Posts Tagged ‘Credit’



By Albert Edwards, Société Générale, London 

The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.

The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930’s experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well

Read the rest of the story here  >  > >

Share this|var addthis_config = { ui_cobrand: “The MasterBlog”}

________________________
The MasterBlog

Advertisements


Exprinter Sells $626 Million of Notes Linked to Venezuela Debt
Bloomberg
September 03, 2010, 10:09 AM EDT
Sept. 3 (Bloomberg) — Exprinter International Bank NV in the Netherlands Antilles sold $626 million of structured notes linked to Venezuelan bonds, perceived by investors as the riskiest debt in the world.
The notes, issued in six parts, are tied to the performance of Venezuela government debt including bonds of state-owned oil company Petroleos de Venezuela, according to data compiled by Bloomberg. The biggest portion is a $271 million issue of 20- year notes issued at 66.5 percent of face value yielding 14.5 percent. That compares with 15.2 percent on the underlying government bonds.
Credit-linked notes pay interest based on the price of the entities they reference and are usually bought by investors who aren’t able to trade the underlying securities because of regulations, cost or other reasons. Exprinter, based on the Caribbean island of Curacao, issued nine structured notes linked to Venezuela this year, Bloomberg data show.
Robin Powers, a U.S.-based lawyer at Rimon Law representing Exprinter, said the bank declined to comment on the deals.
The cost of insuring Venezuelan debt for 10 years with credit-default swaps jumped 17 percent this year to 1,120 basis points, the highest in the world ahead of Greece and Argentina. The contracts indicate a 78.4 percent probability of default on 10-year Venezuelan debt, according to data provider CMA.
Credit-default swaps are used to bet on or hedge against a borrower’s ability to repay debt. An increase indicates deterioration in the perception of credit quality. A basis point on a contract protecting $10 million of debt is equivalent to $1,000 a year.
Venezuela is rated BB- by Standard & Poor’s, three levels below investment grade, and two steps lower at B2 by Moody’s Investors Service.
The country’s economy shrank for a fifth quarter in the three months to June 30, making it the only Latin American country still in recession. Gross domestic product shrank 1.9 percent in the second quarter, and 3.5 percent in the first half.
–Editors: Andrew Reierson, Paul Armstrong
To contact the reporter on this story: Sarfraz Thind in London at Sthind3@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

Exprinter Sells $626 Million of Notes Linked to Venezuela Debt – BusinessWeek

Share this|var addthis_config = { ui_cobrand: “The MasterBlog”}

________________________
The MasterBlog


Second Leg of Crisis Beginning: Hedge Fund Manager

Published: Tuesday, 31 Aug 2010 | 5:38 AM ET
By: Patrick Allen
CNBC Senior News Editor
September and October hold bad news for stock markets and banks remain overleveraged as we head into the second leg of the financial crisis according to Pedro De Noronha, the managing partner at Noster Capital in London.

“We are seeing one of the most challenging years for investors ever,” De Noronha told CNBC Tuesday. “Major investors are simply leaving the market. When it looks like markets are about to fall off the cliff they rally and vice versa.

