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Food prices could stop the whole world?
http://timesofindia.indiatimes.com/business/india-business/Food-prices-could-push-millions-into-poverty-ADB/articleshow/8088229.cms
Asian Stocks Rise on U.S. Housing Data, Companies Beat Earnings Forecasts
By Kana Nishizawa and Satoshi Kawano - Apr 22, 2011 6:30 PM ET
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Asian stocks rose for the fourth week in five as U.S. housing starts gained and companies reported earnings that beat estimates, boosting confidence in global growth.
James Hardie Industries SE (JHX), the largest seller of home siding in the U.S., jumped 4.2 percent in Sydney. Hynix Semiconductor Inc. (000660), the second-largest computer memory chipmaker, surged 7.2 percent in Seoul. ZTE Corp., China’s second-biggest maker of mobile-phone equipment, gained 2.5 percent after its first-quarter profit rose. Inpex Corp., Japan’s largest oil and gas explorer, jumped 3.4 percent after commodity prices rose.
The MSCI Asia Pacific Index gained 2.2 percent to 138.83 this week, the biggest weekly gain since March. The gauge fell last week as China’s inflation rose faster than estimated and the International Monetary Fund cut growth forecasts for the U.S. and Japan.
“U.S. companies, especially tech stocks, are doing well, and that’s helping to instill confidence,” said Mitsushige Akino, who oversees about $600 million in assets in Tokyo at Ichiyoshi Investment Management Co. “Investors are looking to take a little bit more risk.”
Stock markets in Australia, Hong Kong, India, Indonesia, New Zealand, the Philippines, Singapore, Sri Lanka were closed April 22 for holidays.
Nikkei Gains
Australia’s S&P/ASX 200 Index rose 1.8 percent this week, while Singapore’s Straits Times Index gained 1.3 percent. Japan’s Nikkei 225 (NKY) Stock Average increased 1 percent, and Hong Kong’s Hang Seng Index (HSI) rose 0.5 percent. China’s Shanghai Stock Exchange Composite Index slid 1.3 percent on concern the government will tighten monetary policy to rein in inflation.
James Hardie rose 4.2 percent to A$6.20 in Sydney after the U.S. Commerce Department said housing starts increased 7.2 percent in March from the previous month. Work began on 549,000 homes, exceeding the 520,000 median forecast of economists surveyed by Bloomberg News.
“The economy is in a sustainable recovery,” said Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, who helps manage $275 billion. “Earnings are going to continue to surprise on the plus side.”
U.S. companies reported higher-than-expected earnings and forecasts, fueling optimism the world’s largest economy is headed for recovery. Intel, the biggest chipmaker, said revenue will be $12.8 billion, plus or minus $500 million, in the second quarter. That compares with the average analysts’ projection of $11.9 billion.
Tech Shares
Apple Inc., the world’s largest technology company by market value, reported net income almost doubled to $5.99 billion, or $6.40 a share, in the fiscal second quarter, exceeding the average estimates of $5.39 a share in a Bloomberg survey of analysts.
In Asia, Hynix Semiconductor surged 7.2 percent to 36,600 won this week in Seoul. Tokyo Electron Ltd., Japan’s biggest producer of chipmaking equipment, jumped 5 percent to 4,605 yen in Tokyo. Foxconn Technology Co., which makes casings for Apple computers, surged 13 percent to NT$134 in Taipei.
China Unicom (Hong Kong) Ltd., the nation’s second-largest mobile phone company, surged 7.5 percent to HK$16.12 in Hong Kong. China’s newly added third-generation mobile phone users rose 27.5 percent in the first quarter compared with a year earlier, according to a statement from the Ministry of Industry and Information Technology.
Oil and Metals
ZTE gained 2.5 percent to HK$29.15 after reporting a 16 percent gain in first-quarter profit as sales of handsets increased in the U.S. and Europe.
Commodity companies gained as oil and metal prices increased. Inpex rose 3.4 percent to 617,000 yen in Tokyo. Woodside Petroleum Ltd. (WPL), Australia’s second-biggest oil and gas producer, rose 2.7 percent in Sydney. Jiangxi Copper Co., China’s No. 1 producer of the metal, jumped 4 percent to HK$27.30 in Hong Kong.
Crude for June delivery climbed about 2 percent in New York this week through April 21, while the London Metal Exchange Index of six metals including copper and aluminum surged 2.1 percent.
“The risk trade is back, on the back of the growth story and higher commodity prices,” said Gavin Parry, managing director of Parry International Trading Ltd. in Hong Kong.
To contact the reporters on this story: Kana Nishizawa in Tokyo at knishizawa5@bloomberg.net; Satoshi Kawano in Tokyo at skawano1@bloomberg.net.
To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net
Why The Fed Must End QE2 On April 27th
Dian L. Chu, EconMatters | Apr. 24, 2011, 6:54 AM | 10,104 |
http://www.businessinsider.com/the-fed-must-end-qe2-on-april-27th-2011-4
Dian L. Chu is a market analyst with a syndicated financial blog at EconMatters.com.
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The Federal Reserve has lost all credibility on Wall Street, and most of the American public with the absolute refusal to recognize the dire effects on asset prices that QE2 has created. But the refusal is part of the problem. It reinforces the wide spread belief of investors that the Fed is out of touch with reality, and that they sit in their Ivory Tower implementing an exceedingly loose monetary policy, with the stated goal of inflating asset prices.
The Fed has refused to even acknowledge the possibility (rather than the indisputable facts) that not only have they inflated selected asset prices like S&P 500, the Dow indexes, but they also have inflated asset prices like food, energy, and clothing which would actually hurt the economy and consumers (See Chart).
Needed – Housing and Wage Inflation
Remember, overall inflation is actually being artificially under-reported by the numbers because housing and wages are not inflating. These are the two actual groups of assets that Americans in reality need the Fed to inflate. But Fed’s policies have been unable to help and seem to essentially be hurting the housing sector, as higher everyday living costs with stagnant wages tend to reduce disposable income and resources that could be otherwise allocated to saving towards a down payment to purchase a house, improving the real estate sector of the economy.
Inflation Exported Would Come Back To Haunt
Furthermore, since most of these asset prices are priced in dollar, the fed has exported dire and extreme inflationary pressures on an already precariously balanced inflationary picture in the emerging market economies from China to India.
It is the proverbial throwing of jet fuel on a barbeque for most of the economies. Yes, Bernanke is right that these countries had inflationary problems before based upon their undervaluing currencies. Nevertheless, this is how their economies have been set up in the global trade role that has been 30 years in the making.
These countries just couldn`t revalue their currencies near enough to still keep their role as exporting, cheap labor manufacturers, without sending the entire region into a 10-year depression which would bring the entire world into a depression not seen since the Great Depression.
Unmanageable Inflation Elsewhere
Given the fact that these manufacturing exporting countries cannot meaningfully revalue their currencies, they are basically stuck with an endemic higher level of inflation compared with the developed economies, but it is still manageable. Now, with the US`s persistently loose monetary policies exacerbated by QE2, raising input costs for commodities used in abundance by these manufacturing, cheap labor economies like Oil, Copper, Cotton, and Iron Ore (See Chart), these policies are exporting additional inflationary pressures to these developing economies.
This results in making what would be a manageable level of inflation in China of around 3.5 to 4% an unmanageable level of inflation at 5.5 to 6%, and maybe even higher as the full effects of the inflation of commodity asset prices have not yet fully been incorporated and manifested in the Chinese manufacturing economy.
Long Live the Inflation Trade
The other area where Ben Bernanke`s stubbornness of acknowledging the effects of QE2 on food and energy prices, i.e., the rise in prices is due strictly to demand reasons, Middle East tensions, and product shortages and in no part to a loose monetary policy which encourages traders to make the following trade:
Loose monetary policy is dollar negative (printing money, currency devaluation, etc).
Commodities like Oil, Gold, Silver, Wheat, Corn, Cotton, Copper are Dollar negative Hedges
Therefore, put on the following trade: Short the dollar, and go long commodities.
This is the famous inflation trade is has been going on and off for the past 10 years by fund managers around the world. This trade has been in the investing 101 handbook for 50 plus years. And the fact that Ben Bernanke never admits to knowing about these trade dynamics in the marketplace, and how his policy initiate of QE2 actually encourages, facilitates and even mandates that fund managers around the world put on this very trade is beyond a rational explanation.
Inflationary Effects Are Transitory?
In addition, it is even more incredulous of Bernanke and his failure to acknowledge any role whatsoever for the feds function in these higher commodity prices when their stated goal is to in fact inflate asset prices. Whenever he is interviewed about this very question he always uses the standard response that inflationary pressures are not due to the recent Fed policy of QE2.
I guess these are assets that the Federal Reserve has expressly forbidden traders to inflate. However, Bernanke also adds that these inflationary effects are transitory in nature--he has been saying “transitory” for over 6 months now. How long does it take for ‘transitory” to become “stuck in the economy, and cannot get rid of without a massive rate hike sledgehammer”?
Fed Out of Touch with Reality
It is starting to sound like a broken record, and it is completely divorced from the facts in the marketplace, or the facts on the ground for those not in the Ivory Tower. It is this main street denial that has reinforced the notion that Bernanke and his dovish colleagues with their incessant soft selling of inflation in their comments regarding inflation questions every week that they are out of touch with reality.
This “fed out of touch with reality” notion only goes to reinforce the very “Inflation /Currency Devaluation Trade” causing traders to pile even more capital into shorting the US Dollar and going long Commodities because it is only going to get worse down the line. This is what is referred to as inflation expectations.
Dovish Fed Undermines The Dollar
The fed policies regarding QE2 are not near as damaging for the US Dollar as traders perceptions of the Fed policy of QE2, and judging by the rise in Silver alone will tell you, traders perceptions of QE2 is extremely negative. And that old adage perception is reality takes hold and traders do far more damage to the US Dollar than any actual currency devaluation due to QE2 by going heavily short the currency. Traders and their perceptions right now are what is really hurting the US Dollar and Bernanke has failed to realize this fact.
Another interesting question for Bernanke and his Dovish colleagues, and it appears that even the more hawkish members of the Fed are still to dovish in their market comments regarding inflation. Probably because they all are in the upper income bracket on a percentage basis compared with the average US consumer, and are largely immune to the ridiculous six month rise in food and energy prices felt by the average American citizen.
The Fed can change all that on the 27th of April with either a cutting short of QE2, or an equally hawkish wording of the fed statement with a nod towards tightening sooner than previously indicated in past policy statement wording.
Everyone Worries Except the Fed
The Fed might ask themselves the following question:
How come at every Speech where there is a question and answer session that you are asked about inflation?
Or how come every reporter when interviewing a fed member asks them about their role in causing inflation around the world and how this is contributing to political and social instability in emerging economies?
Is this just by coincidence, all these reporters and questions revolving around inflation effects? The answer is that these questions are being asked for a reason, and that alone is a problem for the fed.
Another question for Bernanke is how come every other country is worried about inflation, including developed economy neighbor Europe, while the US doesn`t have an inflation problem? It seems the US is the only country in the entire world where inflation isn`t a problem? Does this seem logical? And if it is in fact the case, how long do you think it will stay this way, where the entire globe is experiencing inflation pressures but the US has a “transitory” inflation problem?
When Transitory Turns Self-Fulfilling
The problem for the Fed is that this goes beyond current inflationary effects in the economy, but future expectations of inflation in the economy. And none of these are transitory in nature once they get embedded in the psyche of investors and consumers. The only way they were doused in 2008 when they were at these exact levels was a near historic crash in the financial and housing markets.
Absent of some similarly extreme deflationary event, inflation and expectations of inflation are only going to feed on themselves and become even more firmly entrenched in the economy, negatively reinforcing investors and consumer’s asset allocation and spending habits.
This all becomes self fulfilling in nature, and the real nasty part about inflation is if you don`t head it off early, once it gets even a little momentum, it becomes much more difficult to control and manage. This is where the fed is right now; they are at the cusp of losing control of their handle on inflation with their incredibly dovish stance towards inflation.
End the Denial or Lose on Inflation
Bernanke and the current Federal Reserve Board have a credibility problem both with Wall Street traders and the American population. The sooner Ben Bernanke acknowledges his role in causing inflation, the better off we will be in fighting the battle of inflation. The longer the denial routine of “transitory’ responses continues, the increased chance that Bernanke loses what shred of remaining credibility he has on the inflation issue.
Then, the inflation battle is essentially lost without equally devastating policy responses that are almost similarly as bad as the inflation effects, i.e., you have to send the economy into a recession with an abundance of tightening measures that completely destroys growth to get a handle on prices.
Needed - Hawkish & Cut Short of QE2
Again, the Fed and Bernanke can change all this on the 27th of April, failure to do so basically dooms Bernanke`s legacy to be remembered by the initial moniker put on him when he initially was chosen as Alan Greenspan`s successor, when he was commonly referred to as “Helicopter Ben”!
During his first six months on the job as Fed chairman, he did everything possible to dispel such a label, but he has more than made up for that period during the last six months regarding his outright refusal to acknowledge the exceedingly negative side effects revolving around out of control food and energy prices related to his QE2 Initiative.
The average American citizen cannot withstand another two months of “Asset Inflating” on behalf of the Fed, enough is enough, time to cut the QE2 policy initiative short.
Read more: http://www.businessinsider.com/the-fed-must-end-qe2-on-april-27th-2011-4#ixzz1KcbVDw99
New wave of Chinese
Baby boom as restaurants flourish
Published: Sun, 2011-04-24 20:37
Radhica Sookraj
http://guardian.co.tt/news/2011/04/24/new-wave-chinese
A new wave of Chinese immigration is sweeping Trinidad and Tobago, triggering a baby boom and unearthing a ring of exploitation which appear to go unnoticed by the authorities. And while the Chinese businesses flourish, more reports of deplorable living conditions continue. Apart from recent exposures of horrendous conditions at construction sites, health officials have reported that many of the Chinese who work in restaurants, sleep inside cupboards and on top of tables as they have no beds.
With no money for rent, the poor Chinese labourers are forced to bunk in often shoddy fast food outlets. In light of these exposures, questions were raised by officials of the Penal/Debe Chamber at a function last week about how illegal Chinese are being brought into the country. Who is issuing their work permits and who is providing drivers licenses to the immigrants? Sources indicate that a local “Chinese connection” arranges the business operations but several Chinese immigrants said they were told not to speak about the transactions.
Once the Chinese get here, they immediately set up their businesses, paying as much as $5,000 per month to rent a venue in urban areas. The Chinese fast food outlets are often located at street corners, spanking new buildings or under people’s homes. Some locals are hired but the majority of cooks and cleaners are of Chinese descent. Checks at 12 restaurants in south Trinidad reveal that most of the Chinese women who work at the restaurants opt to have children in Trinidad as they are not allowed to have more than one child in China.
Under China’s one child policy, couples are limited to having one child, because of strict family planning restrictions. The policy was established by Chinese leader Deng Xiaoping in 1979 to limit communist China’s population growth. In some parts of China, fines, pressures to abort a pregnancy, and even forced sterilisation are imposed to prohibit second or subsequent pregnancies.
During an interview, a Chinese restaurant owner of San Fernando, who spoke little English, said she bore her three children in Trinidad. “I sent two back China. This one will go soon,” she said, pointing to a cherub two-year-old girl. The businesswoman explained that if she had a son in China, then she could not have another child. If she gives birth to a girl, then she has one more chance to try for a son. A Chinese translator who has regular business transactions with the Chinese immigrants said they were given strict instructions not to speak with the media. He explained that many of the Chinese who came to Trinidad were better off than they were in the over-populated China.
Strain on the health system
But while this is so, health officials complained that the Chinese business expansion is taking a toll on the health inspection operations. Chief Public Health officer at the San Fernando Health Department John Ramkhelawan said the Chinese restaurants gives them a heavier workload. He explained that only 16 officers worked in the San Fernando region, which extends from Marabella to La Romaine.
Ramkhelawan noted that apart from this, there were also constraints with respect to the language barrier. “Some of them are not versed in English, so we have problems communicating with them. When we do food handlers lectures, they cannot understand, so we need to address that deficiency in our lecture material to effectively communicate with them,” Ramkhelawan revealed. He said former mayor of Chaguanas, Dr Suruj Rambachan last year developed a lecture in Chinese language to deal with this problem. “When we want to explain to them to do certain works in their business, we have to give it to them in writing and then they could get it translated and interpreted.
This is a long process,” Ramkhelawan said, adding that inspectors are having difficulty with many Chinese restaurants. “Many of them need to have better extractor fans, fridges and waste disposal. Because fast food generates a lot of oil, we have to regularly monitor their disposal of this,” Ramkhelawan said. He added that at least two more Public Health Inspectors must be hired to assist with the additional workload.
Meanwhile, in the Penal district, Chief Health Inspector Shesat Mohammed also complained that communication problems with the Chinese were hampering sanitation. He said during visits, they are often appalled at the living conditions.”We see evidence that they sleep in the restaurants. They do not have alternative homes. On one occasion, we pulled a partially opened drawer and found a baby sleeping,” Mohammed said.
He explained that the petite Chinese labourers curl up on shelves in their cupboards and sleep until the next day. “They are humble people, accustomed to hard work but the way they live is definitely cause for concern. Housing is substandard. Sometimes we have about 20 Chinese sleeping in a two room,” Mohammed added. And even after the Chinese workers register for their businesses, Mohammed said it is difficult to positively identify the faces because their features are similar.
Mohammed recommended that the Government find solutions to ensure better communication with the Chinese. Meanwhile, Carlina Boodram complained that in some Chinese supermarkets, customers are unable to read labels or bills because it is written in Chinese. “The Government must regulate this because it is illegal for us to buy products which are not properly labelled,” Boodram said.
Positive contributions from Chinese
Despite the setbacks, the contribution of the Chinese people in T&T is undeniable. Several sales representatives from merchandising companies said they preferred to do business with the Chinese immigrants. One representative who asked not to be named said: “The Chinese pay in cash. Most business owners want a 30 day credit, but they don't wait for this. As soon as they get their goods, they pay cash.”
He explained that in south Trinidad alone, more than 12 successful new Chinese supermarkets have sprung up at Gasparillo, Point Fortin, La Romaine, Marabella, San Fernando and Debe. Among the newly opened Chinese supermarket chains are Fugian, Flourishing, Rong Yang, Peiping and Tang, Lin Zhi, Song Han and Hang Yu supermarkets. In Debe alone, two new supermarkets Jinxiu and Classics opened their doors to the public last year.
In addition to the supermarkets, Chinese restaurants have been successfully established under people's home, in spanking new buildings and popular street corners. Between Penal to Duncan Village, alone, a total of 11 Chinese restaurants line the SS Erin Road. Along the East West corridor, scores of Chinese restaurants could be found offering an array of delicious Chinese and Cantonese dishes. Usha Basdeo, who was shopping in Jinxiu, said the Chinese supermarkets have better prices. “A few of my friends have been saying that the prices here are cheaper than anywhere else and I have been checking the shelves for the past half hour and its true,” Basdeo said.
She explained that the Chinese supermarkets were well organised and although the workers did not speak much English, they were very helpful. Harripersad Pooran said locals had a lot to learn from the Chinese. “They have a good work ethic and they are very hard working. I believe that our people can learn a lot from the Chinese,” Pooran said. On October 12, 2006, former prime minister Patrick Manning gave a one off holiday to celebrate 200 years of Chinese arrival and contributions in Trinidad. Manning lauded the Chinese for their input in T&T's economic sustainability.
Dr. Doom Predicts Tough Times for China: He Might Be Right
14 comments | April 24, 2011 | about: FXI, FXP, TAO, XIN
http://seekingalpha.com/article/265047-dr-doom-predicts-tough-times-for-china-he-might-be-right
Anyone who isn't familiar, Nouriel Roubini hit his first home run in Q3 2006 when he forecasted the housing bust in the United States. Since then, he's been called Dr. Doom for being correct when others were so wrong. Lately, however, he has been on the wrong side of the trade as markets have been rallying for two years.
Unfortunately, people have a tendency to ignore you if you've been wrong for two years straight. What is he saying these days and why do I sort of agree with him?
China is rife with over investment in physical capital, infrastructure and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns and brand-new aluminium smelters kept closed to prevent global prices from plunging.
Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990s – have ended with a financial crisis and/or a long period of slow growth.
2013? Really? I don't think it's that far off. In my opinion, back in 2008, if China wouldn't have ignited the fire of its economy through excessive stimulus, China would be experiencing GDP decline over the last two years. It's for this reason that contrary to popular opinion, I believe that perhaps the yuan is overvalued. That said, I realize that for the most part, my opinion doesn't matter. China is a "supply and command" economy.
At the current time, however, China is reigning in on speculation. Some toes are going to be stepped on. I'd personally hate to have any exposure to real estate prices in China. Meanwhile, officials in China are trying to anticipate a hard landing by probing banks to see what would happen if prices dropped 50%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
This Time Is Different; Syndrome In China
Also Sprach Analyst | Apr. 25, 2011, 11:23 AM | 361 | comment
http://www.businessinsider.com/8220this-time-is-different8221-syndrome-in-china-2011-4
Also Sprach Analyst is a website on global finance and economics with a special focus on China and Hong Kong economy, finance, and real estate.
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China: Vegetable Prices Slumped Despite High Headline Inflation
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“This Time Is Different” Syndrome In China
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Some people are bearish on China because they really want China to collapse. On the other side, some people are optimistic because China, in their views, will be the next great power and will ultimately overtake the United States as the largest economy. IMF, of course, came up with a shocker that China’s economy will be as large as the US by 2016, something that I don’t really care: China has 4 times as many people as the United States, so the surprising thing should be that the Chinese economy will only be as large as the United States, not that it will be as large as the United States finally.
Bulls like Shaun Rein (who really irritates me) and many others have plenty of reasons to tells people why the bears are wrong. From under-reported income level, fast income growth to eternity (eternity means their foreseeable futures) and urbanisation, bulls are running the story with the same old sets of reasons, claiming that China will be fine. Some went so far to say that there has been no bubbles at all and there has been no over-investment in infrastructure.
The Economist Intelligence Unit believe, for instance, that the housing boom is sustainable because urbanisation will proceed at a rapid pace, with urban population increasing by 26.1% by 2020. They went on and said that they believe Chinese real estate will be among the best performing asset classes in the next 10 years because of urbanisation, income growth and exchange-rate appreciation. They think that the tightening measures will only lead to short-term downturn, not a crash.
