2015-11-30

PMI Breakdown: Opposite of Reform Efforts

CREIS: New Home Price Rise Increases in November

CREIS 100-city survey shows an increase of 0.46% for the month of November. This is an improvement from the 0.30% increase in October and shows the opposite trend from the NBS October figures, which showed a slowdown in the price rise. It also contradicts some of the reports that were out in November, which pointed to a weaker real estate market (than the previously strong Jul-Sep period). From the survey page data linked below, you can clearly see the increase is narrow. Of the 100 cities, 59 saw home pricse fall or stay flat. The average declines were lower though. The 75th city was Yangzhou, down 0.68%. In October, it was Zhenjiang, down 0.84%.

The biggest increase was Suzhou, up 2.84%. Shenzhen was second, up 2.54% on the month. Guangzhou new home prices fell 1.24% in October an another 0.33% in November.

100-city Survey data: 2015年11月中国房地产
Google Translated: 100-city Survey Data page

China's Rebalacing Scenarios

Michael Pettis outlines several rebalancing scenarios in China’s rebalancing timetable. He drives home the point that credit growth and GDP growth are linked and short of taking significant steps to reduce debt, it is very difficult to get out of a debt.
What matters is the associated growth in credit. If growth next year of 7% were achieved with 18% growth in credit, things would actually be getting worse, not better. On the other hand if China grew next year by 5%, with credit growing at “only” 8%, this would represent a significant improvement in China’s medium- and long-term growth prospects. This is something that a lot of economists seem to have real trouble in understanding. There is no “good” level of economic growth independent of the associated growth in credit.

Ultimately, and to repeat Conclusion 5 above, Beijing must continuously choose between a rising debt burden, rising unemployment, or rising transfers of wealth from the state sector. All of its policy options boil down to one or more of these three. So far it has mostly chosen the first, but this can only go on until the country reaches debt capacity limits.
One point he makes is that Beijing has credibility in its ability to prevent a debt crisis:
...that for those who believe (and I include myself in this group) that the structure of Chinese financial markets and Beijing’s high credibility give it protection from the risk of debt crisis...
but he also notes that Beijing does not have the power to abolish the laws of economics:
In fact the real cost of excessive debt levels is what finance specialists call “financial distress” costs, and I have explained elsewhere how debt can become excessive. China is already experiencing financial distress costs and as debt rises, these costs will make it harder and harder for China to achieve target growth rates except at the expense of even more debt, so that rising debt automatically means lower growth than otherwise.
The area where I see this eventually having an impact in on the area Beijing increasingly cannot control: the currency.

Yu Fenghui: 50% Layoffs For Banking Sector Not Alarmist

The impetus for Yu Fenghui's latest blog post (未来银行业或裁员50%不是危言耸听) was comments by former Barclays CEO Anthony Jenkins:
Ultimately, those forces will compel large banks to significantly automate their business. I predict that the number of branches and people employed in the financial services sector may decline by as much as 50% over the next 10 years, and even in a less harsh scenario I expect a decline of at least 20%.
China has one of the world's most retrograde banking systems and at the same time, perhaps the most advanced Internet banking in the world.

The financial industry is a perfect microcosm of China's reform efforts and perhaps its most extreme form. The big four banks are not only the largest companies in China, but also the core of the government's old central planning model. The banking system is years behind the developed world. In contrast, Internet banking in China is more advanced thanks to a lack of regulation. While that has allowed a credit bubble to flourish, at the margins it has also allowed Internet businesses to experiment with new forms of financial services.

With the yuan entering the SDR basket and China poised to open its capital account, China could do to financial services what it did to textiles. The catch is that in order to create a globally competitive financial sector that can go head to head with developed nations, China has to eat its own banking system first. Nothing on the reform front suggests China is willing to allow the level of creative destruction required to make the leap.

China Average Household Assets Climb 20% In Two Years, Housing 70% of Assets

"2015 Chinese household average asset growth of 20.2% compared with 2013, the largest increase in financial assets, up 59.4 percent." She said, results from the survey, household financial assets grew mainly from the growth in risk assets, especially equities and Finance product, compared with 2013, the stock rose 92.5 percent, while financial products is soaring to 198.5 percent. But Li Feng also pointed out that "this growth model is not sustainable, because the growth was mainly derived from the volatility of prices of financial assets and real estate."
Real estate is almost 70% of household wealth:
"This reflects our home equity liquidity is very weak. This and all the people have a sense of tradition related to real estate, but also that everyone's income is not too high, there is no more money to configure highly liquid financial assets , there is the Chinese people, financial awareness is not enough. "Bong told reporters in Chengdu Commercial Daily, the Chinese people's debt levels are much lower than the United States, indicating that financial services be improved.
While Chinese save a lot and buy homes, they don't do much more with their money. The stock market casino is a popular way to gamble, but most people aren't playing:
Meanwhile, Bong contrast to the US data, the Netherlands and the three countries of China, the United States and the Netherlands, family financial knowledge index were 75.3 and 78.8, while China is only 42
The 217 million people in China's middle class have average wealth of $127,000, which give it the highest total wealth in the world, but per capita it lags behind the U.S. and Japan:
Center findings show that Chinese middle-income families to 217 million the number of the adult population, average wealth of $ 127,000...

iFeng: 调查称中国家庭平均资产92万 房产占比近7成

2015-11-29

2016 Default Risk For Dozens of Bonds

Haitong says credit risks have only begun to rise as the bill for China's overcapacity begins to come due.
Economy is still searching for a bottom, the credit risk from industry overcapacity is only just beginning to be released, there will be more and more enterprises defaulting, breach of contract will become as commonplace as the ratings downgrades. No domestic bond cross default clause, raised debt default within the next year may be the following two cases, one is creditors may initiate bankruptcy proceedings before maturity, and second, there are bonds due within the next year that will be difficult to pay back.

In the first case, we screened out insolvent or net assets fell rapidly, will probably insolvent within a year, a total of seven issuers. In the second case, a large screened liquidity pressures issuers, mainly consider two aspects, one is the continuous emergence of large losses or a loss, the second is a low degree of coverage of the book fund short-term debt. Screening results, a total of 49 large and there are liquidity pressures bond issuer before maturity or sold back to the end of 2016, the corresponding bond has certain payment risks. (Author: Haitong Bond Jiang Chao, Zhou Xia, Zhu Zheng Xing, etc.)
Soem specific bonds are mentioned in the article. Some not at all surprising such as Baoding Tianwei, which has a bond due in April 2016.

CN Stock: 警惕:这类公司违约风险大(附判断方法)

China's Bubbly Bond Market

Retuers: China's shadow banking risk shifts to booming bond market
A year after China's financial regulators squared up to the systemic perils of "shadow banking", the threat is shifting to a booming corporate bond market, and risky borrowers' debt is finding its way into products aimed at retail investors.

An opaque network of trust companies and non-bank lenders had grown their annual market to a hefty 2.9 trillion yuan ($450 billion) in loans before regulators stepped in, spooked by rising defaults on wealth-management products (WMPs) backed by such high-interest shadow lending.

2015-11-27

Hope Died In China This Week

There is a saying that any headline with a question can be answered "No."

That said, mood has soured in the past couple of weeks and the analog is entering the period when, if history keeps rhyming as before, the market is due to turn lower.


Recent headlines on China have been negative.

Posts here: Another December Devaluation Call; Chinese State Owned Mining Assoc Asks Govt to Buy Their Inventory; and Hope For China's Economy Smashed To Pieces.

Now another devaluation call has been made (making it three in as many days) based on the IMF lowering the yuan's weight in the SDR basket: IMF Ratio Concern Depresses Yuan as Mizuho Warns of Further Drop
The yuan fell toward a three-month low amid concern China will win a smaller weighting in the IMF’s Special Drawing Rights than some analysts predict.

