A woman walks past a yuan sign outside a bank in Hong Kong on October 14, 2011. China reacted furiously to a US Senate vote to pass a bill that would punish Beijing for alleged currency manipulation, saying it broke WTO rules and could set off a trade war.
China's shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned.
The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.
"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing.
"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told the Telegraph.
While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. "It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property," she said.
Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $US1.4 trillion ($1.47 trillion) segment of the shadow banking system.
Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term "Shibor" borrowing rates, a sign that liquidity has suddenly dried up.
"Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products," she said.
Fitch warned that wealth products worth $US2 trillion of lending are in reality a "hidden second balance sheet" for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.
This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25 per cent in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.
BEIJING (MNI) - Chinese house prices rose at their fastest pace in three years in June as buyers continued to pour in off the sidelines, convinced that a government crackdown on market speculation lacks bite.
Prices for new Chinese homes rose 8.81% y/y in June, according to a floor-space weighted average of prices in the 35 largest cities calculated by MNI. That marks the fastest pace since a +9.42% y/y gain in June 2010 and compares with May's +7.84%, +6.60% in April and +4.88% in March.
On a sequential basis, prices rose for a 13th straight month in June, rising 1.01% m/m, only marginally slower than May's +1.06% and compared with April's +1.30% and March's +1.45%.
In first-tier cities such as Guangzhou, Shenzhen, Beijing and Shanghai, year-on-year gains remained solidly above 10%.
Prices fell in just one of the 70 cities surveyed by the National Bureau of Statistics in June on an on-year basis, versus three in May. They fell in five cities on a month-on-month basis in June versus one in May.
Expectations for prices to continue to rise remain persistent, despite the new government's stated commitment to bring order to the market. Potential buyers have said that they are starting to look again because prices are continuing to rise despite the signals from Beijing.
Some government economists have claimed that Beijing doesn't want to crack down too hard, noting that housing remains one of the only bright spots in the Chinese economy.
The NBS, which released the data on Thursday, abandoned its own national price indicator in 2011 as part of an overhaul of its methodology for collating house price data.
I dont think there is anyone disputing the fact that China has an almost biblical property bubble.
Its impossible to know however, if it will burst any time soon and if that will affect us.
China is can kicking, no doubt about that, back in 2003 it was still believable that China could develop domestic consumption and balance their economy, after 2009 that became difficult to believe and by 2011 , the numbers simply didn’t add up. China like most other countries was addicted, they must keep doing what they’ve been doing to earn money for their next “fix”. This is hardly unique, Australia is addicted to mining and the UK is addicted to financial engineering, Japan is addicted to ZIRP…..none of us can change what we are doing.
There is however a uniquely Chinese problem that will adversely impact their future and indirectly bring about an end to “Can kicking”. It’s rarely talked about in the international press but is openly acknowledged within China, the problem is the spoiled generation. I saw a lot of this in the last couple of years, especially in the children born in the big eastern cities. They are openly mocked in China, they are the first generation of One child families, so they were spoiled from birth, they never learned to share, negotiate or interact within a family, they simply got what they wanted.
These workers are now transitioning from being individual contributors to taking on junior management roles. In these new roles it is not so important what they can achieve alone, it becomes far more important to be able to motivate others AND manage team relationships, with all the personalities involved. Well guess what, they can’t even manage their own relationships, so they are dreadful people managers.
It is unfortunate that this generation is coming of management age at exactly the time that China needs to make such a large economic transition. I suspect that the systemic inefficiency resulting from this uniquely Chinese form of “mismanagement” will be the vector that ends can kicking and actually constrains China’s growth.
I would agree it is impossible to know when it will burst.
But I feel it would be hard to argue that if it does, it won't affect us significantly.
Yeah. It just goes on and on. People who can are fleeing Beijing because they don't want to go through another polluted winter like the last one with their kids. The apartment next to me and above me are now both empty, and listings in the complex are well up.
But the asking price for apts has gone from CNY23k a month to CNY25k per month, and sellers' asking prices are also up. It's just crazy.
Oski
6 Jun 2013, 12:45 AM
The mentioning of empty cities is not that significant , a empty city of 1.3 million people in China is equivalent to a mining town of 24000 in Australia, likely to affect that town but not Sydney or Melbourne , the same goes for China. 64 million empty new apartments in China by some estimates around 5% of population , not ideal but easily made into social housing. This China we talking about after all whatever it takes to keep the system in equilibrium.
I'm always pretty skeptical of the "empty cities" schtick. It's very easy to find empty cities, because the big developments are like cities in and of themselves. When the building is finished, the apartments in the complex are still a long way from being habitable - a new apartment in China is an empty concrete shell with no fitout, water, power, gas.... First you have to get the services connected and then you have to do the fitout. If everything goes smoothly, this takes 6 months. If there is some screwup with the management company or a permit missing, it can take well over a year. So if you want to find an empty city, just go into any big development 6 months to a year after building completion and you will see what looks like a fully-completed city with nobody living there. Go there 12-18 months after completion and it will still seem more than half empty.
Perthite
18 Jun 2013, 10:30 PM
I know it sounds like a lot....
I have heard their inflation is way over the official amount...
The central government fears two things: unemployment and inflation.