The bizarre thing in the report, which I have read last week, was that they actually conclude that at current income level, the Chinese is over-housed by 53% in terms of residential floor area per head. And it said:
Clearly, there are more factors than income that determine living space across countries. Population density, for instance, plays a prominent role. Japan’s population density is over ten times that of the US and nearly three times that of China, going some way to explain why Japanese people live in such small spaces (capsule hotel, anyone?). But even after controlling for population density, China remains the most overhoused country among the 35 listed.
How could they reconcile their finding that Chinese people are over-housed and their conclusion that Chinese real estate boom is sustainable? I don’t think they have adequately addressed this question, except the old arguments of urbanisation and income growth.
More popular view, however, is that people believe that the government is able to control its economy: they have both willingness and ability to engineer a soft-landing.
Willingness, that’s quite sure. Ability?
I tend to agree with judgment of Alan Greenspan that as China is opening up its economy, the leadership will have less and less control over the economy. Jiang Zemin & Co. had less control than Deng Xiaopeng & Co., and Hu Jintao & Wen Jiabo & Co. have less control than Jiang Zemin & Co, and this series will go on and on.
The Chinese government do have much greater control than the government of the United States. But we have to remember that the government has lost control of many aspects of the economy as they open up the economy. In the 1998-1999 banking crisis, for instance, the biggest state-own banks (Industrial and Commercial Bank of China, Bank of China, China Construction Bank, and Agricultural Bank of China) had the non-performing loan ratios which would dwarf the troubles of the Western banks in the subprime crisis, yet the crisis did not drag down the economy, and it is now pretty much forgotten. This is because those banks were 100% state-own, such that they could continue to operate as if nothing has happened with the government’s backing. Now, all these 4 banks have been listed in equities markets in Hong Kong and Shanghai, that means they are partially owned by public shareholders. These banks are being tested in the equities markets on a daily basis, such that a much smaller banking problem will be enough to make the market panic.
The government has also lost control on many other aspects of the economy. As I put it in When a planned economy becomes unplannable:
Things are, of course, getting more and more unplannable. Or, having one variable being controlled in a desirable level, other variables are getting uncontrollable. For instance, by keeping exchange rate low, they have no choice but to accumulate foreign currency reserve, buy US treasury securities that they don’t want, and increase money supply and fuel inflation and real estate bubble. In hope to curb home prices, the central government asked local governments to set prices targets, but all local governments wanted to see prices to increase rather than to fall.
The “this time is different” argument suggests that most people has underestimated the ability of the government. However, what we have seen is that the government has failed to control the economy: they have failed to keep its foreign exchange reserve at the right size, money supply growth at the right rate, inflation at the right rate, and real estate market at the right prices. They have failed to lower the share of investment and increase that of consumption in the GDP. The only thing that they really have good control is the exchange rate.
The government understand the problem of the economy pretty well, but they have literally failed to make necessary changes in almost every aspect, and you just can’t blame the United States for everything that you failed.
Are bulls actually over-estimating the ability of the Chinese government in controlling the economy? “This time is different”? Are you sure?
For an even more pessimistic view (so pessimistic that I actually have some trouble believing in it), see the comparison between China today and the United States in 1920s.
This article originally appeared here: “This Time Is Different” Syndrome In China
Also sprach Analyst - World & China Economy, Global Finance, Real Estate
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Read more: http://www.businessinsider.com/8220this-time-is-different8221-syndrome-in-china-2011-4#ixzz1KcZl66jL
Why China’s Property Bubble is Different
Apr. 22 2011 - 2:52 pm | 2,496 views | 0 recommendations | 2 comments
http://blogs.forbes.com/kenrapoza/2011/04/22/why-chinas-property-bubble-is-different/
When it comes to real estate prices, Shanghai still isn't New York. But like NY, an elite class is driving up real estate values, both commercial and residential. Moreover, a weak local currency has rich foreigners and big business buying up property in China, thus adding to property inflation.
China’s property bubble is “different” than America’s, but that doesn’t make it less dangerous.
Real estate is becoming the country’s top economic story overseas. After the massive US housing market crash, any talk of overheated property values, anywhere, raises eyebrows. China especially. It’s economy is globally important. It’s a key supporter of commodity prices. It is an important trading partner to many countries, especially Brazil, where problems in China can become problems in Rio. No one wants China’s real estate market to crash, and no one really knows the ramifications of a China asset bubble, though everyone suspects the abrupt popping of that bubble will be severe. On a global scale, though, it won’t be as severe to the markets as when property values tanked in the US.
There is official concern that China’s property market is overheated, judging by government actions to cool the residential and commerial real estate market over the last year. Few even want to use the term “bubble” because it conjures up the US recession and resulting historic job loss. China has 1.4 billion people, millions of them living on less than $2 a day. It needs a strong and stable economy to bring those people into at least something resembling the 20th Century. Inequality is growing as the rich get richer, and the urban middle class expands. Meanwhile, life is getting more expensive in a country most Americans would consider dirt cheap.
This is a new China now. People are getting richer. Housing is going through the roof. Big investment banks are buying up office space. And the government, and some investors, are getting nervous.
China’s government probably deserves some respect on its real estate issue than it is getting. US officials, like former Federal Reserve Chairman Alan Greenspan, denied the housing market was overheated just when housing prices were skyrocketing. China acknowledges it.
China ordered its banks this week to conduct stress tests to see how they would be affected if property prices fell by up to 50%, in a sign of growing official unease about the overheated real estate market.
The Chinese government has been introducing a series of policy measures since last year to slow real estate inflation, including raising interest rates, raising down-payment requirements, directly restricting home purchases, imposing price control targets in Beijing and Shanghai and finally charging a real estate tax, albeit on a trial basis, in Shanghai.
Housing prices have been rising by around 1% a month in China’s biggest cities, according to the National Bureau of Statistics (NBS).
On April 18, the NBS said that out of 70 cities it monitors, prices of newly constructed residences declined in only 12 cities, and remained stable in 8. That means that prices rose in the rest of those markets.
Commercial property is in hot demand, and despite government efforts to curb lending by increasing bank reserve requirements, which cuts down the amount of capital they have available to lend, large commercial transactions persist. Morgan Stanley closed a 10,000 square meter office lease in the fourth quarter and is moving into a new 93,000 square meter property at Kerry Parkside in Shanghai. Even Dairy Queen is moving into 61,000 square meters of space at the ICC Towers on Huahai Road in Shanghai next month.
According to Cushman & Wakefield, a global real estate firm, Shanghai is rebounding fast from the 2008 financial crisis. “We expect that domestic insurance companies, investment funds and institutional investment firms will increase their purchases of commercial real estate, especially of entire office buildings,” Cushman analysts wrote in their fourth quarter 2010 Marketbeat report to clients. Over 1.7 million square feet of new office space is being built currently in Shanghai alone. Around 900,000 square feet will come to market this year in that city.
Vacancy rates for grade A office space are low, at 6% in the fourth quarter compared to 6.9% in the third quarter. Companies are renting. And foreign investors are buying. According to Cushman & Wakefield, foreigners account for 43% of Shanghai’s commercial real estate sales. Surprisingly, lease yields (gross rental income-to-purchase price) on investments have declined from around 10% in 2003 to under 5% in 2010. Yet, they still want in on the action given China’s long term growth prospects. Plus, the dollar has more than six times its purchasing power in China.
“If this overheated property market, on all sides of the market, if it does not coool down in 2011, we will continue seeing more hot money to pour into it and more national wealth to pour out of China,” says Wang Jianmao, an economist at the China Europe International Business School in Shanghai.
The government has only been marginally successful at keeping real estate prices in check. Hot money is flowing in, despite some added restrictions. Is hedge fund short seller James Chanos right to say China is Dubai times 1,000?
How China is Different
Negative real interest rates and zero growth of savings deposits have many middle class Chinese investing in property. “There is still very low leverage per capita in China,” says David Semple, Director of International Equity at Van Eck Global. “In the US, home owners were over-leveraged and so when their housing prices declined they had no real source of capital anymore. China is not Dubai on steroids. You don’t buy with no money down there.”
Since last November, in China’s top tier cities, buyers are required to put 30% down for their first home, 60% down for a second home, and are not allowed to buy third homes on credit. In the US, there was widespread evidence of fraud in the subprime lending market. There is no evidence of that in China, and if that was the case, the chief financial institutions are all state run and would likely wipe those loans off their books before foreclosing on low income home owners, says Usha C.V. Haley, a chaired professor of Massey University in New Zealand, who is currently working on a book about Chinese subsidies to be published by Oxford University Press.
In China, the mortgage market is run primarily by “the big four” government banks: Industrial and Commercial Bank of China, China Construction Bank, China Agriculture Bank and Bank of China. However, at least 20 mid- to small sized private commercial banks are in the market, too.
“I have not heard of any of them having problems with failed loans…yet,” says Yulong Li, Research Director at Balentine, an independent investment advisory firm in Atlanta. Prior to joining Balentine, Li was a banker at China’s No. 5 bank, China Merchant.
Another problem that exacerbated the decline in US housing prices was leveraged banks and investment funds buying mortgage backed securities. This market exists in China, but is small by comparison. Chinese banks started their securitization practice in the late 1990s, and it is limited to the commercial banks. Very few investors have MBS’ or CMBS’ in their portfolios, Li says. “The domino effect may not be so significant if a financial crisis comes in China because of real estate,” he says.
Li suspects housing prices to correct as much as 20% nationwide within the next three years. But if the economy slowed too much, say below the government’s intended 7% gain this year (the economy grew 9.7% in the first quarter of 2011), then a steeper correction would occur and present itself as China’s first major economic crisis since reforms began in the 1970s.
“And when that happens, then you will see some of the mid-sized banks run into trouble. The big government banks will just make any debt problems disappear from their balance sheets if they had to. The probability for the big four to fail because of real estate is extremely low,” Li says. “The Chinese central government won’t allow it.”
In the late 1990s, the bad loan ratio of the big four reached a maximum of 20%. The central government then established four “asset management firms” called HuaRong, XingDa, GreatWall and Oriental and then simply transferred those bad loans to these four new firms, making the big four clean again. Sound familiar?
Today, market consensus is that the big four are healthy and profitable due to China’s dynamic economy.
Yet, if the contrarian argument is that the Chinese economy is unsustainable, then could runaway real estate prices and a weak yuan be a potential hazard? Chanos thinks so. So does CEIBS economist Jianmao, on the ground in expensive Shanghai.
Housing Market Correction’s Impact on Chinese Economy
Every year or so the Chinese government comes up with its Five-Year Program. We are now in its 12th reincarnation. Since the 11th Five Year Program, the government has stated its intent to focus on the domestic consumer, rather than on big industry funded by the big four. The same goes for the 12th Five Year Plan, launched in March in Beijing. But in 2010, the results were mixed. Household consumption fell to 34% of GDP, the lowest figure ever recorded. Household consumption is generally around 61% worldwide, according to Jianmao. Meanwhile, capital formation surged to 49% in 2010, compared to 22% on average for the rest of the world.
A nation uses capital stock in combination with labour to provide services and produce goods. The higher the capital formation of an economy, the faster an economy can grow its average income. Increasing an economy’s capital also increases production capacity. That’s why China’s been growing like gangbusters.
This boom, and this newfound wealth, has gone right into real estate because keeping money in Chinese yuans provided no return. Some market forces are at work in real estate, too, says Li. Rural workers are moving to the coastal cities.
According to data from the NBS, real estate prices rose 7.4% in 2010, the fifth highest increase in 13 years. The biggest gains, though, were in the second and third tier cities in Central and Western China. The property bubble has therefore officially extended from the coast to the center.
“Once real estate prices get out of control, everything else will follow,” says Jianmao. “China will lose its comparative advantage in labor intensive industries and be forced to shift these industries to other countries. If that happens, a large number of unskilled laborers who were not adequately educated in the past decades will be out of work,” he says.
China’s official unemployment rate is just 4%.
Critics have argued for years that China’s unrealistic monetary policy have kept the yuan and interest rates unrealistically low. To some extent, the Chinese have admitted this and are increasing rates and letting the yuan appreciate gradually by around 6% a year. If housing gets away from the government’s policy engineers, could the yuan be allowed to appreciate faster, making real estate more expensive, at least, for foreigners? Another solution is raising taxes on real estate investments to keep speculators away.
Foreign buyers are not helping the matter. Take top tier US cities like New York. Wall Street keeps Manhattan real estate stable to high, but so does foreign demand. That foreign flow, coupled with high incomes, is one of the reasons why real estate prices have been strong in New York.
Hot money flow into Chinese real estate was around $119.5 billion in 2004, rising to $147 billion in 2007 and over $210 billion in 2009, according to government numbers compiled by Jianmao.
China’s development model might have run its course. The government is aware of the problem and annnounced millions in low cost housing projects and financing to keep the locals from being priced out. It is unlikely that program would cut into real estate gains in other China market segments which that class of people were already priced out of to begin with.
Higher interest rates and a German-style tax on real estate property gains could be a solution, says Jianmao. Germany charges a 40% tax on real estate property gains.
“China is not the US, but it would do well to draw lessons from the failure experienced by Japan…and the United States,” says Jianmao. “If the national focus on the holy trinity of big banks, big enterprises and big government is not changed, then this will develop into a severe crisis if (housing) is not resolved. The existing macro measures only relieve the symptoms temporarily.”
Boom vs Doom: is Nouriel Roubini right on China?
April 21, 2011 7:00 am by Jamil Anderlini
http://blogs.ft.com/beyond-brics/2011/04/21/boom-vs-doom-is-roubini-right-on-china/
It probably comes as no surprise that Nouriel Roubini – also known as Dr Doom – is bearish on China and its current growth model. Based on “two trips” to China recently the good doctor has come up with a devastating prognosis.
So is the man famous for predicting the downfall of the US housing market and subsequent global credit crisis about to notch up a second nostradamus award?
Here’s a taste of his views on China, as first published on Project Syndicate:
“China is rife with overinvestment in physical capital, infrastructure and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns and brand-new aluminium smelters kept closed to prevent global prices from plunging.”
“Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990s – have ended with a financial crisis and/or a long period of slow growth.”
Mr Roubini is a brave soul to put a date on the great China collapse. Many have tried and failed miserably to do the same thing over the last two decades. He cleverly leaves the exact timing open and if you rephrased his comments they would actually say he thinks China will not suffer a hard landing in the next two years.
Some people counter his grim analysis by pointing out China has been over-building and over-investing for well over a decade and every time it looks like there is too much investment or infrastructure, growth catches up and spare capacity disappears. There are a lot of people in China after all.
Others might also argue that the poor quality of much of the construction also means that within a decade or two all the old infrastructure will have to be torn down and rebuilt.
But Mr Roubini may well be right and makes a convincing argument that China’s addiction to over-investment will eventually cause massive waste and much slower growth down the road.
“No country can be productive enough to reinvest half of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem.”
“Continuing down the investment-led growth path will exacerbate the visible glut of capacity in manufacturing, property and infrastructure, and thus will intensify the coming economic slowdown once further fixed-investment growth becomes impossible. Until the change of political leadership in 2012-13, China’s policymakers may be able to maintain high growth rates, but at a very high foreseeable cost.”
His assessment of the government’s latest five-year plan (2011-2015) is equally gloomy.
He points out, correctly, that the latest five-year plan looks remarkably similar to the last one, with its rhetoric on rebalancing the economy and increasing the share of consumption in GDP, both goals where the government failed miserably.
Mr Roubini is also right when he says the plan’s details reveal continued reliance on investment, especially public housing to boost growth.
His prescription is a mix of reforms including: faster currency appreciation, substantial fiscal transfers to households, taxation and/or privatisation of state-owned enterprises, liberalisation of the household registration, or hukou, system, and an easing of financial repression.
The Mandarins in Beijing are certainly aware of and probably agree with many of the points Mr Roubini is making, but because of the difficulties in implementing any of these reforms they are unlikely to pay much attention to his advice.
Rumor: China To Revalue Yuan 10% This Weekend?
Just stated on CNBC.
I have no way to judge that, but if it comes it is both good and bad.
The good: It's about a third of what has to happen, and as a step function it would apply major cooling to the "Chinese miracle" inflation machine. They need to do that too, which makes the rumor plausible. Coming on a long trading weekend here (Good Friday/Passover closes us this week) and on a weekend anyway (China's favored time to do this sort of thing) it would be appropriate both in terms of timing and event.
The bad: While there would be no direct dollar impact from this action since the Yuan is not convertible and thus not part of the $DXY index the indirect effects would be tremendously disruptive in the short term. This has a high probability of forcing corrective actions by The Fed, perhaps even before the futures market reopens Sunday night. The risk for The Fed and United States is that the dollar winds up gapping down by hundreds of pips, perhaps threatening the all-time low. Violation of the all-time low could result in massive pressing of short bets and a possible immediate fiscal crisis.
Please don't take this article the wrong way - I strongly support a Chinese action such as this, even though it's not enough on its own. The move in the dollar today may be related to this rumor and expectation of action over the weekend.
Beware coming into the weekend with this rumor out there; volatility is, in my opinion, radically cheap against reality and the complacency being displayed by the market is flat-out ridiculous.
Will China's Economy Overheat?
By U.S. Global Investors 04/19/11 - 09:33 AM EDT
http://www.thestreet.com/story/11086871/1/will-chinas-economy-overheat.html
<see charts>
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
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By Frank Holmes
NEW YORK (U.S. Global Investors) -- China's GDP growth continued at a blistering pace during the first quarter of 2011, rising 9.7% from the previous year, according to economic data recently released from the People's Bank of China.
Once again, this outpaced many forecasts -- even that of the Chinese government -- and reignited the discussion about whether China's economy is overheating.
This robust growth may raise a few eyebrows, but the economy isn't in danger of "redlining."
Andy Rothman, from Credit Lyonnais Securities Asia (CLSA) says the first-quarter growth figures aren't "dangerously high given the GDP growth rate and strong income growth" in the country. After rising nearly 8% during 2010, inflation-adjusted urban incomes rose 7.1% during the first quarter, according to CLSA. Rural incomes grew at 14.3%, up from just under 11% in 2010.
Fixed asset investment (FAI) also remains strong. China's FAI grew 25% during the first quarter, a reversion to the long-term pace of FAI growth China saw for six straight years before the government's stimulus plan in 2009.
This pace is supported by a property sector that refuses to slow despite Beijing's multiple efforts to tap the brakes. Property sales grew 15.8% on a year-over-year basis and commodity housing starts grew 19.5% ain March. You can see from this chart that this is a much more manageable pace than the stimulus-induced spike we saw in March 2010. Current levels are much more on par with long-term trends.
Much has been said about empty housing prices in cities such as Shanghai and Beijing, but UBS says that the sharp drop of sales in tier-1 cities have been more than offset by strong sales in most tier-2 and tier-3 cities. These are cities, such as Taiyuan and Xi'an in northwest China, which generally have urban populations of about 4 million to 6 million people and are located away from China's densely populated coastal areas.
Development in the interior has been a substantial driver in continuing China's rapid growth. Insatiable construction demand from these inland regions helped push sales of wheel loaders -- up 45% -- and excavators -- up 58% -- during the first quarter. In addition, planned investment of FAI under construction rose 19.1%, according to CLSA. In addition, the government's plans for extensive investment in social housing development -- 10 million units this year, in addition to carry-forward projects from last year -- should provide an extra boost.
Chinese trade data released last week showed a 32.6% rise in imports during the first quarter. This figure includes a 12% rise in crude oil, 38% rise in metal-cutting machinery and a 32% rise in auto/auto-chassis from a year ago.
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All of these factors are very supportive of demand for commodities such as cement, iron ore and copper.
China's biggest threat continues to be inflation. The country's Consumer Price Index (CPI) rose 5.4% in March, the largest rise in nearly three years. This is certainly something to keep an eye on, but it's not yet at the levels needed to hinder growth or, more importantly, cause social unrest.
The Chinese government has been pulling all stops to curtail inflation. Recently, 24 commerce associations across the country have made a joint statement to support the government's effort to defeat inflation. China Premier Wen Jiabao called on local government officials last week to help stabilize consumer product and housing prices.
Food prices rose about 11% in March, contributing about two-thirds of the increase in CPI. You can see from this chart that if you exclude food and residential inflation -- which was up 23% -- the inflation levels appear quite manageable.
The rise in food prices is a result of external factors and not symptomatic of an overheating economy. However, the rise in incomes we referenced previously negates a portion of this. In addition, CLSA's Rothman thinks we are either at or close to the peak in food price inflation.
China's March money supply (M2) growth rate was 16.6%. This was higher than February but 3.1% lower than the same period last year. This may be close to the government's target money growth rate because it is in line with those prior to financial crisis. We think there is still room for money supply to further contract without damaging the government's target GDP growth rate.
To control money supply, the People's Bank of China (PBOC) raised its reserve requirement ratio (RRR) for the fourth time this year, bringing the ratio to a record high of 20.5%. This is tenth increase since the beginning of 2010. The chart on the left shows how this has effectively slowed bank lending, and thus, money supply. Given that China's inflation battle is not over yet, we believe the PBOC will continue to raise RRR as needed to further slow money supply.
The chart on the right shows that bank lending is declining in China. After adding 679 billion renminbi in new bank loans in March, China's total bank lending this year is 2.24 trillion renminbi. Without an official loan target for this year, the market's opinion is that the unofficial PBOC target is around 7.5 trillion renminbi, roughly the same as in 2010.
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However, the current new loan speed is certainly more than the PBOC can allow. We expect the PBOC may allow a little more lending earlier in the year, before tightening more toward the end of the year, after a clearer picture forms of where the economy is headed.
Other tightening policies are likely to be completed by the first half of the year, and with inflation apparently under control, money supply back to historical levels and food prices peaking, it appears that the government will be successful in engineering a soft landing.
China analysts Xian Liang and Michael Ding contributed to this commentary.
Percentages refer to year-over-year changes unless otherwise specified.
For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow us on Twitter at www.twitter.com/USFunds or like us on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what our research overseas has turned up on our YouTube channel at www.youtube.com/USFunds.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns. M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.
China’s housing market – an inflationary bubble, or a sustainable boom?