While International Monetary Fund staff estimate a weighting of 14 to 16 percent, the market consensus is for 10 percent because of the currency’s limited usability, according to Mizuho Bank Ltd.
Even the China Daily is posting negative views: Demand unlikely to boost yuan despite basket inclusion
The International Monetary Fund's decision to include the yuan in the Special Drawing Rights basket will not directly increase the demand for yuan assets. Also, the implicit endorsement of the yuan as a reserve asset is unlikely to sway the decisions of global asset managers. Indeed, China's market interventions this year in response to capital outflows and the bursting of the equity bubble provide strong reasons for them to steer well clear.
Defaults continue to mount. Bloomberg: China's Bond Stresses Mount as Two More Companies Flag Concerns
A Chinese fertilizer maker and a pig iron producer have flagged bond payment difficulties, adding to signs of stress in the nation’s corporate note market after at least six defaults this year.

Jiangsu Lvling Runfa Chemical Co., based in the eastern city of Suqian, is asking its guarantor to repay 53.1 million yuan ($8.3 million) in bond principal and interest due Dec. 4, according to a statement posted on Chinamoney’s website. Sichuan Shengda Group Ltd., based in the southwestern province of Sichuan, is uncertain it can repay notes due in 2018 that holders can opt to sell back early on Dec. 5, it said in a statement on the same website Thursday.

...The guarantor of Jiangsu Lvling Runfa’s bond is Jiangsu Re-Guarantee Co.
Jiangsu Re-Guarantee says they will fulfill their obligation if the firm indeed cannot pay its debts. Anytime a credit guarantee is involved a red flag should go up because if they cann't cover the guarantee, all the loans guaranteed by the firm could be called by banks. The Chinese headline says credit market pressure is as big as a mountain. 本周两家公司发出违约警报 债市压力山大

Stock market specific headlines: China Stock Bulls Hit Breaking Point as State Dials Back Support

China Calm Shattered as Brokerage Probe Sparks Selloff in Stocks
China’s stocks tumbled the most since the depths of a $5 trillion plunge in August as some of the nation’s largest brokerages disclosed regulatory probes, industrial profits fell and two more companies said they’re struggling to repay bonds.

The Shanghai Composite Index sank 5.5 percent, with a gauge of volatility surging from the lowest level since March. Citic Securities Co. and Guosen Securities Co. plunged by the daily limit in Shanghai after saying they were under investigation for alleged rule violations. Haitong Securities Co., whose shares were suspended from trading, is also being probed. Industrial profits slid 4.6 percent last month, data showed Friday, compared with a 0.1 percent drop in September.

Finally, Chinese economic data continues to deteriorate aside from a pick-up in some consumer data points. If China were rebalancing, this would be a positive sign, but the consumer is a lagging indicator. Even in the U.S., the consumer sector is overweighted and the manufacturing sector discounted because GDP doesn't fully measure it (See: GDP Stands For Garbage Data Point). The summary of the Chinese data points:

Price: October 70 City house prices continue weak rebound. Producer prices hit a new low last week.

Demand: Downstream real estate, household appliances weaker, passenger car picked up. Midstream steel, cement, chemicals weaken. Upstream coal is still weak, weak freight.

Inventory: Downstream real estate remains high, passenger cars, home appliances fair. Midstream steel worsened, cement deteriorated, chemicals fair. Upstream coal, nonferrous metals still high.

iFeng: 中国经济仍未见起色 中观行业上中下游继续探底

2015-11-26

Retail Sector Has Highest NPL Ratios

This report by debt analyst Jiang Chao of Haitong Securities calls manufacturing a disaster area, but its NPL ratio is around 4% versus 7% for retail/wholesalers. Perhaps banks don't use as many tricks to suppress bad retail debts?

3.4 Risk 2.4: wholesale and retail, manufacturing industry is the hardest hit

Wholesale and retail industry, the main source of manufacturing or non-performing loans for 15 years and produced.

Among them, the wholesale and retail sectors most sensitive to the transfer of the money, the economy continues downward, industry revenue low boom exacerbated the difficulties of enterprises, increasing accounts receivable mean the weakening of the industries and enterprises solvency. For the purposes of the four major state line, wholesale and retail of non-performing loans ratio of about 7%, of which a maximum of about 7.82% Agricultural Bank of China, China Construction Bank and Industrial and Commercial Bank of China about 7.09% and 6.09% respectively. At the same time, the manufacturing sector is also a hit, CCB and ABC's non-performing loans in the industry rate of over 4%, which is high labor-intensive textile and clothing NPL ratio.
No surprise at the lowest NPL industries, utilities:
Transportation, storage and postal services, electricity, heat, gas and water production and supply industry, as well as the lowest non-performing loan ratio in water conservancy, environment and public facilities management industry, currently the average less than 0.5%, or derived from such industry has a stable cash flow. With the development of steady growth policies, such industry will continue to reduce risk.
Numbers are worse in the Pearl River Delta: China Construction Bank's division there saw its small and medium enterprise NPL ratio break 2% at the end of June, and then climbed to 2.41% by the end of September. Not as bad as the recessionary Northeast though.
In addition, the Northeast region is still the focus area of non-performing loans of individual banks, such as China Construction Bank and China CITIC Bank
Weakness is in corporate debt which is rapidly deteriorating:
Bad corporate loans was significantly higher, and the deterioration of rapid growth.

First, the company is higher than the non-performing loans of commercial banks overall non-performing loan rate of nearly 60BP, such as the Agricultural Bank report shows 15-year corporate NPL rate of 2.43%, while non-performing loans only point of the Agricultural Bank 1.83%. Construction Bank NPL ratio of corporate loans is also more than 2%, while the Construction Bank non-performing loans is only 1.42%. Secondly, the rate of deterioration in bad corporate loans quickly, with state-owned banks, for example, the rate of about six months between the upstream reach 35-40BP.

NPL ratio of personal loans is more stable.
The conclusion of the report:
We expect that the real NPL ratio in 2016 will accelerate upward, need to guard against credit risk of individual regions and individual sectors outbreak.

This report was the top headline in the iFeng finance section. A day earlier, a report by Industrial Bank was in the top spot, it's headline was Hope For China's Economy Smashed To Pieces.

iFeng: 2015年中国不良贷款率四大风险点暴露(名单)

Chinese Housing Inventory Rises More Than 100 Million SQM in 2015

Although first-tier and in demand cities are experiencing drops in inventory, the overall national inventory of new housing has climbed more than 100 million square meters, to more than 686 million square meters.
"Data from January to September has shown, the national housing new construction area, completion of the area, land acquisition area and land transaction price of four typical indicators for the first time negative growth, which is unprecedented." Wang Zhong, director of Real Estate Research Center, Fuzhou University, said to October while four indicators are still showing negative growth. High inventory, investment fall is currently China's largest property market fundamentals.
This is the catch-22 for China. To reduce inventory, investment must fall, but GDP relies on the real estate industry.

Inventory might be double current levels once unfinished and unstarted projects are added to the mix, as well as unreported supply:
Unsold existing homes area after it is completed, not including a large number of the construction and did not start the potential stock not completed. In addition, there is a small property room around the country, as well as some not included in the statistical coverage of residential projects, as well as some not even rule should be reported unreported stocks. "Once recognized, Chinese property stocks may be doubled." Shanghai E-House Real Estate Research vice president Yang Hongxu said.
Third and fourth-tier cities remain the trouble spot, particularly the high-end:
"The current real estate market oversupply is structural overcapacity." CRIC Research Center analyst Huang Bin said. Reporters also found that in many interviews, while the overall stock continued to rise, but in the city, region, size, price, etc., but there are different degrees of differentiation: third- and fourth-tier cities, a number of central and west cities, high priced large apartments do not sell, inventory remains high.
Investment assets have inverted demand curves: as the price rises, so does demand. Due to Chinese housing being heavily driven by investment, falling prices leads to less demand:
A residential suburb of Fuzhou Lianjiang County residents told reporters that the district less than a third in the evening light. From 2011 opening for the first time sold more than 5000 yuan per square meter, and now down to 4000 yuan, few people want it. It's a microcosm of many four-tier cities in China.
Sales have risen in 2015, but it failed to dent inventory in most cities:
There is a big differentiation between Midwest City and the eastern coastal cities. National Bureau of Statistics data show that from January to October, the eastern part of real estate sales 3.9204 trillion yuan, an increase of 20.7%, the central region of real estate sales 1.2946 trillion yuan, an increase of 9.5%, the western region real estate sales 1.2639 trillion yuan, an increase of 4.6%.

iFeng: 楼市库存1年猛增过亿平米 部分房子不好卖

2015-11-25

Poland Dumps EU Flag

The euro and EU political project are dead men walking.