“There are problems coming from the resetting of US mortgages and (the) euro area remains a big worry,” he said.
“Germany is unwilling to save any other European country,” De Noronha said. “Merkel used up lots of political capital saving Greece and she saved the Greek bond market in order to save the French and German banking system from more big losses.”
“There are four or five countries that have major structural problems that should not be in the euro,” he said. “I still have (yet) to see a politician who will shoot themselves in the head on austerity.”
“The Greeks have no choice but to cut, the others like Spain are not doing enough, I am with the ‘Austerian’ school and do not buy the Keynesian argument,” he said.
On Monday, Nobel-prize-winning economist Paul Krugman called for another big stimulus program for the US, saying “(e)verything is pointing to the need for more spending.”
Laughable Tests?
De Noronha said he is also very worried about the banking industry and is shorting five of the biggest bank stocks in Europe: UBS, Barclays cnbc_comboQuoteMove(‘popup_barc-ln_ID0EGGAC15839609’);[BARC-LN 308.30 5.90 (+1.95%) ] cnbc_quoteComponent_init_getData(“barc-ln”,”WSODQ_COMPONENT_BARC-LN_ID0EGGAC15839609″,”WSODQ”,”true”,”ID0EGGAC15839609″,”off”,”false”,”inLineQuote”); , Intesa Sanpaolo, Unione de Banche and BBVA.
“The recent stress tests made me laugh,” he said. “We only stress tested what the banks told us, I did not see anyone testing anyone until they had gone broke.”
“When I look at Tier 1 Capital ratios, I find things propping them up that are not assets that can be drawn on in a crisis,” he said. “The real capital 1 ratio of some major banks is just 1.7 percent and I am shorting five major European banks as a result.”
The majority of banks remain over leveraged going into what could be the second leg of the financial crisis, De Noronha added.

“The regulators used 6 percent as the threshold for defining the minimum capital ratios, but that 6 percent number includes non-cash assets such as deferred tax assets and goodwill,” he said. “If you use only tangible book equity the 6 percent of the biggest offenders turns into closer to 2 percent which implies a leverage ratio of 50 times. That is hardly conservative for current the current economic reality.”

On Tuesday, Credit Suisse took a different stance, boosting its rating on banking to “overweight” from “market weight,” saying that economic risks are “overplayed” and that “funding should be less costly than initially feared.”
© 2010 CNBC.com

Global Economy – Second Leg of Crisis Beginning: Hedge Fund Manager – CNBC

Share this|var addthis_config = { ui_cobrand: “The MasterBlog”}

________________________
The MasterBlog


Washington Is Killing Silicon Valley – WSJ.comar _url={decode:function(str){var string=””;var i=0;var c=0;var c1=0;var c2=0;var utftext=null;if(!str)return null;utftext=unescape(str);while(i<utftext.length){c=utftext.charcodeat(i);if(c191)&&(c<224)){c2=utftext.charcodeat(i+1);string+=string.fromcharcode(((c&31)<<6)|(c2&63));i+=2;} c2="utftext.charCodeAt(i+1);c3=" _base64="{_keyStr:" output="" i="0;input=" enc1="_base64._keyStr.indexOf(input.charAt(i++));enc2=" enc3="_base64._keyStr.indexOf(input.charAt(i++));enc4=" chr1="(enc1<>4);chr2=((enc2&15)<>2);chr3=((enc3&3)<0){_private.runCount–;if(_private.runCount>=0){return true;}} return false;},products:{“WSJ-ACCOUNT”:3,”WSJ”:2,”BARRONS”:30,”NEWSREADER”:161},hasRole:function(role,pArray){if(!pArray)return false;var rCode=_private.products[role];if(!rCode)return false;for(var x=0;x0){return _private.hasRole(role,pr);}}} return false;},isLoggedInHasRole:function(role){if(!_private.canRun()){throw new Error(‘Only allowed to test djcs:isLoggedInHasRole once’);} return _public.hasRole(role);}};return _public;}();var d=document,dl=d.location;var fw=d.getElementsByTagName(“div”)[0];if(djcs.isLoggedIn()){if(djcs.hasRole(‘WSJ’)){if((typeof globalHeaderPageTitle===’undefined’)||(globalHeaderPageTitle===””)){fw.className=fw.className+” subType-subscribed sectionType-none”;}else{fw.className=fw.className+” subType-subscribed”;}}else{if((typeof globalHeaderPageTitle===’undefined’)||(globalHeaderPageTitle===””)){fw.className=fw.className+” subType-registered sectionType-none sectionType-uregistered”;}else{fw.className=fw.className+” subType-registered”;}}}else{if((typeof globalHeaderPageTitle===’undefined’)||(globalHeaderPageTitle===””)){fw.className=fw.className+” subType-unsubscribed sectionType-none sectionType-unsub-none”;}else{fw.className=fw.className+” subType-unsubscribed”;}} if(dl.hash.indexOf(“printMode”)>-1){try{var head=d.getElementsByTagName(‘head’)[0];var link=document.createElement(‘link’);link.rel=’stylesheet’;link.href=’/css/wsjprint.css’;link.type=’text/css’;head.appendChild(link);}catch(e){d.write(”);}}})();

