Would Significantly Impact Banks – 23rd June, 2011.
» Banning SOE Real Estate Investment to Impact the Soaring Price of Housing: An Analysis – The Epoch Times, 23rd March 2010.
» 5 Things You Need To Realize About China’s Gigantic Bailout Of Local Governments – Business Insider, 2nd June 2011.
» Fitch flags credit-risk worry at China banks – Market Watch, 22nd June 2011.
Posted in China | 9 Comments »
Last month we reported statistics from real estate adviser DTZ showing house sales in Chinese first tier cities plunged 64.6 percent in the month of February. Such a sizeable fall was expected to have an impact on prices.
Business China has now reported the prices of new homes in Beijing has fallen 26.7 percent month on month in March 2011. This is the first fall in new house prices in 19 months, and quite a sizeable one at that.
Moody’s investor service has today downgraded the outlook for China’s property sector to negative. It said “During the next 6-12 months, Chinese property developers will face challenges in securing debt financing, as the government enforces its strategy of slowing monetary growth to reduce the risk of accelerating inflation and to manage domestic banks’ exposure to the property sector,”.
Moody’s downgrade follows ratings agency Fitch who earlier this week downgraded China’s local currency debt rating to negative saying it “reflects concern over the scale of sovereign contingent liabilities and risk to macro-financial stability arising from the very rapid pace of bank lending in recent years, especially against the backdrop of rising real estate valuations and inflation.”
» Beijing Home Prices Drop for First Time in 19 Months in March – Business China, 12th April 2011.
» Moody’s downgrades China property sector to negative – Reuters, 14th April 2011.
» Fitch downgrades China’s yuan debt outlook to ‘negative’ – Agence France-Presse, 13th April 2011.
Posted in China | 5 Comments »
The China Daily has reported comments from Yang Hongxu, a senior researcher at E-House China Research and Development Institute in Shanghai saying he believes China’s House Price Index, based on the 70 major cities, will show a decline in prices before May, following evidence of a slowdown in February’s data.
Statistics from real estate adviser DTZ show house sales in first tier cities have plunged 64.6 percent in the month of February, and second tier cities have seen a 18 percent reduction in sales. Beijing Real Estate agents have told the China Daily that house price growth has been dampened, while ‘industry insiders’ also say property prices will begin falling in the coming months.
The falls stem from a range of tightening measures put in place by the central government to try to gain control of its rampant and overheating property market. The latest move comes today with new regulation preventing agents from using false or non-standard price labels to mislead property buyers.
On Sunday, the SBS aired a story about China’s vast empty cities, built primary to keep GDP ticking along after world demand for Chinese made product collapsed as a result of the Global Financial Crisis. The program showed the deserted CBD of Zheng Zhou’s at 11am on a Thursday, the empty South China Mall which when built was the largest shopping centre in the world and a newly built (but empty) city of Daya Bay, designed for 12 million people.
Gillem Tulloch, a Hong Kong based analyst said “It’s essentially the modern equivalent of building pyramids. It doesn’t really add to the betterment of lives, but it adds to the growth of GDP.”
The SBS Dateline report can be watched online here and gives a good insight to what is driving Australia’s 1 in 100 year mining boom.
» China’s Ghost Cities – SBS Dateline, 20th March 2011.
» Property prices to begin a downward trend – The China Daily, 23rd March 2011.
» China orders honesty in property market – The Sydney Morning Herald, 23rd March 2011.
» Economic slowdown in China likely in second-half of 2011, banker says – The Australian, 22nd March 2011.
» China gets set to pop speculative housing bubble in 2010 – Who Crashed the Economy, 13th December 2009.
Posted in China | 8 Comments »
According to Forensic Asia Ltd.’s managing director Gillem Tulloch, the China property bubble will likely burst next year. Tulloch believes china’s banks are unable to pump out enough credit to sustain further rises in property values. He says the Chinese economy will be short 11 trillion yuan in credit required to make owning more beneficial than renting.
The Chinese government has been working in vein trying to control rampant credit lending to property speculators.
If Tulloch is correct, Australia could be one of the worst hit countries. Much of the building/property boom in China is consuming resources from Australia, causing the “1 in a 100″ year mining boom.
» China property bubble to pop this year, says analyst – Market Watch, 2nd February 2011.
Posted in Australian economy, China | 2 Comments »