Breitbart: New Right Wing Polish Government Removes EU Flags
Asked about the change, Mrs. Szydlo said she was happy with Poland remaining inside the European Union and the North Atlantic Treaty Organisation, but national matters called for the national flag.

In future government press briefings “will be held only with the most beautiful red and white Polish flags”, said Mrs. Szydlo.

The move has been called a ‘snub’ by Britain’s Financial Times and even prompted former Belgian prime minister and senior European Union parliamentarian Guy Verhofstadt to tweet “So you do not wish EU flags, but still want EU money?”.
Social mood is still relatively positive...though not in Poland.

Another December Devaluation Call

Yu Fenghui: 美元指数突破100大关带来何影响?
I predict, after the completion of the yuan into the [SDR] basket, the United States will raise interest rates in December and the dollar will continue to rise, and the yuan will be hard pressed to continue to withstand the depreciation pressure. From the beginning of December, the RMB should start a devaluation. Of course, the powerful Chinese central bank is likely to intervene or entice big banks to sell dollars and buy its RMB in exchange rate intervention. But this is not a permanent solution, by adding RMB to the SDR, the government has promised not to interfere with currency movements. In short, from the end of the year a comparatively large RMB devaluation should be expected. Investors should pay close attention to US interest rates, the trend of the US dollar and the renminbi, to prevent exchange rate losses.

Chinese State Owned Mining Assoc Asks Govt to Buy Their Inventory

Maybe the PBoC can buy all surplus metals, housing and any debt people don't want.
Reuters: Chinese aluminum, nickel producers ask state to buy up surplus metal
China's aluminum and nickel producers have asked Beijing to buy up surplus metal, sources said, the first coordinated effort since 2009 to revive prices suffering their worst rout since the global financial crisis.

The state-controlled metals industry body, China Nonferrous Metals Industry Association, proposed on Monday that the government scoop up aluminum, nickel and minor metals including cobalt and indium, an official at the association and two industry sources with direct knowledge of the matter said.

Wealth Gap in Action: Disposable Lincoln Limousine

A man leaves his Lincoln in a rural Sichuan village two years ago, asking his friend to keep an eye on it. He never comes back for it and nature begins to reclaim the car. He is informed by reporters and doesn't care.


China News: 加长林肯停村道2年多成僵尸车 车主称无所谓

Possible explanation: avoiding a corrupting charge by dumping evidence. More speculative: dumping a vehicle used for one-time large shipment of heroin.

H/T: Chris Buckley 储百亮

Hope For China's Economy Smashed To Pieces; December Do or Die; Yuan Devaluation Coming

Hope for stabilization in China's economic slowdown has been smashed by deteriorating data and economic forecasters at Industrial Bank of China have dubbed December the line in the sand. The article goes through the data points below and mainly sees the existent trends continuing.


Analysts also see the data pointing to devaluation:

The drop in interest rates and RRR, fiscal stimulus, accelerating monetary growth along with other factors, have repeatedly raised the market expectations for a better economy, but soon after these hopeful expectations come falling investment, industrial production, inflation and other indicators, smashing those hopes to pieces.
December could bring a major devaluation in the yuan:
Both have made ​​RMB devaluation pressures continue to grow after the November vote SDR, IMF has currency stability requirements, but also need to have a more market-oriented exchange rate, and this October the US Treasury Department report explicitly gave these requirements. Therefore, December is the key month for the RMB exchange rate choices. Our advice: Instead of waiting, it is better to act decisively. If you wait until next year, the rate of decline in forex reserves will accelerate again.
The problem facing China is that intervention may now be the best course of action, followed by a major liberalization in the currency. Devalue beyond the target and let the market bid the yuan back up to stabilize the market. If instead the market is tasked with depreciating the yuan, the overshoot could be much greater and, by taking far longer to complete the job, will trigger far more secondary and tertiary effects as expectations shift. A quick one-off move short-cuts the market and prevents expectations from forming.

iFeng: 经济前瞻:中国经济美好预期被击碎 12月是抉择时刻

2015-11-24

Money Creation and Currency Collapse in China

FT Alphaville: Pettis on the tragedy of China’s common private central banks
At the extreme, he pointed out, much of the short-term paper issued in China was, in the eyes of investors, a lot like PBoC bills. They were liquid, short-term money substitutes with little to no credit risk. Did it make sense, he wondered, to think of China as an economy with potentially thousands of mini-central banks, all issuing nearmoney instruments, and if so, how might we model the monetary and economic impact?
Is this substantially different from the situation in the U.S. with FDIC insured bank deposits and implicit backing of Fannie and Freddie, or today, the explicit/implicit backing of student loan debt?

The private economy creates new money in the form of credit and it circulates as money until the crisis hits, and like Cinderella's carriage turning back into a pumpkin, it turns into debt. The central bank steps in and buys up the debt, placing it on the central bank's balance sheet, turning it back into money. Hence QE1, QE2, and QE3, and exploding Fed balance sheet and near zero inflation.

The post, which relies heavily on a note by Michael Pettis, focuses on moral hazard and removing it. This is not really the main problem though. It doesn't matter if there is moral hazard or not, except for answering the question of how big does the credit bubble get before it bursts? In a country with no moral hazard, zero implicit guarantees and even private credit insurance is banned, credit growth will be restrained. In an economy with not only an implicit guarantee from the central government and central bank (USA), but also an actively interventionist government working to ensure not even a slip-up in credit growth (PRC), credit growth can reach enormous proportions.
If this revaluation occurred very quickly and forcefully, and if it happened in such a way that investors found it difficult to distinguish between borrowers that might continue to be covered by moral hazard and those that weren’t, they might dump debt as rapidly as possible in favor of credible money, except for debt issued by borrowers whose solvency and liquidity is fully credible (which might only be the PBoC).
Except the PBoC isn't fully solvent, liquid or credible. Only the Federal Reserve is fully solvent, liquid and credible because only the Federal Reserve prints the reserve currency, to which the PBoC has pegged the value of its circulating medium.

The PBoC can choose to buy up the bad debt, devalue the currency and restart the credit system. Or the defaults will begin and Chinese will race down Exeter's pyramid. In which case, US dollars and gold are superior to Chinese renminbi.

Beijing Land Sales Hit New All-Time High

Location, location, location.

Land sales hit 192.1 billion yuan today, exceeding the 2014 full year total of 191.7 billion yuan.

iFeng: 1920.77亿!北京年内土地成交超去年创新高

Deflation Continues in November

Weekly data is volatile, but the drop in prices in the past 10 days points to accelerating deflation. Copper, lead and other industrial metals sank. Pork prices also fell 1 percent in the past week. Perhaps the 23.8% jump in cucumber prices will make up for it...

NBS: Market Price of Important Means of Production in Circulation, November 11-20, 2015
NBS: Average Price of Food in 50 Cities, November 11-20, 2015

Guessing the Form of Housing Rescue Policies

CITIC:

1. buy property for affordable housing. this policy is simplest, has the smallest side effects and can be tailored for each city

2. Historically, the most effective policies are often derived from credit policy. Remove than the total level of interest rates, the most important thing is to adjust the differential housing credit policy. Future restrictions on the purchase of second homes may be further liberalized.

3. reduce the minimum down payment. But still continue to adjust the minimum down payment ratio is more cautious, after all, if the down payment ratio down too much, the banking system will bring potential risks, stimulus effect is limited.

4. the overall tax burden of second-hand housing transactions is still relatively high, the real estate transaction taxes and fees can be reduced.

5. control of land supply, particularly to control three or four lines of urban land supply is a necessary means to resolve inventory issues.
Not sure how the last one would work because it would lead to lower local government revenues as well as reduce local GDP. Also, considering many of the worst cases aren't seeing much in the way of land sales, if any. Finally, it's unclear how easing buying restrictions and second-home rules will play out. It will help the market bottom and rebound sooner, but if psychology has turned, easing buying restrictions has little effect because the demand is gone.

The start of the article also says Shanxi, while the fourth province to cancel all buying restrictions, is the first to fire a shot in the war on housing inventory.