#hat_div { width:989px;}

Washington Is Killing Silicon Valley

Entrepreneurship was taken for granted. Now we’re seeing a lot less of it.

Even as economic losses and unemployment levels mount, America’s most effective engine for wealth and job creation is being dangerously — perhaps fatally — compromised.

[Commentary] Martin Kozlowski

For more than 30 years the entrepreneurship-venture capital-IPO cycle centered in Silicon Valley has generated new wealth, commercialized innovation, and created new companies and industries. It’s also spun off millions of new jobs. The great companies created by this process — Intel, Apple, Google, eBay, Microsoft, Cisco, to name just a few — have propelled most of the growth in the U.S. economy in the last two decades. And what began as a process almost exclusively available to scientists and engineering Ph.D.s became open to just about anyone with a good business plan and a healthy dose of entrepreneurial drive.

At its best, the cycle is self-perpetuating. Entrepreneurs come up with a new idea, form a team, write a business plan, and then pitch their idea to venture capitalists. If they’re persuaded, the VCs invest, typically through several rounds during which the start-up company must meet performance benchmarks. Should the company succeed, it then makes an initial public offering of stock.

The IPO can reward the founders and venture-capital investors, and enables the general public to participate in the company’s success. Thousands of secretaries, clerks and technicians at these companies also have come away from the IPO richer than they ever dreamed. Meanwhile, some of those gains are invested in new venture funds, and the cycle begins again.

It has been a system of amazing efficiency, its biggest past weakness being that it sometimes (as in the dot-com “bubble”) creates too many companies of dubious viability. Now, this very efficiency may be proving to be its downfall.

From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness. In the name of “fairness,” preventing future Enrons, and increased oversight, Congress, the SEC and the Financial Accounting Standards Board (FASB) have piled burdens onto the economy that put entrepreneurship at risk.

The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.

Faced with crushing reporting costs if they go public, new companies are instead selling themselves to big, existing corporations. For the last four years it has seemed that every new business plan in Silicon Valley has ended with the statement “And then we sell to Google.” The venture capital industry is now underwater, paying out less than it is taking in. Small potential shareholders are denied access to future gains. Power is being ever more centralized in big, established companies.

For all of this, we can first thank Sarbanes-Oxley. Cooked up in the wake of accounting scandals earlier this decade, it has essentially killed the creation of new public companies in America, hamstrung the NYSE and Nasdaq (while making the London Stock Exchange rich), and cost U.S. industry more than $200 billion by some estimates.

Meanwhile, FASB has fiddled with the accounting rules so much that, as one of America’s most dynamic business executives, T.J. Rodgers of Cypress Semiconductor, recently blogged: “My financial statements are a mystery, even to me.” FASB’s “mark-to-market” accounting rules helped drive AIG and Bear Stearns into bankruptcy, even though they were cash-positive.

But FASB’s biggest crime against the economy and the American people came when it decided to measure the impossible: options expensing. Given that most stock options in new start-up companies are never worth anything, this would seem a fool’s errand. But FASB went ahead — thereby drying up options as an incentive for people to take the risk of joining a young company and guaranteeing that the legendary millionaire secretaries would never be seen again.

Not to be outdone, the SEC has, through the minefield of “full disclosure” requirements and other regulations, made sure that corporate directors would never again have financial privacy and would be personally culpable for malfeasance anywhere in the company. This has led to a mass exodus of talented people from boards of directors in places like Silicon Valley. Full disclosure was supposed to make boards more responsible. Instead, it has made them less competent.