Posted on | april 19, 2011 | No Comments
Once again, inflation increased in China last month by more than economists expected, as rising commodity costs and inflows of capital threaten to overheat economies across Asia. Chinas consumer prices rose 5.4% from a year earlier, the fastest pace since 2008, according to statistical reports coming out of China. Four interest-rate increases in China since the start of 2010 have failed to tame price pressures in the world’s fastest-growing major economy.
Although in China inflation is largely driven by food costs, which rose 12% in March from a year earlier, Beijing is very concerned about the effect that rising property prices in many cities are having on inflation. China’s fixed-asset investment in non-rural areas, a reliable indicator of construction activity, rose 25% in the January-March period from a year earlier. Strong growth in property investment, which rose 34.1% in the first quarter from a year earlier, also demonstrates that restrictions on speculation and oversupply in the real estate sector did not impact incentives to invest.
The real estate market is immensely important to the Chinese economy. With few other outlets for investment (depositing money in a Chinese bank is a losing investment, given low interest rates and high inflation), many families have been directing their savings into apartments, resulting in what some analyst describe as a bubble. A recent article in the New York Times by Andrew Jacobs, describes the many undesirable repercussions of China’s unrelenting real estate boom. Since 2007 real estate prices nationwide have risen by 140%, and during the past eight years by as much as 800% in Beijing.
However, a recent study by the Economist Intelligence Unit (EIU) is painting a different picture.
“China is not facing a major housing bubble, although there could be a short-term mild correction. The Economist Intelligence Unit’s new models of population and incomes in China’s cities point to strong underlying demand for housing throughout the next decade. They indicate that housing demand in China is growing so quickly that a correction in the next couple of years will be short-lived.”
Non-the-less, current market predictions for the housing market are rather grim. Moody’s Investors Service downgraded China’s property sector last week to “negative” from “stable,” on concerns that rising interest rates and reduced bank lending would deteriorate credit conditions and dampen demand. It appears that home purchasing restrictions had a significant impact on new home sales, with sales in Beijing down nearly 40% in the first quarter of 2011, compared to the previous three months. The Moody’s report also said that reduced bank lending, rising interest rates and increasing property supply would inevitably bring down sales and profit margins while also worsening the balance sheet liquidity for some developers.
The nation’s real-estate obsession is especially noteworthy given China’s relatively recent embrace of home ownership. According to Mr. Jacob’s, the sale of residential property was not allowed until the late 1980s, and even then under a leasehold system that gives buyers 70 years of ownership. Today, about two-thirds of all Chinese under 40 own their own homes, slightly higher than the average for Americans of the same age group. The frenzy starts with the local governments that sell off land at steep prices, and is further exacerbated by overeager developers who force residents out of old neighborhoods. China’s response to the global financial crisis, a stimulus package which channeled a record 17.5 trillion RMB ($2.7 trillion) of lending over 2009 and 2010, is also contributing to the current housing situation.
New supply would also flood the market after Beijing pledged to roll out more affordable housing amid growing public concern over rising prices, with plans to build 10 million low-income apartments this year. According to the Moody’s report, the government’s priorities of maintaining social stability (by controlling inflation and containing any emerging property bubble) will continue to heavily influence the direction of the property market. Moody’s downgrade came a day after Premier Wen Jiabao told a cabinet meeting that home prices were still rising fast in some cities and reaffirmed intentions to keep tightening policies in place against property speculators.
Beijing has rolled out a number of measures to curb housing inflation in the past year and a half, including four rises in interest rates since October and restrictions on multiple home purchases. On Sunday, China raised banks’ reserve ratio requirements for the fourth time this year. In particular, China’s central bank said it was raising the reserves that commercial banks must deposit with the central bank to 20.5%, up from 20% previously, with effect from April 21. Premier Wen Jiabao even said last week that China’s central bank is considering increasing the RMB’s flexibility to help counter inflation.
EIU Report on the Sustainability of China’s Housing Boom
Although soaring house prices in Chinese cities have led to widespread concerns of a property bubble, and the repercussions of a major collapse would be severe enough to send the world into a mini-recession and to cause serious damage to resource-focused economies, the EIU report reaches some more optimistic conclusions than Moody’s recent downgrade.
Furthermore, although the EIU report also agrees that China does have a high level of per-head floor space given its income levels, it does not believe that this will lead to a structural collapse of housing demand. The EIU report argues that:
“China’s love affair with housing is driven by cultural factors linked to the gender imbalance, and relatively light taxation of housing as an investment. Neither of these factors is likely to change significantly this decade.”
On the other hand, demand for housing in China has both global and domestic implications. The EIU report concludes that:
“the global commodity demand set off by China’s housing industry will continue to underpin commodity prices, particularly for steel and oil.”
The EIU report also argues that:
“within China, the housing industry is associated with broad opportunities in construction, retail and transportation.”
Is China’s real estate bubble about to burst?
By Charles Lane
I’m just back from China, where everyone is speculating about, well, speculation. The hottest question in Beijing is whether the country’s real estate boom is really a bubble, and if so, when it might burst. Given the possible impact of a China property meltdown on the world economy, this is a pretty fateful issue. I can’t give you much more than anecdotal stuff. But, I must say, the market looks pretty fizzy to me.
If conversation is a leading indicator of real estate madness, then China could be headed for trouble. In Washington five years ago, every dinner party quickly devolved into a seminar on who was buying what for how much. It’s that way in Beijing these days, too. A friend who has lived there for several years spends a lot of her time kibitzing with friends about how much apartment they can afford, where they might scare up the cash for a downpayment, and the agonies of living with one’s parents.
Fueling the constant chatter about housing prices is the connection to relationships and family life. Women are highly reluctant to even consider marrying men who don’t own their own places. Yet, according to a recent paper published by the St. Louis Federal Reserve Bank, a typical young married couple in China would need to save their entire income for 12 years to afford a 600- square-foot apartment. This is not a healthy situation.
Will Higher Rates Hit China Real Estate ETF?
April 17th at 10:49am by Tom Lydon
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China has been looking at ways to cool its real estate market, and the recent crackdown on speculation in the country’s capital could put pressure on the China real estate exchange traded fund (ETF).
Also, China on Sunday again boosted the requirement on reserves banks must hold, for the fourth time this year.
Guggenheim China Real Estate ETF (NYSEArca: TAO) tries to reflect the performance of the equity index AlphaShares China Real Estate Index, which monitors the performance of publicly issued common equity securities of publicly-traded companies and real estate investment trusts (REITs) that may be invested by foreigners. The fund has an expense ratio of 0.65%. The ETF weights Hong Kong at 72.84% and China at 27.16%.
In Beijing, prices on new homes plummeted 26.7% month-over-month in March, and average prices on newly constructed houses for March dropped 10.9% year-over-year, according to iMarketNews. [China ETFs Rise Along with Inflation.]
In contrast, property prices increased 0.4% month-over-month in February, 0.8% in January and 0.2% in December.
An unidentified official from the city’s Housing and Urban-Rural Development Commission commented that home purchases plunged 50.9% year-over-year and 41.5% month-over-month as the government places greater scrutiny over speculation in the real estate market. The central government has implemented several measures since last year to cool the housing market.
Guggenheim China Real Estate ETF was up 12.7% for the year ended April 14, but is in the red over the past three months, according to Morningstar.
Guggenheim China Real Estate ETF
China’s consumer inflation index hits 32-month-high of 5.4 percent
From ANI
Beijing, Apr 16: China's Consumer Price Index (CPI) rose to a 32-month- high of 5.4 percent in March from the same month last year, said the country's statistics agency.
According to the National Bureau of Statistics (NBS), CPI, a main gauge of inflation stood at 5 percent for the first quarter.
Food prices, which accounted for a third of the basket of goods in China's CPI calculation, surged 11 percent year on year, while housing costs jumped 6.5 percent.Imported inflation has strongly contributed to the domestic price hike," Xinhua quoted NBS spokesperson Sheng Laiyun, as saying.
"To contain CPI growth to 5 percent for the quarter is a hard-earned victory amid abundant liquidity globally and widespread inflation in emerging economies," Sheng said.e said China's March inflation data was still lower than 6.3 percent for Brazil, 9.5 percent for Russia.un Chi, an analyst with the Nomura Securities, said inflation pressure would persist for a period of time, which indicated it was only early days in the monetary tightening circle.
Earlier, Chinese Premier Wen Jiabao said keeping price levels stable was the most urgent task for the government this year.
"Judging from the inflation situation in the first quarter, we are still under great pressure of price hikes," Wen said, adding, "We should never lower our guard."
Copyright Asian News International/DailyIndia.com
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Can You Amass a Fortune With These Stocks?
By Rich Duprey | More Articles
April 15, 2011 | Comments (1)
You don't need the investing acumen of Warren Buffett or the riches of a trust fund baby to achieve financial success.
Small sums of money invested monthly in undervalued small-cap stocks offer hope for your greatest returns. They offer the best growth opportunities for growth because they're mostly ignored by the big investors.
Below we screen for stocks under $3 billion in market cap, offering earnings surprises of 15% or more in the previous quarter, with long-term earnings growth forecast to be at least 15%. We'll then filter our findings through the collective investing wisdom of the 170,000 members in our Motley Fool CAPS community.
Here are some of the stocks this simple screen found:
Company
Market Cap
EPS Act. vs. Est.
Avg. Analyst 5-Yr EPS Est.
CAPS Rating (out of 5)
China Digital TV (NYSE: STV )
$402 million
$0.33 vs. $0.13
20%
****
Xinyuan Real Estate (NYSE: XIN )
$165 million
$0.28 vs. $0.19
20%
****
Zoltek (Nasdaq: ZOLT )
$423 million
($0.05) vs. ($0.06)
15%
***
Sources: Yahoo! Finance and Motley Fool CAPS.
Of course, this is not a list of stocks to buy -- just a starting point for more research. We need to look more closely at these companies to see whether analysts' faith in them is well-founded.
An alternative opportunity
Technological changes can create massive opportunities for profit, but forced migrations to new standards typically leave little doubt as to who should be the winners and losers. When big-screen TVs suddenly became very affordable, glass panel maker Corning (NYSE: GLW ) reaped the rewards. Coming as it did after Congress forced a conversion from analog to digital broadcast signals, Dolby Labs saw its digital sound technology become a required component of TV sets and set-top boxes.
China is now forcing a similar conversion to a digital signal by 2015, and investors might want to keep an eye on China Digital TV, which makes smart cards essential for the new standards. Fourth-quarter smart-card revenues jumped 151% year-over-year and 60% from the third quarter, with profits surging by similar percentages. As new tax laws come into effect in China that will exempt an estimated 20% of the population from paying any income taxes, that should help spur consumer spending and eventually fall to China Digital's bottom line.
With no debt and plenty of cash available to it, CAPS member Fareed69 is in agreement, seeing the macro trends falling China Digital TV's way:
Healthy company which could become a multi-bagger going forward. I like the industry and am very bullish on China.
Tune in on the China Digital TV CAPS page and see whether it's signaling a clear path for growth.
A bend in the road
Although we've heard warnings that China's housing market is a bubble about to burst, expansion continues unabated. Despite attempts to reverse policies that encouraged real estate speculation, sales still jumped 26% in the first quarter. But the curbs on development are taking a toll across the industry.
Housing developer Xinyuan Real Estate is trading 30% lower than it did six months ago, and shares of real estate agency E-House are at similarly depressed levels. CAPS investor humanperson sees this as a great opportunity for a contrarian investor:
Chinese property stocks are unloved and unwanted right now, creating the chance for great value investing. XIN has posted consistent growth and beaten projections for more than a year. Chinese fiscal policy is hugely expansionary this year, and the Chinese government knows that it must support the housing market to stay in power.
Add Xinyuan to your watchlist then head over to the Xinyuan Real Estate CAPS page and give us your thoughts on whether this is a house of cards.
Man the ramparts
Recently American Superconductor (Nasdaq: AMSC ) surprised investors with news that its biggest customer, Sinovel, was withholding placing more orders for electrical components for its wind turbines. While it was a shock that sent shares tumbling, it's not like there haven't been warning signs with inverter makers Power-One (Nasdaq: PWER ) and Satcon Technology (Nasdaq: SATC ) both reporting weak earnings.
Yet the first sign there were strong headwinds facing the industry occurred back in November when carbon fiber materials leader Zoltek said its largest customer, Vestas, was closing down manufacturing facilities in Europe, leading to lower demand for carbon fiber. It's now apparent that the industry is caught in the doldrums amid baffling winds.
CAPS member whomonkyoulus says you need to have a longer horizon to appreciate the value Zoltek offers:
This is a long term pick. I should wait until the stock falls down to a more reasonable price than the current one.... I would put in a limit order but I always have dozens of stocks in the "pending" queue. I feel alright about it though because of the insiders buying.
Let us know in the comments section below or on the Zoltek CAPS page whether its business will find the wind at its back.
Foolish final thoughts
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China Digital TV Holding is a Motley Fool Rule Breakers selection. Dolby Laboratories is a Motley Fool Stock Advisor pick. The Fool owns shares of Power-One. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
Fool contributor Rich Duprey owns shares of Dolby but does not have a financial interest in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
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Report this Comment On April 16, 2011, at 4:21 PM, micsanhan wrote:
Here in Denmark, Vestas shares almost a public share that you should own as a great Dane. The company is a world leader in front of the Siemens Wind Power and other world giants in the World. Vestas has just launched the world's largest offshore wind turbine and it will not stop here. It is my assessment that after Japan one should not underestimate the wind turbines power the next year. There is so much ocean. Since the Chinese are copying almost anything in this world will continue to be required for subcontractors to the industry ..................... and the future will be green .. Best regards from Denmark. Michael Sandager
China: Beijing, housing market collapses: down 50% in one year
In one month, prices have dropped by almost 27%. Nation prepares for burst of housing bubble worse than the United States. The Office of statistics demands punishment for those who published economic data over the Internet before their official publication.
Saturday, April 16, 2011
By Asia News See all articles by this author
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Beijing (AsiaNews / Agencies) - The Chinese real estate market is preparing to plummet: last March, house prices fell by 26.7% over the previous month and purchases have fallen by 50% in one year. According to experts, the real estate crisis in China is even scarier than the one that erupted in the United States three years ago, which led to the global crisis. In response, the Chinese government has decreed that it will punish those who "published economic data on the internet" before they are officially published. The data is considered a "state secret".
Beijing News, citing data from Housing and Urban-Rural Development Commission on the house and released disturbing figures in recent days: the price of new homes in the capital fell by 26.7% in a month. Over the past year prices fell by about 10%. Purchases decreased by 50.9% in one year and 41.5% in March alone.
The government has tried to curb real estate speculation and last year took steps to halt the purchase of second homes and bank loans.
The official data of the real estate market will be published by national statistics only on April 18.
The National Bureau of Statistics yesterday condemned the escape of economic data. Shen Laiyun, department spokesman, said that "any illegal behaviour will be punished by law. Those disseminating state secrets on the Internet or other channels of information will be held accountable. "
Just yesterday, the National Bureau of Statistics released some economic figures: in the first quarter of 2011 GDP (gross domestic product) grew by 9.7%. But inflation also rose to reach 5.4% in March, the highest in almost three years, higher than the 4.9 recorded in the first two months of 2011.
Love lives of Chinese men suffer from housing boom
http://www.csmonitor.com/Business/Green-Economics/2011/0415/Love-lives-of-Chinese-men-suffer-from-housing-boom
In China's big cities, real estate's expensive and young women are in short supply. If the population spread more evenly into cheaper parts of the country, would it be easier for a guy to get a date?
A Chinese elderly couple sit near the Tiananmen Gate in Beijing, Thursday, Feb. 24, 2011. Today, there are fewer women than men in China's biggest cities. If the population spread across the country into new cities, maybe romance would come easier for some men, writes guest blogger Matthew E. Kahn.
Vincent Thian / AP / File
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By Matthew E. Kahn, Guest blogger / April 15, 2011
[Editor's note: The author updated this post 4/16/11.]
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Matthew Kahn
Mathew is an economics professor at UCLA and has written three books: Green Cities (Brookings Institution Press); Heroes and Cowards (Princeton University Press, jointly with Dora L. Costa); and in fall 2010, Climatopolis: How Our Cities Will Thrive in the Hotter World (Basic Books).
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Where are the female economics bloggers?
China's urban marriage market is taking some predictable turns as young women are in scarce supply. This article argues that the young women have the bargaining power and they want to date a man with a car and his own apartment. In the big cities, housing is so expensive that many young men can't afford their own apartment.
Here is an excerpt from the original New York Times article:
“Sometimes I wonder if I will ever find a wife,” said Mr. Wang, who lives with his parents, retired factory workers who remind him of his single status with nagging regularity. “I feel like a loser.”
There have been many undesirable repercussions of China’s unrelenting real estate boom, which has driven prices up by 140 percent nationwide since 2007, and by as much as 800 percent in Beijing over the past eight years. Working-class buyers have been frozen out of the market while an estimated 65 million apartments across the country bought as speculative investments sit empty.
So, the urban economists have a simple solution to this matter of the heart. China needs an "escape valve". In the United States, hundreds of millions of people have sought out new cheap housing in "new cities" and have been happy to settle in such places as Tampa, Dallas, Las Vegas and Phoenix. These folks can travel to the "Superstar Cities" on the coasts or merely watch Kobe and Jerry Seinfeld on TV. They have been free to choose to locate in a less expensive city and thus to be able to afford more housing.
Yes, Shanghai and Beijing are tremendously costly but within a system of cities with easy cross-city migration --- why won't new cities arise that are analogous to Houston or Las Vegas? One answer is that the powerful state may slow down this migration (either intentionally or unintentionally). In a free market capitalist economy, firms follow people and people follow jobs. If both firms and people want cheap land then they can co-ordinate and locate in a Las Vegas.
In the case of China, is the powerful state guiding economic activity to specific locations (either through handouts or subsidies) or is it allowing free market forces to playout? I predict that the dudes' problem will go away if the free market is allowed to operate in China. China's population will spread out into new cheaper cities and romantic bliss will ensue.
In understanding the causes of high urban prices, we can't ignore the supply side and the ability of developers to build new housing and the incentives of those holding inventories of existing apartments to sell them. On the developer side, researchers such as Ed Glaeser and Joe Gyourko have argued that high home prices in the United States is associated with land use regulation. Albert Saiz has documented that steeply sloped land is hard to build on.
I bet that these same factors matter in China. If the state owns the land, how does it decide how much land to devote to development? If it devoted more land in other cities to development, how would this affect apartment prices in those areas?
Why are speculators holding inventories of apartments and delaying selling them now. They must have expectations of being able to sell them at much higher prices in the future. If Chinese urbanites in non-superstar cities --- could contract with developers to build them simple housing, then market forces would create the equivalent of a Levittown in China's cities. If such speculators knew that urbanites could build their own homes or contract with a low cost developer rather than bidding for a speculator's property, then this would convince the speculators to lower their prices and sell their stock of units.
Competition chips away at monopoly power.
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Higher Interest Rates Might Push Up Property Prices
http://blogs.wsj.com/chinarealtime/2011/04/15/higher-interest-rates-might-push-up-property-prices/
The latest rise in China’s inflation rate immediately spurred predictions of tighter credit by the People’s Bank of China. Yet, higher rates might not have the kind of dampening impact they would elsewhere, in particular on the frothy property sector.
EPA
Consumers check out housing models at a real estate fair in Qingdao.
Shortly before China said Friday that its consumer price index rose a higher-than-expected 5.4% in March, Premier Wen Jiabao said food, labor and housing costs mean “we are still under great pressure.” In carrying the premier’s pledge to remain vigilant, the state-run Xinhua news agency termed home prices as “runaway.”
Though a small component of the consumer price index, home prices are among the primary causes and risks of soaring inflation in China. Unaffordable housing is also a threat to social stability.
Economics theory dictates that higher rates would damp prices by signaling to prospective home buyers that they will face higher mortgage payments and should stick to the sidelines.
Now, a study quantifies how that’s not the way it works in China, where tighter credit may actually spur higher prices.
Each credit-tightening move by the People’s Bank of China between June 2005 and September 2010 has been accompanied by a 5% rise in annual home prices, according to a study published by the University of Nottingham’s China Policy Institute. In other words, for every 0.5-percentage-point rate increase, property prices were 5% higher a year later.
“Instead of running away from the market, investors rush to buy houses or shares whenever tightening monetary actions are taken,” write the study’s authors, professors Yao Shujie, Luo Dan and Loh Lixia.
Chinese real estate trends carry world-wide implications.
In a mid-March report, UBS economist Jonathan Anderson described Chinese property as “the single most important sector in the entire global economy,” “pervading” the country’s economy and driving factors like the price of copper.
A few days later, Wang Tao, a Beijing-based colleague of Mr. Anderson’s at UBS, said in a separate report that risks are “very high” China could experience a property bubble in coming years. To gauge it, Ms. Wang said, “Most importantly, given the poor quality of the price-related data, we should watch closely construction activity and credit expansion.”
It’s well known that interest rates have a limited impact on China’s credit, primarily because the financial system lacks market mechanisms to ensure higher borrowing costs actually crimp credit growth. Indeed, China’s monetary policy itself isn’t solely an economic consideration.
These facts help explain why Beijing often backs up monetary policy changes with rhetoric, such as tough talk from Mr. Wen.
“The message from the central government is very clear. The government is trying to control speculation and investor demand,” J.P. Morgan’s China Chairman Jing Ulrich told the Australian Chamber of Commerce in Shanghai this week.
But, like the Nottingham study notes, Ms. Ulrich highlighted how housing prices have risen even as bank credit has tightened. At 20%, the prevailing “reserve ratio” means big banks need to park 20 cents of every dollar they have on deposit, she said. That represents a significant choke on their scope to lend—but still home prices soar.
Central parts of Beijing’s plan to control housing prices, she noted, aren’t rate-related: taxes, targets, plus plans to build 36 million “affordable” apartments in the just-adopted five-year plan.
The authors of the Nottingham paper use the word “irrational” 11 times in 34 pages to describe how the investment psychology of Chinese citizens frustrates the workings of monetary policy.
Yet, the paper also explains roots of the behavior: “Rapid urbanization, attitude towards home ownership, lack of investment channel and imperfect market competition are some of the key factors responsible for large stock market and housing bubbles,” it says.
“Apart from acting early and more aggressively, the Chinese government should try to create more investment channels, to promote a fairer and better free-market system, to shift its economic structure, which will depend less on investment and more on effective domestic consumption,” it says.
