February 12 – February 18, 2016

Chinese seasonal lending binge. CMBS risk premiums are jumping. More shipping woes.

Three key articles that stand out this week are 1) a posting by Bloomberg News “China’s New Credit Surges to Record on Seasonal Lending Binge”, 2) Serena Ng’s “Warning Light Flashes for the Commercial Property Boom” in The Wall Street Journal, and 3) Bruce Einhorn’s “The Shipping Industry Is Suffering From China’s Trade Slowdown” in Bloomberg Businessweek.

Other items that are worth a mention:

Interesting graphics (none inserted this week):

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


China’s New Credit Surges to Record on Seasonal Lending Binge. Bloomberg News. Bloomberg. 15 Feb. 2016.

What is China doing now that its economy is slowing?  Issuing more debt.

“China’s broadest measure of new credit surged to a record as a seasonal lending binge coincided with a recovery in property prices.

Aggregate financing rose to 3.42 trillion yuan ($525 billion) in January, according to a report from the People’s Bank of China on Tuesday, compared with the median forecast of 2.2 trillion yuan in a Bloomberg survey. New yuan loans jumped to 2.51 trillion yuan, also a record and beating the median estimate of 1.9 trillion yuan.”

“Chinese banks expanded their balance sheet aggressively in the first month of this year, which implies an implicit support from the government to counter the economic slowdown. In addition, Chinese corporates should have turned to onshore for funding, while offloading some external borrowing.” – Zhou Hao, senior economist at Commerzbank AG in Singapore

Corporations issued 454.7 billion yuan of notes in January, 2.5 times the amount sold a year earlier, as the yield on top-rated 10-year corporate notes dropped to a decade low in January.

It makes sense that yields would drop as the outstanding amount of debt increases… oh wait, shouldn’t it be the other way around? But China is not unique in this, recall the run up in US real estate debt prior to 2007-2008.

Granted part of this debt is seasonally related.

“While the jump in new loans is mostly attributable to banks front loading their full-year lending targets and the central bank’s efforts to keep liquidity ample ahead of the week-long Lunar New Year holiday, it also shows increasing financial support to the real economy, according to Chen Ji, a Bank of Communications Co. analyst in Shanghai.”

Understandably, this stimulus is an easier measure than adjusting rates again.

“The central bank has turned to cash injections this year instead of cutting benchmark interest rates, as additional reductions could further exacerbate capital outflows. Net injections since mid-January have been the equivalent to about the same as a 1 percentage point cut to banks’ required reserve ratios.”

And for the property market:

“The PBOC also stepped up support for the property market this month, saying Feb. 2 it would allow banks to cut the minimum required mortgage down payment to 20% for first-home purchases, the lowest level ever, from 25%.”


Warning Light Flashes for the Commercial Property Boom. Serena Ng. The Wall Street Journal. 16 Feb. 2016.

Speaking of the US commercial property market.

“Bonds backed by commercial real-estate loans have weakened significantly since the start of the year amid concerns of an economic slowdown. Risk premiums on some slices of commercial-mortgage-backed securities have jumped 2.75 percentage points since Jan. 1, a move that translates into a roughly 18% drop in prices for Triple-B-rated bonds, according to data from Deutsche Bank.”

“Property owners and developers are now facing the prospect of higher rates on loans, tougher refinancings and diminished property values as debt issuance slows and financing becomes more expensive.”

“It’s not a good dynamic. The cost of financing will increase for borrowers with loans coming due.” – Lea Overby, head of CMBS research at Nomura Securities.

“Billionaire investor George Soros’s family office has been a large seller, according to people familiar with the matter.”

“CMBS with BBB credit ratings now yield more than seven percentage points above benchmark rates – a similar risk premium to U.S. junk bonds, according to data from Morgan Stanley. The bank says CMBS risk premiums are at their highest levels since late 2011.”

Note that the Public REITs are indicating that they will be net sellers this year.  It will be interesting to see how values hold up this year – granted I just received an offering for a Zero Cash Flow deal. ZIRP (Zero Interest Rate Policy)! NIRP (Negative Interest Rate Policy))!
The Shipping Industry Is Suffering From China’s Trade Slowdown. Bruce Einhorn. Bloomberg. 11 Feb. 2016.

More on the impact of the oversupply of container ships, declining commodity demand, and falling shipping prices (except for a few select places…Hawaii).

“Shipbuilders, container lines, and port operators feasted on China’s rise and the global resources boom. Now they’re among the biggest victims of the country’s slowdown and the worldwide decline in demand for oil rigs and other gear amid the oil price plunge. China’s exports fell 1.8% in 2015, while its imports tumbled 13.2%. The Baltic Dry Index, which measures the cost of shipping coal, iron ore, grain, and other non-oil commodities, has fallen 76% since August and is now at a record low.

“In Singapore, the world’s second-largest port, container traffic fell 8.7% in 2015, the first decline in six years. Volumes at the port of Hong Kong, the fourth-busiest, slid 9.5% last year.”

There is so much oversupply that now is a good time to be in the ship demolition business.

“Globally, orders for new vessels dropped 40% in 2015, to $69 billion, according to London-based consulting firm Clarksons Research. The demolition rate for unwanted vessels jumped 15%.”

Global trade is slowing down.

“The yuan has dropped 6% since last August. While that should help exports, Hutchinson Port Holdings Trust, a company controlled by Hong Kong billionaire Li Ka-shing that runs some of China’s top container terminals, has yet to see an uptick in outbound business.”


Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – NYC Tenants Battered by Rising Rents Finally Get a Break 2/11

Bloomberg – The Intriguing Math That Turns Manhattan Properties Into Shekels 2/15

Bloomberg – Goldman Sachs: More and More People Who Use Airbnb Don’t Want to Go Back to Hotels 2/16

Bloomberg – Wall Street Girds for Real Estate Debt It Must Invest In 2/17

Bloomberg – Manhattan Skyscraper New Coup for No. 4 U.S. Office Buyer Korea 2/17

Bloomberg – As Hedge Funds Struggle, REIT Shares Become Their Victims 2/18

CoStar – REITs Projecting to be Big Net Sellers This Year 2/10

FT – Rolls-Royce: first divi cut in 24 years 2/11

FT – Many suspects behind murderous markets 2/11

FT – FX world unmoved by negative interest rates 2/15

FT – Jacob Zuma vows action to prevent South Africa rating downgrade 2/16

FT – Judge orders Neymar assets seized in tax case 2/16

FT – Rising interest rates are bad for stocks 2/16

FT – Don’t forget the upside of ‘lower for longer’ oil 2/16

FT – Walmart suffers worst sales performance in 35 years 2/18

FT – ‘Helicopter money’ on the horizon, says Ray Dalio 2/18

NYT – Swedish Bank Move Creates a Global Shudder 2/11

NYT – Chinese Start to Lose Confidence in Their Currency 2/13

NYT – Dividends, Wall Street’s Battered Status Symbol 2/13

NYT – Young Saudis See Cushy Jobs Vanish Along With Nation’s Oil Wealth 2/16

NYT – China’s Foreign Exchange Reserves Dwindling Rapidly 2/18

South Florida Business Journal – Related Group launches sales of new condo in Miami at discounted pricing 2/12

WSJ – A Tesla Innovation Investors Can Do Without 2/11

WSJ – Consumers Power Past Headwinds 2/12

WSJ – Chinese Banks May Need All the Help They Can Get 2/15

WSJ – Why China’s Credit Boom Might Not Pack a Punch 2/16

WSJ – The Real Crisis is for Bank Bonds, Not Banks 2/17


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