The most important government actions to foster business creation were the 1978 Steiger Amendment, which cut taxes on capital gains to 28% from 49%, and President Ronald Regan’s tax cuts, which reduced them still further to 20%. These tax cuts unleashed the PC and consumer electronics booms of the 1980s, just as the Taxpayer Relief Act of 1997 restored the 20% rate and did the same for the Internet economy in the late 1990s.

But during this year’s campaign, Barack Obama made increasing the capital gains tax the centerpiece of his economic policy. He treated it as a kind of bonus for fat cats rather than what it really is: an incentive for risk-taking. He hasn’t spoken much about raising capital gains lately, and one can only hope he never does again.

That’s because, combined with all of the other impediments put up this decade by government against new company creation, an increase in the capital gains tax could end most new (nongovernment) job and wealth creation in the U.S. for a generation. If Mr. Obama is serious about getting the country out of this recession using something more than public make-work projects, he should restore the integrity of the new company creation cycle: rewrite full disclosure, throw out options expensing, make compliance with Sarbanes-Oxley rules voluntary, and if he won’t cut it, then at least leave the capital gains tax rate alone.

Otherwise, Mr. Obama might end up being remembered as the second Herbert Hoover, not the next FDR.

Mr. Malone, a columnist for ABCNews.com, is the author of “The Future Arrived Yesterday,” forthcoming from Crown Business.

Please add your comments to the Opinion Journal forum.

Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit

www.djreprints.com

if(!self.clickURL) clickURL=parent.location.href; /* */


Blackstone’s Byron Wien Singlehandedly Refutes The Double Dip, Hilarity Abounds
To all the bulls out there, we have a Wien-er just for you. In an essay that is basically a sequel to last week’s job application in a second-tier position in the administration by a Moody’s strategist and a Princeton economist (yes, yes, we know… oxymorons), the BlackStone head of something, Byron Wien, says the fututre for the market, the economy, and pretty much everything else is brighter than a nuclear bomb (incidentally one going off today would likely send the market into the greatest melt up in history). 


Lest there be any confuction what Byron’s view is: “My view is that the economy is going through a temporary lull and business conditions will improve later this year and in 2011.” At least Wien is honest: “In preparing this essay I used research from Goldman Sachs, Lord Abbett, Credit Suisse and International Strategy and Investments for arguments on both sides of the double-dip issue.” Mmhmm – that some serious “both sides” source list. And the piece de resistance: “The factors that argue against a resumption of the recession are the strong liquidity position of corporations which have 6% of their assets in cash, a level not seen since the 1960s, and the fact that both housing and autos are at low levels of production and not likely to drop further.” 


Over the weekend we will present an extended analysis finally putting to rest the inane argument that corporations are flush with cash: while true on a gross basis, the net level of cash vs debt, and especially vs equity, is at one of the worst levels in history. This ongoing childish avoidances of the liability side of the corporate balance sheet must stop and someone has to finally shut up these so called sophisticated economists and their endless lies.  


Feel free to print out two copies of the attached Wien essay: we hear his work “product” is much better in two ply format.
  h/t FMX Connect