本轮房地产去库存大幕拉开 山西打响第一枪

2015-11-23

He Who Devalues First Something Something

Twice in the past 6 years there has been a Thanksgiving surprise out of the Middle East. Dubai World defaulted in 2009 and oil prices cratered in 2014. BofA is looking into 2016 for a potential Saudi depeg. If the Saudis are at all considering such a move, the earlier the better.

ZeroHedge: Saudi De-Peg Looms As FX Market Signals Loudest "Black Swan Warning" In 13 Years
And there you have it. It's either stop it with the whole flooding an oversupplied market strategy, or let the peg fall before SAMA runs dry. Bear in mind that it's not just falling crude, the peg, and generous subsidies that are weighing on the Saudis. There's also the war in Yemen and the prospect of a stepped up role in Syria.

Bank of Jinzhou Unloads Hanergy Loans

Reuters: Bank of Jinzhou halves Hanergy exposure ahead of $943 mln HK IPO
Bank of Jinzhou Co Ltd launched an up to $943 million Hong Kong IPO on Monday to bolster its balance sheet after the Chinese lender halved its exposure to Hanergy Group, the parent of troubled solar equipment maker Hanergy Thin Film Power Group Ltd.

Beijing Urbanization Plans

I see the goal in Beijing as the same as the Obama's administration's plan to move minorities out of high value city centers and into distant suburbs or rural towns, under the guise of diversity. Beijing will open up the outer counties and push lower income residents there with cheaper housing, while industries with attractive real estate will be forced to relocate.

Caixin: Plan to Develop Two New Beijing Districts 'Flies in Face of Population Curbs'
The desire for more development in the two areas runs counter to official efforts to ease overcrowding, smog and traffic congestion problems that have worsened in Beijing in recent years, Lu said.
"The change will lead to more industry and people living there, which would be contradictory to the city's population control policies," he said. "It might also cause problems related to a shortage of infrastructure facilities and public services in the capital to worsen."

2015-11-22

Housing Rescue Efforts Continue: Shanxi Province Cancels Buying Restrictions

Every restriction is canceled, including foreign ownership, number of homes, residency requirements and pre-sale price registration.
Which provides that the abolition of real estate purchase restrictions. Including the cancellation of the purchase of commodity housing copy number, residence, age and other restrictions; abolish commodity housing sales (pre) sale price reporting system; the lifting of restrictions on foreign institutions and individuals to purchase of commodity housing in the region.

Down payment and first time homebuyer mortgage interest is also cut:
The purchase of the first set of ordinary commercial housing households, financial institutions lending minimum down payment of 30% the proportion of funds, the interest rate limit is 0.7 times the benchmark rate.
Shanxi is the fourth province to cancel buying restrictions. Gansu, Sichuan and Anhui are the other three.

iFeng: 山西成中国第四个明文取消楼市限购省份

2015-11-21

Solution to Government Cash Crunch: Tap Public Housing Fund

As part of a reform package (draft rules) for public housing funds, local governments will be able to use public housing funds (invested by individual workers and their employer) to purchase local government bonds under a new plan.

iFeng: 新版住房公积金投资放宽 将可购买地方债
In addition, the provisions approved by the housing provident fund management committee, may apply in accordance with relevant regulations issued by the state housing fund individual housing loan-backed securities and housing fund can be used to purchase local government bonds, policy financial bonds, housing fund individual housing loan-backed securities high credit rating of fixed income products.

Update: Bloomberg recently covered China's forced savings in The Trouble With Saving 21 Trillion Yuan
Liang responds that one reason debt is so high is that so much money is being put, by the government and others, in bank deposits: The only way to get the trapped money out is to borrow. “The savings rate is crazy,” she says in a phone interview. “It’s not natural.”
Using public housing funds to buy local government bonds is exactly the wrong way to get the money out.

Rubber Meets Road: Liaoning Bank to IPO in Hong Kong

A little over a year ago, I posted Liaoning Sounds Warning on Chinese Economy. The impetus was seeing real estate investment and industrial production turn negative. A year later, Liaoning is still at the epicenter of China's industrial slowdown. In October, Industrial Production Collapsed 13.3% in Liaoning. Home prices in Jinzhou fell in October and are down 5.8% from last year. Dalian and Shenyang also have seen home prices decline as the entire province's economy slows.

Clearly, things are not going well in Liaoning, but a bank in Jinzhou city is about to IPO.

Over at FT Alphaville, Andrew Collier of Orient Capital Research asks: Could China suffer a banking crisis?
Could a banking crisis erupt in China? The commonly accepted answer among western analysts is no, for the simple reason that China has huge State owned banks that dominate the country’s banking industry. But dig a little deeper and a different picture emerges.

It turns out that within China’s smaller cities, the market share of the big banks fades away. Instead, local banks take over.

...In the city of Jinzhou, population 810,000, the state bank share drops by more than half to 19.4 per cent. Most of the slack is taken up by just one bank, the Bank of Jinzhou, with 62.6 per cent of assets.

Global Capital: Chinese city banks pounce on last window for HK IPOs
Bank of Qingdao Co plans to launch its $600m listing on November 20 via joint sponsors Citic CLSA Securities and Goldman Sachs, alongside a syndicate of some 10 banks, according to sources close to the company. Pre-marketing kicked off earlier in the week.

It is not the only one seeking fresh equity. Bank of Jinzhou Co commenced investor education on November 17 for its $600m float, while Bank of Zhengzhou, which is yet to gain approval from the Hong Kong Stock Exchange, is eyeing a $700 IPO before the year is out. Meanwhile, Bank of Tianjin is seeking a float next year.
A loan to Hanergy kept the firm's listing delayed: Hanergy wait over for Jinzhou in IPO
The commercial bank, based in northeastern Liaoning province, missed its original listing plan in June, as authorities questioned an eight billion yuan (HK$9.72 billion) credit line it granted to the parent of scandal-hit solar firm Hanergy Thin Film Power (0566).

The bank will kick off a roadshow next Wednesday and debut December 7.
The company's application proof is here: Application Proof, PHIP and Related Materials, Bank of Jinzhou Co., Ltd.

My curiosity got the better of me when I saw the bank is growing 50%+ yoy. I want to see how the bank increased assets to over 300 billion yuan with only 90 billion in loans. What are these assets? They're listed as debt securities classified as receivables. A look at the notes: wealth management products. The bank, as of June 30, had 90 billion lent out in normal banking and 125 billion lent out through shadow banking. Also from the notes: the average yield on their assets rose from 6.04% in the six months ended June 2014 to 7.80% in the six months ended June 2015.

These WMPs and whatever else is lumped in here, have been driving profits. "Interest income from investment securities and other financial assets" constituted 19.5%, 27.4% and 42.6% of interest income in 2012, 2013 and 2014. Note that they're investing in these products, in addition to offering them. Page 28 lists risk factors associated with these products. As of June 30, 2015, these assets were almost 70% of total assets.

A basic picture of another type of shadow banking works, beneficial interest transfer plans:
The credit guarantee makes an appearance. As of June 30, 2015, 45.9% of assets in BITP were backed by credit guarantees.

I wonder how the market will price this.

China Goes Negative

Going Negative
A “negative list” names areas and sectors in which foreign investment is barred. Those not listed are fully accessible. Investors in these unlisted areas can obtain pre-entry national treatment (PENT), meaning that they will be accorded the same status and privileges of a domestic company before entering China.

China Daily: Negative list for foreign investment expanded to inland regions
The negative list method was first adopted in the China (Shanghai) Pilot Free Trade Zone after it opened in 2013. Free trade zones were subsequently launched in Guangdong, Tianjin and Fujian, and they too adopted negative lists.

Xu Shanchang, director of economic system reform at the National Development and Reform Commission, said on Friday the practice will be expanded from the coastal regions to inland areas.

Yibada: Xi Pledges to Cut Restrictions on China's Market
Beijing is set to “substantially cut back” restrictions on foreign investment to enter the Chinese market and build an economy with an even higher level of openness, President Xi Jinping said in a regional business gathering on Wednesday, Nov. 18, amid global concerns over China’s slowing growth.

Next month an expanded pilot begins in the four cities, which should last two years, after which the program will be rolled out nationally. EO: 下月起,中国试行负面清单

Great news for the long-term, if it is fully implemented.

