Monday, May 12, 2014

China's Property Market Is Tanking

China's property market is clearly slowing sharply.  Price declines will happen in the months ahead unless Beijing blinks and pumps in more credit as they've always done in the past decade during prior downturns.  But… this time they say they won't, they say they are determined to wean the economy off rapid credit growth (and the resulting mal-investment).  If, in fact, they don't blink, given China's huge contribution to global economic growth, global stocks will get hit very hard.

 

The following snippets on China property are from McAlinden Research Partners:

China – To avoid big economic stimulus: central bank chief

China will not use any large-scale stimulus to boost its economy, Central Bank Chief Zhou Xiaochuan was reported as saying on Saturday, in response to speculation that authorities might lower reserve requirements for banks to spur growth....  saying the central bank would only "fine-tune" its policy to counter economic cycles.  R 

Almost half of the economists surveyed by Bloomberg News last month predicted a cut in the reserve requirement ratio this year as part of an easing of monetary policy to support the economy.   B

 

China – Xi Says Must Adapt to 'New Normal' of Slower Growth

Chinese President Xi Jinping said the nation needs to adapt to a "new normal" in the pace of economic growth and remain "cool-minded"....  The government has so far limited its support to tax breaks, and speeding up infrastructure and social housing investment... "We must boost our confidence, adapt to the new normal condition based on the characteristics of China's economic growth in the current phase and stay cool-minded,"...

Premier Li said in April the government won't adopt "short-term and strong stimulus policies in response to temporary fluctuations in the economy." PBOC Governor Zhou Xiaochuan reiterated that stance on May 10 B / AP

 

China – Credit still double GDP growth; deleveraging hasn't really started

Banks made a net 774.7 billion yuan ($124 billion) of local currency loans in April, down from 1.05 trillion yuan in March and slightly below market expectations... Total social financing, a broader measure of credit creation that includes bank loans, bonds and "shadow bank" lending—or nontraditional financing outside the banking sector—also slowed. That tally dropped to 1.55 trillion yuan in April from 2.09 trillion in March.... China's outstanding credit is still expanding at a much faster rate than the economy.... Outstanding private credit has risen to 208% of gross domestic product from 203% since the start of the year WSJ

China's debt is poised to keep expanding faster than the economy through at least 2016, according to a Bloomberg survey of analysts in March B / b

 

China – Entrusted Lending Raises Risks

With credit tight in China, companies in industries beset by overcapacity are turning to an unconventional source for cash—other companies—in a new rising risk for the country's financial system. These company-to-company loans, known as entrusted lending, have emerged as the fastest-growing part of China's shadow-banking system... Net outstanding entrusted loans increased by 715.3 billion yuan ($115.4 billion) in the first three months of 2014 from a year earlier... equivalent to nearly 30% of local-currency loans issued by banks—almost double the portion in 2012.  WSJ


  REAL ESTATE

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China – Home Prices Continue to Weaken in April

Average new-home prices rose 9.1% in April from a year earlier, decelerating for the fourth straight month after March's 10% rise and February's 10.8% gain, data provider China Real Estate Index System said..... On a month-to-month basis, average home prices in the 100 cities surveyed rose 0.1%. That is the smallest gain since mid-2012, when the housing market was emerging from a downturn...

Home buyers who earlier might have purchased a second or third home for investment purposes are increasingly turning to alternative investments, some analysts said, including homes abroad or wealth-management products that offer higher yields  WSJ

 

China – Price gains in 67 of 70 cities below Yu'e Bao money market fund / b
 

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China – Developers pull back as property downturn hits economy

New housing starts in the first quarter fell 25.2 percent compared to a year ago, Nomura calculated.... They estimated the property slump could take a full percentage point off China's economic growth this year, knocking it below 7 percent for the first time since 1990. The government is targeting growth of about 7.5 percent.  R

 

China – Gloom deepens for developers

Unsold floor space continued to surge in April.... The total net profits of 117 domestically-listed developers posted a 27 per cent decline in the first quarter....  The amount of residential floor space available for sale in the 14 cities monitored by China Confidential rose 25 per cent year on year in April, while in second and third tier cities the rate of increase was higher at 31 per cent year on year. ...  The value of land bought by developers for future projects has tanked since the start of this year.   ft

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China – 'Property developers face uphill battle'

Among the 117 developers listed on the Shanghai and Shenzhen stock exchanges, 61 posted shrinking profits or even losses for the first three months, according to statistics compiled by property agency Centaline Property .... The top 20 developers by home sales have bought less land in the first four months. The value of the land they bought decreased from 60.1 billion yuan in January to 32.56 billion yuan in February, then continued to drop to 25.45 billion yuan in March and to April's 13.3 billion yuan  X

 

China – A continued slowdown in property sector likely / b

 

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China – Property Slump Adds Danger to Local Finances

Land sales in 20 major cities fell 5 percent in March from a year earlier, the biggest drop in at least a year, according to China Real Estate Information Corp...The value of land sales in third-tier cities declined 27 percent last month, according to SouFun Holdings Ltd., the nation's biggest real-estate website owner.....

The weakness adds to the urgency of expanding China's municipal-bond market so regional governments can sell debt directly to the public instead of through off-budget corporations called local-government financing vehicles. A sample of provincial, municipal and county administrations shows they have guaranteed repayment of about 37 percent, or 3.5 trillion yuan ($560 billion) of debt with land sales, according to a national audit report released in December.  B

 

China – Property Bubble Has Already Popped, Report Says

"To us, it is no longer a question of 'if' but rather 'how severe' the property market correction will be," three Nomura analysts wrote in a report.... For some time, Nomura has been among the most bearish of the big investment houses when it comes to China. And it has made some gutsy calls, although they haven't always turned out to be right.....

Nomura bases a lot of its argument on the observation that that property investment turned negative in four of China's 26 provinces in the first quarter of 2014, and in two of them, Heilongjiang and Jilin, the fall was greater than 25%. To Nomura, that's a warning sign of similar problems to come in other Chinese provinces.  wsj

 

China – 'Housing bubble is collapsing' / q

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China – Leaning towers

Apparently every property market leading indicator at the national level turned down in Q1, and for most monthly indicators the rate of decline accelerated through the quarter. That, says Nomura, means the question is no longer "if" or "when", but rather "how much" China's structurally oversupplied property market will correct....  UBS ... see a 15 per cent probability that a sharp property downturn could lead to GDP growth dropping to a 5 per cent handle in 2015. ... 

The assumption from both UBS and Nomura is that the government will eventually step in to mitigate the pain of a property downturn. The property market in China has, after all, been driven by monetary policy with two previous downturns in property investment growth — in 2008-2009 and 2011-2012 — both arrested after the government got to easing once again. ft

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