China’s monetary policy mechanisms might be imperfect, but they are needed to tackle the problem.
–James T. Areddy. Follow him on Twitter @jamestareddy
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8:33 am April 18, 2011
Sol wrote:
China’s economy is going to face a crash sooner or later. They’re running up a bubble economy by spending like no tomorrow. Their high GDP figures mean nothing. Sooner or later the house flipping and trading will blow up and leave a huge hole in the economy. Anyway, there is no real value in the sector to begin with. China’s government is allocating all their resources and workers into construction of worthless ghost towns, super malls and museums. Sooner or later their economy will hit reality and the debts will come knocking at their door. Exactly what happened to our country. Our government pushed downed interest rates and spurred on the housing bubble. Sure everything seemed great for a few years, but look where we are now. Politically, government spending is good: it makes it seem like your doing something when all your doing is pushing the problems to the next generation. All the government can do is create an illusion of prosperity. Market forces cannot be intervened or “controlled”.
8:32 am April 18, 2011
Sol Lee wrote:
China’s economy is going to face a crash sooner or later. They’re running up a bubble economy by spending like no tomorrow. Their high GDP figures mean nothing. Sooner or later the house flipping and trading will blow up and leave a huge hole in the economy. Anyway, there is no real value in the sector to begin with. China’s government is allocating all their resources and workers into construction of worthless ghost towns, super malls and museums. Sooner or later their economy will hit reality and the debts will come knocking at their door. Exactly what happened to our country. Our government pushed downed interest rates and spurred on the housing bubble. Sure everything seemed great for a few years, but look where we are now. Politically, government spending is good: it makes it seem like your doing something when all your doing is pushing the problems to the next generation. All the government can do is create an illusion of prosperity. Market forces cannot be intervened or “controlled”.
11:19 am April 17, 2011
China moon wrote:
Of all the justifications to wish bad things to happen to China, this would be one of the most idiotic thing I have heard. With these kind of morons around, its no wonder that the west are going bankrupt.
1:01 am April 16, 2011
Joshua Nesbit, Seattle WA wrote:
Property prices are determined by ONLY one thing! How much money people can pay. Higher Interest rates mean people who don’t have cash and must borrow more cannot do so cheaply. Which means they have less money. Which means property prices fall.
Higher interest rates always result in reducing property prices because only people with cash can afford to buy.
The author of this article probably did not do too well in high school arithmetic.
10:22 pm April 15, 2011
Reason wrote:
Crony capitalism and corruption are fueling the property game in china. People need better investment options and freer markets. The government gets in he way of too many so people dont tell the government the truth. They lie on taxes. Lie on official statistics. Lie about business and bank deals. There is no way the government can work well. Chinese government is like Chinese parent: strict but only care about grades. Just like child people do what they want and dont tell parents. Chinese government cant control economy. The harder it tries the more difficult it is to control. Just like child. Someday child must grow up.
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Beijing's Empty Bullet Trains
Is China investing way too much in its infrastructure?
By Nouriel RoubiniPosted Thursday, April 14, 2011, at 2:43 PM ET
http://www.slate.com/id/2291271/
Bullet train. Click image to expand.A bullet train to BeijingI recently took two trips to China just as the government launched its 12th Five-Year Plan to rebalance the country's long-term growth model. My visits deepened my view that there is a potentially destabilizing contradiction between China's short- and medium-term economic performance.
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China's economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible—most likely after 2013—China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium.
Despite the rhetoric of the new Five-Year Plan—which, like the previous one, aims to increase the share of consumption in GDP—the path of least resistance is the status quo. The new plan's details reveal continued reliance on investment, including public housing, to support growth, rather than faster currency appreciation, substantial fiscal transfers to households, taxation and/or privatization of state-owned enterprises (SOEs), liberalization of the household registration (hukou) system, or an easing of financial repression.
China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors). When net exports collapsed in 2008-09 from 11 percent of GDP to 5 percent, China's leader reacted by further increasing the fixed-investment share of GDP from 42 percent to 47 percent.
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Thus, China did not suffer a severe recession—as occurred in Japan, Germany, and elsewhere in emerging Asia in 2009—only because fixed investment exploded. And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50 percent.
The problem, of course, is that no country can be productive enough to reinvest 50 percent of GDP in new capital stock without eventually facing immense overcapacity and a staggering nonperforming loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.
Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further. In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.
Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment—including East Asia in the 1990s—have ended with a financial crisis and/or a long period of slow growth. To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption.
The trouble is that the reasons the Chinese save so much and consume so little are structural. It will take two decades of reforms to change the incentive to overinvest.
Traditional explanations for the high savings rate (lack of a social safety net, limited public services, aging of the population, underdevelopment of consumer finance, etc.) are only part of the puzzle. Chinese consumers do not have a greater propensity to save than Chinese in Hong Kong, Singapore, and Taiwan; they all save about 30 percent of disposable income. The big difference is that the share of China's GDP going to the household sector is below 50 percent, leaving little for consumption.
Several Chinese policies have led to a massive transfer of income from politically weak households to politically powerful companies. A weak currency reduces household purchasing power by making imports expensive, thereby protecting import-competing SOEs and boosting exporters' profits.
Low interest rates on deposits and low lending rates for firms and developers mean that the household sector's massive savings receive negative rates of return, while the real cost of borrowing for SOEs is also negative. This creates a powerful incentive to overinvest and implies enormous redistribution from households to SOEs, most of which would be losing money if they had to borrow at market-equilibrium interest rates. Moreover, labor repression has caused wages to grow much more slowly than productivity.
To ease the constraints on household income, China needs more rapid exchange-rate appreciation, liberalization of interest rates, and a much sharper increase in wage growth. More importantly, China needs either to privatize its SOEs, so that their profits become income for households, or to tax their profits at a far higher rate and transfer the fiscal gains to households. Instead, on top of household savings, the savings—or retained earnings—of the corporate sector, mostly SOEs, tie up another 25 percent of GDP.
But boosting the share of income that goes to the household sector could be hugely disruptive, as it could bankrupt a large number of SOEs, export-oriented firms, and provincial governments, all of which are politically powerful. As a result, China will invest even more under the current Five-Year Plan.
Continuing down the investment-led growth path will exacerbate the visible glut of capacity in manufacturing, real estate, and infrastructure, and thus will intensify the coming economic slowdown once further fixed-investment growth becomes impossible. Until the change of political leadership in 2012-13, China's policymakers may be able to maintain high growth rates, but at a very high foreseeable cost.
This article comes from Project Syndicate.
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Nouriel Roubini is chairman of Roubini Global Economics and professor of economics at New York University's Stern School of Business.
Photograph by AFP/Getty Images.
Carl Thelin
I have seen a number of stories in the Western press citing empty trains and airports as a sign of a bumpy economic future here in China, and while I agree with the general argument that the government is overspending on infrastructure and that there is likely to be a crash when these public works funds inevitably dry up, my gut reaction to this supposed trend is to ask "where?" Where are all these empty trains and planes? As a frequent domestic business traveler, I have never been on a bullet train that was anything other than jam-packed with people, and have never been able to book a seat on one with less than 3 days notice. China's newer airports are vast, imposing structures that at first glance may seem empty, but you don't have to spend more than about 5 minutes in one before you realize that it is a bustling beehive of activity. Lines at check-in counters tend to be long, and flights are fairly full. I do a lot of travel between major cities like Beijing and Shanghai, where one would expect the fullest flights and trains, but also between a lot of 3rd tier cities - Fuzhou and Xiamen, for example, where you'd expect this type of trend to rear its not-so-ugly head first, but I have seen absolutely no evidence of it whatsoever. Everywhere I go - chock-a-block full. Frankly, I long for the day when I can by a ticket as I walk in to catch my train, and be assured of a comfortable seat in an only partially full carriage. Bring it on!
Today, 5:14:29 AM
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Carl Thelin
Sorry - obviously that should have been "I long for the day when I can BUY a ticket as I walk in to catch my train..."
Although as I said, I agree that there will be a crash at the end of this public spending juggernaut, there is a serious underlying point to be gleaned from my tongue-in-cheek comment: My admittedly anecdotal experience indicates to me that actually, there is real need for much of the new infrastructure being generated, and it will make China an even more efficient and business-friendly place.
Today, 6:02:14 AM
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steve dunmore
The writer failed to mention two important factors in the Chinese economy the healthcare issue and lack of social security for retirement . There is a retirement program for Chinese government workers as well as private schemes for the middle class - but unlike the USA or other developed nations there's no national govt administered social security program.
As for healthcare- --- Sick patients have to pay for their hospital bills, doctors visits and medicine - There are private healthcare insurance plans available such as PCCC,and rural residents pay about 50% of the hospital bill . The government pays the other 50% which doesn't mean much when you only make less than 50USD per month growing rice.
These two issues would perhaps explain why the Chinese hate to spend money because they are so worried about becoming sick and the subsequent bill, as well as not having enough money for retirement. The other issue is the Chinese have been slow to embrace bank credit cards which could lead to higher domestic consumption, partially because of the Chinese societal belief that good citizens should not live beyond their means.
Today, 1:25:16 AM
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Michael James
Yes, but a bit of perspective on those issues. China is trying to change those things but obviously it will take time. And most of the other Tiger economies were similar, even Japan today has limited unemployment and retirement schemes (and Japan was very late in adopting credit cards). Hong Kong does not have a comprehensive healthcare insurance system but still has one of the best population health metrics in the developed world--because while citizens still have to pay a lot of their medical bills the hospital system is publicly financed and charges are low.
Today, 2:47:58 AM
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Ron P
Possibly this spending results from China like it's neighbors Taiwan, Japan, India, South Korea, etc. with 4 billion or 60% of the worlds population realizing that urbanization of the world's cities are be dominant drivers of future economic growth (Aerotropolis - Greg Lindsay and John Kasarda) and that transportation systems are more than just infrastructure or competitive advantage. They are now economic engines in their own right and poles of 24/7 economic activity within hours of each other, making them formidable forces to compete against (When Cities Rule The World - Parag Khanna - McKinsey: http://whatmatters.mckinseydigital.com/cities/when-cities-rule-the-world).
Yesterday, 6:58:01 PM
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Patrick
Actually, since before the Federal Government spent massive amounts of money on airports and highways, it would have been hard for people to travel by car or plane since the infrastructure was rudimentary. So if your point was that the government was just building what people were already using, the government would have been maintaining railroads, as that was the predominant mode of transportation at the time. Instead, the Federal government left WWII train taxes in place into the 1960's, left speed limits from the 1930's in place permanently, and massively subsidized air and car travel. Not exactly the invisible hand at work.
Yesterday, 4:08:13 PM
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ibivi
If there isn't an a social safety net why shouldn't people save? Poverty has been an ongoing issue in China and people are just beginning to enjoy a better standard of living that permits them to save and indulge in some spending.
Road traffic is horrendous. Last year there was a huge backup that took a month to clear up. That is inconceivable in developed countries. They need efficient and affordable rail services. Rail travel in North America has been allowed to decline in favour of cars on highway systems. Tracks and stations were dismantled and the land was sold for profit and development. Yet, freight rail shipping is highly profitable and takes priority over passenger travel. Amtrak is a mess because it is not supported properly by politicians who are hostile to publicly-funded rail service. Even the subway system in Washington, DC was allowed to deteriorate to the point of hazard. At least the Chinese are spending on rail service.
Yesterday, 2:39:01 PM
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Allen Sherzer
Remember that half billion $ bridge in Alaska so many people where complaining about a couple of years ago?
Guess that was just much needed infrastructure our forward looking government knew we needed and was going to build. Pity it was cancled. We can only hope the country survives...
Yesterday, 2:30:36 PM
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Brent Butterworth
Government spending does sometimes deliver benefits, though. For example, it created the medium you're now using to parrot right-wing platitudes.
Yesterday, 3:02:48 PM
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@Brent,
Right wing platitudes? I'm just expressing worry that the government said we need a half billion $ bridge in Alaska that won't be built. This must be important, or why would they do it?
If I where some crazed right winger, wouldn't I be opposed to this important piece of spending?
Yesterday, 3:06:09 PM
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Brent Butterworth
True, Dave. As someone who has some left-wing positions and some right, I've found that if you want love here your best bet is to bash the right. I'm happy that we have some interesting right-wing thinkers who are brave enough to keep up the discussion.
Yesterday, 7:51:59 PM
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Michael James
@Allen Sherzer
".... a half billion $ bridge in Alaska that won't be built. This must be important, or why would they do it?"
You need to distinguish between transparent governance and the Road Lobby's ability to extract money for their pet projects, just like the rich extract ever more tax concessions. Alaska likes to think it epitomizes the land of the free but in reality is the biggest welfare state in the union (and possibly the western world)! Their model would appear to be Bahrain or Saudia Arabia who disperse petrodollars to their citizens to appease them.
Today, 12:30:30 AM
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????
The focus of the comment posts here is overwhelmingly about high speed rail, but the larger point of the article was about Chinese infrastructure in general.
Many posters have compared China's rail system to our own interstate highway system in the 50's. Namely, as an investment that wasn't necessarily needed in 1950, but paid off in the long run. Whether this is true or not (I have no idea), it misses the larger point of the article that in many cases the real issue isn't the trains and roads in China, it is that the trains and roads lead to empty cities.
To extend the analogy, it would be like the US in the 1950's building the interstate highway system, and then building a bunch of large cities from scratch that nobody lived in, rather than letting cities grow organically around the highway system.
China has an estimated 64 million newly built homes and apartments that are empty. Ones that the Chinese people either don't want or can't afford. And they have many dozens more of these cities in the planning/building stages. This is where the White Elephant starts to rear its ugly head.
I guess it is possible that the Chinese government is incredibly wise and far sighted. But even more likely they are creating a property bubble that will make the US bubble look like child's play. We recently have started to view the Chinese government as infallible, but their recent history tells us it is capable of disasterous mistakes from time to time. Let's hope this building frenzy isn't one of them.
Yesterday, 2:16:25 PM
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William Gruff
64 million empty units vs 800 million people living in mud huts....
You do the math.
Keep in mind that China is elevating more people out of poverty each year than most European countries have as their entire population. The annual housing turnover in China amounts to hundreds of millions of units... 64 million is nothing.
Today, 12:52:29 AM
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William Gruff
"More importantly, China needs... to privatize its SOEs, so that their profits become income for households"
And this clown Roubini teaches economics? What a joke. What China really needs is to ignore worthless advice. Privatization 'works' for a handful of wealthy and politically connected individuals who can snap up SEOs for pennies on the dollar then dismember them and sell them off piecemeal, but when has privatization EVER worked for the economy and society as a whole? Never.
China's leaders know that they need to grow their domestic market, but it seems likely that they will allow that market to grow more naturally by taking a more relaxed attitude towards labor-management relations (see the recent strikes at Honda plants, for example). With only slight government encouragement, wages can be raised VERY quickly, growing the domestic market almost overnight. As Roubini notes, "labor repression has caused wages to grow much more slowly than productivity." So, for the Chinese government to grow the domestic market, all that they have to do is exactly NOTHING... a point that you can be sure is not lost on them. The problem is a lack of modern infrastructure, higher-end housing, etc to support an explosion of China's middle class. So, China could encourage the demand side of the equation to ramp up and then build the infrastructure afterward with the higher wage labor that would be prevalent at that point, or build the infrastructure now with the cheaper labor that is available, then let their middle class grow into it. From what I can see, however, China's infrastructure is getting utilized almost as quickly as it is being built.
Realize: For long-term stability, China needs to at least double the proportion of their population that is middle class. As staggering and mind-boggling a task as that may appear, it is not really farfetched. When they get closer to achieving that goal, all of these investments will begin to look far short of "way too much".
This may be really hard to understand for people wedded to capitalist investment paradigms that require guaranteed quarterly ROI and where big projects are arranged to be pay-as-you-go, but the Chinese are looking decades down the road. Even their Five Year Plans, at many dozens of times the scope of even the biggest corporate endeavors, are still just steps towards a bigger goal. It's no surprise that economists enamored with a narrow, capitalist comprehension of economics will continue, year after year, to utter dire predictions of doom for the Chinese economy, while most of them can't even spot an economically deadly real estate bubble growing right under their own noses (kudos to Roubini for being one of the very few to spot that, but really, it was obvious... even I knew it was happening).
China just needs to keep doing what China is doing.
Yesterday, 1:37:44 PM
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RedWell
China-style long term investments won't look so good if between now and "long term" consumption consistently fails to support those investments. Sounds to me like you're encouraging the kind of building glut that characterized the housing bubble and now mars the landscape with aborted developments.
Yesterday, 2:11:20 PM
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William Gruff
"Sounds to me like you're encouraging the kind of building glut that characterized the housing bubble and now mars the landscape with aborted developments."
You're comparing apples to anchovies here. China's economic growth is real, with millions of people moving out of poverty annually and the middle class growing every year. Practically ALL of America's economic growth for the last three decades has been imaginary, from Reagan’s "Are you better off than you were four years ago?" on, and is due to speculation and game-playing in the finance sector. America's middle class is shrinking, so the realistic market for McMansions dwindles year by year. Please note: You can really only call an economic trend a "bubble" if prices are speculated up well beyond real value (and to understand that, you need to know the difference between price and value; a fine point that confuses many non-Marxists). To be certain, there is some speculative price inflation taking place in China, but so far it is nowhere near the obscene scale of what happened in the United States and the Chinese government has plans in place to keep the speculation somewhat under control.
To clarify, there are still millions of people in China that live in mud huts or yurts, so the potential market there for highrise luxury condos remains vast. You can argue that America's trailer homes are roughly equivalent to China's mud huts and yurts, and having spent some time in samples of all three home types I would be hard pressed to counter your claim; nevertheless, every year millions of China's yurt-and-mud-hut set find themselves in the position to upgrade their housing conditions. The same is most certainly NOT true of America's trailer dwellers, at least not without 'creative financing'.
To close the cycle, why is 'creative financing' a necessary poison to keep real estate selling in the United States, but is unnecessary and irrelevant in China? Answer: China's economic growth is real, with more people really and for true able to afford improved housing every year, while America's economic growth has been only a groovy hallucination, with most people moving up in neighborhoods counting upon 'flipping' houses or lead zeppelin loans to do it.
Today, 12:46:08 AM
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mark wilk
The building had problems with occupancy long after the Depression was over. That much additional office capacity simply wasn't needed in NYC when it was being constructed.
Yesterday, 3:24:41 PM
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Michael James
@Allen Sherzer
>The Empire State Building is another example, it had low occupancy for
>many years following its completion.
That was because of the depression, not because of some plan."
Err, isn't that exactly like the 30s depression and all the make-work big projects? I don't think the Golden Gate or Oakland Bay bridges were busy or congested for another 30 years after construction. The expansion of bank credit in China was ordered by their government in direct response to the GFC and because housing is a huge unfilled need, and will be for decades to come. (The large stock of newly built apartments may be too expensive but either that may change quite quickly with 9% growth or government may order cheap mortgage loans for people to make it affordable--after all government has $3 trillion in foreign cash so it can easily afford it.)
Managing China's incredible growth and internal problems (urbanization, transport, power, water, environment etc) is massive and complex beyond anything the world has ever experienced. Even if they get some of this wrong (it would be pretty stupendous if they did not) it does not prove these western economists to be right. They would have had all the SOEs instantly privatized (look what that did for Russia, both its economy and its fragile hold on democracy--flushed both down the toilet and they continue to suffer today), adjusted forex rates to suit American corporate interests and in essence sacrificed their national interests and stability.
Today, 12:46:20 AM
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William Gruff
TS
Why is this article linked on Slate's homepage as "Nobody rides China's awesome new bullet trains", when this is obviously not true, and the linked article also does not really support it (except for one unsupported passing reference to "empty bullet trains") ?
Is this the rule is journalism, that headline writers can make stuff up? (FYI, average DAILY ridership is listed at 796,000 for 2010, probably higher now, which is more than the weekly total for all of Amtrak.)
As for whether China has overinvested in high speed trains: quite possibly so, but that does not mean the trains have to actually be empty. If they are half full (or half empty, your pick) or if they are full but fares are too low, that would be enough to make it uneconomical.
Yesterday, 12:52:18 PM
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RedWell
I agree: Slate has a stellar SEO-oriented headline writer, but you can never assume the article and the headline are more than tangentially related.
Yesterday, 2:13:51 PM
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Charles Litwin
Another Slate headline that doesn't match the content. The article focuses on the economic picture but doesn't explore quality of life. The US made huge investements in infrastructure after WWII and we rely on this infrastructure today. It caused shifts in populations and increased density.
Yesterday, 12:41:10 PM
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Allen Sherzer
After WWII we did indeed spend a lot on infrastructure and it was sucessful.
That spending was based on what people ARE doing (driving cars, riding planes). This is why is worked.
Current infrastructure spending is based on what politicians WANT us to do (take trains). This is why it will not work.
Yesterday, 12:53:10 PM
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Matthew Thome
@ Allen Sherzer
"That spending was based on what people ARE doing...(c)urrent infrastructure spending is based on what politicians WANT us to do (take trains). This is why it will not work."
This is a nonsensical point. If commuter light-rail is not available, how then could people every be "doing" it as a means of transportation. Furthermore, the proliferation of automobile in this country came into effect after a) oil and rubber companies bought out and dismantled the street car systems people were using (so much for the invisible hand) and b) state and federal governments built the highway and interstate systems.
Another point, current infrastructure spending is already almost completely dedicated to auto and air transport. The funding going to promote trains is minuscule by comparison.
Finally, to refuse to invest in anything other than our current transportation paradigm is short sighted and will only serve to harm our country in the long term.
Yesterday, 2:21:49 PM
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Matthew is right about oil and car companies dismantling streetcars. An often-overlooked point (though one attested to by the histories of cities across the country, from Boston to Chicago to L.A.), is that those streetcars were not themselves less entangled with private enterprise than automobile transportation systems; most of the earliest streetcar lines were financed by property developers, very much in the fashion of "roads to nowhere." Some of these succeeded brilliantly (a descendent of President John Adams was involved in the highly-profitable streetcar scheme that led to the development of land he owned in Brookline, Massachusetts). Others failed spectacularly.
Lest anyone respond that this is exactly what should happen, i.e. private enterprise taking big risks, reaping profits when successful, and making losses when not, it's important to point out that in many (though not all) cases of failure, private investors were able to socialize the costs of failure, by using influence on government to obstruct competition from other means of transportation, and/or receiving sweetheart deals for plant whose long-term viability was already in question.