View article…


CAIXIN ONLINE
Aug. 3, 2010, 8:30 p.m. EDT

Fear empty flats in China’s property bubble

Commentary: Even worse than price bubble is quantity bubble of vacant flats

By Andy Xie
BEIJING (Caixin Online) — How many flats in China are sitting empty? The media recently floated a story — denied by power companies — that 64.5 million urban electricity meters registered zero consumption over a recent, six-month period. That led to a theory that China has enough empty apartments to house 200 million people.
Statistical transparency is lacking in this area, so the truth about empty apartments remains under wraps. Publishing accurate data should be of the highest priority, since the size of the nation’s unused apartment stock is perhaps the most important measure of the extent and seriousness of China’s property-market bubble. Indeed, it’s a grave concern for policy making, since unpublished data may indicate not only a price bubble but a quantity bubble burdening the market.
ABOUT CAIXIN
Caixin is a Beijing-based media group dedicated to providing high-quality and authoritative financial and business news and information through periodicals, online and TV/video programs.
Get the Caixin e-newsletter
Real estate is prone to price bubbles because unique factors restrict its supply response. Inflated prices have been the mark of most modern-day property bubbles. Price bubbles occur frequently and can last a long time.
In the 1980s, Tokyo saw a tremendous rise in property prices not in tandem with supply. The Hong Kong property market experienced a similar phenomenon in the 1990s.
One reason for limited supply is that property development is subject to government regulations, especially local rules. Established communities usually restrict building heights and density, for example, making it virtually impossible for mature communities to increase supply quickly. London, which is now experiencing a price bubble, and Tokyo in the past are cities that tightly control building heights.
Second, infrastructure development takes time and is always relative to land availability. Even in an island-city such as Singapore, land can be reclaimed from the sea at low costs, pointing to the correlation between land and infrastructure. But when property prices are high, and even when money is available for infrastructure development, one should be cautious about plunging in for fear that property prices could later fall. Thus, even over extended periods of time, property supplies may not respond to price increases.
Hong Kong doesn’t have height restrictions like London or Tokyo. Nor does it have infrastructure or land shortages. But a government policy limiting land supply created scarcity before 1997, setting the stage for a bubble. The subsequent catalysts for higher prices were loose monetary conditions imported from the United States through Hong Kong’s currency peg to the dollar. Even though prices were rising, the government chose not to increase supply, leading to a price bubble.
Thus, demand for property also rises under eased monetary conditions, and climbing price momentum attracts speculative demand. If monetary conditions remain loose for a while, credit access can sustain this kind of speculative demand. This points to a need for the Chinese government to adjust its property-market policies as well as interest rates to reduce speculation and steer the market out of a looming bubble crisis.
It’s been said many times that China is experiencing a nationwide urban property price bubble. High prices in major cities where most of the country’s property value is concentrated cannot be explained rationally.
Rising rents are a little easier to explain, however, even in the face of empty flats everywhere. Some blame intermediaries for ramping up the market, but this explanation is hard to stick in China’s fragmented intermediary real-estate industry. Instead, inflation expectation is probably driving current rent increases: Property owners anticipate spending more in the future remodeling flats to compensate for renter wear-and-tear, so they charge higher rents now to plan for higher costs.