Credit Carnage in USA

Here's an actively managed credit fund, Third Avenue Focused Credit (TFCVX). "An opportunistic, bottom-up investment strategy that selects high yield stressed and distressed credits up and down the capital structure." It has been a good performer in the past and is well managed, but it is subject to the whims of the credit markets. It has been serving well as a leading indicator for high yield credit and it is pointing south again. Trouble is brewing.

Chinese Hedge Funds Shorting Industrial Metals Across the Board

Reuters: As Chinese funds return to copper, should we be worried?

Depends. Do you run with the bulls or the bears?
At the start of this year most analysts were still scratching their heads as to what was happening in China, the driver of global copper demand growth.

Chinese hedge funds, it seems, had already made up their mind that whatever was around the corner wasn't going to be good, and they voted with their wallets.

Should we be worried that they are evidently doing so again? Particularly since, this time around, it's not just copper that is being singled out for the bear treatment. Shanghai open interest has spiked in both zinc and, unusually, aluminum.
This is a thinly traded ETF, but I've held it for the past two or three years waiting for this. The only that surprises is how low the volume has remained despite the good returns. The 2008 peak was above $80.

2015-11-20

One Chinese Underground Bank Moved $64 Billion

Bloomberg: China Cracks $64 Billion `Underground Bank' Moving Money Abroad
The case brought the total for underground banking and money-laundering activities to 800 billion yuan since April, the newspaper said.
One thing to keep in mind: the outflows represent real demand for foreign currency, assets and/or investments. Closing underground banks does nothing to deal with this demand.

New Beijing "Land Kings" Continuously Being Crowned As Land Prices Exceed Average Home Prices

Land prices are climbing in Beijing, leading to the crowning of a new land king every week or so.

Beijing sold 25 parcels of land in the past month, with the latest parcel in Changping selling for 4.5 billion yuan. Based on the developer's planned construction, it works out to 43,000 yuan per square meter. Changping is an outer district of Beijing, north of Haidian. As of October, CREIS reported the average price in all of Beijing was 34,596 yuan per square meter and the median price was 27,750 yuan per square meter. The price of the land is 25% above the average price of new homes. This is why analysts are forecasting a rise in prices in the first-tier: only luxury construction can justify these prices.

The oft quoted Zhang Dawei of Centaline says Beijing's average residential land sale price in 2015 is 38,000 yuan per square meter this year and land prices are about 42% of final sales prices, pointing to final per sqm home prices above 80,000 yuan, or more than 130% above the current average for new homes.

iFeng: 北京一个月成交25宗地 区域地王不断刷新

Another Busted Coal Miner

Bloomberg: China's Yunnan Coal Becomes Latest Miner to Struggle With Debts
State-owned Yunnan Coal Chemical Industry Group Co. and its businesses had 1.31 billion yuan ($205.6 million) of overdue loans as of Oct. 30 due to rising borrowings and a cash shortage
Sina: 云南煤化工13亿债务违约 多家银行“躺枪”

The Financial Crisis Is An Order of Magnitude Larger Than Believed

This article was translated into Chinese and is the top article in the finance section at iFeng: 厄运来临:这个万亿美元市场要崩溃了

Telegraph: The world's multi-trillion dollar bond market is circling the drain
There are plenty of possible reasons why liquidity might be evaporating. For one thing, there has been a huge increase in the amount of bond trading being conducted electronically and this method of dealing is now responsible for about half of all turnover in the US. This has attracted the attention of high-frequency firms who help provide liquidity and lower transaction costs but only really for small trades, creating the illusion of liquidity, which, like a mirage, disappears when you reach for it.
If liquidity is disappearing amid massive central bank intervention, perhaps the economic models are wrong?
One of the upshots is that it is now much more expensive for banks to hold securities on their own books and therefore provide liquidity in the market. Deutsche Bank recently noted that the amount of outstanding corporate bonds has doubled since 2001 but dealer inventories of these securities have fallen 90pc over the same period.
Risk has been taken off the bank balance sheets because regulators (and politicians, mainstream economists, etc.) believe the financial crisis was solely at the firm level. Remove the risk from the banks and the banking system appears sound. If the risk is in the entire financial system, then it can only be shifted, not eliminated. If the risk is the financial system itself, only major reform stands a chance at preventing a crisis.

Long story short: these bonds cannot be repaid. Nobody really wants to own them, but in a world of financial collapse, government bonds will likely retain more value than corporate bonds.

2015-11-19

"End of the End" For The Credit Bubble

It's not the beginning of the end, it is the end. The numbers are now reaching the point where the credit bubble cannot continue to expand, short of a inflationary surge in base money which would significantly devalue the yuan. The "Ponzi" phase of the credit bubble is growing rapidly and it signals the end. SMEs who pay extremely high financing costs are in the Ponzi stage, as are industries with access to bank credit, but collapsing fundamentals.

Bloomberg: China Has a $1.2 Trillion Ponzi Finance Problem
Chinese borrowers are taking on record amounts of debt to repay interest on their existing obligations, raising the risk of defaults and adding pressure on policy makers to keep financing costs low.

The amount of loans, bonds and shadow finance arranged to cover interest payments will probably rise 5 percent this year to a record 7.6 trillion yuan ($1.2 trillion), according to Beijing-based Hua Chuang Securities Co., whose lead fixed-income analyst was top-ranked by China’s New Fortune magazine in 2012 and 2013.
Related: SMEs Wonder Not How to Live, But How To Die As Borrowing Costs Spike

China Eases, Gold Rebounds

It's early, but gold and gold mining shares have been behaving well the past few days.

CNBC: China's PBOC announces more easing measures
The move, which will come into effect on Friday, will cut the overnight and seven-day rates it gives to Chinese lenders by 2.75 percent and 3.25 percent respectively.

Rail Data Corroborates Industrial Slowdown

No surprise here considering things like steel and coal are transported by rail.

China Daily: China's rail freight drops faster in October
The railways carried 280 million tons of cargo in October, down 16.3 percent year-on-year, compared with a fall of 15.6 percent in September and 15.3 percent in August, according to data released by the National Development and Reform Commission (NDRC).

In the first 10 months of 2015, rail freight slipped 11.9 percent from a year earlier to 2.8 billion tons, a sharper decline than the 11.4-percent decrease for the first nine months, the NDRC said.

What Common Sense Economic Policy Looks Like

Caixin: How a New Idea for Revamping the Economy Is Taking Shape
Caixin: No clear definition of “structural reform on the supply side” has appeared yet. What is its core idea?

Xu Lin: I think the core idea is to reduce transaction costs created by institutional arrangements. Businesses are paying quite high costs in transactions, taxation, financing and social security. High transaction costs in China are mainly created by institutional hurdles. Reforming the supply side will reduce costs and make it easier for enterprises to do business. It will encourage business innovation, boost quality and efficiency of the supply system, and improve the supply structure. Eventually, supply side reform will lead to higher productivity of the economy and improve enterprises’ competitiveness.

Does the idea mean China will reduce its reliance on investment, consumption and exports for growth, as well as fiscal and monetary stimulus policies?

There has been no change on official expressions regarding monetary and fiscal policies. And no one has denied the role of the troika of economic growth, namely investment, consumption and exports. The fifth plenum of the Communist Party’s 18th Central Committee again mentioned the role of the three. So emphasizing the supply side doesn’t mean giving up the consumption side.

For the 13th five-year period, from 2016 to 2020, investment, consumption and exports will continue their functions. But more attention will be paid to the effects of investment, while people’s consumption will upgrade through innovation on the supply side. Competitiveness will be more important for export goods. For the next five years, the room for growth driven by traditional forces will be extended through reforms to the supply side.

...What is the theoretical foundation for supply side reform? How do we create demand through it?

Supply-side economics emphasizes deregulation on the supply side and cutting taxes. It was adopted in Western countries by leaders such as Margaret Thatcher, who pushed forward privatization in Britain. In China, most experts are talking about new supply-side economics that include some Chinese features. China started to expand domestic consumption in 1998 as a long-term strategy of the central government. There is no new theoretical framework. People will support reform from the supply side when they realize that the traditional way of expanding consumption will have a negative impact on the economy in the long run.
Supply side reforms are the pragmatic, common sense and simple approach to economic reform. Remove barriers and let the market sort out the allocation of labor and capital. This is what China is supposed to have been doing the past few years, but it's still not off the ground yet.

