A blog on Chinese economy & society

Posts Tagged ‘property

Bad debts galore?

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A slew of Chinese banks are reporting half year results, and most have reported lower bad debts ratios. Good news? Wait. Due to an explosion of property related loans in the H1, total bad debts had actually gone up.

China has a prudent down-payment policy, in the range of 20% to 60% (!). As such mortgages are actually prime assets of the banks. The weak link is loans to the property developers. Huaxia Bank, listed in Shanghai and known ninja loan maker, reported a 14.5% increase in bad debts to the developers. Citic Bank’s bad debts to property developers were up 10%. China Minsheng Banking Corp., one of the better managed ones (and perhaps more transparent?), actually surged by 78%!

In terms of bad debts ratios, all banks are still within the comfort zone. But with the tightening policies only kicking in mid-April, one has to wonder whether the bad debts situation will deteriorate, perhaps dramatically, in H2.


Written by Cindy Luk

August 17, 2010 at 12:03 am

The property lobby is having the upper hand…for now

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Despite global weakness, Shanghai actually went up 2.1% today. This is NOT an indication of faith in the global recovery, or any recovery, but rather an expectation of loosening of governmental controls over the property market.

Due to popular backlashes against runaway housing prices, Chinese government launched a series of cooling measures in April, causing a sharp drop in turnover (Shanghai saw a fall of over 75% in turnover) but the impact on prices has been marginal so far. To date, the developers have refused to cut prices, buttressed by record profits last year. However, the war of attrition is gradually starting to bite, and an association representing the developers has plead with the central government in an open letter to loosen the controls.

Despite repeated government responses of “No”, you can’t blame the public for trusting the developers more, as previous cooling measures all ended in sharp policy reversal in the face of economic slowdown. However, I think the government will hold out for longer this time, at least for one more quarter.

  1. Chinese slowdown will not be apparent until end of Q3. There’s still a wee bit of time.
  2. Popular discontent with extra-orbital housing prices is threatening the CCP’s legitimacy. Contrary to western conception, even an authoritarian government has to deal with popular opinion if it wants to stay in power.
  3. Housing policy is believed to be part of the portfolio of Li Keqiang, slated to the China’s next premier. Failing in a key policy initiative will become a major stumbling block on his personal route to power.

As such, I believe housing policy will remain unchanged (i.e. tight money, anti-speculation) till the end of Q3. Since I expect rapid deterioration of the Chinese economy in Q4, the government might be forced to revert its stance then.

Written by Cindy Luk

August 16, 2010 at 4:57 pm

Posted in China, Macro

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Battle lines hardened in the Chinese property market

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With the CBRC, China’s powerful banking regulator, banning 3rd mortgages and tightening other banking operations like securitization, it seems like the Chinese government, the central government at least, has hardened its resolve in pricking the property bubble.

However, the push back from the property lobby is forceful as well, especially now it seems that government is serious and the tightening measures might last a while. An economist from TsingHua University had calculated earlier on that if the tightening measures last for more than a year, more than 45% of Chinese property companies will encounter solvency problem.

A strong and faithful ally to the property lobby is China’s local governments. Yes, China is not all synchronized and monolithic, and there is indeed internal politics. Many ocal governments absolutely live on land sales. Due to the tightening measures, land sales had been way below budget during the first half of the year. In Hangzhou, a prosperous coastal city, the government sold only 22% of land budged for 2010. Shanghai, China’s money center, sold 29% of its annual plan during the same period.

So in order to secure more revenue, the local governments will definitely push for more loosening, especially now that the economy has weakened. One can only hope that the sane mandarins, who have been calling for “tolerance for a new lower growth rate”, will prevail, but somehow I’m not particularly optimistic.

Written by Cindy Luk

August 13, 2010 at 5:01 am

China to ban 3rd mortgages in key cities

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The Shanghai and other Asian markets have been choppy lately, mainly on the prospect of the Chinese government backing off from regulating the property market. So much so that property sales doubled last week in Beijing. Some other cities have even racked up price increases.

To prove that it’s indeed serious about pricking the property bubble, the powerful China Banking Regulatory Commission is now banning 3rd mortgages in Beijing, Shanghai, Shenzhen, and Hangzhou all together. Taking out 3rd mortgages in other cities, while still legal for now, will require 60% down payment and almost 200bp over prime rate.

Of course the central government worries about economic slowdown, but failing to regulate the property market risk serious popular discontent. With most full year GDP forecasts still in the 9%+ range, the tightening measures seem to be in place, for now.