It's pretty-well documented that the basket of goods for inflation is rigged. First it is secret, and second, the way to find out what is in the basket is to see what happens when someone tries to raise the price of something. If the item is in the basket, then pressure gets brought to bear for that price increase not to happen. Taxi fares just went up about 15% in the first price hike since 2001. Pretty clear that taxi fares are in the basket.
What is harder to know is what inflation really is. For a start, food has to be a huge component in any real measurement because it is such a big portion of the average person's budget. But food prices are incredibly volatile - they go up and down a lot depending on season, weather, phase of the moon, market manipulation..... Also, nobody except the government is allowed to try to measure inflation. Any university that tries to do its own study gets stopped quick smart.
Australia has become more reliant on China as a buyer of its exports than any other trading partner in the last 63 years, surpassing even the dependence on Britain after World War II.
Not since the wool boom of 1950 has Australia been so reliant on a single trade relationship. Even Japan in the early 1970s and late 1980s was not as significant.
“As you become more exposed to one country, you become increasingly vulnerable to short-term shocks,” said Scott Haslem, a senior economist at UBS in Sydney…
Michael Pettis, a renowned “China bear”, said the surge in demand for iron ore is “wholly unsustainable” and will “reverse sharply”.
“I think there is a real possibility that we will return to the price levels of the turn of the century [$US50 a tonne]”…
According to Mr Pettis… the problems for Australia won’t end with a plummeting iron ore price. He believes a sharp economic slow down in China will see a surge in capital flight from the world’s second biggest economy, which will find its way to Australia.
“Australia could suffer from both a sharp drop in mining revenues and a relatively stronger currency than it needs,” he said.
Even former Morgan Stanley Asia Stephen Roach, the unofficial leader of the “China Bulls”, said Australia was in for a difficult period ahead. He doesn’t think China’s level of resource demand will fall but “the growth rate of resource demand will most assuredly drop.”
“The open ended hyper growth driving the super commodities cycle … is going to prove more challenging in the years ahead as China moves to services-led economic growth which is far less reliant on resources.”
A massive property bubble in China is about to go...pop!
Say this property bubble pops in China. What does it mean for us?
Well if it was Spain again, probably no effect, but since we and China are joined at the hip I think there might be quite large effects. A big decrease in their iron ore demand for starters since steel is a major component in the hi-rises they build there.
Well if it was Spain again, probably no effect, but since we and China are joined at the hip I think there might be quite large effects. A big decrease in their iron ore demand for starters since steel is a major component in the hi-rises they build there.
I don't think anyone could possibly predict the implications of a Spain type popping of the property bubble in China (if there is one). But I think it's safe to say that most people in the world would see some effect, and I'd say it would be mostly detrimental. Not something you want to wish for.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
The pessimists see Chinese growth falling to developed economy levels. The optimists see growth continuing at 7% or more for another decade.
Importantly, however, for Australia and Australian investors, the outcome is more clear cut. If the pessimists are right, Chinese growth will fall along with infrastructure investment and commodity prices will too. However, if reform proceeds as the optimists demand, fixed asset investment will still fall but be replaced more swiftly by other forms of less commodity intensive growth. In short, China will be fine but commodity prices will not be.
Either way, Australia and its miners lose.
So, is it a no-brainer then to sell miners? No, it’s not. Timing is everything. China is sending very mixed signals about when it intends to seriously embark on the reform process. Both the former leadership of Wen Jai Bao and that of the new in Li Keiqing have openly acknowledged the problem, yet both have continued to roll out mini-stimulus packages aimed at fixed asset investment and propping up the old model of growth, making the risk of stagnation worse.
This article is not long enough to inquire into the intense machinations of Chinese politics but it appears that China is bitterly divided between the reform-minded new government and those interests aligned with former President Jiang Zemin, which included the recently retired Prime Minister Hu Jintao. Zemin is heavily associated with the Shanghai elite that benefited spectacularly from the old development model and will lose if economic liberalisation is embraced.
Premier Li is a reformer and the theory runs that the current flush of Chinese stimulus is designed to give the new regime enough time to corner its opponents so that reform can be prosecuted with the greatest vigour once political dominance is established.
That leaves us with two potential scenarios for Chinese growth:
the reformers win and begin the rebalancing project in earnest, causing large falls in bulk commodity prices from mid-2014 (as well as the supply deluge already pushing them down) but either high or moderate growth continues in China the reformers lose and China lurches from stimulus to stimulus through another cycle that supports bulk commodities for several more years, culminating in stagnation and a Chinese financial crisis.
What should investors do?
Predicting the timeline for these events is impossible. But in the short term the massive supply response in the bulk commodities is likely to pressure prices even if China elects to postpone its adjustment. Earnings for the miners could still be good and given low valuations a decent rally is possible as markets focus on the cyclical over the structural.
It is also possible that such a process will see the Australian dollar stabilise at current levels until China’s structural challenge reasserts itself.
But in the medium and long term, the probable outcome is that Chinese reformers will prevail in the view that the costs of reform now outweigh the costs of the status quo. Either that or crisis ensues sooner or later.
Long term investors are thus better served looking beyond local miners for gains and can still be confident in a lower Australian dollar within an acceptable time frame.
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