Tuesday, June 10, 2014

China Bubble Bust: Land sales in a free fall, Rehypothecation Woes Spread

China’s bursting bubble appears to be intensifying
From Marketwatch.com (bold mine)
Amid ongoing central government curbs, China’s property market is cooling off dramatically despite the onset of the sector’s traditionally “hot season,” as both land sales and transaction values plunged in May across 300 major Chinese cities.

Total land sales fell to 1,767 transactions in May in 300 Chinese cities, down 45% from a year ago and 19% lower than in the previous month, according to a survey published Friday on China’s leading real estate website Soufun.com.

In the same month, the total transaction value for land sales dropped 38% year-on-year, marking a 30% drop from April, to 13.75 billion yuan ($2.2 billion).
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The above 'earlier' housing data comes from the World Bank. The cascading rate of property transactions should percolate into housing prices too. 

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Here is another example of the diminishing returns on debt relative to output or what is technically known as ‘credit intensity’. 

Chinese economic growth has become largely dependent on credit. Said differently, debt drives growth rather than growth drives debt. This means that the ongoing bubble bust will weigh heavily on real economic activities as there will be a feedback loop between credit problems and the economy--via loan delinquencies, insolvencies, liquidations and access to credit.


And because Chinese debt levels seems to have reached a saturation or tipping point, whose inflection point has been prompted by earlier accounts of of a pick up in inflation that led to rising yields or interest rates, credit growth has pulled back (chart from Wray-Mauldin at goldseek.com). 

Also shown in the above is how China's credit boom generates excess capacity, which becomes apparent during the bust.

One ongoing ramification from the reversal of the credit expansion has been for creditors to examine the quality of their loan portfolios. 

Many are discovering, in horror (!), that commodities (such as aluminum and copper) which have been used collateral have been “rehypothecated” –-"reused" collateral or the same collateral used in many loans.
From Reuters: (bold mine)
Global trading houses and banks are scrambling to check on their exposure to a probe into metal financing at China's Qingdao port, as concerns intensify that a crackdown on commodity financing could hit trade in the world's top metal buyer.

The investigation at the world's seventh-largest port is looking into whether single cargoes of metal were used multiple times to obtain financing, according to industry sources.

This means different banks and trading houses were holding separate titles for the same metal, they said.

The inquiry has revived worries about the impact of China's deepening credit crunch on its metal imports, many of which pile up in warehouses to be used as collateral.
In short, as trading partners and as finance counterparties, many parts of the world have been exposed to China’s credit woes. So China's ongoing bursting bubble (asset deflation) will be “exported” globally.

Part of this has become apparent in the former one way trade the USD-yuan, which has been crumbling.

So how will the Chinese government deal with hissing credit bubble? Well, in the same way almost every government deals with the addiction problem: give them more of the substance which they have been addicted to: credit

From the Wall Street Journal: (bold mine)
In the latest battle, the country's top banking regulator on Friday said it would ease rules to make it easier for banks to lend only to small companies. That followed a decision a week earlier by the State Council, the government's top decision-making body, to target more bank funding for small businesses and farms.
It's a world dominated by Keynesian dogma gone berserk.

Don’t worry, be happy. Stocks are bound to rise forever!

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