2015-11-18

The Yuan Needs to Drop

Bloomberg: China Should End Exchange-Rate Distortion, Ex-PBOC Adviser Says
"I don’t know why the PBOC is so obsessed with the stability of the renminbi exchange rate," said Yu, who was an adviser to the monetary authority from 2004 to 2006 and is now a member of the Chinese Academy of Social Sciences. “A flexible exchange rate will give greater impetus to China’s economic readjustment and growth paradigm shift."

...The significance of the SDR inclusion may have been exaggerated, Yu said.

"The inclusion is symbolic, though it should be regarded as a good thing," he said. "It will not have any significant impact on anything and it will change nothing unless the inclusion is a step toward more reforms of the international monetary system."
China's renminbi has to fall for the same reason a ball thrown in the air needs to fall. If the U.S. dollar falls, the yuan can maintain a semi-peg with the greenback, but if the dollar is about to break out, the yuan must depreciate versus the dollar. The SDR push is a political achievement and for China's internal politics it will be a significant achievement that may push forward reforms, but by itself, it is not a meaningful change for the currency.

Real Estate Is Over, No Amount of Stimulus Will Work

The Chinese government has been contemplating rescue measures and analysts have been turning bullish on the sector in expectations of stimulus. There are still holdout bears though, one of which is Ren Zeping, chief economists of Guotai Junan Securities.

He sees the Chinese economy downshifting into a slower growth phase that will last 3 to 5 years, creating an L-shaped slowdown. He says this is an exciting time as the 30-year cycle is ending through reform and deregulation, a new 30-year period of growth can begin.

He says there will be no dividend from reforms without three years of labor pains. He's optimistic though:
This critical point in time, if we do not reform strategy and commit the wrong direction, I believe that China's transformation is a high probability event. We can see the success of these transition economies, Japan, South Korea, China Taiwan, Singapore, Hong Kong, China are in our vicinity.

As for real estate:
In the future, how you stimulate the real estate when this era is over. We can see that from 2014, the real estate investment from the previous 20% growth is now down to zero growth. Now we must study what are the characteristics of the real estate cycle after the population inflection point. I asked you a question, people continue to migrate to the big cities? Or return to small towns? Yes, migration to large cities and towns.

We did a study of more than 10 economies, this picture tells us that after the end of the demographic dividend, people continue to migrate to the big cities. Whether it is the United States, Japan and other economies are the same. Young, talented person net worth, the natural alternative to the big cities which, because only the big cities can give young people achieve the dream stage, only large cities that net wealth available to provide quality public resources.

So, people continue to go among the big cities. So, we can see that when people continue to migrate to the big cities, when first tier cities have no land, prices rise. No sales in third- and fourth-tier cities, land and inventories high.

Last year, I did a real estate prediction for China over the next 10 years, housing prices will double in the first-tier, third- and fourth-tier will have no change, zero growth in real estate investment. First- and second-tier core cities, together there are 10 cities, there are hundreds of third- and fourth-tier cities, they account for 80% of real estate investment. Third- and fourth-tier cities continue to decrease inventory, how do we re-stimulate the real estate when we cannot go back to the era of depending on steady growth in real estate. If you could stimulate third- and fourth-tier real estate ghost cities, you want to spend how much money? Not necessarily a good thing.

iFeng: 任泽平:房地产时代已结束 怎么刺激都没用

Immigration: The Key Political Issue

Immigration has clearly been the key political issue for some time and the evidence is now overwhelming. There's still an opportunity to run on the issue though, because most politicians are running on extreme pro-immigration policies. This is like being anti-war in 1943 and one must assume they truly want whatever mass immigration is bringing their nation if they refuse to win massive landslide victories.

The clearest examples of the popularity of immigration restriction come from the United Kingdom and Germany. More than a year ago, UKIP was running on an anti-EU platform. As I wrote last year in Immigration Issue Set to Explode in America; Prepare for Political Volatility
UKIP's reason for existence was to get the United Kingdom out of the EU. There are many issues that fall under the control of Brussels, such as economic regulations, but the big issue that voters wanted to hear about was immigration. UKIP realized immigration was the big issue and it focused on that issue, turning it into a shock electoral victory.
The media and politicians have such intense ideological blinders that they cannot see this. When UKIP brought up the immigration issue it was like a red flag and they were attacked as bigots, a menace, etc. The truth is immigration was really an accidental issue, the party was pushing a referendum on EU membership, but found that one subset of the issue, control over national borders and immigration, was very popular. It rode the issue to victory in EU elections and did well in the national election.

Now in Germany, we see a repeat. The wikipedia clearly explains Alternative For Germany's reason for existence:
In September 2012, Alexander Gauland, a former federal minister Bernd Lucke, an economist and Konrad Adam, a former editor of Frankfurter Allgemeine Zeitung from 1979 to 2000 and chief correspondent of Die Welt until 2008, founded the political group Electoral Alternative 2013 (German: Wahlalternative 2013) in Bad Nauheim, to oppose German federal policies concerning the eurozone crisis. Their manifesto was endorsed by 68 economists, journalists, and business leaders, half of whom were professors and three-quarters of whom had academic degrees.[14] The group stated that the eurozone had proven to be "unsuitable" as a currency area and that southern European states were "sinking into poverty under the competitive pressure of the euro".[15]
Purely economics, mainly anti-euro.

Today: Merkel Cites Refugees as Boon as Anti-Immigration Party Advances
Even so, the Alternative for Germany party, which wants to curb immigration, gained for the second consecutive week, polling 10.5 percent.

...Alternative for Germany, known as AfD, polled 3 percent in the INSA survey as recently as August...
This is not surprising. Identity and culture are now the most important issues in politics, not economics. The new left-right axis runs international to national. Old allies now fall on either side of the spectrum: there are libertarians who qualify as far left lunatic open borders extremists as well as far right lunatic deport-them-all extremists. The question is one of identity: the international libertarians do not believe in borders, the nationalist libertarians do.

The surprising thing is that politicians, who should want to win elections, refuse to budge on the issue. As I have written here many times, the immigration policies in the U.S. are still peak social mood policies that belong to the year 2000, not the current year. Europe actually started shifting right on the issue in the 2000s and accelerated after 2008, and yet Merkel is pushing what can only be described as an insane policy in light of social mood. It is strange to watch the political leaders and business elite commit mass political suicide due to ideological zealotry and greed.

Finally, there is the example in the United States. Donald Trump made a throwaway line about rapists in speaking about illegal immigration and the media took the bait. He recently hit 42% in a Reuters national poll. Unless he makes a major mistake, he will not only win the Republican nomination, but the White House as well, very likely in a landslide with a mandate and control of both houses of Congress.

Immigration and nationalism were third rail political issues. The national media and politicians suppressed these issues even though there is majority support for immigration restriction, as an example. The numbers rose and rose as social mood trended lower, creating a situation where anyone could walk in and win total political control by advocating for the issue. On top of that, however, most of the ruling politicians aren't even trying to win on the issue, they're pushing even harder in the other direction.

From the first link above:
Most members of religious denominations do not feel that illegal immigration is caused by limits on legal immigration, as many religious leaders do; instead, members feel it’s due to a lack of enforcement.

Catholics: Just 11 percent said illegal immigration was caused by not letting in enough legal immigrants; 78 percent said it was caused by inadequate enforcement efforts.
Mainline Protestants: 18 percent said not enough legal immigration; 78 percent said inadequate
enforcement.
Born-Again Protestants: 9 percent said not enough legal immigration; 85 percent said inadequate enforcement.
Jews: 21 percent said not enough legal immigration; 60 percent said inadequate enforcement.
Unlike religious leaders who argue that more unskilled immigrant workers are needed, most members think there are plenty of Americans to do such work.