As Mark Rose and other transportation historians have shown, the whole history of transportation systems in the U.S., from the Canal Era to the present day, has been one continuous admixture of governmental action and private enterprise, so that historical examples of "free market" solutions, such as Allen means to invoke, simply don't exist.
How many Chinese millionaires is enough?
The Hurun Wealth Report reveals that China is closing in on the 1 million millionaires mark
By Jessica Beaton 14 April, 2011
http://www.cnngo.com/shanghai/life/how-many-chinese-millionaires-enough-089704
1 million Chinese millionaires
What's fueling the Chinese millionaire boom? Two words for you: real estate. In this housing development in China, a European-style villa costs about RMB 3 million, and people are snapping them up.
With about 1.4 billion people in China, it’s no surprise that a number of them are rich. But the Hurun Wealth Report released this week shows that the world’s most populous country is closing in on the one million U.S. dollar millionaire mark -- 960,000 millionaires with personal wealth of RMB 10 million or more, to be exact.
That’s up almost 10 percent from last year, when the number came in at 875,000 people.
More on CNNGo: Hainan Rendez-Vous: Living the luxury life on the 'Chinese Riviera'
The key drivers in China’s wealth grab? Rising property prices (in Shanghai high-end property prices went up 21 percent since 2010) and GDP growth, according to the report, which is in its third year.
Just more than half -- 55 percent -- on the list got there due to wealth from private businesses.
From the report, we can see that the rich people are concentrated in more developed eastern regions, while the rest, especially in the vast western area, have been left behind.
— Zhong Dajun, director of the Beijing Dajun Economy Observer Institute
Although real estate was also a major driver of wealth accumulation over the last year, the government has taken steps to curb property speculation and control rocketing housing prices. "The overall confidence of China's millionaires in the property sector and China's overall economy remains very high," said Rupert Hoogewerf, chairman and chief researcher of Hurun Report.
More on CNNGo: Shanghai universities turn out billionaires
Of the 960,000 millionaires, 60,000 have been identified as China's “super rich” with assets valued at RMB 100 million or more, up nine percent from 2010.
Beijing boasts the top spot with just over 10,000 “super rich” residents, followed by Guangdong Province with 9,000 and Shanghai municipality with 7,800.
So who is the typical Chinese millionaire? While those with the hefty bank accounts in other countries tend to err on the side of gray hairs, this is not the case in China as the average Chinese millionaire is 39 years old -- 15 years younger than people in similar wealth brackets in the West -- and they live in Eastern China.
More on CNNGo: Caviar company uses booze to woo Shanghai's rich
"From the report, we can see that the rich people are concentrated in more developed eastern regions, while the rest, especially in the vast western area, have been left behind," said Zhong Dajun, director of the Beijing Dajun Economy Observer Institute, to the state-run Global Times.
Even with all of these statistics, the Hurun report writers acknowledge that of the 200 people in China with assets of RMB 10 billion or more, only 97 of them are known to the public, leaving what the company has deemed “hidden wealth” -- adding up to a total of RMB 5.7 trillion -- in the hands of undisclosed individuals.
Read more: 1 million Chinese millionaires | CNNGo.com http://www.cnngo.com/shanghai/life/how-many-chinese-millionaires-enough-089704#ixzz1JxmPz4g6
Beijing March New House Prices Plunge 26.7% M/M: Press
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BEIJING (MNI) - Prices of new homes in China's capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city's Housing and Urban-Rural Development Commission.
Average prices of newly-built houses in March fell 10.9% over the same month last year to CNY19,679 per square meter, marking the first year-on-year decline since September 2009.
Home purchases fell 50.9% y/y and 41.5% m/m, the newspaper said, citing an unidentified official from the Housing Commission as saying the falls point to the government's crackdown on speculation in the real estate market.
Beijing property prices rose 0.4% m/m in February, 0.8% in January and 0.2% in December, according to National Bureau of Statistics data.
The central government has launched several rounds of measures since last year designed to cool the housing market, though local government reliance on land sales to plug fiscal holes mean enforcement hasn't been uniform.
The NBS is expected to release March house price data on April 18.
China: A million millionaires?
Indo-Asian News Service
Beijing, April 13, 2011
First Published: 23:06 IST(13/4/2011)
Last Updated: 23:08 IST(13/4/2011)
http://www.hindustantimes.com/China-A-million-millionaires/Article1-684897.aspx
China has a mind-boggling 960,000 millionaires, said an annual wealth report published in The China Daily. The figure was a jump from 825,000 millionaires two years back. The 960,000 millionaires have a personal wealth of 10 million yuan ($1.5 million) or more. Of them, 60,000 are considere
d super rich with 100 million yuan or more inwealth, up 9% from last year.
China has a population of 1.3 billion.
Rising property prices and a rapidly-growing GDP (gross domestic product) have led to a rise in number of Chinese millionaires, the GroupM Knowledge-Hurun Wealth Report 2011 said.
As many as 55% of Chinese millionaires got their wealth from privatebusinesses while 20% were property speculators. About 15% are stock experts and 10% are high-earning executives, the report said.
In 2009, there were 825,000 millionaires while last year the number went up to 875,000. Housing prices went up by 13.7% in 2010 and luxury property prices rose even faster.
“The overall confidence of China’s millionaires in the property sector and China’s overall economy remains very high,” Rupert Hoogewerf, chairman and chief researcher of Hurun report.
The report said that the average age of the Chinese millionaires was 39 years, a good 15 years younger than those in Western countries. Around 30% of the millionaires are women.
Emerging market funds take a back seat
The sector's dazzling gains ebb as inflation worries dog many emerging economies.
http://www.latimes.com/business/la-fi-emerging-markets-20110410,0,6684727.story
By Walter Hamilton, Los Angeles Times
April 10, 2011
For most of the last two years, emerging market stock funds were money-making machines.
Economic growth in countries such as China and India was far outpacing that of the U.S. and Europe. And governments in countries with developing economies weren't burdened with the huge government debt afflicting the U.S. and other fully industrialized nations.
But investors got a surprise in the first quarter as emerging market funds as a group eked out a meager gain of less than 1%, compared with average total returns of 6% for U.S. stock funds and 5.3% for European funds, according to fund tracker Lipper Inc.
The underperformance stemmed partly from renewed hope for growth in developed countries, rather than big problems in the emerging world. Still, the lackluster performance seemed to back the increasingly widespread notion that the biggest gains in emerging markets already have been made.
Although economic growth in those markets is likely to remain strong for years, it's expected to slow a bit in some major countries such as China, Brazil and Mexico.
In addition, emerging economies are grappling with the possibility of rising inflation. And although valuations of emerging-market stocks and funds aren't overpriced, they're not bargains either.
"We can have a very good year, but the easy money is gone," said Tom Roseen, senior analyst at mutual fund tracker Lipper. "Now we're getting back to reality. I expect we'll have high-single-digit returns, and we should be very happy with that."
Since plummeting 56% in 2008 during the global financial crisis, emerging market funds have erased most of that decline after soaring 78% in 2009 and jumping 20% last year.
Despite the first-quarter slowdown, managers of the funds remain upbeat.
"There is a tremendous amount of opportunity in all of these markets," said Patricia Ribeiro, lead manager of the American Century Emerging Markets fund.
A key issue is inflation, many experts said.
To tamp down rising consumer prices, several countries have been raising interest rates, risking a slowdown in economic growth. China last week boosted rates for the fourth time since October, in part to cool its scorching housing market.
Inflation is particularly worrisome in emerging countries, where rising food and energy prices weigh heavily on the underclass, said Simona Mocuta, economist at IHS Global.
"Right now I don't think most emerging markets are into that red-hot danger category, but clearly they are moving in that direction," Mocuta said.
Still, rising inflation would mean different things to different countries. Oil exporters such as Russia could fare much better than India, a heavy oil importer.
Bulls said that even reduced growth rates will be enough to power the markets higher.
"We're confident that emerging markets are going to continue to be the dominant driver of global economic growth," said Alec Young, international equity strategist at Standard & Poor's Corp. "And that's going to happen regardless of whether China grows 10% or 8% or whether Brazil grows 7% or 5%."
Still, fund investors must be careful about overpaying after the sector's blazing rally since its October 2008 low.
Fund managers said they're still finding good stocks to buy, but acknowledged that valuations are getting high in some areas.
Laura Geritz, co-manager of the Wasatch Emerging Markets Small Cap fund, has lightened her holdings in China as prices have risen.
Emerging market stocks are trading near their long-term averages, according to FactSet Research Systems. Based on 12-month projected profits, the price/earnings ratio of the MSCI emerging market index is 11.3, compared to a five-year average of 11.9 and a 10-year average of 11.
By some measures, individual investors are light on emerging market stocks.
Developing countries comprise 28% of global gross domestic product, according to Vanguard. But because some countries restrict access to their markets, the stocks in emerging markets make up only 14% of the MSCI All Country Investable Market Index, a broad measure of global stock market capitalization. China, for example, bars outside investors from key economic industries such as energy and basic materials.
Still, even after heavy inflows into funds in recent years, U.S. investors have only about 6% of their assets in emerging market funds.
Vanguard recommends that investors earmark 20% to 40% of their equity portfolio to foreign stocks. Of that, the fund giant suggests devoting to emerging markets one-fourth of that foreign allocation, or 5% to 10% of an overall equity portfolio.
Chris Philips, senior analyst in Vanguard's investment strategy group, said boosting an emerging market allocation can be a wise move — as long as it's done to increase diversification and overall international exposure. Given that the developing world's strong projected growth rates already are reflected in their stock prices, investors shouldn't be jumping in expecting huge gains, he said.
"It's encouraging to see assets and cash flows going where they are," Philips said. "But our concern is: Are [investors] going for the right reasons? Are they going for diversification or are they going because they've seen emerging outperform other markets?"
Above all, experts said, don't panic when bad times come.
Investors "get way too emotional about the swings" in developing markets, S&P's Young said. "The reality is if you don't have the stomach to ride out the volatility you won't be around long enough to capture the long-term promise."
After Japan Tragedy, Investing in Thailand Might Be a Good Bet
5 comments | April 10, 2011
http://seekingalpha.com/article/262741-after-japan-tragedy-investing-in-thailand-might-be-a-good-bet
The Japanese stock market is at a serious inflection point with respect to the future. After the selloff a few weeks ago, the stock market roared back as investors sought out perceived value in Japanese equities.
After a short rebound, the Nikkei has turned lower as the news regarding the problems at the Fukushima reactor appears grim, hampering cleanup and reconstruction efforts.
The earthquake in Japan has left many analysts scrambling to review first and second quarter estimates. Japanese exposure is being quantified within first and second quarter estimates, along with how the reconstruction will play out in the second half of 2011.
Already, ripples are being felt across global supply chains as automobile manufacturers are shifting production of parts made only in Japan to other factories. It is uncertain at this time if the affected plants will return 100% to Japan as manufacturers will look to diversify their global supply chains in the wake of this disaster.
Given the news flow coming out of Japan with regard to the damage at the Fukushima nuclear plants, it appears the problems at the reactors are much worse than expected. Water in Tokyo was declared undrinkable (I am ignoring the pronouncement made 24 hours later that it is in fact safe) for newborns, the radiation levels in crops near the plant are higher than expected, and now radioactive water has leaked into the ocean in significant quantities.
Prime Minister Kan's announcement that the situation at the nuclear plant ‘still does not warrant optimism’ is not a positive signal for the markets.
After reading the daily status updates from the Fukushima plants, it is becoming more apparent that the most likely scenario will be a Chernobyl style solution with the rods and nuclear fuel eventually being cemented in place and the surrounding area being declared off limits.
The corresponding spike in radiation levels out at sea worries me more than the readings on the ground because unlike the ground, where radiation will stay when it settles, the fish and water will continue to move and circulate around the Pacific.
Another side effect from the disaster will be the shift in consumer spending that has occurred because of the disaster. The images playing out on television screens of empty shelves in Tokyo food stores represent a shift away from flashy items like smartphones, and tablets to need items like food and water. It is unclear at the present time how this will affect retail sales, but it is likely to push retail sales lower after an initial spike.
The long-term effects are unclear, but if history is any indication, it is likely that retail sales in Japan will show very little growth for some period of time despite the jump coming from reconstruction efforts.
Due to increased radiation levels over the ocean and its unknown effects on the fish population in the Pacific, companies that farm fish suddenly become attractive. Unfortunately, the only fish stocks that I know of are AS Premia Foods trading on the NASDAQ OMX Tallinn Stock Exchange and Charoen Pokphand Foods in Thailand. This is for institutional and international investors.
The continuing uncertainty over the reconstruction will push Japanese stocks sideways until the nuclear crisis at Fukushima settles down over the coming months. Only then can the government ascertain and quantify the radioactive damage to the land and water in the area surrounding the Fukushima nuclear plant.
This will be important as it will determine the amount of reconstruction within the affected areas. As of this moment, I believe that most areas near the nuclear plant will not be rebuilt, and with manufacturing moving overseas, closer to final assembly factories, the demand for items like copper, steel, and other hard metals will be lower than expected from Japan.
The creation of a JPY 1 trillion loan facility by the Bank of Japan is a signal that they believe the supply chain problems to be short lived, and ultimately, the areas being reconstructed will be smaller than the world believes.
The Bank of Japan is correct in stating that there is considerable downside risk to the economy. If consumers remain scared and passive in their spending habits, it will hold back growth and may counteract any inflationary effects from the reconstruction efforts.
Ex-Japan Asian markets spent the first quarter re-adjusting to a new global landscape. Many central banks across the region are firmly entrenched in a tightening cycle, hoping to keep a lid on inflation and growth in real estate.
Risk has returned to the market over the past few weeks with Thailand breaking to new highs on positive thoughts ahead of a forthcoming election. Korea has returned to test old highs, with Indonesia and Malaysia following close behind.
The worry coming from Asia is that some of the more developed markets like Hong Kong and Singapore are lagging behind. Quite often, the developed markets lead and if they continue to lag behind, this may be a sign of a coming top.
There will be many questions regarding the effects on global supply chains arising from the earthquake and tsunami in Japan. The ripple effects are likely to be felt for some time as suppliers’ inventories are stretched out, and in some cases, vendors find replacements - either on a temporary or permanent basis.
China remains entrenched in a tightening cycle, attempting to squeeze commodity (especially agricultural) inflation out of the system.
The use of reserve requirements in China is a positive in that China can restrict bank lending while keeping interest rates low and keeping out hot money.
The recent move in raising interest rates shows that China is not afraid to use the heavy stick if necessary.
The recent problems with US listed Chinese firms regarding financial reporting are an example of why Chinese citizens are scared to invest in the stock market and prefer to own real estate and hard assets, like gold, over equities.
If trust and well developed capital markets are not in place then the citizens have few options available to invest their excess income. In Chinese society, a home is seen as something that cannot be taken away and the more problems that arise with listed firms, the slower capital markets will develop.
The development of strong capital markets that the public can trust would be the best way to deflate the housing bubble.
Asian agricultural stocks are a good investment at the present time, especially those companies who export products to Japan and rice growers as a portion of the farmland in Japan was destroyed in the tsunami.
Small investors can gain exposure to Thailand through the iShares MSCI Thailand Fund (THD).
As of December 31, 2010, THD had a large weighting towards 2 major energy Thai energy stocks, PTT PCL and PTT Exploration, which combined make up 20% of the index followed by 3 of the largest bank stocks, Bangkok Bank, Siam Commercial Bank, and Kasikornbank.
PTT is state owned, is listed on the Thai stock exchange, and a member of the Fortune Global 500. Interests include oil and gas exploration, petrochemical products, underwater pipelines, electricity generation, and retail gasoline.
The banking sector in Thailand is solid, having come through the financial crisis relatively unscathed. No banks collapsed and there was only limited exposure to the problems that gripped the world in 2008 and 2009.
In terms of agriculture exposure, there is a sizable holding in Charoen Pokphand Foods (CPF_TB). CPF is a large agriculture and food conglomerate in Thailand which exports shrimp and fish globally. In the wake of the Deepwater Horizon accident last summer, CPF jumped by 20% on expectations that the death of shrimp and fish in the Gulf of Mexico would prompt restaurants to switch suppliers.
In Japan, the Nikkei is at a key resistance level, just under the 200 day moving average. There is a chance we may see a pullback in the coming weeks down to the 8800 level, but with the Bank of Japan buying equities to support the market, all bets are off the table.
Until the problems at Fukushima are sorted out, it would be advisable to avoid Japanese equities until the damage and reconstruction efforts are fully quantified.
If you are thinking about donating to a charity, please think of the children who lost a parent or both parents to this tragedy, as this could be the greatest tragedy of all.
Disclosure: I am long Rojana and Ticon Industrial Connection.
Mining company executive predicts tight copper supply
Tulsa World
By Staff and Wire reports Global mining giant Rio Tinto Group says it expects copper demand in China and other emerging markets to grow faster than output, prompting a global deficit for the metal used in housing and appliances. ...
http://www.tulsaworld.com/business/article.aspx?subjectid=46&articleid=20110407_46_E1_ULNSbp754318
China's housing prices expected to drop, but not sharply, in second quarter
English.news.cn 2011-04-07 14:47:52 FeedbackPrintRSS
http://news.xinhuanet.com/english2010/china/2011-04/07/c_13817263.htm
BEIJING, April 7 (Xinhua) -- China's housing prices are expected to decline in the second quarter after some major cities experienced price slumps in March, experts say.
In March, major Chinese cities, including Beijing, Shanghai, Guangzhou and Shenzhen, watched as housing prices dropped. Shanghai had the widest range of decline, down 7.6 percent, according to statistics from China Real Estate Index System (CREIS).
In Beijing, real estate trading volume decreased 40 percent in the first quarter from the previous quarter, hitting its lowest level in three years.
Moreover, real estate trading volume in 80 percent of the 30 cities monitored was lower this March compared to the same time last year, according to the CREIS.
Some industry insiders say that a turning point for housing prices is likely to occur in the second quarter, but others say a sharp price decline can not be estimated now.
Zhu Zhongyi, vice secretary-general of the China Real Estate Association, told Xinhua that a modest decline in the cost of housing is likely to happen in the second quarter, adding that a sharp drop is not quite possible.
"I don't think the word 'turning point' is appropriate to describe future housing prices," said Zhu.
He said housing prices depend on many factors, including location, and prices can vary between places.
Zhu mentioned that the current austere policies could trigger housing price promotions, but it remains difficult for local governments to be fully independent of financial revenue from land.
It is better to resort to market regulation to control the housing industry, said Zhu.
The People's Bank of China, the country's central bank, on Tuesday announced an interest rate hike of 25 basis points beginning Wednesday, part of an intensified effort to fight inflation and asset bubbles.
This was the second time the central bank raised the benchmark interest rate this year and the fourth increase since the start of 2010.
Housing prices have been climbing quickly since mid-2009. Record numbers of loans and tax breaks have resulted in prices that are too high for average Chinese people to afford.
The Chinese government began creating new policies to combat these increases around the beginning of 2010. These newly issued policies include higher requirements for down payments, mortgage rates and new purchases.
China Shares End At Near 5-Month High; Steelmakers, Coal Miners Lead
APRIL 8, 2011, 4:19 A.M. ET
http://online.wsj.com/article/BT-CO-20110408-703087.html
SHANGHAI (Dow Jones)--China's shares ended at a near five-month high Friday, as steelmakers rose because of hopes for strong demand related to the government's massive subsidized housing plan and coal miners were boosted by expectations higher oil prices will push up the price of coal.
The benchmark Shanghai Composite Index, which tracks both A and B shares, ended up 0.7%, or 22.11 points, at 3030.02, its highest closing level since it closed at 3147.74 on Nov. 11. The index has gained 2.1% in this week's shortened trading period. China's financial markets were closed Monday and Tuesday for a public holiday.
Property prices fall in Chinese cities
English.news.cn 2011-04-08 14:06:21 FeedbackRSS
http://news.xinhuanet.com/english2010/video/2011-04/08/c_13819197.htm
BEIJING,April 8 (Xinhuanet) -- As more Chinese cities are taking a hard-line attitude to harness rising home prices by rolling out property control targets, the former purchasing frenzy is no longer occurring at real estate centers. Demands have been dampened, and housing prices, especially for resale homes are beginning to fall.
For the real estate market, the "sweet spring" has not come as expected.
March and April have long been regarded as the golden time for house selling, but this year, it's not the case.
In Shanghai, it's common to see house sale advertisements in front of real estate agencies.
Low demand has prompted some resale house owners to lower their price.
Mrs. Zhu, Second-hand homeowner said "Currently, many real estate centers offer lots of discounts to customers. I'm afraid my house can't be sold at such a high price, so I have decided to lower it 50-thousand yuan."
So far, in Shanghai resale house prices have fallen by 3 to 5 percent.
The same can also be found in Shenzhen, south China.
At this center specializing in new real estate, few people are visiting.
Despite land developers' discount offers, most customers are opting not to buy.
Local resident said "I think housing prices are still too high. I'm taking a wait-and-see attitude and will buy one if the price comes down."
According to statistics from the Shenzhen Land and Resources Bureau, average housing prices for the first quarter have fallen from more than 20-thousand yuan per square meter in January, to nearly 19-thousand in March.
In Nanjing, in eastern China's Jiangsu Province, land developers are feeling a little better.
Although only two real estate centers began to sell apartments during the Qingming Festival, over 60 percent have been sold.
But for most land developers, the future still looks tough.
Li Ning, Market Manager of Mantanghong Real Estate Agency said "The high housing prices have prompted more residents to choose not to buy, although some offer a 10 percent discount."
No matter what direction the real estate market heads towards, one thing is certain. Most home buyers want to see the drop of the housing prices.
China property market ‘not a bubble’, says EIU in a new report examining the sustainability of china’s housing boom
Wednesday, 06 April 2011
http://www.sourcewire.com/releases/rel_display.php?relid=63938
Fears of a major housing bubble in China are overblown according to latest research from the Economist Intelligence Unit (EIU).
The EIU’s new Access China model which forecasts population and incomes in nearly 300 Chinese cities, points to on-going strength of demand for housing in China over the next decade.
With China’s property market being the single most important global economic indicator, China’s housing boom will present opportunities for investors in sectors such as furniture, cars and building materials. The latest population survey data* showed that 88% of Chinese households lived in homes they owned, one of the highest such rates in the world.
