October 14 – October 20, 2016

The Chinese housing market is looking rather shaky. Investors are going to have to brush up on their social sciences. China is smarting from an aggressive push into developing world loans.

Headlines

Briefs

    • “The collective wealth of the world’s ultra-rich has fallen for the first time since the aftermath of the global financial crisis even as Asia, powered by China, continues to create a billionaire every three days, according to research published on Thursday.”
    • “Last year the world’s billionaires lost 5% of their fortunes, or $300bn, and their wealth growth failed to match stock market performance for the first time in two decades, according to a report by UBS, the world’s largest wealth manager, and PwC, the professional services firm.”
    • “Over the past 20 years billionaires have increased their wealth sevenfold – double the rate of global stock market growth – in what has been termed a second ‘Gilded Age’ for wealth creation.”
    • Easy for some to say.
    • “Among the causes for the fall in billionaires’ fortunes last year were transfers of wealth…, falling commodity prices and a rising US dollar, the currency on which the report is based.”
    • “But such vast wealth can prove fleeting. While 41 billionaires made the cut in the US for the first time last year’s UBS/PwC report, 36 dropped below that level. In China the situation was even more volatile: while Asia generated 113 billionaires last year, 80 dropped below that level, of whom 50 were Chinese. Their declining fortunes were attributed to fluctuating markets and a government crackdown on corruption and graft.”
    • “The new fund, dubbed the SoftBank Vision Fund, will be based in London and seeded with $25bn from SoftBank and up to $45bn from Saudi Arabia’s Public Investment Fund over the next five years, according to a statement from the Japanese telecoms group.”
    • “At $100bn, the new fund would be the same size as all funds raised by US venture capital firms over the past two and a half years, according to data from the National Venture Capital Association.”
    • “SoftBank said the fund would be investing over a five-year time horizon, which at $20bn a year would represent roughly a quarter of total annual investments in US-based venture-backed start-ups.”
    • According to Masayoshi Son, the fund will be “the biggest investor in the technology sector.” Quite a statement.
    • “China, long the world’s factory floor, is taking control of a bigger portion of the world’s supply chains as well, causing a shift in global trade patterns by buying less from abroad.”
    • “Exports to China, which had risen nearly every year since 1990, fell 14% last year, the largest annual drop since the 1960s. They are down another 8.2% this year, through September. The decline helped shave 0.3 percentage points off world trade growth last year, and is a big reason that growth is expected to slow to 1.7% this year from the 5% a year it has averaged over the last two decades.”
    • One of the reasons, simply Chinese companies have been using less product from foreign sources. “The proportion of foreign-made inputs in Chinese exports has been shrinking by an average 1.6 percentage points a year over the past decade, and last year fell to 19.6%, from more than 40% in the mid-1990s, according to Chinese trade data.”
    • wsj_china-to-world-we-dont-need-your-factories-anymore_10-18-16
    • “To build domestic capabilities on the high end, the Chinese government last year announced a plan to raise the domestic content of core components and key materials to 40% by 2020 and 70% by 2025. It has been spending large amounts on research and development: $213 billion last year, or 2.1% of gross domestic product, according to state media reports. In June it pledged more money for ‘technological innovation.'”

Special Reports / Opinion Pieces

Graphics

Twitter – Nick Grealy @RelmagineGas 10/10

Twitter_Nick Grealy @RelmagineGas_10-10-16

WSJ – Bleak Times at the Mall – Justin Lahart 10/14

wsj_bleak-times-at-the-mall_10-14-16

WSJ – China’s Property Frenzy Spurs Risky Business – Lingling Wei 10/19

wsj_chinas-property-frenzy_10-19-16

FT – Saudi Arabia’s $17.5bn bond sale has lessons for debt market – Elaine Moore and Simeon Kerr 10/20

ft_largest-em-government-bonds_10-20-16

Featured

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

China’s Ballooning Mortgage Debt Built on Shaky Foundation. Anjani Trivedi. Wall Street Journal. 14 Oct. 2016.

A brief and well-articulated article on precarious position of the Chinese mortgage/housing market.

“Seeking to quell worries that China’s home-finance market has gotten out of hand, a banking regulator disclosed this week that the loan-to-value ratio in the housing market, or the ratio of the value of mortgage loans to the value of underlying property, was on average 55%.”

“But the absolute level may not matter as much as the pace of increase. UBS estimates the loan-to-value ratio of new-home purchases is even higher, closer to 70%, having surged from 15% in 2012. Much of that rise has happened in the past year.”

“As a comparison, U.S. mortgages before the housing bubble burst had a loan-to-value ratio of less than 60%… In any event, that basic number very quickly rose to over 90% when the bubble popped and prices dropped.”

“Because so many of China’s mortgages are of recent vintage, the value side of their loan-to-value calculation rests on the most recent surge in prices. Simplistically, should prices correct, say, 20%, LTVs would suddenly on average be at 70%. That doesn’t take into account individual markets where leverage and price increases might be higher. Nor does it factor in the vast market for shadow lending, which anecdotally has been helping buyers fund down payments, heaping leverage on top of leverage.”

Keep in mind, “home prices have a way of overcorrecting.”

Granted, with so much at stake for the Chinese economy, I would expect the government will do almost anything to keep the real estate cycle trending up as it moves to the right.

Investors are ill equipped for our unfathomable future. Gillian Tett. Financial Times. 13 Oct. 2016.

Ms. Tett does a good job of highlighting recent remarks by Axel Weber, former head of the Bundesbank and now chairman of UBS, at one of the International Monetary Fund meetings held recently.

Essentially, he sees three primary themes shaping the market today.

First, “the banking system today is much stronger than a decade ago as a result of post-crisis reforms.” Despite the effects of low-to-negative interest rates. So we have that going for us.

Second, “while the banking system looks healthier, markets do not.” Markets are no longer ‘markets’ in the traditional sense. There is too much distortion. For example, “in the government bond markets, where the central banks of Japan, US and eurozone currently hold a third, a fifth and a tenth of the outstanding local government bonds.”

“Central bank purchases are distorting the price of European corporate bonds and Japanese equities, with knock-on effects in numerous other asset classes. ‘I don’t think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention,’ Mr. Weber warned.”

Third, “these distorted markets are increasingly hostage to unfathomable political risk.”

“Now investors holding US, Japanese or European assets need to ponder questions such as: how much further can central banks take quantitative easing? Are the US and UK governments becoming anti-business? Does the rise of Donald Trump, as well as Britain’s vote to leave the EU, herald a new protectionism?”

“Most investors are not well equipped for an analysis of this kind. They built their careers by crunching numbers, not pondering social science.”

China rethinks developing world largesse as deals sour. James Kynge, Jonathan Wheatley, Lucy Hornby, Christian Shepherd and Andres Schipani. Financial Times. 13 Oct. 2016.

Just because you want something to be so, doesn’t mean it will be.

Entering the world of international development finance about a decade ago, China has jumped in head first.  “With a loan portfolio larger than all six western-backed multilateral organizations put together. Outstanding loans form the two big Chinese ‘policy’ banks and 13 regional funds are well in excess of the $700bn owed to the western-backed institutions, according to a recent study.”

ft_china-dominates-development-lending_10-13-16

Well, the thing is that when they entered the game, they backed a lot of risky players/countries.  As one Chinese official put it “China had no choice but to lend a lot to risky countries because they had the commodities we needed and because the western multilateral organizations already dominated the rest of the world.”

Of course the lesson is being learned. “These days we need viable projects and a good return. We don’t want to back losers.”

All told China has invested $65bn in Venezuela since 2007 in 17 tranches. Which “for context, $65bn is more than the World Bank has lent to any country – with the single exception of India – since 1945, data from the bank show.”

Now, in regard to Venezuela “China is no longer willing to ‘put good money after bad, unless it is the only way for it to avoid losing its entire position through the collapse of the regime.'” A possibility.

“Six of the top 10 recipients of Chinese development finance commitments between 2013 and 2015 were classified alongside Venezuela in the highest category of default risk ranked by the Paris-based OECD. By contrast, only two of the top 10 recipients of World Bank development finance fell into the same category.”

ft_china-loads-up-on-overseas-risk_10-13-16

Lesson learned. We’ll see how it works out.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Economist – China’s uncannily stable growth versus the price of reform 10/19

FT – How the west has lost the world 10/12

FT – Snap: high altitude (Lex) 10/13

FT – Inflation fears cast shadows over long-dated bonds 10/13

FT – China escapes deflation but are rising global prices on the way? 10/14

FT – Didi Chuxing to be hit by rules on migrant drivers 10/15

FT – Investment in UK commercial property sinks after Brexit vote 10/17

FT – Time to buy ‘real assets’ in age of inflation – BAML 10/17

FT – IPOs brought down to earth amid market uncertainty 10/18

FT – Airbnb faces fight for survival in New York City 10/19

Reuters – Manhattan office market booming as asking rents set record: report 10/13

WP – NFL ratings plunge could spell doom for traditional TV 10/14

WSJ – SoftBank’s Elephant Gun Packs a Scare 10/14

WSJ – Immigrant Investor Program for Poor Neighborhoods Benefits Rich Ones More, Study Shows 10/19

WSJ – Here’s Just How Much Building It Would Take to Boost Big-City Affordability 10/20

 

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