Catholics: 12 percent said legal immigration should be increased to fill such jobs; 69 percent said there are plenty of Americans available to do such jobs, employers just need to pay more.
Mainline Protestants: 10 percent said increase immigration; 73 percent said plenty of Americans available.
Born-Again Protestants: 7 percent said increase immigration; 75 percent said plenty of Americans available.
Jews: 16 percent said increase immigration; 61 percent said plenty of Americans available.
When asked to choose between enforcement that would cause illegal immigrants to go home over time or a conditional pathway to citizenship, most members of religious communities choose enforcement.

Catholics: 64 percent support enforcement to encourage illegals to go home; 23 percent support conditional legalization.
Mainline Protestants: 64 percent support enforcement; 24 percent support conditional legalization.
Born-Again Protestants: 76 percent support enforcement; 12 percent support conditional
legalization.
Jews: 43 percent support enforcement; 40 percent support conditional legalization.

In contrast to many religious leaders, most members think immigration is too high.

Catholics: 69 percent said immigration is too high; 4 percent said too low; 14 percent just right.
Mainline Protestants: 72 percent said it is too high; 2 percent said too low; 11 percent just right.
Born-Again Protestants: 78 percent said it is too high; 3 percent said too low; 9 percent just right.
Jews: 50 percent said it is too high; 5 percent said is too low; 22 percent just right.
This is what the public believes and most of the information they receive from the media are lies. Crime data on illegal immigration isn't collected by the government or is horribly distorted, and welfare use is suppressed.

The Center for Immigration Studies has conducted an independently verified study of welfare use by immigrants, legal and illegal, and the numbers are eye popping. Not only is welfare use far higher among immigrants, but welfare use rises over time, likely because they are better able to navigate the welfare state. The most shocking number is the 91% welfare use by Hispanic immigrants with one or more child.

Welfare Use by Immigrant and Native Households

The video below runs through the numbers.


The welfare numbers do not include other social costs, such as schooling and policing due to higher crime rates. Nope, crime statistics don't hold up either. After Trump made his explosion on the scene this summer, there were claims that illegal immigrants commit less crime than natives.
Piquero and Bersani's joint study, "Comparing Patterns and Predictors of Immigrant Offending Among a Sample of Adjudicated Youth," used as its base group "adolescents who were found guilty of a serious offense."
Yes, the mainstream media widely blasted a story based on a study that found among the subgroup of youth criminals who commit serious crimes, illegal immigrant youths committed crimes at a lower rate. This was then reported as illegal immigrants commit less crime overall. This is what passes for information from the pro-immigration side. Goebbels would be proud.

The anti-immigration candidate can look forward to 50-60% popular support in most countries as a baseline before he begins an information campaign. Political enemies will respond by running harder in the opposite direction. Social mood is headed in a direction that favors nationalist policies. If the candidate can make a breakthrough with the public, immigration will carry the candidate and the party to landslide victory so complete that the only thing stopping the winners will be themselves. In a conservatively designed government such as the U.S., change is more gradual and less volatile by design. In parliamentary European governments, volatility will be more extreme and it will come both from parties on both the traditional right and left even within a country. The extreme left and right in Greece are bitter enemies, but line up on issues of sovereignty. Understanding this will help make sense of what unfolds in the coming elections.

Policy Easing Will Spark Rally In Home Prices Next Year

The headline in iFeng: most experts thing home prices will be up in 2016. Hukou reform and government easing efforts will soon cause a bottom in the market, followed by a strong rebound in the first-tier cities. The article cites 5 bulls and 1 bear.

iFeng: 政策暖风引热议 多数专家称明年房价将大涨

2015-11-17

October Real Estate Investment By Province: Fire and Ice

Some provinces saw real estate investment explode in October, while others saw it collapse. Three provinces saw massive one month spikes way above trend: Beijing, Tianjin and Hubei. Shanghai saw a bounce, but still much slower than only a few months earlier.

Several provinces saw growth collapse, many either fell into contraction or saw the contraction accelerate. Guangdong swing to contraction in October, a major shift considering the province accounts for 8.6% of national real estate investment. The largest is Jiangsu, which accounts for 8.8% of national real estate investment and contracted 4.5% for the month. Chongqing rebounded to positive growth of 0.34%; last year at this time, growth was over 20%.

Panic Time: Home Price Rebound Stalls in October

No wonder there's been so much talk about real estate rescues in the past few days. New home prices increased only 0.07% month-on-month in October, well below the 0.20% increase in September. The end of the rally is more evident in the number of cities seeing home price increases, 27, down from 39 a month earlier.

One reason for the drop in price increases is the cooling in first tier cities, namely Shenzhen. Shenzhen was responsible for 58% of the price increase in July and the four first-tier cities combined for 95% of the total increase that month. Things improved slightly in August. Shenzhen accounted for 42% of the increase, while first-tier cities combined for 69% of the total increase. The four first-tier were the top four gainers as well. In September, Shenzhen was still going strong at 29% of the total national increase in new home prices (its prices climbed 4% for the month). The four first tier cities were 57% of the total increase. Removing the first-tier cities from September left an increase of only 0.09% in the remaining 66 cities, an annualized rate of 2.8%.

In October, Shenzhen only saw prices rise 1.2%, less than Shanghai's 1.4%. Yet these two cities alone combined for 63% of the national price increase thanks to falling prices in the lower tiers. Add Beijing and Guangzhou into the mix and the first-tier cities accounted for 82% of the total increase in home prices. The remaining 66 cities saw prices increase 0.01%. Remove Xiamen and new home prices were down nationally.

Year over year, prices are down 1.1%.

Since 2010, average prices are up 8.6%.

March 2014: 4 cities saw declines in price mom, 10 cities were flat, 56 were up.
April: 8 cities saw declines in price mom, 18 cities were flat, 44 were up.
May: 35 cities saw declines in price mom, 20 cities were flat, 15 were up.
June: 55 cities saw declines in price mom, 7 cities were flat, 8 were up.
July: 64 cities saw declines in price mom, 4 cities were flat, 2 were up.
August: 68 cities saw declines in price mom, 1 city was flat, 1 was up.
September: 69 cities saw declines in price mom, 1 city was flat, 0 were up.
October: 69 cities saw declines in price mom, 1 city was flat, 0 were up.
November: 67 cities saw declines in price mom, 3 cities were flat, 0 were up.
December: 65 cities saw declines in price mom, 4 cities were flat, 1 was up.
January 2015: 65 cities saw declines in price mom, 3 cities were flat, 2 were up.
February: 66 cities saw declines in price mom, 2 cities were flat, 2 were up.
March: 49 cities saw declines in price mom, 9 cities were flat, 12 were up.
April: 47 cities saw declines in price mom, 5 cities were flat, 18 were up.
May: 41 cities saw declines in price mom, 9 cities were flat, 20 were up.
June: 34 cities saw declines in price mom, 9 cities were flat, 27 were up.
July: 39 cities saw declines in price mom, 10 cities were flat, 31 were up.
August: 26 cities saw declines in price mom, 9 cities were flat, 35 were up.
September: 21 cities saw declines in price mom, 10 cities were flat, 39 were up.
October: 33 cities saw declines in price mom, 10 cities were flat, 27 were up.

Existing home prices were slightly better than new home prices last month, but still rounded to a 0.07% increase. The city up/down breakdown was the same as with new home prices. The first-tier accounted for 96% of the increase in existing homes nationally. Remove them and the existing home price increase in October rounds to 0.00%. Remove Xiamen and prices fell 0.02% nationally.

The bear rally has ended.

Source: 2015年10月份70个大中城市住宅销售价格变动情况

Industrial Production Collapses 13.3% in Liaoning

The epicenter of the recession is without a doubt in Liaoning, where industrial production contracted 13.3% year-on-year. Shanxi saw a drop of 1.2% and was the only other province in contraction, though Heilongjiang was barely positive at 0.1% growth.

Chinese Provincial GDP Exceeds National GDP By 1.9 Trillion Yuan

China's National Bureau of Statistics reports provincial GDP exceeds national GDP by 1.9 trillion yuan. That's up from 1.4 trillion yuan in Q1 and 1.3 trillion in Q2.
National Bureau of Statistics data show that the first three quarters of GDP 48.7774 trillion yuan, while the sum of the 31 provinces in the first three quarters of GDP to 50.72562 trillion yuan, exceeding the national total of up to 1.94822 trillion yuan.

