Good Evening,
The EMC and various traders/parties have been batting a few (add-on) ideas around
for a while and coming to firmer conclusions today. A summary with suggestions
about the distortion and inaccuracies in the property
data in China. Today's discussions drew similarities between Spain and
China in separate discussions.
The consensus being that the measure for house prices is
warped, stalling more than the Chinese official data implied. With what can
only be described as greater downside risk than 2009 (comparative point).
Revenues in the form of company turnover and taxation have all fallen, save for
some clever accounting, it’s a sector in decline.
Any Chinese analysis always
has a caveat of government intervention (the stimulus), including the
possibility of social housing schemes (large scale) being introduced by the
Chinese Government or 101%+ mortgages. The sales incentives on the property sales
should be discounted out of the price achieved and disclosed to Government data
and revenue collectors. The incentives only serve to distort the figures that
should have a greater impact than the ones announced.
Margins have been squeezed, with developers failing
to incentivize buyers, whether for speculation or their own home. The
Government has increased the liquidity, reduced the down payment criteria and loosened
the first home-buyer entitlements to include those that had previously
owned.
With the Chinese Government slowly running out of options to
stimulate the economy at a local government level, expect to hear more about
western investment in Chinese public-private partnerships (PPP), reducing the
burden in the short-term on local governments.
So with banks having a biased interest in prices being
maintained and how the value is carried on the books against their reserve
requirement ratios (RRR). We're bordering on a Spanish manipulation of the
housing market by the banks, with an arm’s length consent by the Chinese
Government. Any drop of more than 6% year on year leaves the Chinese banks
being forced to make drastic cuts to their balance sheets. Alternatively, the
Government reducing the RRR requirements further to allow for greater flexibility.
There's a glut of property inventory out there, both
commercial and residential, those Irish property speculators will be all too
familiar with and wary of. Although China is far from at the extreme of the
Irish property contagion, it does have resounding similarities such as
excessive supply, unrealistic balance sheet valuations, overly expectant prices
and the minor problem of evaporating demand.
The lower income, like most economies, are the drivers in
China and the transfer of wealth between state and comrades is slowing and
potentially contracting. PPP could just be China’s saviour to avoid a property
contagion and at least meet more realistic growth targets in the short-term
whilst international expectations are reset.
Whilst remembering the caveat "without further
stimulus", Li and I, have been working on some modelling for the
Chinese property sector. (worse for commercial property). We'll exclude the
likes of the equivalent Chelsea areas within Shanghai（上海), Shenzhen, Guangdong Province（广东深圳）,
Beijing（北京）and Sanya, Hainan Province（海南三亚） (EMC has gone international with copy and paste; we hope Li's
versions are not offensive!).
The EMC is
off the fence and a depression and/or staling in property prices until 2017 and
perhaps beyond. This of course depends on how the economics of China pan out
and how the Chinese Government motivate the economy re: PPP. With factory gate
prices, earnings and raw materials all under pressure, this could extend beyond
2017 and as far as 2020 before a realistic growth story sets in. There's a risk
of a property contraction year on year for near 3 years, with restricted growth
their after.
The
contraction in financing is being noticed by the traders, save for the larger
houses whom have internal liquidity and government cheques. A limited example
being the Chinese purchases of gold, down circa 30%, copper, iron ore and coal.
The property woes are being
exacerbated by the contraction in financial liquidity (within China and
externally) for speculation.
It implies
the RRR of most of the major Chinese banks is questionable with balance sheet
valuations ignoring the obvious elements of the economy…or are they, as speculators
disappear?? It’s not going unnoticed that Chinese companies are refocusing on
international property portfolios (the hedge) like Japan in yesteryear.
In part, the commodities have depreciated as the Chinese
were incapable of tapping yet more finance for leveraged
speculation (after significant loses), this has a knock on effect throughout
China. It would be wise to consider the Chinese milk crash, which is unfolding
as we sip our coffee, the pork crash that didn't appreciate during Chinese New
Year (historically appreciating). Those Pork Riblets, Semi-Meaty have a
greater margin if exported to the Congo now, we'll ignore the political issues
some miners should be disclosing.
When considering how weighted the Chinese economy is reliant
on the property sector, its concerning no action has been taken. The lack of
taxation revenues both centrally and locally is having an impact. Various
measures are likely but property taxation will have to be utilised to plug a
gaping hole in the local government budgets bolting on to PPP. This will
further kick property developers as those speculators derisk their
"investments" as the asset becomes a greater liability. As such,
China, although further from negative interest rates than most, could be more
reliant than any central bank on these measures.
We acknowledge that China's property taxation model is
dependent on building, with low cost ownership currently the norm. The property
taxation and revenue model will have to be rebalanced, with an equilibrium
applied to existing home taxation plus a new homes sales tax. The Local
Government debt has grown disproportionately to the decline in property
taxation revenues, and the lack of growth, contradicting the desire to “urbanise.”
The rolling up of local government debt will have to be
answered sooner rather than later. It would be wise to reset the expectations
of Chinese growth to 4.5% now to iron out these problems, rather than anything
near the 7% the analysts think sensible.
There's implications for demand on all base metals and
resources excluding oil and gas, and water. More time is required to explain
the latter three with China as a consumer and space required to validate the
statement. Sweeping statement perhaps, but not without good reason.
Atb Fraser.