As a side note, the 21 Century Business Herald has a follow up story on the stress test that raised so many eyebrows. Assuming a 30% drop in housing prices and 108bp  interest rate hike, the property portfolios of  sample banks would have registered 2.2 percentage point increase in their bad debts, and taking 20% hit to pretax profit.

Yes, painful, and would have been excruciatingly more so with a 60% fall in housing prices, but the system will not collapse. With the hindsight, it seems that the 60% fall stress test was ordered partly as a way to advertise to all speculators that the government is indeed serious and won’t be taken hostage by the property market. However, I expect the economy to slow dramatically in Q4, so it might have to sing a different tune by then.

Written by Cindy Luk

August 6, 2010 at 1:56 am

How bubbly is the Chinese property market?

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This is the million dollar question and I’ve decided to give it a try. Where do I start? How about the developers inventory?

The National Bureau of Statistics just announced yesterday that developer’s inventory for residential housing by the end of June at 106mn sqm, or roughly 1.5mn homes assuming an average of 70 sqm (753sf) per home. This amounts to a mere 1.5 months of new home supply on last year’s sales. Now, 2009 was a brisk year. But even if I use 2008 figure, when sales dived 20% due to the financial crisis, it equates to 1.8 months of supply, far from horrendous if you consider that the US new homes supply seldom dip below 4 months even in the best of times.

Why is this focus on new homes supply important? Due to the requirement for 30% down payment for homeowners, the weakest link for a Chinese bank is actually lending to the developers, the conduit in which the bursting of a property bubble may morph into a full-fledged financial crisis.

Of course, the tightening measures on the property market only kicked in mid-April and the data is only from end of June. Given time, it’s definitely plausible that inventory may build up further and prices may plummet (so far it has barely budged). Which is why the Chinese banking regulator is performing a stress test on the assumption of 60% pricing fall in the worst case scenario. But should this be taken as an admission that Chinese property market will indeed collapse? I think not.

According to the National Bureau of Statistics, housing price index rose 14% year-on-year by June this year. Before you scream communist propaganda, I should add that this index is compiled with data from 70 Chinese cities, with huge variance among them. Beijing registered 22% rise during the period, while Sanya of Hainan (think Florida in terms of climate, location, and economy) rocketed by 59%! Private economists, like Stephen Green of Standard Chartered, have also noted the geographical concentration of the housing bubble.

So all in, I think the coming bursting, while painful, will not be catastrophic. The froth is concentrated in a few key cities and the banking system is insulated to a degree by the down payments. The US financial crisis had its root in leverage, rather than the fall of housing prices.

Written by Cindy Luk

August 5, 2010 at 1:08 am

Chinese slowdown is here to stay

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The HSBC China PMI fell to 49.4 in July, showing a contraction in the economy. Although the government’s PMI for July was reported at 51.2, and still expanding, this distinction is largely superfluous as the deceleration is obvious from both accounts. The government’s survey differs from that of HSBC in that it focuses more on large and state-owned companies.

The economic slowdown, though expected, still buoyed the Chinese and regional markets. Are their hopes for new stimulus justified? I would think no.

The side effects from the first try are still very pronounced in China. CCTV, China’s state-owned television station and not exactly known for exposing the darker underbelly of the nation, ran a program recently about a “ghost city” in Tianjin, housing developments that are largely vacant due to speculative demand. Inflation on foodstuffs is over 10%. Contrary to popular belief, the 1989 Tiananmen Square protest was really driven by runaway inflation. So the CCP, mindful of their “mandate of heaven”, will most likely stay on the cautious side and refrain from having another puff of addictive stimulus.

Written by Cindy Luk

August 3, 2010 at 1:33 am

Posted in China, Macro

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Vacant homes in China

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How severe is the Chinese property bubble is one of the most heated debate these days. An earlier report from the South China Morning Post about 64.5mn vacant homes, enough to accommodate 200mn people has everybody (as in here, and here) talking.

The problem with these seemingly shocking figures is that China had only completed 577mn sq m of residential housing in 2009 (National Bureau of Statistics), the highest amount in 10 years. Even assuming a conservative 70 sq m (753 sf) per home, it still comes up to only about 8mn homes.  To have 64.5mn vacant homes would imply that every unit built in the past 10 years is vacant!

So what is the true vacancy rate? The developers insist that it’s only in the single digit (yeah right!) while the doomsayers would have you believe it’s closer to 30%. No, I don’t know what the true number is. But reports like this only serve to illustrate that most in the media have already made up their mind on the state of Chinese property market, and as such any writeup they offer may simply be propaganda from either side of the debate.

Written by Cindy Luk

August 1, 2010 at 2:24 am

Posted in China, Industries & Companies

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