Reporters combed found , in the first quarter of this year exceeded the sum of provincial GDP of about 1.4 trillion yuan nationwide, the first half of the provinces beyond the country's total GDP of more than 2.7 trillion yuan.
iFeng: 统计局:前三季度GDP各省之和超全国总数1.9万亿

More on Real Estate Rescue

A top level real estate rescue policy is now a "high probability." Real estate is a major factor in the cement and steel slowdowns, and a key component in fixed asset investment.

The policy garnering the most speculation is financial support for the removal/renovation of shantytowns, which would require moving people out of old homes and into new ones. It is dubbed "monetization of shantytowns." This could go a long way to solve inventory problems in some cities and was already proposed earlier this year: Fastest Way to Reduce Housing Inventory: Bulldoze Shantytowns. The same things said by the Ministry of Housing at the start of the year are being talked about now as a bailout measure. It could mean the policy becomes an official and top priority policy, or it could mean the plan is flawed due to constraints such as impaired local budgets.

Also consider this from 2014 (Bloomberg): China to Spend More Than $162 Billion on Shantytowns
China said it will invest more than 1 trillion yuan ($162 billion) redeveloping shantytowns this year as the government detailed how it will boost its urban population to support growth.
If 1 trillion yuan wasn't enough in 2014, how much is needed in 2016 and where will the cash come from? Visions of 4 trillion dance in my head. The second article below mentions the banks providing loan support. It sounds like 2008 all over again.

Reports also say a cut in the down payment minimum to 20% nationally is likely, along with the return of 30% discount mortgages, which were around back in 2010. A full easing of restrictions on second and multiple homes may also be in the cards.

iFeng: 房地产调控政策将推 定向宽松是大概率事件

iFeng: 媒体称房地产定向宽松近期将出 有三种政策可能性

2015-11-16

Steelpocalypse

Steel will become the poster child for the breakdown of global trade and the return of mercantilism.

Bloomberg: Steel Is the Poster Child For Oversupplied Commodity Markets, and It's in Shambles
"With 1.6 billion tonnes of consumption globally, steel remains the lynchpin of industrial growth," wrote Hamilton. "However, the growth part of this equation is an increasing problem, and not only in China."

India, which has the potential to buoy demand for steel, is also contributing significantly to supply growth. Bloomberg Intelligence's Yi Zhu notes that 37 million metric tons of production capacity in India are currently under construction or in planning to be added.

"The only people who still seem to think there is significant upside in global steel consumption akin to the past decade are the major iron ore producers—for example BHP’s belief global steel consumption will hit 2.5 billion tonnes by 2030—just a further 50 percent upside required there!" Hamilton wrote in a separate note.
We only need Japan and Western Europe to completely shut down their steel industry in order to restore balance.

Related: Chinese Steel Industry "Sliding Into The Abyss"; Chinese New Year Could Bring Mass Bankruptcies

China Big Four Banks See Lending Drop, First Time Since 2009

Bloomberg: Lending by China's Biggest Banks Falls for First Time Since '09
Total loans by the four lenders, including Industrial & Commercial Bank of China Ltd., amounted to 35.7 trillion yuan ($5.6 trillion) at the end of October, down 65.6 billion yuan from a month earlier. That’s according to data released Sunday by the People’s Bank of China.
How can they increase lending with falling deposits, increased NPLs and a slowing economy? Their balance sheets are impaired, much worse than is publicly admitted, and they know it.

Bloomberg: Dangers Lurk in China's Online-Lending Jungle
Online peer-to-peer platforms sold a record 119.6 billion yuan ($18.8 billion) of financing products in October, according to researcher Yingcan Group. That’s equivalent to 23 percent of commercial bank lending in the month, up from 5 percent a year ago. While authorities said in July that Internet finance companies must provide sufficient disclosure and send risk reminders to customers, regulators have yet to issue specific laws.
Credit creation is moving towards the riskiest, least regulated, least stringent areas of the market——and that's saying something in China considering the big banks will take a worthless credit guarantee and slap in on a loan to call it AAA. Furthermore, whereas the big four banks concentrate risk, P2P lending spreads it far and wide across millions of households. There will be no extending and pretending for them if loans sour.

Chinese Steel Industry "Sliding Into The Abyss"; Chinese New Year Could Bring Mass Bankruptcies

There's a really long article on China's steel industry heading into a long winter, a reference not only to the calendar. A steel executive named Li (a pseudonym) is quoted throughout. He currently is hearing of steel mills shutting production entirely as bank funding runs out, with local governments intervening. In order to maintain cash flow and market share, mills continue producing at a loss in what is dubbed "slow-motion suicide."

Pressure is rising:
"From the beginning of the second half of this year, this phenomenon is more obvious, we can see significant tightening of corporate liquidity."
That quote is from a manager at a steel futures trading firm who notices the producers tapping their capital more often, drawing out cash from hedges immediately after settlement.

Balance sheets are ugly, even for listed firms:
According to Reporters statistics, as of the end of the third quarter of this year, listed companies Bayi Iron & Steel [600581] , asset-liability ratio was 100.63 percent, SGIS [000717] ), Xining Special Steel [600117] , asset-liability ratio as high as 93.37% respectively, 88.38%, and another 7 debt ratio of listed steel prices more than 80%.

Loans are down, but financing costs are rising:
The end of September, China Iron and Steel Association statistics steel enterprises data shows bank loans fell 2.02% year over year, while finance costs rose 2.69%.
Mr. Li says:
"After the central bank's double cuts, long-term funding costs declined, but new lending is still difficult, this year our business lines of credit may be contracted by 30% or 40%."
The shock-wave blast from the economic slowdown and tightening credit conditions is about to hit the mills. Although there's been talk of cutting production, Mr. Li says it's very little. Most firms are stretching their funds and cutting their costs, they will produce right into the end. (That might explain this headline: World's Second-Biggest Miner Unfazed by China Growth Pessimists) Huatai Securities estimates production has been cut by about 80 million tons so far out of more than 1 billion tons.

Why so few production cuts? The reason is whether steel company, bank or government, none can bear the pain of steel mill closures.
On the one hand, on the asset-liability ratio generally higher steel prices, it must rely on the continued operation of the production line in order to maintain cash flow, bank credit guarantee loans, or enterprise funds strand breaks, will enter bankruptcy reorganization proceedings; on the other hand, steel prices bear the local GDP pressure, taxation, employment, once the closure will form a larger impact on society, can only hold the burden of losses to continue production.
Instead, the industry continues on into a darker and darker future:
"There is no good cash flow, there is no good sales demand, it is possible closures will come true, but the time will be longer, after all, local governments and banks are reluctant to see this scene. The result is that now this vicious cycle, steel getting lower and lower, but the cost has remained high, or a little bit of steel prices rise, costs rise even higher results, scissors are obvious. For example, from July this year into mid-September, the iron ore price rose from $45 dollars to $55, but from July to September, steel prices fell from 2300 yuan / ton down to 1800 yuan / ton, both sides were squeezed, it basically wiped out our profit. " Li told reporters.
Lee sees a bankruptcy wave exploding around the time of Spring Festival in 2016, in the middle and west of the country where the slowdown in demand is more acute.

Others, including Li, are trying to survive by dumping onto the world market:
"Two years ago we committed to the internationalization of the company, established a number of offices in Singapore, Italy and other places, would like to expand the sales market, this year also increased the export efforts." Lee told reporters, brothers units Shagang, Zhongtian steel is also more emphasis on overseas markets.
Global prices are 200 yuan / ton less than Chinese steel prices, but due to lack of demand, there are no buyers, so Chinese mills eat the loss and dump it, which is keeping Chinese prices somewhat elevated (important for mills since they sell more domestically):
Industry insiders, the recent domestic steel export prices and compared to already upside down 200 yuan / ton, the price for all orders of steel mills can basically losses. However, if you do not take orders from overseas, domestic overcapacity or worse, we will eventually continue down domestic steel prices, China's steel enterprises will be more difficult situation.

The piece closes with this quote from the executive:

"The past two years was the bankruptcy wave for steel traders, now begins the steel industry's slow motion suicide, slowly sliding into the abyss."

iFeng: 钢企衣衫单薄地苦熬寒冬 资不抵债钢厂已出现