The cumulative value is enormous – using the Chinese fixed asset investment measure, we forecast a total of 75 trillion RMB being spent on real estate investment over the decade to 2020 - $11.5 trillion US dollars at today’s exchange rate, an amount equivalent to almost five times total current UK annual GDP.
Gareth Leather, economist at the Economist Intelligence Unit says: “Despite rapid rise in house prices in China, the property market is not a bubble. While the government is set to tighten measures the country will only see a slight dip in the short term. However, continued strong growth in housing over the next decade to 2020, will also lead directly and indirectly to more than 50% growth in demand for steel and strong demand of energy. This will place increased pressure on global markets for iron ore and oil.”
Between 2011 and 2020, the Economist Intelligence Unit expects China’s urban population to increase by 26.1% or over 160 million people, while urban per head disposable incomes will increase by 2.6-fold to 51,310 RMB (about US$7,500 at current exchange rates). Residential floor space per head in urban areas will increase from 30 sq m (in 2008) to 41 sq m by 2020.
The EIU model pinpoints exactly where and when the housing growth will occur in China. China is entering a phase of rapid structural transformation as growth shifts from a handful of coastal cities to dozens of inland ones. While overall growth in China will tend to moderate over the decade, the breadth of the new wave of inland growth will help to ensure that it will be strong by global standards and relatively stable.
*National Bureau of Statistics' 2005 population survey
For more information, please download a free copy of the report.
To interview one of the EIU’s team of expert analysts, please contact:
Angelina Hunt
Telephone: 020 7592 7932
Email: Angelina.hunt@grayling.com
Josh Wheeler
Telephone: 020 7932 1868
Email: Josh.wheeler@grayling.com
The Economist Intelligence Unit
The Economist Intelligence Unit is the business information arm of The Economist Group, publisher of The Economist. Through our global network of over 650 analysts and contributors, we continuously assess and forecast political, economic and business conditions in more than 200 countries. As the world's leading provider of country intelligence, we help executives make better business decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies.
Customers in corporations, banks, universities and government institutions rely on our intelligence. In order to meet the needs of executives like these, we provide a full range of print and electronic delivery channels and have developed a portfolio of leading electronic services. These include: eiu.com, a virtual library with access to all of our publications, and store.eiu.com, our transactional site; viewswire.com, which provides daily and operational intelligence on countries worldwide; Executive Services, which provides insight and analysis on global business and management trends; and Data Services, a portfolio of economic and market indicators and forecasts.
Access China
The Economist Intelligence Unit’s (EIU) Access China service has developed new models for forecasting population growth and economic performance down to the city level in China. When combined with EIU data on business conditions across all of China’s 287 prefecture-level cities, the new forecasts give unparalleled insight into business opportunities in this rapidly emerging new segment of the global economy.
China interest rate rise reignites inflation fears
China’s central bank has increased its interest rates for the fourth time since October as it attempts to check unrestrained lending and curb inflation.
China raises interest rates, reignites inflation fears
China is struggling to control rising food, metal, energy and housing costs. Photo: AFP
By Alex Webb 4:52PM BST 05 Apr 2011
http://www.telegraph.co.uk/finance/china-business/8429731/China-interest-rate-rise-reignites-inflation-fears.html
The move has led to suggestions that data next week will show that inflation in March exceeded predictions as global commodities prices surged.
Benchmark one-year deposit rates will be lifted by 25 basis points to 3.25pc on Wednesday, while one-year lending rates will be raised by 25 basis points to 6.31pc, the People's Bank of China said in a statement.
"This is the kind of response we would expect given that headline inflation is close to five per cent," said Rain Newton-Smith, the head of emerging markets at Oxford Economics. "I would be concerned if we didn't see signs of interest rates gradually increasing in China to slow down some of that growth."
The announcement coincided with criticism from Russia’s Finance Minister Alexei Kudrin of the US Federal Reserve’s stimulus programme, which he said fuels inflation in emerging markets.
“The continuation of the quantitative easing programme, which is designed to support the US economy, creates an excess of liquidity and inflows of speculative funds into emerging markets,” the minister told an academic conference in Moscow.
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Mr Kudrin added that the pace of Chinese growth may pose a risk to the global economy: “It is the problem of China: how the quasi-state economy of China manages to support its growth, not create bubbles - which are already being created.”
Chinese Premier Wen Jiabao said last month that keeping inflation in check was his “top priority” this year, as China seeks to maintain a steadier growth rate of eight per cent and ease Mr Kudrin’s concerns.
"The Chinese authorities have been behind the curve slightly up until the beginning of this year, but now they’re quickly catching up," said Jinny Yan, an economist at Standard Chartered. "The first half of the year is the best time to hike rates, because in the second half there are a lot more reasons for a slow-down in the economy, such as more tightening in the property sector, which means that developers will start to slow down investment."
In both January and February the country’s consumer price index climbed 4.9pc, exceeding the government’s full-year target of 4pc.
Economists expect the inflation measure to hit 5.1pc in March, equalling November’s 28-month high. China's March consumer price index will be reported on April 15.
"We don't think that inflation will peak until May or June, which is why we still factor in another rate hike before the end of the first half," Ms Yan added.
Hidden Losses, Little Reform: China May Be Slowing More Than You Think
By Mike Mish Shedlock Apr 04, 2011 11:30 am
China and commodity bulls keep repeating the China growth story, but it's important to consider the other side.
http://www.minyanville.com/businessmarkets/articles/china-china-economy-china-growth-inflation/4/4/2011/id/33745
In his latest Email review, Michael Pettis at China Financial Markets discusses financial reform (actually the lack thereof in China), as well as an observation on China's Growth.
Pettis writes:
Three months ago during their 2010 Q4 conference, the PBoC said that they believed that the global economic recovery would continue in 2011, although they acknowledged a great deal of uncertainty. The PBoC also said that stabilizing the price level was their top priority, and the central bank planned to control the “main gate” of liquidity inflows and to bring credit growth to “normal” levels. 
Chen Long at SWS notified me yesterday of a change in tone. In their 2011 Q1 conference earlier this week the PBoC said that the fundamental basis of the global recovery is not very solid. The central bank still acknowledges that stabilizing price levels is an important task, but they only refer to “managing liquidity efficiently."
What does this imply? I suspect it means that policymakers are becoming a little more concerned with slowing growth and a little less concerned about domestic overheating. As I argued in the past few newsletters, growth may be slowing more quickly than Beijing would like, and combined with the very volatile external environment, I suspect they are going to be cautious about too much more tightening. We will see how many more interest rate hikes and reserve requirement hikes we are likely to get in the next quarter.
Whether or not we have reached the point in China in which investment is misallocated and debt levels rising is clearly a matter for heated debate -- I think we have already passed that point -- but clearly we are tending in that direction. 
In the last 10 years the combination of socialized credit risk, very low interest rates, state-directed lending and tremendous pressure on the part of SOEs and local and municipal governments to generate employment and growth in the short term has increased the probability that the Chinese financial system may be misallocating capital on a dangerous scale. 
Aside from the many studies I’ve cited showing that profitability in many of China’s largest companies is substantially less than the value of the financing and other subsidies, and anecdotal evidence of unnecessary real estate and infrastructure projects, just imagine what would happen to banking deposits and stock prices if the government credibly removed all guarantees on loans extended by the banks, and furthermore removed interest rate controls. I suspect most investors and depositors would assume, correctly in my opinion, a surge in non-performing loans that would wipe out the banks’ capital base, and so would sell their stocks and withdraw their deposits.
The fact that this is unlikely to happen is irrelevant. It just means that the losses are hidden and transferred to the state, and via the state, to households. If that is the case, then since the banking system can no longer easily identify economically viable projects and is in fact wasting money, the usefulness of the bank-as-fiscal-agent model is much reduced. We need now to have banks in China that can correctly identify economically useful projects in which to invest and limit their credit growth to those projects. 
This is, I think, pretty clearly the attitude of financial regulators at the PBoC and the CBRC. They are concerned about the pace of credit growth, which would not be a problem at all if credit were going to economically viable projects. After all, I would guess that the only significant systemic risks that banks take on are credit risk and maturity mismatch, and Chinese banks don’t have to worry about the latter (no bank runs).
As I see it financial reform in China really means four things, none of which have been seriously implemented:
1. Interest rates must be liberalized so that the true cost of capital is reflected in evaluating the worth of a project. All central banks intervene in interest rates, if only to smooth out seasonal and temporary volatility, but PBoC artificially sets the rates for all maturities at least 400-800 basis points too low. By keeping the cost of capital so low, it disguises the true cost to China of capital and permits investment in projects whose returns are simply not justified.
2. Corporate governance must be reformed, and this means in part a significant reduction in the number of projects whose risks are socialized. Borrowers and banks must act on economic rather than non-economic issues, and as long as risk is socialized -- implicitly or explicitly -- there is no need to worry about the riskiness of repayment prospects. Remember how a much milder socialization of credit risk, the so-called “Greenspan put," distorted lending and investment decisions in the US.
3. The regulatory framework must be stabilized and government intervention should become much more predictable, at least on economic grounds. Investors should be in the business of predicting what economical value will be created, not what steps the government will take next.
4. Information quality must be sharply improved -- macroeconomic information as well as financial statements. It is pointless to ask investors to make decisions about the future if they have poor or systematically biased information with which to work.
To take the last point first, I would argue that the National Bureau of Statistics and the People’s Bank of China have done great jobs in improving the quality of macroeconomic and financial sector data, but there still is a long way to go, especially in the quality of financial statements.  In that sense, there has been some real reform of the banking and financial systems in the past decade.
On the other three matters, however, I would argue that there has been very little change at all, expect maybe some backward movement in corporate governance in the past three years. There is from time to time some talk about eventually liberalizing interest rates, but interest rates are as controlled as they have ever been (in fact real rates have declined in the past several months to seriously negative rates) and I don’t think anyone expects anything to happen soon on that front. 
Banks compete heavily for deposits, but they cannot compete on price, and any attempt to get around the system -- for example when banks offer gifts to attract deposits -- is prohibited. Many would argue that the PBoC cannot liberalize interest rates now because if they did, and rates soared as they would be expected to do, we would see a surge in bankruptcies.  This is true of course, but it is equally true that the longer we wait, the more difficult it becomes for exactly that reason.
Duration Mismatch Everywhere
Pettis describes problems at every central bank not just China. I note with interest his discussion regarding duration (maturity) mismatch that I discussed at length twice recently:
Fractional Reserve Lending Problems Go Far Beyond "Duration Mismatch"
Why Banks' Borrow-Short, Lend-Long Strategy Will Fail
Question of Stability
Pettis comments: "The current Chinese financial system, even more than Japan, is clearly one in which the purpose of the financial system is to act as the state’s fiscal agent and in which banking stability is guaranteed by the state. It is also clearly one in which capital misallocation can become a huge problem."
Certainly misallocation of capital was a huge problem in the Anglo-Saxon model as well. We saw it spades during the DotCom and Housing busts, something Pettis admits. We also saw it in Greece, Spain, Ireland, Iceland, Portugal, the Baltic states, the UK, etc.
We, too, socialized the losses at taxpayer expense for the benefit of the wealthy. Places like Ireland, Spain and Portugal were especially hard hit. Taxpayers will continue paying a price for another decade.
Also note that the "stability" provided by the FDIC in which there were almost no bank failures for decades, came at the expense of thousands of bank failures at once. Was this a good trade-off? I think not.
Allocation of Capital Over the Long Term
Pettis argues that in spite of the housing blowup the Anglo-Saxon banking model has done "a pretty good job in allocating capital productively over the long term".
I disagree.
Under the Greenspan and Bernanke Fed we have seen serial bubble after serial bubble with increasing amplitude of booms and busts. Moreover, I would question whether we have given sufficient time to say just how poorly the system has performed.
Many mistakes have been massed over as households shifted from one wage earner to two and as the baby boomer cycle progressed. We are now at a state where those boomers are starting to retire and the system is not prepared for the transition.
I do not think the credit bust has fully played out. Moreover, I strongly suspect the US will suffer another lost decade.
Therefore, I suggest the "long-term" to which Pettis refers has not yet happened and the decades since Nixon closed the gold window provide an insufficient window to judge.
Nonetheless, I would agree with Pettis that the perverted fractional reserve fiat-credit model we are in will likely be better over the long haul than any command economy. However, that does not mean the model is any good.
China's Starting Point for Growth
One advantage of starting with little infrastructure as China did decades ago, is that there is a huge supply of economically viable projects. China was able to grow without fueling inflation because the growth was backed by a solid expansion in productive assets.
That is no longer the case today as evidenced by vacant apartment, vacant malls, and even vacant cities. As a result, inflation has soared. China is clearly overheating.
Pettis noted his belief "that policymakers are becoming a little more concerned with slowing growth and a little less concerned about domestic overheating."
I am not in a position to disagree with Pettis on that belief. However, regardless of whether Chinese officials are "a little less concerned about domestic overheating" several facts remain:
Inflation is still huge problem in China whether there is lessened concern or not.
Chinese interest rates are too low.
Price for the malinvestment and unwarranted infrastructure building has yet to be paid.
China's growth is still unsustainable.
Peak oil is a limiting constraint.
China has the world's biggest property bubble and it will bust.
For more on China's property bubble please see:
World's Biggest Property Bubble: China's Ghost Cities Revisited; 64 Million Vacant Properties
Speculation, Investment Scandals, Fraud, and China's Hard Landing; Miracle of Chinese High-Speed Rail will be Reduced to Dust; Peak Oil Doomsday Clock
China and commodity bulls keep repeating the China growth story. It's important to consider the other side as presented above.
Singapore Property Prices Up and Still Going
by Phil Butler - 04 April 2011
http://realtybiznews.com/singapore-property-prices/9871928/
In news from Singapore, property prices there have continued to edge toward new highs. In the first quarter of 2011 residential property prices rose by as much as 2.1 percent even despite government measures to curtail prices.
Modern Singapore Home
Modern Singapore Home - Soon the price may just be too high
The Urban Redevelopment Authority also reported prices climbing for seven straight quarters with an 18 percent increase last year. The Housing Development Board there added that even public housing, where most Singaporeans actually live, rose by 1.6 percent in Q1. Singapore, much like Hong Kong and China, has attempted to slow the property market, but to little effect. While the Q1 increases appear to indicate some slowing, prices are still near all time record highs.
A report earlier this week from Jones Lang LaSalle suggests spillover from China has caused the rally in Singapore prices. At the beginning of the year the government of Singapore introduced new anti-speculation measures like tougher borrowing limits to try and curb this rather mercuric rise in prices. The cost of buying and owning a home in Singapore has now become a huge political football as well.
Minimalist Singapore home design
Minimalist Singapore home design - nothing minimal about the price
Private home prices these last few quarters have gone from a price jump of 5.6 % in Q1 of 2010 to a 5.3 % gain in Q2, and onward to Q1 2011 of 2.1 %. There has been a steady decline in the rate increase, but the growth is still astounding. The good news for Singapore citizens is, many there may still be able to afford homes if the predicted salary increases across the country come true. Some employers say pay raises of up to 8 percent are in the offing.
Property Bubble Hits the Grave in China
Grace Ng - Straits Times Indonesia | April 04, 2011
A woman prays at a grave in the Babaoshan cemetery in Beijing. Tomorrow marks the annual Qing Ming Festival, or grave-sweeping day, in China. The cost of grave space in China is pricing many people out of the market.
http://www.thejakartaglobe.com/business/property-bubble-hits-the-grave-in-china/433367
Beijing. China's notorious property bubble is spreading to the grave, as the same speculative frenzy and soaring prices that plagued the housing market now haunt its crowded cemeteries.
When Chinese pay their respects to their departed on Tomb-Sweeping Day tomorrow - also known as the Qing Ming Festival - only a small number of urban residents will visit tiny plots where the ashes of their loved are were interred because they are either lucky or rich enough.
But this number might get even smaller as cemeteries with good feng shui located close to a town can now cost 20,000 yuan (S$3,900) per sq m - three times more than 10 years ago.
Still, many are competing to buy the limited graveyard space in big cities like southern Guangzhou.
As affluence and unfading respect for the age-old tradition of burying one's dead is driving up the demand for burial land, cemetery owners and agents have found ways to maximize profits.
Their tactics could make the dead turn in their graves as tombs now are partitioned to accommodate more urns. Because of land constraints, only ashes, not bodies, are buried in China.
Maintenance fees for the urns also have been jacked up while some land is being hoarded to drive grave prices even higher.
The business is so lucrative that some housing agents are going into graveyards.
They go renting out houses by day but shift to selling graves - sometimes to the same clients - by night, the Guangzhou Daily reported last week.
"I helped a speculator sell a cemetery space recently for over 300,000 yuan, and earned 10,000 yuan in commission," one agent named Xiao Zeng told the newspaper.
The profiteering mirrors what is happening in the overheated housing market, prompting a common lament across China: "Nowadays, you can't afford to live, and you can't afford to die."
The current sky-high prices of burial grounds are unacceptable, said 90 percent of 10,000 respondents to an online survey released last week. All respondents said they would be willing to buy such costly graves only for their parents, but not for themselves.
In Beijing and Guangzhou, where the average per sq m price of a burial plot now exceeds that of houses, some Chinese call themselves fen nu (grave slaves). This label is derived from fang nu (housing slaves) - those burdened with huge housing mortgages.
Of course, there are cheaper alternatives, such as keeping the ashes at home or on a crowded crematorium shelf, or buying a spacious "online graveyard" from local websites.
But many older Chinese still prefer a piece of real estate in death, reflecting the national obsession with owning property. "My grandmother has already pre-paid for her tomb space; this arrangement is called 'living person's grave'," said Beijing corporate communications manager Candy Wang, 28.
Wang admits she is worried that the booked space may not be unoccupied. Newspapers recently exposed scams where "living person's graves" were each sold to multiple people.
This month, netizens have also raised an outcry over a law that stipulates ownership of cemetery space must expire after 20 years.
"When I'm alive, I get only a 70-year lease on my house. When I'm dead, I'm entitled to only 20 years for my final resting place? This is ridiculous!" said one netizen who joined a call for the lease to be extended to 40 years.
All this has prompted calls for the government to protect the interests of property owners - both living and dead.
This year, Beijing's policies to clamp down on speculation and build new subsidised housing for lower-income Chinese have helped to cool the housing market a little.
Now, some are calling for similar measures to be applied to the cemetery market.
"The government should take the responsibility to provide cemeteries for the public good, increasing investment and lowering the [price] threshold," said Shandong University's Professor Wang Zhongwu.
Is Ron Paul Right?
Wyatt Research Staff | The Daily Profit | April 1, 2011 12:07pm EDT
http://www.wyattresearch.com/article/is-ron-paul-right/23092
It's the first day of the second quarter, and also April Fool's day, so be on your guard. The first day of the month has been an overwhelmingly bullish day ever since the stock market bottomed in March 2009. And the first day of a new quarter has also been bullish, as new money gets put to work by mutual funds.
Today we also have a strong non-farm payroll number to propel stocks higher.
The economy added 216,000 new jobs in March. This is a net number that includes job losses at the government level. Private hiring has now topped 200,000 jobs for two months running, for the first time since 2006.
The government published unemployment rate fell to 8.8%. And while that's still unacceptably high, it's an improvement.
Whether or not we can give the Fed any credit for helping the jobs market with QE2, today's jobs number increases the odds that the Fed will stand down in June, and not move directly into another round of stimulus QE3.
And while we've discussed the end of QE2 as a potentially bearish catalyst for stocks, it could also be considered a sign of confidence in the U.S. economy. I know that might seem like a stretch, and I still expect there to be some kind of correction ahead of June (sell in May?).
*****After being sued by Bloomberg, the Fed released its data on which banks tapped its emergency overnight lending program during the financial crisis. As you may know, the Fed has resisted releasing this information because it thought it might increase fear that certain banks were on the verge of failing.
But of course, the banks that were going to fail have already done so, like Washington Mutual, the former WAMU.
The data, released yesterday, shows that foreign banks and financial firms were very active in taking loans from the Fed. In fact, Wachovia was the only U.S. bank that ranked in the top 5 of borrowing at the peak of the crisis. Wachovia was eventually bought out by Wells Fargo (NYSE:WFC).
Banks in Europe, China and even the Middle East were actively borrowing from the Fed. But let's not forget, companies such as MacDonald's (NYSE:MCD) even took loans from the Fed under other emergency lending programs.
*****In reaction to the Fed's lending, Bloomberg quotes Fed nemesis Rep. Ron Paul as saying:
"The American people are going to be outraged when they understand what has been going on...What in the world are we doing thinking we can pass out tens of billions of dollars to banks that are overseas? We have problems here at home with people not being able to pay their mortgages, and they're losing their homes."
I respect Rep. Paul a great deal. But I think he's dead wrong here. The Fed should be credited with averting a full on economic disaster by opening lending to foreign banks. The U.S., in general, and the Fed specifically, are always in a unique position to influence the course of global events.
Let's never forget just how terrifying those days were. Nobody knew how deep the crisis ran, and nobody knew how many banks could potentially fail. Remember that the very foundation of capitalism was being called into question.
It might sound well and good to ignore what goes on beyond the U.S. borders, but to pretend that we'd be unaffected by banking meltdowns in Europe or China or the Middle East is very naïve.
And besides there's been no indication that any of this lending hasn't been repaid.
I would also point out to Rep. Paul that it is not within the Fed's power to start lending to individuals so they could make their house payments. If anything, the Fed's lending programs have helped banks become healthy enough to deal with the prolonged housing problems in more constructive ways.
And if you want to put some of the blame for the housing mess on the Fed, which is totally appropriate, you have to go back to Alan Greenspan and his endorsement of "exotic" home loans and derivatives to spread the risk (they spread the risk, all right.). And still further back to Fannie and Freddie securitizing risky debt to be sold as derivatives at the insistence of certain of Rep. Paul's Democratic colleagues in government.
Finally, to Mr. Paul I would say that the U.S. is a global leader, and we led. Maybe Mr. Paul would prefer the U.S. to go back into its pre-WW II shell, where we simply ignore global matters.
Not me.
And the next time China or Russia starts grumbling about the U.S. dollar being the world's reserve currency, I'd politely remind them how that reserve currency saved their bacon in 2008. And ask them if they'd like to pony up their currency as the world's reserve currency.
*****One final note, I'm starting to hear some rumblings that China's economy may be emerging from its inflation scare. The Chinese government has raised interest rates three times since October. It also raised reserve requirements nine times last year.
Bank lending is down 25% from last year, and profits are still strong. That's a sign that Chinese economy is experiencing strong demand above and beyond credit and lending.
Chinese stocks are extremely cheap. And a few accounting scandals have made them about as hated as any group of stocks out there. I'm not jumping (back) on the China stock bandwagon just yet, but it may be time for contrarians to start nibbling again.
Have a great weekend,
Ian Wyatt
Editor
Daily Profit
P.S.: Taking bail out money in 2008 and 2009 was so common it was easier to come up with a short list of those that didn't than those that did. I kid you not; according to ProPublica, a non-profit, no partisan investigative journalism organization, 924 banks, credit unions, insurance companies, and other financial firms took bail out funds to the tune of $563 billion. I've added one bank to my High Yield Wealth portfolio that took NO bail out money and it's not on ProPublica's list. And it's paying 8.2%. It's the kind of bank everyone should have.
Hong Kong House Prices Likely to Drop 25%-30% as Rates Rise, Barclays Says
By Sophie Leung - Apr 1, 2011 2:45 AM ET
http://www.bloomberg.com/news/2011-04-01/hong-kong-house-prices-likely-to-drop-25-30-as-rates-rise-barclays-says.html
Hong Kong Housing Prices Likely to Drop 25-30%
Hong Kong housing prices are likely to drop by 25-30 percent as mortgage rates climb to 4-4.5 percent by the end of next year, Barclays Capital said. Photographer: Dale de la Rey/Bloomberg
Hong Kong home prices are likely to fall as much as 30 percent as banks increase mortgage rates, according to Barclays Capital Asia Ltd.
The “debt-fueled property price rally since mid-2007 is entering its last leg,” Andrew Lawrence and Jonathan Hsu, analysts at Barclays, wrote in a report today. “While we do not expect a near-term correction, rising mortgage rates hold the potential for a price correction into 2012, driven by reduced affordability and purchasing power for new buyers.”
Home prices will probably increase as much as 15 percent this year, before dropping 15 percent to 20 percent next year and declining by another 10 percent in 2013, the analysts wrote. Prices will sink as banks quadruple mortgage rates for new borrowers to more than 4 percent by the end of 2012 from as little as 1 percent now to boost lending margins, they wrote.
Hong Kong’s housing prices have surged more than 70 percent since the beginning of 2009 to the highest since 1997, according to Centaline Property Agency Ltd., as mortgage rates remained at record lows, the economy recovered and buyers from China increased. The city’s government, robbed of an independent interest-rate policy because of a currency pegged to the U.S. dollar, has kept its base rate at the record-low 0.5 percent since December 2008.
"Given our forecast that mortgage rates will reach 4-4.5 percent by end-2012, we consider a 25-30 percent price correction an increasing likelihood for the housing market," Barclays said.
Lending Rates
Standard Chartered Plc and BOC Hong Kong (Holdings) Ltd. are among lenders which raised mortgage rates in the city last month. Both banks increased the lending rate by between 10 and 20 basis points.
Increased mortgage rates will come as a "shock" to home buyers, Barclays said. "We suspect that with mortgage margins having been on a decline for 13 years, many home owners would not expect a sustained mortgage rise independently of a move in U.S. interest rates. This level of uncertainty would clearly negatively impact home buying confidence."
The number of home sales in Hong Kong surged 30 percent in February from the previous month, according to the Land Registry. The city is the world’s most expensive place to buy a home, according to London-based Savills Plc. If Hong Kong was a "property clock," the time is probably past nine o’clock, meaning there is still a quarter of the upwards cycle to come, David Edwards, regional director for LaSalle Investment Management, said in an interview in Beijing last month.
U.S. Rates
Property lending rates for existing borrowers may increase to as much as 2 percent by the end of next year as the U.S. Federal Reserve raises borrowing costs by 50 to 75 basis points, Barclays said.
Higher mortgage rates and Fed rate increases will start to start to feed into price reductions next year as low supply holds up prices this year, the analysts wrote. "The end result of the removal of this liquidity is likely to be a property price correction, reflecting our belief that property markets top out soon after liquidity has been most abundant."
BREAKINGVIEWS - China's hot property: a guide for the perplexed
http://in.reuters.com/article/2011/04/01/idINIndia-56054520110401?type=economicNews
<< 2 pages >>
Fri Apr 1, 2011 5:59pm IST
-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --
By John Foley
(Reuters Breakingviews) - China's property bubble is so big you can practically see it from space. House prices have been driven skyward by cheap money, aspiring middle classes and rising numbers of city dwellers. Taxi drivers, politicians and hedge fund managers talk of little else. The government tolerated a boom for too long, but prices need to return to earth.
-- Why do people say China has a housing bubble?
The speed of price rises has been dizzying. In ten of the country's biggest cities, the price of new mass-market houses rose more than 10 percent in the last year. And from 2004 to 2009, prices in 35 cities doubled. As with any bubble, there is no definitive proof. The National Bureau of Statistics has abandoned its headline price indicator, saying it masked huge variations. The International Monetary Fund has decided that, on a country-wide basis, Chinese property is not yet a bubble. But in some urban centres, it's a different story.
Consider affordability. In most markets, a comfortable ratio of house prices to average annual household income is around four times. In a metropolis like Beijing, Shanghai or Shenzhen, the current level is more like 12. Even with wages rising rapidly, that's excessive.
The financial conditions for a speculative bubble are also present. Broad money supply has increased 39 percent in the past two years. Real interest rates are negative. A hoarding mentality, the result of decades of grievous shortages, looks conducive to investment manias. Investors have only three places to put their funds: in the bank, in stocks, or in real estate.
What's missing is leverage. As buyers have to put down at least 40 percent of the purchase price in most cases, a bursting bubble would look different from the recent U.S. housing crash. Still, the fact that prices have reached such levels in the absence of easy mortgage credit shows how much expectations of capital gain have risen.
-- So who owns all those empty buildings?
That's the wrinkle: China has a supply bubble too. Rising prices have attracted new investment, but buyers and sellers can't agree, so apartments sit empty. Ordos, a city in Inner Mongolia, shows up on Google Earth as a pristine ghost town. And a widely circulated rumour in 2010 suggested that 65 million Chinese homes had used no electricity in the previous six months.
The government has helped create this excess. Provinces depend on revenue from selling land for development. Officials at every level have tacitly welcomed building activity, since it pushes up GDP, on which their success tends to be measured. Even wealthy cities like Tianjin and Dalian boast visibly empty stretches of prime real estate.
Sellers also have no reason to cut a deal in a hurry. Rental yields, as low as 1-2 percent, are less than the cost of depreciation, so there is little pressure to rent out properties. And since many speculative owners have little or no leverage, they often do not face cash flow pressure.
The authorities see the problem. China's banks are being told to clamp down on property-related loans, which made up a quarter of last year's total, and keep 20 percent of their deposits on reserve to curb frivolous lending. That doesn't help Ordos much, but it should ensure ghost towns don't become a bigger feature of China's landscape.
-- What can China's leaders do about it?
So far, politicians have tried to buy time by stopping the market in its tracks. Shanghai and Beijing now limit purchases by non-residents, and third homes are taboo. That has slowed the pace of transactions, which fell 70 percent from January to February, according to real estate website SouFun.
Speculators, though, are merely waiting for the market to thaw. An annual property tax, which makes it more costly to leave properties empty, has been introduced in Chongqing and Shanghai but is too small to have an effect.
Why not really grab the bull by the horns? The reason may be that if prices fell, construction of new projects would plunge, and GDP with it. Housing construction makes up around a sixth of China's economy. Put another way, if building activity were to drop by a third in one year, GDP growth would halve. That would cost thousands of jobs, and put social stability -- China's bugbear -- at risk.
Meanwhile, authorities are trying to increase the supply of affordable housing. That won't bring down prices at the top end. But it does have the benefit of pacifying the unhoused poor, and may provide a boost to construction even if house prices fall.
What would really make a difference is a sharp increase in interest rates. Even with little mortgage lending, a big hike -- say two percentage points -- would make owners lower their expectations of future value. The problem is that it could also cause a broader economic slump. For now, the housing bubble is holding monetary policy hostage.
-- Who gets hurt if the bubble bursts?
The victims can be divided into three camps. First, the banks. Since most mortgages are worth less than 50 percent of the value of the property, big lenders have plenty of security in the event of widespread default. Agricultural Bank of China, one of the big four lenders, claims a 50 percent price drop would increase its bad loans by just 0.5 percent, though that might be an overly rosy assessment.
Smaller lenders may be more exposed and might have to be swallowed by larger ones. But China's banking industry has healthy capital ratios, and bad debts are currently just 1 percent of the total loan book. Even if soured loans do go through the roof, China could afford to recapitalize its banks by drawing on savings elsewhere in the public sector, or tapping its $2 trillion of foreign reserves, as it has before.
The second set of victims would be property developers. Again, the biggest may be shielded, and some have eschewed debt financing. Others, though, are already raising funds at high rates, notably through bond issues in Hong Kong. Inventories are bloated, especially in second-tier cities like Wuhan and Taiyuan. Officially, a quarter of loans made in 2010 were to the property sector, but the real number is no doubt higher.
The final group would be house buyers. The number of people affected by a property slump may be larger than it looks, since families often club together to buy, or borrow informally from other sources. One apartment may tie up three generations' savings.
Faced with that outcome, Beijing may feel that the best thing to do is nothing. But that would be folly. The lesson from other property crashes is that if regulators and policymakers don't prick bubbles, an external crisis or sudden reversal of sentiment eventually causes a much more savage sell-off. Governments that attempt to cure investment manias are damned if they do, but much more damned if they don't.
CONTEXT NEWS
-- China's property market is being driven by some "irrational factors", the China Banking Regulatory Commission warned on March 29. The regulator said that further action was needed to cool speculative fervour, and said it would monitor the banking sector closely.
-- Shanghai has pledged that the rate of price increases in newly built homes would be lower than GDP and per-capita income growth in 2011 -- the first Chinese city to do so.
-- China's government launched a series of tightening measures on Jan. 26, including increasing down payments for second-home buyers to 60 percent of the price, from 50 percent.
(Editing by Peter Thal Larsen and Martin Langfield)
Rising prices in China trigger panic buying
By John Chan
31 March 2011
http://www.wsws.org/articles/2011/mar2011/chin-m31.shtml
Reports in the Chinese media this week that the price of four companies’ soap, detergent, shampoo and body lotion products would increase by up to 15 percent next month led to a rush on these goods in supermarkets in Shanghai, Nanjing and other cities.
According to the official Xinhua news agency, the four companies increasing their prices—multinational firms Unilever PLC and Procter & Gamble, and the Chinese-based Liby Group Co. and Nice Group—control fourth-fifths of the Chinese market. The companies have blamed higher prices for oil and other raw materials.
The Wall Street Journal reported that the run on soap and shampoo in supermarkets represented the “latest signal of public alarm over rising inflation despite government attempts to bring it under control.” An office worker Wang Jingyan told the newspaper that he reacted to the reports of price increases because “shampoo is already way too expensive, and I can’t bear any further price increases.” Web site editor Ramona Yan bought five bags of laundry detergent, explaining that she wanted to buy in bulk for the coming months. “Everything I buy must be on sale or else I just can’t afford to buy,” she said.
These comments were from better-paid, skilled urban workers. The impact of rising prices on migrant labourers and factory workers, as well as small farmers, is more severe.
The panic buying is another sign of the growing pressure of inflation on China’s working class, and points to the possibility of social tensions erupting, as in Tunisia, Egypt and other Middle Eastern countries.
China’s consumer price index (CPI) rose by 4.9 percent in February compared to the same month last year. Although it was unchanged from January’s 4.9 percent, the February index was higher than the government’s 4 percent target. Moreover, food prices, which account for much of the household expenditure of workers, increased 11 percent in the year to February.
China Security Journal, a leading financial newspaper, reported in its front-page commentary this week that there was “quite a big possibility that the March CPI broke through 5 percent,” with the index possibly increasing toward 6 percent in June and July. At a press conference concluding the National Peoples Congress (NPC) earlier this month, Premier Wen Jiabao likened inflation to a tiger. “Once it is set free it is very difficult to put it back in its cage,” he declared. Although Wen rejected any comparison between the Middle East and China, he acknowledged that “rising consumer and housing prices affect the immediate interests of the people, and that is why the government has given top priority to curbing inflation.”
The Chinese Communist Party (CCP) is deeply fearful of any rebellion of the country’s multi-million working class. In order to placate public anger, Wen made phony promises during the NPC to build more state-financed rented units for low-income families, as well as a campaign to root out endemic official corruption, and restrictions on glaring bureaucratic privileges such as buying luxury cars and travelling overseas.
A Global Times editorial on Wednesday warned that the Chinese people had no patience for “market-based” solutions to rising prices. “No matter whether right or wrong, Chinese society is now urging the government to solve all its economic and livelihood issues,” it stated.
The reality, however, is that the CCP will not take any action that will undermine the profits of the Chinese and global corporate elite. According to Forbes magazine, the number of Chinese dollar billionaires doubled to 115 in 2010. Other commentators estimated that the actual number could be as high as 400 to 500.
The government is caught in a dilemma, balancing between the pressure to create jobs by maintaining high economic growth rates, and taking measures against inflation that will likely slow economic activity and investment. Since last October, Beijing has raised interest rates three times, and banks’ reserve requirements six times, in attempts to rein in inflation and especially rising housing prices. These measures have had little impact.
Moreover, an economic slowdown could burst the Chinese property bubble. According to the property company Soufun Holdings, home prices in Beijing rose 28 percent and in Shanghai 26 percent last December on an annualised basis.
Housing inflation has hit working people hard. The government, on the other hand, is highly dependent on revenue from land and other property taxes, and could be faced with a major debt crisis if the market crashed.
According to NPC Financial and Economic Committee vice chairman Yin Zhongqing, local governments incurred at least 10 trillion yuan or $US1.5 trillion of “hidden debt” after the global financial crisis in 2008, by setting up investment companies to borrow from the banks to boost property and infrastructure development. Yin warned the result could be huge bad debts.
“Seventy percent of the loans from these investment and financing platforms in 2009 and 2010 were generated at the county level, where governments don’t have much assets, and some cannot even afford to pay their staff,” Yin explained. “Debts accumulated from these platforms, even with government financial guarantees, simply cannot be paid back. In other words, when they borrowed the money, local governments did not plan to pay it back.”
Yin said the enormous debts would have to be written off by Chinese banks and the central government. “China’s rapid development has covered up many problems,” he said. “But once economic growth slows down, these problems will emerge as stones rise when water levels fall.”
The regime’s measures against inflation are limited by powerful global forces beyond its control. The ongoing social unrest in the Middle East and North Africa, and the US-led bombing in Libya have pushed up global commodity prices, exacerbated by the US monetary policy of “quantitative easing,” which consists of electronically printing hundreds of billions of dollars. At the same time, the deepening European public debt crisis and weak US consumer demand mean that Chinese-based exporters struggle to afford workers’ wage increases that could alleviate rising living costs.
The sight of Chinese consumers rushing for daily necessities recalls the inflation in 1988-89 that preceded nationwide protests of workers and students—a movement that ended in the Tiananmen Square massacre on June 3-4, 1989. Today, social and economic contradictions in China are far more explosive than they were two decades ago. There is a much wider gap between the rich and poor, and a far larger and more concentrated working class.
Beijing’s real answer to social grievances was demonstrated by the NPC’s approval for more money to be allocated this year for internal security ($95 billion) than the military ($91 billion). The government is clearly concerned to ensure the readiness of its police-state apparatus in the event of serious unrest in the working class.
Walmart China Chief Executive Chan Says Seeking Land to Build More Stores
By Bloomberg News - Mar 31, 2011 4:51 AM ET
http://www.bloomberg.com/news/2011-03-31/walmart-looking-to-buy-more-land-to-build-china-stores-ceo-says.html
Wal-Mart Stores Inc. (WMT), the world’s biggest retailer, may buy more land to build stores in China, which it predicted will be the world’s largest grocery market by 2014.
Wal-Mart is building its seventh Sam’s Club outlet in the northeastern port city of Dalian, on the first plot of land it bought in the country, said Ed Chan, chief executive officer of the company’s China operations.
“When the location is suitable and site is available and meet our needs, we’ll go and work with the government directly to acquire” the land-use rights, Chan said today at an investors’ conference broadcast on the company’s website.
China’s soaring real-estate prices are seeing some foreign retailers switch their business model in the country from leasing property to acquiring land and building their own stores. Tesco Plc (TSCO) this month formed a $280 million joint venture with HSBC’s Specialist Investments Ltd. and Metro Holdings Ltd. to develop three shopping malls in China.
Inter Ikea, a mall developer part-owned by Sweden’s Ikea Group, plans to spend about 5 billion yuan ($763 million) to build a shopping center in Beijing to which the furnishings chain’s second store in the city will be connected. It is to be the biggest investment by Ikea and Inter Ikea in the world.
New Home Prices
Premier Wen Jiabao said on March 5 that China will “resolutely” press ahead with controls on the property market to curb speculation. About 40 Chinese cities said they will cap new home prices below annual economic and disposable per-capita income growth after local governments were ordered to submit home price control targets by the end of March.
The Chinese government is intensifying efforts to keep housing affordable after prices gained 19 consecutive months to December. Spending on affordable housing gained 15 percent last year to 13.6 billion yuan, according to a report by the finance ministry.
Wal-Mart, based in Bentonville, Arkansas, is speeding up its store openings in China, where it had 329 outlets at the end of its fiscal year in January. The China operations generated $7.5 billion revenue, or 1.8 percent of the company’s $420 billion total, during the year, according to Scott Price, chief executive officer for Asia.
Wal-Mart rose 0.2 percent to $52.36 in New York trading yesterday. The stock has lost 5.8 percent in the past year.
The retailer will increase its penetration in smaller Chinese cities, Chan said today, with the proportion of stores located in tier one cities falling to 18 percent in 2014 from 20 percent last year.
China will be the world’s largest grocery market by 2014, Roland Lawrence, Wal-Mart’s chief financial officer in the country, said at the same briefing.
Sam’s Club
The company will have Sam’s Club outlets in 17 Chinese provinces in five years, from four provinces now, said Sandy Tam, a vice president with Wal-Mart China. Sam’s Club is a membership division of Wal-Mart that offers warehouse shopping services.
Chan reiterated today that the company will close its purchase of Chinese supermarket operator Trust-Mart in the 2011 fiscal year. The U.S. retailer delayed the closing of the deal to May this year so that some conditions in the contract could be fulfilled, it said in December.
To contact the Bloomberg News staff on this story: Michael Wei in Beijing at mwei13@bloomberg.net
Foreign investors jumping back into China’s property market
Mar 31, 2011
http://www.property-report.com/site/foreign-investors-jumping-back-into-chinas-property-market-12858
Foreign investors are re-entering China’s property market despite the central government’s slew of tightening measures passed recently, real estate consultant Jones Lang LaSalle said this week.
Foreign interests are investing in developers who need cash or buying distressed assets, after leaving China’s market during the global financial crisis to take profits and raise cash. Demand today is surpassing that of three years ago, JLL said.
Beijing’s cooling measures on China’s red hot real housing market has left many domestic developers strapped for cash, creating an opportunity for foreign investors to get a toehold in the world’s fastest-growing economy.
“They are back,” said David Hand, JLL’s head of investment in China, as reported by Reuters. “They are looking in China to invest, speaking to guys like us to identify, on the residential side, those who are facing this liquidity constriction.”
Foreign investors are not handing over their money on the cheap, however. They now demand returns of 10-12 percent, from 6-7 percent before the global financial crisis, Hand said. On top of that, they also want to work more closely with company management to ensure they can get their money back smoothly and quickly, he said.
To tame record-high home prices and control inflation, China has tightened bank lending to developers, while virtually barring them from raising funds in the stock market. That has pushed many Hong Kong-listed Chinese developers such as Evergrande and Glorious Property to sell bonds abroad instead.
Other tightening moves that target home buyers are also adding to the squeeze on real estate developers by hitting property sales. That has led many industry observers to predict some regional developers may go bankrupt this year.
The prospect of firms falling onto hard times have attracted another group of international investors such as Morgan Stanley , Blackstone , Carlyle and JP Morgan , who want to buy attractively priced distressed assets, Hand said.
“The competition now for prime commercial assets is really hot again, which is pushing up pricing again,” he said.
“They are probably a little bit more humble than they were the first time, recognizing that last time they had cheap capital and they could just come in to woo everyone with big brands and cheap capital,” he said.
“The market has matured a little bit in that respect.”
Foreign investors outside Asia accounted for a record 33 percent of China property investment in 2007. That more than halved in 2008 to 12 percent, before falling to a mere 2 percent in 2009. The ratio has recovered slightly since, rising to 7 percent last year, JLL said.
China set for strong second-half recovery
Wed, 30/03/2011 - 10:03 | Craig Farley
http://www.iii.co.uk/articles/14944/china-set-strong-second-half-recovery
We have turned bullish on China and have positioned the portfolio accordingly over the past week.
We believe, on a risk-reward basis, that China is a very attractive investment proposition at current levels given the confluence of positives that have developed over the past month.
Additional exposure has been taken in selective oil and gas and industrial machinery stocks, and we have taken on property exposure (with a view to adding further in due course).
For more on China and its appeal to investors, visit Interactive Investor's guide to BRIC.
Goldilocks scenarios are perpetually absent in China - investors take the view that things are either too hot or too cold; we continually find so-called 'experts' calling for a market crash or an imminent implosion of the Communist Party. Indeed, mainstream media suggests there are more bubbles in China than at a Wrigley's factory, be they in property, infrastructure or the stock market, lest we forget the usual criticism relating to unbalanced growth! For us these issues are not today's story.
First and foremost, the standard argument for avoiding China in favour of emerging market peers or the ultra expansionary policy-fuelled Western markets has been that China is in 'tightening mode'. History shows us it has rarely paid to bet against Beijing and this cycle has supported that argument as the Party has attempted to rein monetary policy back in to pre-stimulus levels. Inflation, property and loan growth data all suggest to us that we are approaching the end of the cycle, if we haven't already, whilst valuation support and recent announcements from Beijing provide added comfort.
Like it or not, China remains a policy-driven market.
Comments over the past six months from various Party officials have confirmed Beijing's stance that fighting inflation and managing inflation expectations remain top priorities. We have argued for some time now that we expect CPI inflation to peak in the first half of this year and we see nothing in recent figures to change that view. Further reserve requirement ratio rises cannot be ruled out but these are being utilised to mop up excess liquidity (accumulation of foreign exchange reserves) but do not constitute monetary 'tightening'.
Attaining a short and sharp feel for China's stockmarket performance can often be achieved by looking at the property sector - the correlation is nearly 90%. Government policies in the form of investment restrictions and property taxes are now having a major impact on speculative demand, and an abundant supply of residential and social housing is coming on-stream this year.
Property transactions are approaching 2008 lows whilst developers are less flexible given their own balance sheet limitations, therefore we expect clearing prices to happen sooner rather than later.
In terms of overall monetary policy, jitters abounded at the latest reading of M2 growth (+15.7% in February versus a 16% government target) yet this only confirms to us that normalisation from the expansionary stimulus policies of 2008/9 is nearing completion. Whilst we will see a slowdown from last year, conditions will remain mildly accommodative.
Loans outstanding, fixed asset investment and infrastructure investment have all returned to 'pre-stimulus' levels as Beijing has squeezed the brake-pads. Indeed, the implementation of the differentiated RRR (reserve requirement ratio) has enforced further constraint on lending and tightened liquidity, resulting in much stricter compliance with stated government levels, a very positive development.
As the first quarter draws to a close, Mr Market has digested a plethora of Black Swans but our sentiment remains strong for China and we have taken the opportunity to step-back, assess, and in the words of Mr Buffett, 'reload the elephant gun' for what we envisage will be a strong second-half recovery.
CBRC to strictly control increase in loans to local governments' financial platf
Tuesday, March 29, 2011 11:17 PM
http://www.istockanalyst.com/business/news/5019668/cbrc-to-strictly-control-increase-in-loans-to-local-governments-financial-platf
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BEIJING, Mar. 30, 2011 (Xinhua News Agency) -- China Banking Regulatory Commission (CBRC) said on Tuesday that the land reserve loans and property development loans are still the focus of the banks' risk control.
The banking regulator said that China has exerted effective control over the property market, but there are still factors that increase the risks of property market bubble.
The banking regulator said in an annual industry report that in this year it will strictly control the increase in the loans to local governments' financing platforms, and enhance the capital and provision requirements on such loans.
The CBRC will also strengthen management on real estate loans, strictly implement dynamic and differentiated personal housing loan policies, and curb speculative housing purchases.
In 2010, China's central bank raised reserve requirement ratio six times and benchmark interest rates twice. These moves led to declined liquidity among banks.
According to CBRC, the liquidity ratio of Chinese banking financial institutions had fallen 2.1 percentage points from a year ago to 43.7 percent.
The CBRC has urged banking institutions to monitor their monthly deposits and loans in order to strengthen liquidity management.
The regulator will also boost the implementation of liquidity regulatory requirements.
The CBRC said in the report that the industry achieved 899.1 billion yuan of net profits in 2010, an increase of 34.5 percent year on year.
The non-performing loan ratio (NPL) of the commercial banks stood at 1.1 percent in 2010. The NPL ratio of the loans to real estate sector was 1.26 percent. (Edited by Jiang Yujuan, jiangyj@xinhua.org)
Housing prices down but trade volumes up
English.news.cn 2011-03-30 15:00:48 FeedbackRSS
http://news.xinhuanet.com/english2010/video/2011-03/30/c_13805297.htm
BEIJING, March 30 (Xinhuanet) -- China's house prices dropped last week in 60 percent of the cities surveyed, but sales volumes were significantly higher.
Figures from the China Index Academy show, the average home price in Shanghai was more than 22 thousand yuan per square meter, down nearly 5 percent compared with the previous week. While new home prices in Shenzhen decreased by a little under 1 percent. But the trade volume surged in many cities. Sanya, in Hainan province, posted the biggest increase. The trade volume there more than doubled last week compared with previous week.
Analysts say developers have been feeling cash flow pressure recently, and predict many new homes will be put on the market in Shanghai during the first half of this year.
64 million vacant apartments in China
http://www.sbs.com.au/dateline/story/watch/id/601007/n/China-s-Ghost-Cities
Does It Make Sense to Be Bearish on China?
4 comments | March 28, 2011 | about: CHIA, CHIB, CHII, CHIQ, CNY, CYB, FCHI, FXI, FXP
http://seekingalpha.com/article/260391-does-it-make-sense-to-be-bearish-on-china
The China bear story is overdone. Through most of this year and much of last year, it has been popular to write stories about how China’s real estate market is about to crash, and how there’s countless ghost cities, and how it will be such a struggle for China to shift to a domestic demand-led economy. Sure, there have been some interesting signals and data emerging, but in all, concerns about an imminent market crash are likely premature.
Is property really the Achilles heel that everyone makes it out to be?
I would guess that most of the people writing the most doom and gloom-filled articles on China have never been there. I traveled to China again early this year, and though I did see construction on a scale I could hardly imagine (coming from a small developed economy), I also saw a bustling economy. I counted about 13-odd cranes on construction sites just when I looked out of the window of the place we were staying. There’s no denying that they are doing a lot of building, but does that mean they’re doing too much? My quick guess would be no.
Without studying the data too closely, but based on an informed view, it is likely that China can support such large-scale construction. The population argument alone can provide a degree of justification, but so too can things like debt capacity and income growth. Historically, Chinese property markets have seen residential units financed with LVRs (loan to value ratios) of less than 50%; some of this is down to culture (e.g. high rates of saving), but also coming into play are the practices and culture of the banks.
Residential housing credit
Banks in China will tend to look first and foremost at the security backing the loan and the amount of down payment, emphasizing deposit/equity over cash flow. This is different from the U.S. and other countries where cash flow is the most important part of the loan assessment, and where LVRs can reach 95% or more. I would hazard that some of this emphasis on a low LVR is due to the state of development of the banking sector in China. I wouldn’t be surprised to see banks using more sophisticated lending policies and more aggressive financing over time.
This is also interesting from the perspective of investing in the banking sector in China (in terms of how well secured their loans likely are – at least in the residential sector), but also in terms of the capacity for property financing to grow. At the moment it’s safe to say that China’s property boom is not predicated on credit; this is another reason why China is not "sub-prime on steroids" or Dubai X1000.
So that’s one (admittedly relatively weak) argument, i.e. “credit use is relatively low at the moment, therefore in the future there is capacity to increase use of credit” – thereby creating buying liquidity. But the other side is the income argument.
Rising incomes and urbanization
Over the past five years, China’s per capita income for urban households has almost doubled, and it’s hard to see why it won’t continue a strong upward trajectory. Even looking at wage statistics and employment hiring intentions, there are notable upward trends underway. The key for the property market is how fast and broadly incomes rise. In its annual five-year plan, the Chinese government has put a priority on increasing incomes, as well as tackling some of the issues in income distribution.
One of the measures is likely to take the form of a higher minimum tax threshold aimed at the lowest income earners – with the current threshold of 2,000 expected to be lifted to as high as 3,000 yuan. Oh and while we’re on the topic of the lower end, the Chinese government is planning to build 10 million units of social housing (affordable), in order to help lower income earners into their own house, which will also help keep the economy stoked over the medium term.
Thus, while economic growth, rising corporate earnings, and government policy (including raising minimum wages) will result in higher earnings on average, much of the policies noted above are targeted at the lower end ... which more or less refers to rural China, that vast population that inhabits inner China (as opposed to the coastal cities). Indeed, such measures are likely to assist in efforts to shift development inland, and boost rates of urbanization.
In fact, the urbanization and inward development trend is probably one of the important economic and investment themes in China. You need only look at some basic stats to get an idea of the potential: In the past five years, rural incomes rose 65% to 5,919 yuan, with average spending on food comprising 41.4% of income. Meanwhile, urban incomes rose 63% to 19,109 yuan, with average spending on food comprising 35.7% of income.
To throw some numbers around, let's say of about 700 million (or 900m?) rural Chinese, 30% enjoy "urbanization" over the next five years, their incomes rise to the current level for urban citizens (19,109), and call non-food spending 65%. That would equate to a very roughly-estimated rise in potential consumer spending of about 2 trillion yuan, as a result of a structural shift, which would be additional to organic growth.
Ignorance or myth – the lack of a consumer sector in China
Another argument I’ve frequently seen batted around is the great challenge of reorienting China’s economy to a consumer-led, rather than a manufacturing/export-led economy, as if to suggest there is no consumer sector. Sure, the Chinese prefer to save a large portion of their income, rather than spend. But again, a look from the ground over there will reveal just how vibrant the consumer sector is.
There is something you notice when you go to China: The people there get the idea of entrepreneurship, and the class struggle is alive and well in this Communist nation. I’ve hardly seen a greater divide between the rich and the poor. China is a great place to be wealthy. Going from the cities into the countryside, you can see the difference between the rural peasants and the city-folk. But even within the cities, the wealth divide is palpable. But when you see it (and I’m sure I’m not the only one), if anything, it makes you feel inspired to achieve or raise your position in the world, given what riches and privileges await those successful in fame and fortune.
Perhaps the best illustration of the divide and the depth of the consumer sector is the clothes shopping.The bottom tier is the street markets, with vendors making do in tents or simply with a blanket on the ground and their wares on display; that is where you find the lowest prices (and quality).
The next tier is in some sense the indoor equivalent: A large multi-story building with each floor filled with grids of dozens and dozens of small vendors, their shops perhaps about 5-10 square meters. The quality can vary, but at least you can bargain with the store owners.
The next tier is what I would call the standard malls, which are basically your stock-standard malls, full of Chinese brands (and there are a lot); the quality is a bit better, the environment a little more comfortable.
The final tier is the premium malls: Filled with all the brands you would see anywhere in the world, especially the luxury brands(pdf): L’Oreal, Armani, Hugo Boss, Dior, CK, Versace, etc. These places are much more pleasant, designed for the shopping experience for the wealthy; all the amenities are high quality; it’s a place you wouldn’t mind spending time in. The prices are not/less negotiable – and it is not uncommon to see a price in yuan that, translated, works out to be higher than that in your own country.
The point is, consumerism is alive and well in China. Brand awareness, self-image, and status are important things, especially for the younger generations. So if anything, I would see the consumer sector growing and growing. With both Chinese brands and western brands (like the highly successful KFC) flourishing, and the wide variety of shops and services continuing to prosper.
A time to be bearish and a time to be bullish
As far as I can tell, the future for China is fairly bright. There is still a long way to go for modernization (you won't find all of the comforts of home if you go there as a tourist from a western country), and as the nation has made leaps and bounds in this respect over the past decade, there are still opportunities for the Chinese in terms of catch-up. It is also true that there is a lot of potential in the form of urbanizing rural inner/western China – with growth spreading from the coast to inland.
In short, it’s easy to present the case for China as a long-term investment. But as stupid as it is to be always bearish, it is also stupid to be always bullish. You need only look at the Chinese stock market over the past few years to see the unfathomable stock bubble: A rise of about 700% and subsequent 80% crash (rough numbers). In terms of the China allocation, it will pay to take a medium-term outlook, reducing exposure when valuations get out of hand, and buying on the dips (or crashes).
Basically, as long as the long-term story stacks up, it will make sense to buy when future crashes occur. I don’t think there is a crash due in the near term; the market needs to make a lot more ground in terms of valuations and rolling return levels before a major stock bubble arises again. But of course there are short-term risks like a policy overreaction to inflation, or a significant deterioration of banks’ loan books.
But even if China did sink its economy into recession by tightening too much, it’s pretty plain to see that it has a lot of ammunition in its clip: The required reserve ratio is at all-time highs, and the interest rate is also still relatively high. The technocrats in China could easily stimulate the economy out of most recession scenarios.
In the immediate term
The question is: Is the hard-landing/slow-down story over-done? The time to answer this question for the China asset allocation is before the middle of this year. By that time, we will probably know whether China has won the inflation battle. Much of the near-term outlook for Chinese equities depends on inflation in the second half of this year. Currently, valuations and rolling returns are fairly stable and stuck in a range – but as soon as the signals emerge, either way, the market will move ... so get ready.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Heightened inflation a concern in China
http://www.chinadaily.com.cn/business/2011-03/28/content_12235844.htm
Wanted: Fresh thinking on housing
Published On Sat Mar 26 2011
http://www.thestar.com/opinion/editorialopinion/article/961778--wanted-fresh-thinking-on-housing
Alan Redway
The late Chinese Communist leader Deng Xiaoping, who spearheaded China’s economic boom, has been widely quoted as saying, “It does not matter whether a cat is black or white so long as it catches mice.”
We need to apply this wise lesson to the Toronto Community Housing Corp.
TCHC’s problems began before it was even created.
In the 1990s, the federal and Ontario governments stopped providing new money for additional assisted housing developments and virtually froze the funds available to maintain existing assisted housing.
Then came the downloading of federal responsibilities to the provinces and, in turn, the province downloaded many of its responsibilities — including assisted housing — to the municipalities. Voila! The Toronto Community Housing Corp. was established to administer housing stock already in need of major repairs but without sufficient funds to do the job.
Realistically, neither the federal nor the provincial government is going to provide significant new money for TCHC in the near future. Housing advocates have been urging both Liberal and Conservative governments for new housing policies since the 1990s without success.
Innovative suggestions, such as Professor David Hulchanski’s “1 per cent solution” (restoring spending on housing to 1 per cent of government budgets) have received a deaf ear not only from governments but, sad to say, from the vast majority of the public as well. Non-market housing is not a priority with most people.
What all this means is that TCHC and city taxpayers are left to come up with innovative solutions if we are to ensure decent, affordable housing for the 20 per cent of our population who, through no fault of their own, will never be able to own a home or pay market rent.
TCHC made a good start with its public-private partnership for the revitalization of Regent Park but it will need much more of the same. HSI Solutions Inc., a TCHC subsidiary that provides construction and maintenance services, can with careful management and oversight play an important role both in creating savings and generating new sources of revenue.
TCHC definitely should take a very serious look at utilizing more rent supplements in private and co-op housing buildings. This would not only overcome the concerns about buildings that house only low-income residents but would also shift the responsibilities and the costs of dealing with such pests as bed bugs and cockroaches to the private owners who would not only have to satisfy these concerns from their assisted tenants but from their market tenants as well.
The city also must take a careful look at reducing the red tape that inhibits the building of ownership homes for low-income people by developers such as Options for Homes and Home Ownership Alternatives. To do so should increase the supply of affordable housing while reducing long TCHC waiting lists
Above all, let us not be captive to past solutions and approaches. Rather, let us apply the Deng Xiaoping formula. It is not important how we solve our TCHC problems so long as we achieve our goal of decent, affordable and sustainable housing for TCHC residents.
Alan Redway is a former federal housing minister and former mayor of East York.
China's Housing: Subsidized, Not Subprime
By TOM ORLIK
China's property sector is a larger but less worrisome animal than its U.S. cousin.
In 2010, investment in residential real estate accounted directly for 12% of China's gross domestic product, up from 10% in 2009 and a record. Throw in demand for construction material, and real estate's contribution is even larger. By contrast, the peak of spending on U.S. residential investment in 2005 was equal to just 6% of GDP.
A larger role for real estate in the Chinese economy means the consequences of a bust should be more serious than in the U.S. And recent years offer a worrying precedent. A crackdown on speculation saw growth in real-estate investment fall from 31% a year at the end of 2007 to 3% at the beginning of 2009. The hit to construction spending, as much as the fall in exports, crunched China's GDP growth to a decade low of 6.5%.
At first sight, history appears ready to repeat itself as prices run up sharply. The official house-price data tend to underestimate changes. But data from Soufun Holdings, which runs China's leading property website, show average prices in first-tier cities like Beijing and Shanghai rising considerably faster than disposable incomes.
Meanwhile, breakneck construction in 2009 and 2010 has created an overhang of supply—including the ghost blocks of high-end residential apartments bought for speculative purposes that loom large in the bears' arguments. The government continues to clamp down on speculators. That double whammy will at some point bring the price surge to an end and take the wind out of real-estate developers' sails.
But when private investment fell away in 2008, there was nothing to take its place. This time round, the government plans a huge investment in affordable housing. The thin margins available in affordable construction are cold comfort for listed developers, but plans to build 10 million new budget residences in 2011 should to an extent cushion China's economy from a sharp slowdown in private-sector construction.
In the U.S., post-crash housing is still weighed down by overbuilding in certain hot spots. In China, urbanization and rising wages mean most construction is better underpinned by demand. And houses are generally paid for with cash, not credit. In the U.S., mortgage debt reached 103% of GDP in 2007. In China, long-term loans to households, a proxy for mortgage borrowing, is 16% of GDP. Even throwing in loans to real-estate developers and a share of loans to local government investment vehicles—some of which are invested in property—takes the total only to 50%.
A slowdown in prices, if not an outright decline in some cities, is a distinct possibility. That will hurt private developers. A sharp enough correction will cause the banks pain and hit consumer confidence and spending. But it shouldn't signal economic disaster as it did in the U.S.
China Looks to Curb Speculative Investment
Monday 10 January 2011
China Looks to Curb Speculative Investment
http://www.ipinglobal.com/ipin-live/news/353889/china-looks-to-curb-speculative-investment
The Chinese government has announced that it is planning on introducing further legislation and regulatory measure to help cool the overheated real estate sector.
Officials have said that they will begin increasing checks and supervision on property investments that involve overseas buyers, as well as looking to strengthen risk controls on the sector. Foreign-funded developers are no longer allowed to make profits by buying and selling property, the ministry of commerce said.
Foreign investment into the real estate sector in China during 2010 grew by 48 per cent year-on-year to USD 20.1 billion.
And in an attempt to put a stop to this trend, the commerce ministry has ordered local authorities to halt the approval of some foreign property investments and stop speculative purchases.
According to real estate brokerage house Colliers International, foreign capital accounted for around 40 per cent of the public deals in Beijing's property investment market in 2010, compared with 20 per cent in 2009.
- Author: Oliver Knight
Coal > Production | 2,204,729,000 ton | [1st of 65] | |
Coal consumption | 1,310,000,000 | [1st of 41] | |
Commercial energy use | 904.93 | [75th of 119] | |
Electric power consumption > kWh | 2,054,568,000,000 kWh | [2nd of 132] | |
Electricity > Consumption | 2,859,000,000,000 kWh | [1st of 210] | |
Electricity > Production | 3,256,000,000,000 kWh | [2nd of 210] | |
Electricity > Production by source > Fossil fuel | 80.2% | [108th of 223] | |
Electricity > Production by source > Nuclear | 1.2% | [31st of 223] | |
Gasoline prices | 0.66 | [115th of 141] | |
Geothermal power use | 8,724 | [1st of 53] | |
Natural gas > Consumption | 70,510,000,000 cu m | [12th of 206] | |
Natural gas reserves | 1,290,000,000,000 cubic feet | [16th of 72] | |
Nuclear energy consumption | 25.9 terawatt-hours | [15th of 28] | |
Oil > Consumption | 7,578,000 bbl/day | [3rd of 212] | |
Oil > Exports | 79,060 bbl/day | [8th of 184] | |
Oil > Production | 3,725,000 bbl/day | [1st of 212] | |
Oil imports > Net | 1,600,000 barrels per day | [6th of 21] | |
Oil reserves | 18,260,000,000 barrels | [15th of 97] | |
Wall plugs > Voltage | 220 V | [142nd of 209] | |
Wind energy installation | 764 MW | [10th of 53] |
Background:For centuries China stood as a leading civilization, outpacing the rest of the world in the arts and sciences, but in the 19th and early 20th centuries, the country was beset by civil unrest, major famines, military defeats, and foreign occupation. After World War II, the Communists under MAO Zedong established an autocratic socialist system that, while ensuring China's sovereignty, imposed strict controls over everyday life and cost the lives of tens of millions of people. After 1978, his successor DENG Xiaoping and other leaders focused on market-oriented economic development and by 2000 output had quadrupled. For much of the population, living standards have improved dramatically and the room for personal choice has expanded, yet political controls remain tight.Borders:Afghanistan 76 km, Bhutan 470 km, Burma 2,185 km, India 3,380 km, Kazakhstan 1,533 km, North Korea 1,416 km, Kyrgyzstan 858 km, Laos 423 km, Mongolia 4,677 km, Nepal 1,236 km, Pakistan 523 km, Russia (northeast) 3,605 km, Russia (northwest) 40 km, Tajikistan 414 km, Vietnam 1,281 km | |
Population:1,330,044,544 | GDP per capita:$2,033.90 per capita |
Capital with population:Beijing - 12,033,000 | Largest city with population:Shanghai - 17,420,000 |
Rank | Countries | Amount | Date | |
---|---|---|---|---|
# 1 | China: | 1,330,044,544 | 2008 | |
# 2 | India: | 1,147,995,904 | 2008 | |
# 4 | United States: | 303,824,640 | 2008 | |
# 5 | Indonesia: | 237,512,352 | 2008 | |
# 6 | Brazil: | 196,342,592 | 2008 | |
# 7 | Pakistan: | 172,800,048 | 2008 | |
# 8 | Bangladesh: | 153,546,896 | 2008 | |
# 9 | Nigeria: | 146,255,312 | 2008 | |
# 10 | Russia: | 140,702,096 | 2008 | |
# 11 | Japan: | 127,288,416 | 2008 | |
# 12 | Mexico: | 109,955,400 | 2008 |
http://www.nationmaster.com/country/ch-china/ene-energy
Rank | Country | Capital city | 2008 Population | Estimate | 2002 Population | Est | Population growth 2002-2008 | Land area (sq km) | Population density #/sq km |
1 | Russia | Moscow | 140,702,000 | Jul-08 | 144,978,573 | 2002 | -2.95% | 17075200 | 8.2 |
2 | Canada | Ottawa | 33,213,000 | Jul-08 | 31,902,268 | 2002 | 4.11% | 9976140 | 3.3 |
3 | United States of America | Washington DC | 303,825,000 | Jul-08 | 280,562,489 | 2002 | 8.29% | 9629091 | 31.6 |
4 | China | Beijing | 1,330,045,000 | Jul-08 | 1,284,303,705 | 2002 | 3.56% | 9596960 | 138.6 |
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