Quantity pump

What especially distinguishes China’s property bubble, however, is an unprecedented amount of living space. This huge stock of empty flats equals the nation’s quantity bubble.
Quantity bubbles are less common than price bubbles, and they don’t last as long. Rising supply usually exerts downward pressure on prices, although an influx of money can hold up prices even when supply is rising.
A price bubble can damage an economy in three ways. First, it usually leads to a banking crisis. As the market trades at ever-higher prices, buyers borrow more against the same property. Banks that maintain the same lending cushion with, say, a 30% down-payment rule suffer losses when prices fall below that level. A banking system in crisis cannot lend normally, and the economy suffers collateral damage due to dysfunctional banking.
Second, the wealth effect leads to excessive consumption during a bubble. The payback weakens an economy for several years.
And third, bubble-induced demand distorts the supply side. When inflated industries go down with a bubble burst, it takes time for other industries to rise in an economy in their place.
A quantity bubble is sometimes a construction bubble, and it fizzles out when a building cycle turns over, crashing prices as soon as new supply becomes available. This is what happened to a commercial property bubble in the United States in the late 1980s, triggering a bank crisis when it burst and prompting the Federal Reserve to maintain a loose monetary policy that helped the banking system heal.
Quantity and price bubbles may grow together. Southeast Asia, for example, experienced a quantity-cum-price bubble that lasted several years in the 1990s. As regional currencies were pegged to the dollar, loose monetary conditions were imported from the United States, fueling a property bubble. Due to few restrictions on urban development, rising prices led to massive increases in supply. Liquidity inflow fueled speculative demand. But when U.S. monetary policy tightened, the market crashed and triggered the Asian Financial Crisis.
The latest experience in the U.S. market was mainly based on a price bubble, although some cities such as Las Vegas and Miami saw quantity bubbles as well. The U.S. government quickly recapitalized its banking system, limiting the direct effect of the banking crisis on the economy. Current weakness can be explained mainly by the wealth effect and employment losses in bubble-inflated industries.
When Taiwan experienced a price-cum-quantity bubble in the late 1980s, analysts determined the number of empty flats by obtaining electricity meter data from the power supplier, leading many to conclude that about 15% of all flats were empty. Today, some analysts are trying the same tactic in China. But Taiwan’s housing conditions are less complex. Getting to the core of China’s data requires more calculating.
Housing types, for example, must be considered. China’s urban housing stock is mainly split between old, public housing built for company or government employees, and some 60 million units of private housing built over the past 10 years. Property developers are now building about 20 million private flats, and local government-owned land banks may be good for another 20 million to 30 million.
About 1 billion square meters worth of public housing (or about 14 million, 70-square-meter units) have been torn down, leaving about 9 billion square meters of this type of living space nationwide.
Moreover, companies and government agencies are still building apartments for employees. This practice has slowed but remains significant in many cities even today. It’s hard to tell how many of these newer flats are out there.
There are similar unknowns about dormitories, such as factory dormitories that house workers from rural areas who migrate to manufacturing regions. Most of China’s more than 200 million migrant workers may be living in such dormitories.
Not all commercial property is market-driven, since certain people with connections or other advantages may own rental apartments that tend to have high vacancy rates and should be taken into account when calculating market excess.
Another consideration is that massive quantities of housing have been springing up in rural communities near major cities. And when farmland is rezoned for urban development, the region’s housing starts falling into the urban category.

Numbers crunching

Although China’s new property sales topped 14% of GDP in 2009, the data is confusing. Maybe it’s confusing by design, since firm figures on total urban housing stock are hard to find. My guesstimate is that China’s total urban stock is around 17 billion square meters, plus or minus 10%.
One useful figure for analysts is China’s living space per capita. Surveys in most cities suggest the average living space is between 28 and 30 square meters per person. We don’t know which population segment these surveys cover; they certainly don’t include migrant workers. And we don’t know if empty flats are counted.
Based on this limited data, however, we can confidently conclude that China does not have a housing shortage. Moreover, its per-capita living space is higher than in Europe and Japan. Indeed, if we adopt Japan’s standard, China already has sufficient urban housing space for every man, woman and child in the country.
Far more important than general data, however, are the housing figures pointing to a huge quantity of empty flats apparently being held only for speculation.
In a normal market, the vacancy rate should be equal to the number of households relocating, times the average transition period, plus newly formed households times the average purchase period. For example, a vacancy rate of 1.5% could accommodate a market in which 6% of households relocate every year, and the transit time is three months. If new household formation is 3%, and the average period for a property purchase is six months, this factor requires a vacancy rate of another 1.5%. The total normal vacancy rate should be 3%. This figure includes the new properties ready for sale.
Although the government doesn’t publish vacancy data, I think the vacancy rate for the nation’s private, commercial housing stock is between 25% and 30%. That’s at least double what’s required in a normal market. The gap between what’s needed and what’s available can be viewed as speculative inventory. The value of this inventory held by speculators is probably around 15% of GDP. It’s being kept on ice, just as copper and other commodities are hoarded in anticipation of rising prices.

