Submitted by Tyler Durden: China's attempts to "reign in" its credit and
housing bubble (to "taper", if you will) and to deleverage its financial
sector, so widely trumpeted over a year ago just before its banking
system nearly locked up overnight, are rapidly becoming the biggest joke
in finance, just after anything relatedd to the Fed of course. Sure
enough, confirming that the reason for the epic surge in Chinese lending
over the past few months (a topic we will touch upon later) was making
sure that the all important housing bubble doesn't pop (at least not
yet, recall: in China housing is a far more critical bubble than the
stock market which is widely ignore by most as a "wealth effect"
mechanism), was data released overnight showing how Chinese home prices
reacted following the last few months of credit conservatism and
destruction courtesy of the commodity funding deal rehypothecation
scandal. In short: not good.
As summarized by Bloomberg, China’s
new-home prices fell in a record number of cities tracked by the
government as developers cut prices to boost sales volume. Prices fell in a record 55 of the 70 cities last month from
May, the National Bureau of Statistics said in a statement today, the
most since January 2011 when the government changed the way it compiles
the statistics.What's worse, and as can be seen on the chart above, prices in Shanghai and the southern city of Guangzhou fell 0.6 percent each from May, the biggest drop since January 2011, while they declined 0.4 percent in Shenzhen. Prices fell 1.7 percent in the eastern city of Hangzhou, the largest monthly decline among all the cities.
At the national level, China recorded a 0.48% sequential decline in home prices: the largest since at least 2010. And slamming the nail in the Chinese housing market, at least for now, is that the Average Sale Price dropping by 1.5% Y/Y, the biggest drop since Lehman!
Some more details from BofA:
Back to Bloomberg which reports that some Chinese cities started to relax property curbs to stimulate the local market, while developers have cut prices since March to lure buyers. The central bank in May called on the nation’s biggest lenders to accelerate the granting of mortgages, and urged them to give priority to first-home buyers.Prices of new commodity residential properties for 70 medium-to-large-sized cities surveyed by the National Bureau of Statistics (NBS) increased by 4.3% yoy in June compared with 5.6% in May. The number of cities with higher home prices mom was 8 in June, down 7 from 15 in May, while the number of cities with lower home prices mom was 55 in June, up 20 from 35 in May.
In June, Soufun’s 100-city average new home price index rose by 6.5% yoy compared to 7.8% in May. Divergence in home price growth narrowed slightly among the different tiers of cities in China as all of them experienced negative mom growth. June new home price growth was 14.3%, 4.6% and 0.8% yoy, respectively for Tier-1, Tier-2 and Tier-3 cities, down from 16.6%, 6.4% and 1.9% yoy in May.
National average sale prices (ASP) of new homes was RMB6,033/sqm in June, down by 1.5% yoy compared to 1.2% decline recorded for May.
Lowering prices to clear out excess inventory? What a novel concept. Too bad it will never be tried in the US. Or China for that matter, because should the ongoing home price collapse continue, the impacts on the bad loans held by China's semi-nationalized financial system will be dire. Which is why we expect that the recent surge in credit injection, which in Q1 was the highest on record as tracked by financial assets in the local banking system, will accelerate and blow out all previous records. In doing so, and especially if China indeed blocks all liquidity conduits to divert local cash offshore, expect Chinese inflation to finally pick up once again as it did in 2011, when it sent the price of gold to an all time high in the process.Housing Minister Chen Zhenggao urged cities with high housing inventories to reduce them “with all means,” 21st Century Business Herald reported today, citing an unidentified local housing official who participated in a meeting that Chen held. Local authorities could set policies to stabilize their property markets based on local conditions, according to the paper.
...
“The current biggest problem of China’s property industry is that the housing inventories are too high,” said Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong in a phone interview today. “But the declines are still not very big. With more cities relaxing curbs and the economy stabilizing, the property market will gradually stabilize.”
As for China's "deleveraging", may it rest in piece.
Source
_______
Chinese Construction Company Threatens To Default, Debt Dominoes Are Lined Up
By Wolf Richter: Changzhou, a city of 4.7 million people in the Yangtze River
Delta area, is most famous for its ghost city, one of many ghost cities
in China, product of a ludicrously overheated, self-reinforcing,
debt-driven property and construction bubble, powered by local
governments’ limitless ambitions and hunger for revenues and by
developers who took the money that grew on trees and plowed it into the
ground.
What remains now is a simple question: Who would ever live in these luxury homes?
Rather than waiting for some unlikely miracle, the Changzhou Daily – a Communist Party rag, so this is the trusty government speaking – ran a front-page article that exhorted citizens to buy homes in the ghost city. The article proclaimed (via China Real Time) that it was “a good time to purchase real estate.” So prices in the ghost city had dropped 5.8% from a year ago and sales in the first half had dropped 11.3%, the article admitted, but what the heck, there is “no downside for home prices in our city.”
That’s how bad it is.
And the companies that made these ghost cities and other worthy projects happen? They borrowed money without limit, they mortgaged, re-mortgaged, hypothecated, and re-hypothecated whatever assets they might have had to build and profit without limit. Now the dominos are beginning to fall.
Huatong Road & Bridge just warned that it may default on both interest and principal on 400 million yuan in one-year bills that mature July 23. The announcement blamed it on the chairman who, tangled up with authorities, is currently “assisting an official investigation.”
Active in the construction and property industries, the company has fallen on hard times. You can build only so many ghost cities before you become the laughingstock of the world, and now home prices are declining, and the infrastructure spending spree has run its course. The fact that the company was able to issue the debt in July last year, that it found buyers for it when everyone already knew that the China housing and construction bubble was in the uneven process of imploding – variously, despite and/or because of government actions – was a sign of just how blindly these investors trusted the notion that the government would always bail them out. They knew you couldn’t lose money in bonds.
If the default is allowed to occur, it would be the first such publicly announced default in the interbank market, China’s largest bond market, and the first default on both interest and principal due on a bond, Reuters reported.
In March, Shanghai Chaori Solar Energy Science & Technology defaulted on 89 million yuan in interest payments due on a bond that traded on the smaller Shenzhen exchange. That was China’s “first publicly known default,” as Reuters called it, and it rattled the markets. New issues were put on hold. Yields on riskier issues jumped as investors began shifting their money into bonds they thought were better protected by implicit government guarantees.
Until then, it was assumed that all debt would somehow get bailed out by the government via its state-owned megabanks or other mechanism. They could roll over the debt forever, rather than acknowledging that the money has been plowed into the ground without returns and without possibility of ever earning enough to service the debt.
China’s credit ratings agencies were right on top of it. Like their American sisters, they down-grade after a potential default is announced. This is very helpful for investors who’d bought this crap earlier. So after Huatong’s announcement, China Lianhe Credit Rating downgraded the outfit to BB-plus from AA-minus with negative bias, and the bond that might default next Wednesday to B from A-1.
Companies exposed to China’s gargantuan property, construction, and infrastructure sectors are in trouble. Their credit metrics have been deteriorating. Other sectors are in trouble as well. Domestic auto brands are getting clobbered by foreign brands. Industrial overcapacity has reached crisis proportions. Local governments have borrowed out the wazoo and on the sly to fund their building binges. This ballooning debt was central to China’s growth. But many of these investments have turned into mal-investments and unrecognized losses.
And now China is drowning in an unknown sea of bad debt that is being rolled over, rather than cleared up through defaults or other forms of write-downs, and so the implicit losses are being rolled over too. Via its highly centralized decision-making process and a banking sector that is controlled by the state, authorities have been able to prevent legal defaults and push this system to extremes unimaginable in other countries.
But bad debt and implicit losses don’t just evaporate. They’re all still there, unresolved, useless, worthless, an “asset” on some set of books – the balance sheets of state-owned banks, for example – and an albatross around the neck of the economy.
In the end, these losses will have to be eaten. In free markets, equity holders, bondholders, and other creditors would swallow them lock, stock, and barrel. In central-bank or government manipulated markets, losses are transferred to savers via financial repression (preferred in the US), to taxpayers via direct bailouts (Europe excels at this), to consumers and workers via inflation, to a combination…. You get the idea. And that’s when reality returns to China.
Source
Rather than waiting for some unlikely miracle, the Changzhou Daily – a Communist Party rag, so this is the trusty government speaking – ran a front-page article that exhorted citizens to buy homes in the ghost city. The article proclaimed (via China Real Time) that it was “a good time to purchase real estate.” So prices in the ghost city had dropped 5.8% from a year ago and sales in the first half had dropped 11.3%, the article admitted, but what the heck, there is “no downside for home prices in our city.”
That’s how bad it is.
And the companies that made these ghost cities and other worthy projects happen? They borrowed money without limit, they mortgaged, re-mortgaged, hypothecated, and re-hypothecated whatever assets they might have had to build and profit without limit. Now the dominos are beginning to fall.
Huatong Road & Bridge just warned that it may default on both interest and principal on 400 million yuan in one-year bills that mature July 23. The announcement blamed it on the chairman who, tangled up with authorities, is currently “assisting an official investigation.”
Active in the construction and property industries, the company has fallen on hard times. You can build only so many ghost cities before you become the laughingstock of the world, and now home prices are declining, and the infrastructure spending spree has run its course. The fact that the company was able to issue the debt in July last year, that it found buyers for it when everyone already knew that the China housing and construction bubble was in the uneven process of imploding – variously, despite and/or because of government actions – was a sign of just how blindly these investors trusted the notion that the government would always bail them out. They knew you couldn’t lose money in bonds.
If the default is allowed to occur, it would be the first such publicly announced default in the interbank market, China’s largest bond market, and the first default on both interest and principal due on a bond, Reuters reported.
In March, Shanghai Chaori Solar Energy Science & Technology defaulted on 89 million yuan in interest payments due on a bond that traded on the smaller Shenzhen exchange. That was China’s “first publicly known default,” as Reuters called it, and it rattled the markets. New issues were put on hold. Yields on riskier issues jumped as investors began shifting their money into bonds they thought were better protected by implicit government guarantees.
Until then, it was assumed that all debt would somehow get bailed out by the government via its state-owned megabanks or other mechanism. They could roll over the debt forever, rather than acknowledging that the money has been plowed into the ground without returns and without possibility of ever earning enough to service the debt.
China’s credit ratings agencies were right on top of it. Like their American sisters, they down-grade after a potential default is announced. This is very helpful for investors who’d bought this crap earlier. So after Huatong’s announcement, China Lianhe Credit Rating downgraded the outfit to BB-plus from AA-minus with negative bias, and the bond that might default next Wednesday to B from A-1.
Companies exposed to China’s gargantuan property, construction, and infrastructure sectors are in trouble. Their credit metrics have been deteriorating. Other sectors are in trouble as well. Domestic auto brands are getting clobbered by foreign brands. Industrial overcapacity has reached crisis proportions. Local governments have borrowed out the wazoo and on the sly to fund their building binges. This ballooning debt was central to China’s growth. But many of these investments have turned into mal-investments and unrecognized losses.
And now China is drowning in an unknown sea of bad debt that is being rolled over, rather than cleared up through defaults or other forms of write-downs, and so the implicit losses are being rolled over too. Via its highly centralized decision-making process and a banking sector that is controlled by the state, authorities have been able to prevent legal defaults and push this system to extremes unimaginable in other countries.
But bad debt and implicit losses don’t just evaporate. They’re all still there, unresolved, useless, worthless, an “asset” on some set of books – the balance sheets of state-owned banks, for example – and an albatross around the neck of the economy.
In the end, these losses will have to be eaten. In free markets, equity holders, bondholders, and other creditors would swallow them lock, stock, and barrel. In central-bank or government manipulated markets, losses are transferred to savers via financial repression (preferred in the US), to taxpayers via direct bailouts (Europe excels at this), to consumers and workers via inflation, to a combination…. You get the idea. And that’s when reality returns to China.
Source
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