2017-10-23

New Home Prices Rise 0.2pc, Top Tiers Cool


New home prices rose 0.2 percent in September. The first-tier cities (and Xiamen) fell by an average of .01 percent. The 7 "hot" second-tier cities fell by an average of 0.08 percent. None of these 12 cities reported rising prices. Existing home prices rose 0.21 percent. Prices fell in the first-tier, but rose slightly in the "hot" second-tier cities.

NBS: 2017年9月份70个大中城市住宅销售价格变动情况

China Topping

For the past 18 months or so, I've said the rally in commodities is the best sign of an inflationary recovery. If prices keep moving higher, it doesn't matter if its real demand or global currency devaluation, it will signal an exit from the post-2008 low growth environment. However, I still believe this is a massive topping process. Xi Jinping's bold 30-year vision looks a lot like a social mood top. Only 5 years ago, one of the big goals was doubling incomes in 10 years. After 5 years of financial bubbles and a brush with a global recession, China's turned even bolder. The shift in vision only makes sense in the context of social mood, the fundamentals argue for a much more humble, circumspect China that needs to clean house before pressing on with a grand strategic vision.

Balding's World: Everything We Think We Know About Chinese Finances is Wrong
The absolute size and growth of assets imply there will be enormous (as in Biblical) costs to deleverage. Let me give you a simple example. Let’s assume a flat rate of economic financialization by which I mean that nominal GDP and systemic financial asset growth are equal. For our case here, I’m going to use similar but round stylized numbers. In our world, financial system assets are equal to eight times nominal GDP. Now, let’s assume that both financial system assets and nominal GDP grow at 10%. In this stylized but similar world, financial system assets will have grown by an amount equal to 80% of GDP. If this both nominal GDP and financial system assets grow at 10%, by 2025, China will have financial system assets equal to approximately 1,900% of nominal GDP. Because total banking system assets are so much larger than nominal GDP, simply growing both at the same pace will continue to lever up the economy.

This might actually explain one unique data point which no one has a good explanation for, including myself. For a number of year, fixed asset investment in China has been above 80% of GDP. Through the first three quarters of 2017, it is only 3%. It has been puzzling to many how FAI could top 80% of GDP even with the growth in debt that we saw. That was simply an amazing number. Well if there was unseen asset growth of equal to twice official banking system assets, this would explain how FAI could comprise that amount of GDP. However, this implies that China has been much much more dependent on credit and money growth to drive GDP than anyone, myself could have believed.
Back in March I showed how China cannot be deleveraging: China Can't Deleverage, At Least Not Yet
Assume China's nominal GDP is 80 trillion yuan, and debt is 160 trillion yuan (200 percent of GDP).

If GDP grows 8 percent, that's 86.4 trillion yuan.
If credit grows 12.6 percent, that is 20.2 trillion yuan.

Total nominal demand was 106.6 trillion and 19 percent was credit.

In Year 2 China lowers credit growth to match nominal GDP.

China's GDP was 86.4 trillion. It grows 8 percent to 93.3 trillion.
Credit was 180.2 trillion, it grows 8 percent or 14.4 trillion.

Total nominal demand is 107.7 trillion, growth of 1 percent. Credit drops to 13 percent of total nominal demand.
The numbers get much uglier at 800 percent of GDP.

FT: China’s warning of a ‘Minsky moment’ should not be ignored
Speaking on the sidelines of the Communist party congress in Beijing, Zhou Xiaochuan, who is soon to stand down as governor of the PBoC, said: “If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment’. That’s what we should particularly defend against.”

This might sound unexceptional. But it is about as close as someone in Mr Zhou’s position can come to yelling “fire” in a crowded theatre. To quote Robert Hockett, an expert on China at Cornell Law School: “It’s calculated to inspire panic. It’s almost an incantation to panic — especially in China.”
Assume the figures Balding cites are true, China's options are rather limited. It can try to shoot the Moon on growth (OBOR), it can devalue the yuan 25 percent (or more), or it can turn into a more crippled version of Japan. While the Japanese have seen their world-beating status wiped away over the past three decades, in real per capita terms, Japanese workers are arguably doing better than those in Europe and the United States. A demographic/debt/welfare state crisis looms everywhere, but the economic standard of living has held steady with the rest of the developed world without using the crutch of mass immigration. It is better if one adjusts for crime and societal decay in the West. This is most evident in the collapse in social trust and fractured politics. Few nations have clear ruling majorities outside of Eastern Europe. In contrast, the Japanese have given the ruling party a majority.

CNN: Japan's Shinzo Abe hails landslide victory in snap election
Abe's ruling coalition has won a clear majority with more than two-thirds of Parliament's 465 seats, with the Liberal Democratic Party holding a majority even without its coalition partner, the Komeito party, he told reporters Monday.

"We were able to earn the powerful support of the Japanese people, well surpassing our goal," Abe said at a press conference after Sunday's vote.
China can go the path of Japan. It will remain unified. If the average workers life is improving, the CCP will retain popular support. It might have to put a challenge to the United States on hold for a few decades though.

Japan Times: Xi lays out road map to make China leading global power by 2050
Xi also laid out an ambitious plan to make China a “great modern socialist country” in the following 30 years — part of what he has called the “Chinese dream.” By 2050, he said, the party would be near the goal of achieving a “beautiful China” with the rule of law, innovative companies, a clean environment, an expanding middle class, adequate public transportation and reduced disparities between urban and rural areas.

“Chinese people will enjoy greater happiness and well-being, and the Chinese nation will stand taller and firmer in the world,” Xi said of his vision for 2050.

...Xi said the Communist Party will strive to fully transform the People’s Liberation Army into one the world’s top militaries by 2050, and emphasized the need to modernize its combat capability.

“A military is built to fight,” he said.
All of this can be accomplished in a "turning Japanese" scenario, but China will turn inwards for 30 years to achieve it.

I still believe the most likely scenario is a controlled yuan devaluation of significant magnitude. A Japan scenario will happen if nothing is done about the present course. I don't think the OBOR is doable given global social mood. Unless the West turns inward and Islam quiets, China won't be able to achieve the multilateral cooperation needed for the OBOR. Finally, a crisis is always possible, but then I expect China would quickly determine the potential losses and weigh that again a surprise detonation of the yuan, and opt for the controlled collapse.

2017-10-22

Yuan Is Euro Since August 2015

Quantitative Housing: Chinese Govt Buying 25pc of New Homes

The Chinese government cut housing inventory in recent years by buying inventory.

ZH: Unprecedented Housing Bailout Revealed, As China Property Sales Drop For First Time In 30 Months

The punchline:
To paraphrase: Beijing is now the (covert) marginal buyer of a quarter of all Chinese real estate. That, in itself, is a mind-blowing statistic. What is scarier, is that despite this implicit backstop, property sales are once again declining after 30 months of increases. One can only imagine the epic crash that would ensue if - for some reason - the government bid were to be pulled, and just how spectacular the ensuing global depression would be as the rug is pulled from under the most important asset of the middle class in the world's fastest growing economy.
The bullish take: since the government demolishes existing housing stock, prices can be supported moving forward. In that case, the government is still digging holes and filling them in, but paying for it on credit. Imagine the worst thing possible and then you have a good idea of the bearish scenario.

2017-10-20

China Has a Garbage Bubble as Paper Prices Soar

Recyclable paper prices are soaring in China. A wild price rise has created "junk kings" in China who move piles of refuse instead of low-rated credit.

The iFeng link includes a video with some of the "junk kings" of Dalian. They talk about how some of the paper would be thrown out, but today they don't toss anything and sell it instead. Prices are moving multiple times in a single day as money rushes into the latest investment boom. The monthly income of one "junk king" has doubled from 5,000 yuan to more than 10,000 yuan.

The spark for this boom was a ban on the importation of foreign trash.

Reuters: China ban on waste imports leads to piles of paper abroad, surging prices in China
The city’s system for dealing with its paper waste has been failing since China in July imposed a ban on imports of 24 types of rubbish, as part of a campaign against “foreign garbage” and environmental pollution, including unsorted scrap paper.

As a result of the impasse, the manager of a major paper mill in southern China told Reuters the price of finished paper had doubled to 6,000 yuan ($902) per ton from 3,000 yuan as supplies of the raw material shrink.

That is hurting everyone from e-commerce sites to exporters.

Alibaba’s upcoming ”Singles’ Day online shopping festival on November 11, which posted more than 120 billion yuan ($18.1 billion) in sales last year, is heavily reliant on such packaging.
A drop in supply causes a rise in prices, but a boom is triggered by an increase in the supply of money and credit. The rally in junk is the downstream result of commodities market speculation that even government officials have blamed on excess credit.

iFeng: 废品价格大面积回升 从前的“破烂王”如今收入过万!
Li Youan Dalian scrap recycler: scrap prices are rising, including plastics, cardboard, all waste are rising. Mineral water bottle should be up over last year, rose about 30 percent. Is now selling about five to four four seven one kilogram of paper gains would be greater, under normal circumstances, paper, general paper in previous years, more than a thousand dollars a ton, this year is more than two thousand one ton of .

Scrap price hikes, so his business is extremely busy, reporters saw just a few minutes there are 56 individuals to sell scrap, but due to his busy again this year hired two people to help, but in order to increase the amount of recycling he is no longer just waiting for collection at home every afternoon, he took the initiative to the neighboring village to the acquisition of waste. In this way a month down the overall recovery of the amount, compared to the same period last year increased by about 20%, while in recent months, his monthly income has reached the million, compared to last year, an increase of nearly doubled.

It is understood that this year the overall recovery in scrap prices, domestic scrap prices in 1600 yuan / ton, up 14%, aluminum prices at around 10,500 yuan / ton, up 23%, paper prices rose the most, currently the Recycle Bin recovery of prices in the 2100 yuan / ton, up more than doubled. Prices rose sharply, driving the overall industry to pick up, "Polan Wang" re-active.
China's ban on "foreign garbage" is partly responsible, but the main culprit is the supply of money and credit racing around China's economy in search of a home as the iFeng article notes:
In fact, the fluctuation of recycling prices is inextricably linked to the entire commodity market, and its rise this year mainly due to upstream manufacturing, building materials industry increased demand, as well as major engineering and infrastructure investment to accelerate, in a rise in the price, gains in prices of waste paper can be described as ferocious.
There's only one piece of waste paper whose fundamental value is ferociously declining: the Chinese yuan.

2017-10-19

Fixed Asset Investment Breakdown

Rising state investment climbed above 10 percent in September, in line with June and July growth rates.
Within private FAI, industrial investment declined year-on-year in September.

Private FAI Rose 3.9 pc in September

Private FAI increased 6.0 percent YTD in September and 3.9 percent year-on-year for the month of September.

Fixed Asset Investment Rises 6.2pc in September

Fixed asset investment rose 7.5 percent YTD through September; 6.2 percent year-on-year in September.