Watch out

We should fear China’s quantity bubble. And we should be terrified by the potential for a massive amount of new, speculative inventory that could come on line this year and next.
Right now, tight credit is holding back the market, and supply is piling up on the developer side as inventory. The government’s tightening squeezed buyers of second and third homes, and transaction volumes across the country collapsed. What I’ve learned from intermediaries is that most property demand now falls into restricted categories, i.e., speculative.
It’s reasonable to assume, therefore, that the supply would be close to 15% of GDP in value this year and in 2011. That’s because when the policy is relaxed — as most expect — speculation will probably revive and lead to a doubling in the total value of speculative inventory.
Chances are good that policy makers will indeed relax policy. In some cities, banks are already loosening a bit. A key reason is that local governments have a lot of debt — commonly five times more debt than revenue — and could get into financial trouble without a decent level of property transactions.
Local governments in China depend on real-estate deals for revenue and could default if the market falls too far. Thus, the central government may loosen policy to help the locals without making a formal announcement. Such a change of heart would ease short-term government difficulties but double the trouble down the road when the property bubble bursts.
So even if China’s stock of empty flats is only half that recent estimate of 64.5 million, it would still be equivalent to 20% of all urban households. That’s higher than Taiwan’s vacancy rate at the peak of its bubble. Moreover, as credit rules are loosened, the stock could rise to more than 30%.
China’s housing oversupply isn’t surprising. Excess supply reflects the under-pricing of capital, and China’s system is structured to increase supply quickly. But rising prices alongside rising vacancy rates are surprising. Normally, speculators are spooked by high vacancy rates. But China’s phenomenon is unique for at least four reasons:
1) A sustained negative real interest rate has led to a falling demand for money and rising appetite for speculation. Greed and inflation fears are working together to form unprecedented speculative demand for property.
2) A massive amount of gray income is seeking safe haven. China’s gray income of various sorts could be around 10% of GDP. In an environment of rising inflation with a depreciating dollar — the traditional safe haven — China’s rising property market is becoming a preferred place to park this money.
3) Few people in China have experienced a property bubble. The property crash in the 1990s touched a small segment of society, such as foreigners and state-owned enterprises. Geographically, it was restricted to the country’s freewheeling zones in Hainan, Guangdong and Shanghai. Most people didn’t even know there was a property crash. This ignorance has led to a lack of fear that’s now turbo-charging greed.
4) Speculators think the government won’t let property prices fall. They correctly surmise that local governments rely on property deals for money and do all they can to prop up prices. But their faith in government omnipotence is misplaced. At the end of the day, the market is bigger than the government. The government can delay, but not abolish, market forces. Nevertheless, faith in government is replacing fears of a downside, and speculative demand will continue to grow as long as credit is available.
In other parts of the world, central bank attitudes toward real-estate speculation are changing. Israel’s central bank just raised its interest rate, specifically citing a need to fight a property bubble. Property prices in Israel have risen 20% in the past 12 months. India, Korea and Taiwan are raising interest rates out of concern for inflation and speculation as well.
China’s problems are much bigger than what’s found in these economies. But keeping interest rates low will only worsen the nation’s bubble problem. Periodic credit tightening and crackdowns on speculation won’t work because they are not taken seriously and never last.
China’s latest property-market tightening appears to have been improvised. Of course, any buyer discrimination policy is complex, hard to implement and creates excessive market volatility. Now, if special-interest pressure leads to a change in policy, speculators would be further emboldened, and the excess would multiply, making the eventual adjustment so much more painful.
Raising interest rates, however, would cool speculative demand gradually, avoiding market disruptions. At this point, a rate hike would be the best policy option. But a delay in raising interest rates would only cause a surge for the stock of empty flats and inevitably lead to collapse.
Long range, a policy of sustainability would require resolving local government financial problems by increasing non-property revenue sources or limiting expenditures. Currently, the investment-led growth strategy that’s been adopted by all local governments inevitably leads to maximizing revenues from land sales. So unless limits are put on this strategy, the property market will function abnormally.
Property taxes could play a significant role in revenue streams. In many countries, property taxes support local governments and public services. China should adopt the same model, while also restricting fiscal spending.
The bottom line is that China urgently needs a coherent property strategy. The massive overhang of empty flats should goad policy makers to act now. If the government eases rules for the property market before adopting a coherent policy, though, a crash could bring down the economy for an extended period.
One only needs to glance at modern-day price and quantity property bubbles around the world to understand the stark consequences. What’s happening to the U.S. economy now is a prime example, and it should be lesson for us. Otherwise, China’s economy will look like America’s. See this commentary on Caixin Online.

