Second-quarter housing prices in 70 large and medium-sized Chinese cities rose 9.2 percent year-on-year, said the National Development and Reform Commission and the National Bureau of Statistics on Monday.The rise was 1.8 percentage points less than in the first quarter.
One of the regular debates on this and other sites is over whether there really is a problem of excessive hot money inflows, as I have been arguing for over a year. If stock market and real estate prices are collapsing, skeptics ask, then how can hot money inflow be excessive? Where does the money go?
Aside from the fact that there are many other places where hot money can go (commercial bank deposits, deposits in informal banks, and commodity hoarding are just three of the most obvious), I think we have to distinguish between slowing growth in real estate prices and declining prices. There are declining prices in certain real estate sectors – for example in some of the major cities – but overall prices still continue to rise, even in spite of what seems to have been massive overbuilding.It is hard to prove this, but the combination of overbuilding, hot money inflows, and all the gossip about SUVs carrying armed men in sunglasses and bags of cash suggests plausibly that hot money inflows have managed to keep up demand for real estate in what otherwise might have been a sharper supply/demand imbalance,.
Gregor Neumann, in the comments to Friday’s posting, cites a piece that argues that at least some property markets in China are seriously oversupplied, and yet we haven’t seen a real collapse in real estate prices anywhere. I think we are seeing a tug of war between oversupply and excess monetary-based demand. I am not a real estate expert and I hesitate to speak authoritatively on this very complex subject, but any time spent over drinks with my more expert friends in the real estate business leaves me very gloomy about the impact of an economic or monetary contraction on the real estate sector.
But for today we should be cheerful. A great start to the week saw the SSE Composite run up 2.99% today to close at 2861.Financial companies led the rise after CITIC reported better-than-expected earnings, although you might not have guessed it from Xinhua’s article headlined, “Slump hits CITIC’s profit rise”, which said that the collapsing stock market had slowed first half profit growth to 13.3%.Over the weekend meetings among senior officials suggest that the authorities are still tilting towards an economic slowdown as the more serious of two problems (the other being, of course, inflation) and so most of us continue to think we are less likely to see dramatic tightening moves in the immediate future.That is likely to be good generally for financial and real estate companies.
The stock market was also helped by an article in China Securities Journal that said that regulators would slow approvals for stock sales in order to ensure “stable and healthy” markets. This doesn’t come as a big surprise, but because it does indicate continued government concern about the performance of the market this year, people see it as yet another signal that the government will intervene to stabilize the market..
On that subject the current issue of Caijing has a very interesting article, in which they say “A report that criticized regulatory intervention in the securities market appeared briefly July 16 on the official Web site of the Shenzhen Stock Exchange (SZSE) before being quickly removed.” The article goes on to say:
The 129-page report, compiled by the research arm of SZSE, said China's “securities regulatory bodies intervene too often and distort normal market operations.” The report also said misplaced regulatory clout partially contributed to widespread illegal activity on the mainland bourses in Shenzhen and Shanghai.
An anonymous source at SZSE told Caijing that exchange officials had asked the Web manager to remove the report the night of July 16 because “further review is needed about the content, and it will be published in the future when the timing is right.”
The now-you-see-it, now-you-don't report shed light on what the authors said are four major factors behind illegal market behavior last year: legislation, the market, participants and regulations. The report said the China Securities Regulatory Commission (CSRC) had expanded its jurisdiction with little oversight, and now oversees a wide range of issues including professional standards, business approvals, IPO regulation, and investor education. Meanwhile, CSRC gave itself the right to make rules as well as supervise the nation’s bourses, and had assumed a bailout role during market troubles.
The report said the current securities market is “overburdened with administrative regulations.”According to the report, CSRC's overbearing control contributed to irrational swings in the stock market, since administrative commands often hindered market mechanisms and poor implementation of regulations -- included some laws flawed from the start -- disrupted market order. Gray legal areas also leave the market open to exploitation.
There was also a call for better supervision of regulatory bodies and the media. The report suggested a securities court and arbitration bodies that could interpret existing laws, strengthen law enforcement and launch class action lawsuits. The report also said lax law enforcement, not a clean market, is the reason why China has been reporting few insider trading cases.
None of these criticisms are new or surprising, of course, and I have made the point dozens of times on this blog that the overbearing administrative measures used by authorities to control the market actually have the effect of increasing speculative behavior and volatility.What this report suggests is that there is a real attempt internally to roll back government heavy-handedness, although I am pretty skeptical that it will succeed. The article also suggests how powerful, important and perhaps even necessary to China’s further development Caijing is, that they can openly discuss a report that seems to have been suppressed almost immediately upon publication.
Finally, following up on last Thursday’s post, today’s South China Morning Post says “Chongqing starts to ration power.”Chongqing is one of the largest cities in China and the world, and one of four cities in China separated from their provinces and granted provincial status as municipalities (the others are Beijing, Shanghai and Tianjin). Within China people often think of Chongqing as a sort of Chicago, the large urban and industrial gateway to the west.According to the article, brownouts and declining coal stocks have forced the city to join more than a dozen other provinces in rationing power. This has been a long, hot summer, and it isn’t over yet.
From what I have heard there can be quite a difference between the market price and what you actually pay, or get for your money. Apart from discounts and incentives the latest story I heard in Shanghai last week was someone who paid the developer the market price for a new apartment but was then given for free the apartment upstairs as well allowing her to create a duplex.
By David Oliver - 7/21/2008 9:08 AM
That's quite a discount...
By Michael Pettis - 7/21/2008 12:33 PM
Caijing has a pretty good wrap up of the current economic debate plus lot of local observations: http://www.caijing.com.cn/20080723/76088.shtml
Interesting gems: * "It's been reported that many coastal export manufacturers are already bankrupt, and that local financial institutions have been hit by bad loans. Because many small- and medium-sized enterprises (SMEs) in Zhejiang Province usually provide loan guarantees to each other, there may be a domino effect of insolvency, and the unofficial “civil” financing system could collapse. There is no solid data on this civil financial system. After speaking with officials at dozens of SMEs in Zhejiang, Caijing reporters felt the situation may be better than many believe."
* Still, research by the Economic and Trade Commission of Wenzhou, a major export city in Zhejiang, said 6.3 percent of the 23,570 surveyed enterprises in 26 industrial categories have suspended or partially suspended production.
* "Meanwhile, a problem with excess investment has been exposed. According to the central bank, loans to Zhejiang companies grew 22 percent annually between 2003 and '07 -- far above the 16 percent national average. Apparently, they went too far. Cai explained that companies in the province flush with cash have tended to increase investments and expand production, instead of enhancing management, upgrading product structures or improving risk and cost controls. "
* “They have invested too much in too many fields,” said an executive at a major shoemaker. “Once credit conditions are tightened, they have trouble raising funds.”
* The good news is that total lending has not fallen since last year. So, because companies usually do most of their borrowing in the first half of the year, and credit has been tightly controlled in the past six months, loans may be easier to get in the second half. Thus, many experts see no reason for major credit control adjustments.
* "Government controlled prices have led to shortages of power -- and inefficiencies. Some power companies can make more money by reselling coal than generating electricity. In addition, low caps on industrial power prices effectively subsidize foreign producers and consumers. Domestic steelmakers, for example, export products made with cheap power after importing high-priced iron ore from abroad."
* "Excess liquidity has been blamed for inflation, while the trade surplus is said to be a major liquidity driver. To maintain a stable yuan exchange rage, the central bank -- the People's Bank of China -- buys with U.S. dollars, putting another 7 yuan into circulation for every dollar. To soak up trade surplus liquidity, the central bank raised the required reserve ratio for commercial banks six times this year to 17.5 percent, and continued issuing central bank bills. Now, there is less room for reserve hikes, and bill issues are less effective."
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
Subscribe to this Site
in today’s China Daily says:
Comments (3) for "Housing is still up, but rat...
January, 2008