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ryan China (中国）

India’s most notorious state is failing to live up to its reputation

And to overcome what one minister describes as a “crisis of implementation”—teachers who don’t teach, nurses who don’t nurse, roads built but not maintained, funds received but not spent—he will have to overcome the most obdurate caste of all: the local bureaucracy.

More than the floods that frequently test Bihar’s embankments, local officials fear the rising expectations of people who no longer meekly accept their lot in life. Their instinct is to contain the waters by discouraging such self-assertion. But it is only by giving people their say, by turning unmet need into a political demand, that the state apparatus will begin to do its job.

ryan China (中国）

Gordon Chang, author of “The Coming Collapse of China“, published in 2001. The book predicted the China would collapse by around 2005, or perhaps as late as 2010. He predicts that widespread unemployment, government corruption, inefficient state owned enterprises, and a lack of leadership would lead to the undoing. Publishers Weekly comments:

His invocations of the “power of the Chinese people,” or of an imaginary individual who will one day “end the Chinese state as it now exists,” read more like political soap opera than judicious analyses.

One of the Amazon commenters summarized Mr Chang’s POV as:

“The Coming Collapse of China” is an angry book written by the son of a man who “left China before the end of the Second World War and [the son] grew up hearing him say that Mao Zedong’s regime would have to fall.” The son returned to China to work as a lawyer in Shanghai. When he wrote this book – his first – it was a polemic in which he pounded away at the evils of Communism and predicted that Jiang Zemin’s regime would have to fall.

The Christian Science Monitor published Mr Chang’s “China: the world’s next great economic crash” article in the Opinion section this week. The truth is probably somewhere in between the current China Euphoria (rise of China is story of decade) and Mr. Chang’s China Collapse POV. For the record, I’m optimistic that China will be in a very strong position by 2050, with living standards in the largest cities (Beijing, Shanghai, Guangzhou) at parity with Taipei and Hong Kong. However there is a massive asset bubble in China that is hurting all but the wealthiest 0.5% (85% of families can’t afford basic housing). 40% of local gov’t revenues come from land sales (Professor Chovanec) and current GDP growth is fueled by real estate development.

The following is an [objective?] look at the current China situation:

Beijing, ignoring advice from Washington and other capitals, did not in the boom times try to restructure its economy to favor consumption. Instead, the Chinese government sought to take maximum advantage of then-surging foreign demand. The role of consumption, therefore declined – falling from a historical average of 60 percent of the economy to about 30 percent last year. No country has a lower rate.

To make up for slumping demand abroad and sluggish consumer spending at home, the State Council, the central government’s cabinet, announced a stimulus plan in November 2008. Beijing originally said it would spend $586 billion through 2010. In the first full year of the program however, it has directly and through state banks disbursed about $1.1 trillion in stimulus funds.

The plan, not surprisingly, is creating gross domestic product, but growth is an artificial “sugar high.” For one thing, Beijing’s stimulus spending last year was around a quarter of the total economy. Now, perhaps as much as 95 percent of China’s growth is attributable to state investment, as a Chinese analyst noted recently.

Despite the massive state spending, the country’s economy is not particularly robust. Power consumption statistics, a crucial indicator of economic activity, show the economy expanding at only two-thirds the announced rate.

Moreover, essentially flat consumer prices last year belie official reports of roaring retail sales. So does the full-year 11.2 percent decline in imports, another sign of sluggish domestic demand. And if the economy is really growing by double digits, why is Beijing insisting on continuing its stimulus?

New York Times columnist Thomas Friedman, however, thinks none of this will be a problem. Arguing that China is not the next Enron, he gives this advice to Mr. Chanos: “Never short a country with $2 trillion in foreign currency reserves.”

Yet Beijing’s record-setting reserves – now $2.4 trillion – are essentially unusable for this purpose. Why? China’s leaders need local currency, the renminbi, to deal with domestic needs. If they convert reserves into renminbi, they will cause the currency to zoom up in value and choke off the critical export sector. Foreign reserves have only limited uses in domestic crises.

Second, the state’s stimulus plan is taking the nation in the wrong direction. It is favoring large state enterprises over small and medium-sized private firms, and state financial institutions are diverting credit to state-sponsored infrastructure. Over the past three decades, China’s economy has expanded at an average annual rate of 9.9 percent because of the private sector, but now Beijing is renationalizing the economy with state cash.

Third, Beijing’s flooding of state enterprises with government cash will undermine their competitiveness, as a similar tide of money severely damaged Japan’s corporations during the bubble years.

Japanese managers discovered they could make more money managing cash than from anything else, and they therefore neglected their underlying businesses. Essentially the same thing is happening in China.

ryan China (中国）, Economics （经济学） ChinaBubble

Until the Real Estate Super Bubble finally pops here, I’ll smile anytime I see “China” and “Bubble” in one sentence. From The Economist’s asia column titled “Japan’s love-bubbles for China“.

WHAT our colleague, Charlemagne, calls “bubbles of optimism” over China have been popping in Western capitals, as China has taken a hard line against internal dissent, proven unhelpful in efforts to tackle both climate change and Iran’s growing nuclear threat, manipulated its currency and launched cyber-attacks on Western computer networks. China, muscling its way to global prominence, is not quite the partner the West had been cultivating. Striking, then, that in Japan the bubble of optimism, among the country’s new leaders, is only inflating.

Reuters’s most read story of the decade is the “Rise of China“. The rise started with China’s entry into the WTO – in contrast to Russia who’s never been a WTO member. Western businesspeople and politicians believed that WTO membership would mean China plays by the same rules as the rest of the allies: UK, Germany, France, Japan, Korea, etc. Open markets. Rule of law. Migrating their way toward first world standards. That’s what we’ve seen from the Chinese in Hong Kong and in Taiwan, but there is ever growing skepticism that the same transformation will happen in China.

Now rumors suggest Mr Hatoyama may make a visit of remorse, the first by a Japanese prime minister, to Nanjing, site of a massacre by Japanese forces in 1937. In return (and at less political cost), Mr Hu may pay respects to the nuclear victims of Hiroshima.

In the eyes of Chinese people, the “Little Japanese Devils” are their mortal enemy. The Japanese raped and pillaged in Manchukuo, and even committed specifically horrible atrocities in Nanjing. The Gov’t regularly stokes up anti-Japanese sentiment, so the potential patching up of the relationship could immediately alter the balance of power in asia.

History wars, still far from resolved, point to the limits of rapprochement. So too do maritime disputes over territory. But a huge constraint is the fiscal one. Greying Japan is burdened with deflation, stagnant growth and a national debt close to 200% of GDP. Japan lacks the resources (and the will) for the kind of bold strategic moves, putting Japan at the heart of Asia, at which Mr Hatoyama and Mr Ozawa hint. Even a more autonomous security policy, out from under America’s wing, is almost a non-starter. Japan has cut its defense spending in recent years, to just 1% of GDP. It has grown more dependent on the United States, not less.

The commonly accepted debt numbers are: Japan @ 200% of GDP, USA @ 100% of GDP, and China @ 15-30% of GDP. These numbers are interesting, however the Chinese public debt to GDP ration is probably actually closer to 62% – comparable to the western european average.

Due to the one-child-policy, China is also greying, though not quite as fast as Japan. China also has a 117:100 male to female ratio, meaning that 1 in 5 boys won’t be able to find a mate. Compared to 105:100 in Japan and the USA.

Moreover, only 15% of Chinese Chinese can afford to purchase a home – not even the basic 50 sqm (550 sqft) that most Chinese families reside in. Under these circumstances, even getting married and having a family is a luxury beyond the reach of far too many mainland Chinese.

Note: public debt is the cumulative total of all government borrowings less repayments that are denominated in a country’s home currency. Public debt should not be confused with external debt, which reflects the foreign currency liabilities of both the private and public sector and must be financed out of foreign exchange earnings.

ryan China (中国）

Why is “NetEase” known as 163.com? Originally, China Telecom (电信) and China Mobile (移动) we’re both part of China Post (邮政局). During those days, Chinese people who wanted to use the internet all dialed up via modem to: 163. That’s right, 163 was the phone number to access the internet – no other digits required. In those days, you would buy a pre-paid card to get a temporary username and password.

Why 6.cn, 56.com, ku6.com? In Chinese 6 is just a very lucky number. When Chinese people turn 60, it’s a very big deal – called “dàshòu (大寿)”. Why 60? Because it means that you went through all 12-years of the terrestrial cycle shēngxiào (生肖) 5-times.

Nine is also a lucky number both because 9 is the biggest number and it sounds like “久” (jiu) – the word for permanence.

Of course 8 is the luckiest of them all. Why? Because 8, in Chinese is pronounced “bā” which is very similar to “fā”, as in fācái (发财) – to get rich!

There are also lots of times you’ll see “168″. Why? 168 means “一路发” (yi lu fa) – the road to riches.

However 0, 1, 2, 3, 6 and 7 don’t have any special meaning. They’re neither positive or negative.

Office on the 4th floor? Not likely, because most Chinese buildings don’t have a 4th floor. The Chinese word for death sǐ (死) sounds a lot like the number 4 (四), pronounced sī. Most western buildings don’t have a 13th floor.

On that note, do you know why western culture is sensitive to the number 13? Legend has it Friday the 13th was the day Jesus was crucified, additionally the 13th guest at the last supper was Judas – the apostle who betrayed Jesus to the romans resulting in crucifixion. Ancient Persians, assigning the twelve constellations of the Zodiac to the months of the year, and though the 13th represented the destruction that would follow the completion of the Zodiac cycle. More about unlucky 13.

ryan China (中国）

China whines about “Internet Freedom”

The first lines of the story really say it all.

CHINA hit back at US criticism of Internet control yesterday, warning that relations between the two countries were hurt by the unreasonable accusations in the name of so-called Internet freedom.

Yet another reminder that the CCP is their own worst enemy. It’s sad that the official mouthpiece of a nation with so many bright and talented people responds to intellectual challenge with “your wrong” and “that hurts”. Come on central comittee, you can do better than that.

It was as if the government had hired The Onion as its image consultant.

Seems that the CCP leaders believe they are the ones with the guns and they money and everybody wants to be their friend. However the turning point in Chinese foreign relations seems to have arrived. Their foreign business friends are getting ready to turn their backs just as the real estate bubble litters the landscape with empty luxury apartments and empty office towers.

Of course, the CCP response also included some hard hitting “facts” like:

China’s Internet is open

The Chinese constitution protects the citizens’ freedom of speech

There are a lot of Chinese folks that would sure like to see that new “free speech” version of the Chinese constution… Tank Boy vindicated? We all dream. Come on CCP, this isn’t gradeschool. There are thousands o expatriots and western educated Chinese out here that are here to help, just call before publishing this sort of thing.

ryan China (中国）

Prof Chovanec on Chongqing

I think when you live in a place like Chongqing; you get a much better finger on the pulse than if you live in an expat community in Beijing. What’s happening in Chongqing is very typical of what’s happening throughout the rest of China.

This is an excellent point that is not made often enough. How much would you expect someone in Washington DC’s Chinatown to know about the intent of the president or the future policies to impact the nation? Yet too many of our int’l correspondents in China are not nearly local enough.

Obviously China’s opaque political system, relatively poorly educated average citizen, flexible (unpredictable?) government policy, restrictions on political speech and “state secrets” and lack of a long track record make accurate forward looking analysis difficult to produce.

ryan China (中国）

Jeffrey Frankel, of Harvard University wrote “On the Renminbi”, concerning the RMB/USD peg as the view looked from 2005, just after the first minor devaluation (2.1%) of the RMB. When one currency is pegged to another, the value will typically be pegged too high, or too low. If pegged too high, there will be a run on the currency, just like an old fashioned bank run, but in this case it’s the nations central bank. If pegged too low, the currency will be undervalued. Hot money will arrive in anticipation of the eventual revaluation. Central Bankers must try to get the excess cash out of the system, primarily through Sterilization Bonds.

We have already mentioned that a balance of payments surplus implies that the reserve component of the monetary base is increasing. Some expansion in the monetary policy may be entirely appropriate, especially in an economy with strong long-term growth. But in an economy that is in danger of overheating, the central bank may wish to sterilize the inflow, so as to prevent expansion in the overall money supply.

If the money supply expands, you will create inflation and may also create asset bubbles which [mis]allocate resources from productive efficient. Recently these misallocations have expanded global housing markets and propped up global stock markets.

Sterilization can be a good response to an inflow, for a period of time. It can help the country maintain its exchange rate target without abandoning a target for the money supply or interest rate. But it can become increasingly difficult over time, especially if traditional barriers to capital flows have been gradually eroded. One problem is that it just prolongs the balance of payments disequilibrium, because it by-passes the automatic mechanism of adjustment that reserve flows provide under the monetary approach to the balance of payments. Another potential problem is the quasi-fiscal deficit: if the central bank has to pay high interest rates to get domestic residents voluntarily to absorb “sterilization bonds,” while receiving low interest rates on its reserves of US treasury securities, then it is running a deficit.

Under normal circumstances, Sterilization Bonds would require chinese state banks to purchase bonds from the government, reducing the size of the money supply (because money is handed back to the government). However, in China all foreign currencies collected at state banks are immediately surrendered to the central bank. I believe this policy removes the typical need for “Sterilization”.

Some governments are able to force their bonds down the throats of their banks without paying market interest rates, a form of financial repression; but this just weakens the balance sheets of banks and raises the odds of a banking crisis somewhere down the road.

With the banks all being owned by the Gov’t, this is the case here…

One disadvantage of a balance of payments surplus, on the other hand, is that the reserves, which are typically held in the form of US Treasury bills and bonds and other dollar securities, pay a low rate of return. Interest rates on US treasury bills are low because the market is so liquid and because default is assumed to be very unlikely — and also, during the period 2001-2004, because the Federal Reserve has held short-term interest rates well below normal historical levels. The Chinese authorities have evidently already diversified out of Treasury bills, into agency bonds and other longer term securities, which will probably help the yield somewhat. But it is more likely than not that the dollar will depreciate over the next ten years (not necessarily in the short run), in light of the large US trade deficit, which would reduce even further the return to holding dollar securities. (Diversification into the euro or other currencies has evidently not yet gone far.)

The low interest rates associated with this giant pool of money helped sow the seeds for the global financial crisis. Basically, there is too much money in RMB and not enough good USD investments, yet the Fed set interest rates too low. The result was Chinese bankers buying Fannie, Freddie and boatloads of mortgaged backed securities.

These points are drawn largely from the experience of emerging markets such as Colombia and Korea in the early 1990s. Those countries were able to sterilize capital inflows only for a year or two, before it became too difficult, due to high interest rates on the sterilization bonds and the prolongation of strong capital inflows (as in standard macro models). Chinese officials may be correct that their case is somewhat different, due to a financial system that is less open and less market-oriented.

See the “surrender” policy for dealing with foreign currency.

The capital inflow has consisted largely of Chinese citizens bringing capital flight money back home, speculating on a revaluation, and so far the authorities have not had to pay high interest rates locally to sterilize it. But they may find it increasingly difficult to sterilize further inflows.

The “inflows” are all the Chinese expatriate class returning home story was probably true when this story started, however the size of the bubble today and “Rise of China” being the most read story of the decade indicate the story has been stretched quite a ways now. Interesting that speculators always have a million reasons why it’s different this time and how other people are speculating, but not them and it’s not widespread.

Either way, if this gap is real, better to address it through appreciation than inflation.

But I doubt this is the policy that the CCP will peruse, despite how logical it may be and how much it may benefit the average citizen.

ryan China (中国）, Economics （经济学）

Caing reported that it’s going online. Now, the guys at google have decided to stop self-censoring, even if it means pulling their operations out of China! Full source (blocked by GFW)

These attacks and the surveillance they have uncovered–combined with the attempts over the past year to further limit free speech on the web–have led us to conclude that we should review the feasibility of our business operations in China. We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.

In Mainland Chinese culture, the person with slightly more authority in a situation routinely strong-arms the weaker party, and the weaker party generally goes along with the situation, saying “没办法 – No [other] method”. Google is another recent example 1st worlders of saying “No, are civilized and don’t agree with mafia negociation tactics”. Great job guys! Hope to see an explosion of cases like this in 2010!

The CCP has been using 8% annual GDP growth as the metric of success for years, but has lost sight of WHY 8% GDP growth has been the objective – and the bureaucrats have figured out how to manipulate GDP growth during the bubble years, the same way managers in American firms figured out how to manipulate stock prices in the 60s/70s. The resulting american conglomerate boom didn’t create long term shareholder value any more than the central planners focus on unproductive GDP will create long term financial benefit.

Deng Xiaoping made massive steps forward in Chinese reform by simply getting the gov’t out of the way, and with his support Zhao Ziyang and Zhu Rongji were able to go further. Chinese reform has been in exercise in gradualism, and this gradualism has avoid many undoable mistakes. However, we are left asking who are the reformers today? Wen Jiabao seems to generally came deeply about the welfare of the people, but without a free press and an independent judiciary, I think corruption will eat away at the efficiency of the Chinese economy and prevent mainlanders from reaching living standards of their brethren in Taiwan and Hong Kong.

ryan China (中国）, Economics （经济学）

The mainstream financial press has recently started picking up on the idea of weather or not “China” is a bubble. Longtime China bull Jim Rogers is quoted as saying: “I find it interesting that people who couldn’t spell China 10 years ago are now experts on China… China is not in a bubble.”

Rogers’ partner George Soros got famous shorting sterling. Meanwhile, Jim Chanos got famous shorting Enron. Chanos noticed that Enron had a very low return on Capital Investment (only 6-7%/year) and is seeing the same low return on invested capital here in China.

The first day I ever came to Shanghai, it was for a lunch invitation with Rogers. I fell in love with the place, and though it took a few months to get here, I plan to stay in Shanghai. Bubble or not. That first day in Shanghai, standing with Rogers on top of the Ritz Carlton, he explained to me the madness of the Shanghai real-estate bubble, and moreover, the world wide real-estate bubble. So there you go: “Rogers, China real-estate Bubble: Yes”.

Listen, Rogers is saying that “There is no commodities bubble”. Rogers has a huge amount invested in this, and if central banks keep printing money, they keep proving Rogers right. When China’s real-estate bubble pops, some commodities will take a short term hit, but the macro trend is that the USD is being devalued.

Chanos isn’t saying that he doesn’t think that China has a bright future, he is said the GDP numbers are “massively inflated by under-depreciating a very, very, very shaky capital asset base.” Chanos’ critics say that China’s different because there’s no leverage here, but that’s not true. The market is leverage by multiple layers of ownership each using existing property as collateral. Not unlike the structured leverage in Dubai, but completely different from the leveraging the the US property market.

Most interesting is that many in the US are vehemently opposed to government involvement in the economy, yet those same people are bullish on the China market because the Chinese Technocrats can “fine tune” the economy at their will. These are the same all powerful technocrats that drop dead regularly bingeing with the hostesses at KTV.

Here’s the relevant China situation, as it stands today, summed up quickly: 1. Everybody in China was dirt poor from 1949-1977 because the gov’t prevented private enterprise (basically the same as North Korea today) 2. In 1977, Deng Xiaoping created the first Special Economic Zone in Shenzhen, beginning the growth of China. 3. In the late 90s, Clinton arranged for China to enter the WTO, speeding up foreign direct investment 4. More investment more, higher efficiency factories and foreign exchange reserves soared 5. The gov’t invested (25%?) these foreign exchange reserves into infrastructure, creating hopes of a modern, industrialized, first world China at some point in the future. 6. The owners of the factories, the beneficiaries of the infrastructure projects earned private profits, and had to invest these profits – due to lack of investment options, most chose to invest in luxury real-estate, pushing up prices to current levels. 7. In ‘07, the Global Economic Crisis came and China still had enough foreign reserves to weather the crisis, not only offsetting the drop in exports, but preserving the lucky “8%” GDP “growth”. 8. Throughout ‘08/’09, Due to high real-estate prices and weakened global trade and investment options, even more money has been poured into Chinese Real-Estate

Things to remember. The Technocrat “Central Planners” have never had a good track record. We’re all aware of the disasters of Communist Central Planning of Russia, Cuba and the Closed China. In the 80s though, American’s talked about the magic of the METI (Ministry of Economy, Trade and Industry) explaining how America couldn’t compete with Japan’s centrally planned capitalism. That infatuation ended around when American’s bought Rockefeller Center back from Japanese investors for half the price.

Personally, I’m very long on the Chinese entrepreneurs and the Chinese people. In the next 50 years, I hope that most of them are able to join us Americans, and our allies in Japan and Europe in first world living standards – they’ve already done so in Hong Kong and Taiwan and it seems to be a great thing for all of us. Meanwhile, I’m very bearish on bureaucrats everywhere, and nowhere more so than where the bureaucrats are living in a giant bubble – and feeding the bubble for their own benefit.

ryan China (中国）, Economics （经济学） ChinaBubble, JimRogers

A “bubble” is a sustained but temporary major misalignment between perceptions of value (momentarily reflected in market prices) and actual underlying value (eventually reflected in actual cash flows over time). In this sense, it is primarily a psychological phenomenon, caused by unrealistically high expectations of profit and/or underestimation of risk. I stress the words “sustained” and “major” because minor misalignments are taking place — and being corrected — constantly, which is what markets are all about. If all of us knew what returns would actually be over time, we wouldn’t even need markets — or entrepreneurs — in the first place. But there are times — we call them bubbles — when these misalignments persist and feed on themselves until, somewhere down the road, the market loses faith and valuations suddenly come crashing back to reality in one fell blow.

Some economic bubbles that we’ve experienced:

• Tulip Mania, Netherlands, 1637
• South Sea Company Bubble, UK, 1720
• Compagnie d’Occident / Mississippi Company, France, 1720. (Leveraged)
• Railway Mania, UK, 1840s
• Canal Mania, UK, 1790s
• Stock Market Bubble, US, 1920s (Leveraged)
• Japan Real-Estate and Stock Bubble, Japan, 1986-1990 (Leveraged)
• Internet – Dot Com Bubble, US, 1998-2000
• Housing Bubble, Worldwide, 2000-2006 (Leveraged)

Non-leveraged bubbles are still bubbles, but fortunately their ends are not as dramatic and there effects are not as long lasting as leveraged (credit boom) bubbles. Frederic Mishkin pointed out this distinction in the Financial Times (Not all bubbles present a risk to the economy [FT subscription required]).

Like the start of the Internet Industry, there were also bubbles at the start of the Automotive, Radio and Television revolutions. Each one changed our life. Each time, too much speculative capital chases too few good assets. Additionally, the excess supply of capital creates an excess supply of assets that can be purchased.

The common thread in these three bubbles is over-excited investors putting money into a relatively new product, financial scheme, or industry that seems, given its limited track record, to offer a sure-fire path to riches but whose real risks and rewards they do not yet fully comprehend. Funding those investments via debt is not a necessary ingredient.

I have not yet been able to find a lot of 3rd party sources covering real-estate leverage in China, for now I’ll quote Prof. Chovanec on the subject (Leverage and China’s Property Market).

According to current rules, Chinese developers must use their own capital to secure land. Once they do so, banks will lend them 65% of the money they need for construction and related development costs, with the land pledged as collateral. But saying developers must use “their own capital” to buy the land is a bit misleading.

Residential Sector: Developers build and offload projects rapidly to buyers, half of whom are paying cash.

• Many developers do raise such funds by listing on the domestic or Hong Kong stock exchanges
• Many bring in private equity investors.
• I’ve also seem them raise it in the form of debt
  • Parent company take out loans and then inject the funds as capital into a real estate subsidiary. (most common)
  • Issuing high-yield bonds (if they’re listed)
  • By taking on loans at multiple layers of holding companies, a developer can leverage up considerably to cover his “capital” commitment to the banks.
  • It’s very hard to quantify the extent of this exposure, due to the indirect way many of these loans were raised and channeled into real estate.
• Approximately 50% of all residential purchases in China today are financed with mortgages
• China’s mortgage market is relatively small — about 10% of GDP, compared to 48% for Hong Kong.

Commercial sector, developers are building properties mainly to hold and lease. That means they are raising debt — both from banks and subordinated creditors — and they are not deleveraging.

• Many commercial buildings sit nearly or completely empty
• Where does the cashflow to pay the loans on the property come from?
  • Does the bank care, or is it happy rolling over the loan because the (supposed) value of the collateral has risen?
• This is the Dubai story all over again — multiple layers of leverage, no tenants, no cash flow.

Credit vs Collateral

• In the West, banks usually make commercial loans to businesses based on an evaluation of their expected profits and cash flows — will they earn enough to repay?
• In China, as in many developing markets where banks’ technical skills are not so sophisticated, most business loans are made on the basis of collateral — are there assets the bank can seize if the loan goes bad?
  • Asset Chinese banks like most as collateral is real estate
  • Therefore SOEs enjoy both preferential access to land AND lion’s share of bank loans in China
• Nobody is really arguing that Chinese banks are over-leveraged.
• It’s their clients, the developers and SOEs, that are leveraged up on real estate.
• It’s loans to those clients, should property take a tumble, that would hit the banks as losses.

ryan China (中国）, Economics （经济学）

Cash Rich SOEs Pushing Real Estate Bubble Ever Higher

The National Audit Office data shows that 25 central ministries are involved in real estate violations, worth billions of yuan. Among them, unlisted assets of 51.6917 million yuan from the Ministry of Foreign Affairs have gone into purchasing real estate. The Ministry of Agriculture has developed commercial housing, acting beyond its authority, and has submitted false reports on housing subsidies. In 2008, a real estate rental service center under the Ministry of Finance took in rental income of 5.3193 million yuan. The Ministry of Public Security has approved construction projects worth 422 million yuan, utterly exceeding its authority. Other data show that among 136 central enterprises under the State-owned Assets Supervision Administration Commission, about 70% of the companies are involved in real estate, among which 16 firms are primarily based in the property industry, including Poly, Sino-Ocean, and China Resources, while more than 80 outside firms have business in real estate. Among the top ten highest priced land purchases in major cities in the first half of this year, 60% were gobbled up by SOEs.

Yes, that is 25 central ministries that have been caught speculating in the real-estate market.

• What is the Ministry of Agriculture doing building houses?
• And the Police Department (called “Public Security” here) is in the construction business too?

The government here is just as “asleep at the wheel” as the OFHEO was when regulating Fannie-May and Freedie-Mac.

The Office of Federal Housing Enterprise Oversight (OFHEO) was an agency within the Department of Housing and Urban Development. It was charged with ensuring the capital adequacy and financial safety and soundness of two government sponsored enterprises — the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

ryan China (中国）, Economics （经济学） ChinaBubble

Ignoring the Dubai Crisis and Bubble Concerns, Chinese SOEs Continue Playing “Land King”

Another 19 real estate companies also showed interest in the land bought by Sino Ocean, among them Gemdale Group, a private real estate company. It didn’t bother to bid, though, as prices were too high and a huge challenge for a private company. In the current environment, SOEs are able to take significantly greater risks than private enterprises.

My closest friend in Shanghai is also a land developer (房地产开发商) and I’ve heard the exact same story from him. Every time they try to bid on a project, some SOE backed business comes in at a higher price. No matter how much you are willing to offer, the SOE backed group raise the bid until they get the property.

Do SOE’s have a secret for generating better ROI than experienced, well managed, privately held developers? If they do, they should start a training academy teaching their “post-market economics efficiency”. Most likely this will be a lesson in buying high and selling low.

Zhang Shuguang, chairman of Unirule Institute of Economics, says, “Real estate policy next year is a choice among contradictions and big changes may not take place. Tightening policies will cause the real estate bubble to burst, resulting in economic problems, while excessive stimulus will bring a bigger bubble and greater risks.”

You’ve got a bubble on your hands. Choices I’m aware of are a) soft landing or b) hard landing. Sounds like the Chinese plan is to “manage the bubble”. Good luck with that.

The dilemma is more obvious for local governments. Zhang Shuguang says that half of local government income is real estate-related, and local real estate policies will not see big changes. Preferential policies may be fine-tuned instead of cancelled.

In case you want to know “why” the bureaucrats what to “manage the bubble” instead of fixing the economy? Because the bubble is putting money in their budgets. The bigger the budget, the bigger the kickback.

Can we bring Zhu Rongji back the way Deng Xiaoping was brought back? He’s ceased to exist as a public figure since 2003 – just about the time the economy started going way off track.

Zhu tackled the problems of an excessive money supply, rising prices, and a chaotic financial market stemming, in large measure, from runaway investments in fixed assets. After four years of successful macro-economic controls with curbing inflation as the primary task, an overheated Chinese economy cooled down to a “soft landing”.

Unfortunately, he’s not likely to be restored because:

Zhu has a reputation for being a strong, strict administrator, intolerant of flunkeyism, nepotism, and a dilatory style of work. For his hard work ethic and general truthful and transparent attitude, he is generally considered one of the most popular Communist officials in mainland China.

ryan China (中国）, Economics （经济学） ChinaBubble, ZhuRongji

The New York Times put together an excellent story about the struggle against chinese real-estate speculation here in Beijing. The article is called “Chinese Businesses Resist Eviction by Developers“.

The company that bought the land that included her restaurant for $700 million — a huge parcel a few minutes from the Olympic stadium — was already busily clearing the block for another glittering mega-development. The sooner it broke ground, the sooner it could capitalize on property values that spiked more than 30 percent this year in Beijing and a handful of other cities.

The only thing in the company’s way was a squat row of buildings that included the Fish Castle Restaurant, a decidedly modest Sichuan-style seafood joint that Ms. Qin and her boyfriend opened just before the 2008 Summer Olympics. The couple, the very picture of modern Chinese entrepreneurial bravado, had signed a three-year lease, poured their extended families’ life savings into fixing up the space, and then learned in August that they had only two months to get out.

Chinese newspapers are filled with stories of battles involving so-called nail houses, the properties whose owners and occupants are like deeply embedded spikes that refuse to give way to redevelopment juggernauts. As an unceasing real-estate boom has swept the nation, much of it orchestrated by the local governments that benefit from soaring land values, property owners and occupants often protest unfair compensation.

SOEs are becoming an ever larger portion of the Chinese economy, bidding up prices and pushing out private entrepreneurs. Long term, I have zero faith that the “central planners” in any country can create long term growth better than innovative entrepreneurs.

ryan China (中国）, Economics （经济学）

The 234-room Pangu Plaza, which opened in December, charges as much as $17,750 a night for a suite. The sushi bar, where the cheapest lunch special is $265, cooks its rice in mineral water flown in from Japan.

Confidence, however, is belied by the cavernous, empty lobby where the only sound is the tapping of the high heels of the crisply attired staff. No paying customers were evident during a weekday afternoon visit, although Seng said that occupancy has reached “up to 30%.”

This is an extreme example, but this sort of scene is EVERYWHERE in China. Weather you’re in the showcase cities of Shanghai and Beijing, in the 2nd tier provincial capitals, or any of the smaller cities. EVERYWHERE you go there is construction and everywhere you go the buildings are UNUSED.

Glad to see the western media is finally opening their eyes to this one. Nice job to the LA Times for this article “Global financial crisis hits Beijing luxury hotels hard“.

ryan China (中国）, Economics （经济学） ChinaBubble