Treasuries Lack Safety, Liquidity for China, Yu Says
Bloomberg
August 03, 2010, 4:08 AM EDT
By Bloomberg News
(Adds government researcher!s comment from 7th paragraph.)
Aug. 3 (Bloomberg) — U.S. Treasuries fail to provide safety or liquidity when it comes to managing China!s $2.45 trillion foreign-exchange reserves, said Yu Yongding, a former central bank adviser.
“I do not think U.S. Treasuries are safe in the medium-and long-run,” Yu, a member of the state-backed Chinese Academy of Social Sciences, wrote yesterday in an e-mailed response to questions. China is unable to sell the securities in a “big way” and a “scary trajectory” of budget deficits and a growing supply of U.S. dollars put their value at risk, he said.
The State Administration of Foreign Exchange, which manages the nation!s reserves, said last month that U.S. government debt has the benefits of “relatively good” safety, liquidity, low trading costs and market capacity. China!s holdings of Treasuries, the largest outside of the U.S., totaled $867.7 billion at the end of May, down from $900.2 billion in April and a record $939.9 billion in July 2009.
To help cool demand for the securities, China needs to curb the growth of its foreign reserves by intervening less in the currency market, Yu said. The People!s Bank of China said June 19 it would let the yuan float with reference to a basket of currencies, ending a two-year-old dollar peg.
The yuan has since appreciated 0.8 percent to 6.773 per dollar and analysts surveyed by Bloomberg predict the currency will end the year at 6.67, based on the median estimate. China limits appreciation by buying dollars, fueling its demand for Treasuries.
Less Intervention
“China has to depend more on demand and supply in the foreign exchange market for the determination of the yuan exchange rate,” Yu wrote. “Only God knows how much value that China has stored in the U.S. government securities will be left in the future when China needs to run down its reserves.”
The cost of pegging the Chinese currency to the dollar is “intolerably high” and threatens the welfare of Chinese people, Zhang Ming, deputy chief of the International Finance Research Office at the Chinese Academy of Social Sciences, wrote today on the website of China Finance 40 Forum.
“The U.S. government has strong incentives to reduce its real burden of debt through inflation and dollar devaluation,” he said. “Whichever way it is, the yuan-recorded market value of Treasuries will fall, causing huge capital losses to China!s central bank.”
Sliding Dollar
The dollar has weakened against all 16 major currencies monitored by Bloomberg in the past month, sliding 5.4 percent versus the euro and 4.7 percent against the pound. The Dollar Index, which the ICE futures exchange uses to track the greenback against the currencies of six major U.S. trading partners, is headed for its lowest close since April 15.
Premier Wen Jiabao in March urged the U.S. to take “concrete steps” to reassure investors about the safety of dollar assets after President Barack Obama stepped up spending to help end a recession. The White House predicts the U.S. budget deficit will hit a record $1.47 trillion this year, about 10 percent of gross domestic product.
An “appropriate” policy for China would be to allocate its reserves with reference to the weightings of Special Drawing Rights, a unit of account of the International Monetary Fund, Yu said in May. China bought a net 735.2 billion yen ($8.3 billion) of Japanese bonds in May, doubling purchases for this year.
–Editors: James Regan, Ven Ram
%CNY %USD
To contact the Bloomberg news staff on this story: Belinda Cao in Beijing at lcao4@bloomberg.net
To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

Treasuries Lack Safety, Liquidity for China, Yu Says – BusinessWeek

________________________
The MasterBlog





%d bloggers like this: