November 27 – December 3, 2015

Moral Hazard in the Chinese bond markets. Chinese buying US real estate. The new global oil economy. So just how much do Airbnb hosts in NYC make?

Another big week… the renminbi will be added to the IMF’s Special Drawing Rights basket of currencies (currently made up of four currencies: USD, Euro, Yen, and Pound Sterling) in October of next year – importantly it will be given a greater weight than both the Yen and the Pound Sterling – and the ECB cut its deposit rate to -0.3% from -0.2% (granted less than the financial markets had expected). Even with these happenings, the four articles I am going to cover this week are 1) “China’s bond market – Pricing Risk” in The Economist, 2) “Chinese Cash Floods U.S. Real Estate Market” by Dionne Searcey and Keith Bradsher in The New York Times, 3) “Understanding the new global oil economy” by Martin Wolf in The Financial Times, and 4) ““Five Numbers From Airbnb’s Just-Revealed New York City Data” by Eric Newcomer in Bloomberg Business.

*Note: bold emphasis is mine, italic sections are from the articles.

China’s bond market – Pricing Risk. The Economist. 28 Nov. 2015.

Essentially as China continues to employ quantitative easing in its economy the cost of funds continues to decrease, regardless of increasing use of leverage. Sounds familiar.

“China’s domestic bond market has never been riskier. It was only last year that it suffered its first default. This year at least six companies have defaulted.”

While six is barely any in comparison to developed world economies, it is a dramatic shift from the status quo. Credit risk is increasing and the economy on the whole is slowing with some sectors in meaningful decline (particularly those that are capital intensive).

“A gloomy outlook of this kind would normally lead investors to demand a premium before buying bonds. Instead, they have lapped them up, making it cheaper for China’s companies to borrow. Bond issuance has boomed this year, reaching almost 12 trillion yuan ($1.9 trillion) so far, up from the record 7.7 trillion sold in all of 2014, according to Wind Information, a data provider.”

China has become the world’s third-largest bond market behind the U.S. and Japan.

“For most of the past five years, yields on highly rated corporate bonds were two or three percentage points higher than on government bonds of the same maturity. This year the spread has narrowed, hitting a low in early November of just 1.3% points. This implies that investors think corporate bonds have become less risky, despite the proliferation of defaults.”

Granted, much of the activity is from existing borrowers rolling over higher cost loans.

“The increase in issuance has been exaggerated by a debt swap: local governments are on track this year to replace about 3 trillion yuan of expensive loans with cheaper bonds. The average interest rate paid on outstanding debt in China has fallen from nearly 7% last year to just over 6% this year, according to Hua Chuang Securities.”

To be sure,

“China is willing to let some companies fail, but so far no big firms in which the central government retains a sizeable shareholding have met that fate. Instead, those that have got into trouble have been rescued, leading investors to treat their bonds as virtually risk-free.”

Chinese Cash Floods U.S. Real Estate Market. Dionne Searcey and Keith Bradsher. The New York Times. 28 Nov. 2015.

Faced with these conditions and the prospect of declining currency relative to the greenback as the People’s Bank of China (PBOC) implements measures to further reduce capital controls in accordance with IMF guidelines prior to the renminbi being integrated into the SDR basket, it is no surprise that Chinese nationals are placing cash abroad. The news is that their presence is increasing and it is effecting more and more markets across the country.

“This year, Chinese families represented for the first time the largest group of overseas home buyers in the United States.”

This is also due to the drop in the value of the Canadian dollar, curbing Canadians enthusiasm for U.S. real estate.

“While Chinese purchases make up a small sliver of overall sales in the United States, they have had a disproportionate impact on the market for more expensive properties, buying one in 14 homes sold for more than $1 million. On average, buyers from China, including the mainland, Taiwan and Hong Kong, pay $831,800 for a home, more than three times as much as Americans spend, according to a National Association of Realtors survey.”

“The price of property in Beijing is very high, the stock market is crashing, and the real economy is not stable… The people here have some money, but they don’t have enough good ways to invest their money.” – Eric Du, a management and investment consultant from Beijing.

“Chinese buyers spent $28.6 billion on American homes in the year ended in March, more than double their purchases two years before, according to the Realtors association. Chinese purchases in overseas commercial real estate jumped 49% last year, Jones Lang LaSalle, a big real estate brokerage firm, has estimated.”

“An estimated $590 billion moved out of China in the 12 months through June, according to Fitch Ratings… In the past, they tended to stay under $200 billion a year.”

“But the highflying deals may have only just begun. By the end of last year, Chinese insurers had only 1.44% of their money overseas (they can now allocate up to 15%).”

“A majority of home purchases by Chinese buyers – 69% – are entirely cash, according to the Realtors association.”

“Outside the United States, the Chinese demand has been so great that some places are trying to temper it.

Hong Kong and Singapore have each imposed 15% taxes on nonresident buyers of residential real estate. In Australia, the State government of Victoria, which includes Melbourne, introduced a 3% tax on overseas buyers.”

Basically,

“Overseas real estate speculation by Chinese investors started to rise after the recession in America began to recede in 2009. The two markets have been out of sync, creating opportunities. American home prices have been in a recovery phase, while the Chinese boom has been fading.”

Understanding the new global oil economy. Martin Wolf. The Financial Times. 1 Dec. 2015.

Are the drop in oil prices temporary or structural?

“With US consumer prices as deflator, real (oil) prices fell by more than half between June 2014 and October 2015. In the latter month, real oil prices were 17% lower than their average since 1970, though they were well above levels in the early 1970s and between 1986 and the early 2000s.”

Spencer Dale, chief economist of BP (and former chief economist of the Bank of England), believes that the general belief of oil as an exhaustible resource with prices that tend to rise over time is false. The key disrupter has been the US shale revolution.

“…the global supply capacity is not only enormous but expanding. Forget peak oil. As Mr Dale notes: ‘In very rough terms, over the past 35 years, the world has consumed around 1tn barrels of oil. Over the same period, proved oil reserves have increased by more than 1tn barrels.‘”

An important byproduct of the US shale revolution “… is a huge shift in the direction of trade. In particular, China and India are likely to become vastly more important net importers of oil, while US net imports shrink. Quite possibly, 60% of the global increase in oil demand will come from the two Asian giants over the next 20 years.”

“By 2035, China is likely to import three-quarters of its oil and India almost 90%…. If it does, it demands no great mental leap to assume that US interests in stabilizing the Middle East will shrink as that of China and India rises. The geopolitical implications might be profound.”

“The problem is not that the world is running out of oil. It is that it has far more than it can burn while having any hope of limiting the increase in global mean temperatures over the pre-industrial levels to 2⁰C. Burning existing reserves of oil and gas would exceed the global budget threefold. Thus, the economics of fossil fuels and of managing climate change are in direct opposition. One must give.”

Five Numbers From Airbnb’s Just-Revealed New York City Data. Eric Newcomer. Bloomberg Business. 1 Dec. 2015.

I’ve included this article because it provides some real stats on Airbnb in NYC.

Due to requests from New York City, Airbnb just released anonymized host data for approximately 59,000 listings in the city between November 1, 2014 and November 1, 2015 outlining the information on the type of listings in the City offered by its users and their earnings from the activity.

16% of hosts list their full time home or apartment on Airbnb for more than 121 days per year. 3% of hosts list for 271 days or more and more than half list their full homes or apartments for between 1 and 30 days.
The median annual earnings by hosts in NYC is $5,110. SoHo and East Village hosts have the highest median rent ($6,558) and the Bronx the lowest ($3,249).
126 New York City hosts made between $100,001 and $350,000 a year from Airbnb. 888 hosts made between $50,000 and $100,000 and the majority less than $10,000 a year.
25% of the revenue going to active hosts went to those with more than two listings. Airbnb projects that this number will decline to 7% in the future.
The median Airbnb property is rented out 42 nights a year or approximately 3.5 nights per month.

Other Interesting Articles

The Economist

BloombergBusiness: World’s Biggest Pension Fund Loses $64 Billion Amid Equity Rout 11/29

FT: Classic cars and fine wines leave Warren Buffett trailing 11/26

FT: John Cryan is right, bankers’ pay has to fall further 11/29

FT: The rise of liberal intolerance in America 11/29

FT: IMF gives renminbi strong weighting in currency basket 11/30

FT: Sovereign wealth fund pullback hits Aberdeen Asset Management 11/30

FT: Brazil’s economy shrinks by record 4.5% 12/1

FT: Our virtual reality future is bigger than it appears 12/1

FT: Signs of froth in China’s debt market 12/1

FT: Global defaults climb to 6-year peak of $95bn 11/30