Tag: Hong Kong

June 16, 2017

Perspective

MarketingDaily – Despite Retail Slump, Consumers Feel Generous At Checkout – Sarah Mahoney 6/14

  • “With retailers closing thousands of stores and malls growing emptier, it’s easy to think Americans would be less inclined to pony up for good causes at the register. But the latest Charity Checkout Champions report says that people contributed $441 million last year to some of the biggest point-of-sale campaigns, up 4.5% from 2014.”
  • “The biggest fund-raiser is eBay for Charity, which raised $56.6 million by allowing sellers to give a portion of sales to one of 34,000 charities. The Miracle Balloon program at Sam’s Clubs and Walmart stores came in at No. 2, raising $37 million for Children’s Miracle Network Hospitals in just seven weeks. And Petco bumped the McDonald’s Coin Collection program, benefitting Ronald McDonald House, out of third place, generating $28.3 million in gifts for the Petco Foundation, which funds pet welfare and adoption groups.”

The Big Picture – Sharing Economy – Barry Ritholtz 6/15

Our World in Data – Proportion of seats held by women in national parliaments 6/15

WSJ – A Test of Loyalty at Macy’s – Miriam Gottfried 6/15

Worthy Insights / Opinion Pieces / Advice

WSJ – Oil Outlook Now So Bleak It May Be an Opportunity – Spencer Jakab 6/14

  • “Things look bleak, but oil bulls nursing losses should take solace in the fact that the consensus view in this market is usually wrong.”

Markets / Economy

WSJ – Daily Shot: FRED – Used cars and trucks price index 6/15

WSJ – Daily Shot: Capital Economics – Projected Fed Asset Holdings 6/15

Real Estate

Bloomberg – Blackstone Plans to Sell San Francisco’s Ferry Building – David Carey and Hui-yong Yu 6/9

NYT – A $664,000 Parking Spot Symbolizes Hong Kong’s Property Frenzy – Austin Ramzy 6/15

  • The last time this happened I covered in my 10/28/16 – 11/3/16 post. Well now the record is $664,000.
  • “The buyer was listed as Kwan Wai-ming, whom local news outlets identified as executive director of the Huarong Investment Stock Corporation. His company declined to comment. That price, paid for a spot in an apartment complex on Hong Kong Island, was a new local record, breaking the previous $615,000 paid for a slightly smaller spot last year.”
  • “For his money, Mr. Kwan may get convenience. He already owns property in the same apartment complex where the parking spot is situated, called the Upton, in the Sai Ying Pun district. He previously bought two apartments for $9.7 million and two other parking spots in the complex for $995,000, according to the Hong Kong land registry.”
  • “But some wealthy residents revel in the recognition that comes with a Lamborghini or even a coveted license plate. Last year, a plate carrying the number 28, which sounds like a phrase for ‘easy money’ in Cantonese, sold for a record $2.3 million at auction.
  • Seriously?

WSJ – Google Will Buy Modular Homes to Address Housing Crunch – 6/14

  • “The Mountain View, Calif., company is finalizing an order to buy 300 apartment units from Factory OS, a modular-home startup, in a building likely to serve as short-term housing for Google employees, according to executives from both companies.”

Energy

WSJ – OPEC Stumbles in Face of Oil Glut – Summer Said, Georgi Kantchev, and Neanda Salvaterra 6/14

  • “The global oil glut is proving immune to the limits set by the Organization of the Petroleum Exporting Countries and its big-producer allies like Russia, fueling the idea that output caps withholding almost 2% of world crude supply were a miscalculation.”
  • “In the U.S., the Energy Information Administration said Wednesday that crude stockpiles fell last week by 1.7 million barrels, less than the 2.6 million drop forecast by a Wall Street Journal survey. At the same time, gasoline inventories rose by 2.1 million barrels, compared with the survey’s expectation of a 700,000 decline, underlining worries about the oversupply extending to crude oil’s products.”
  • “Oil stockpiles in the Organization for Economic Cooperation and Development—a club of 35 countries with industrialized economies—rose by 18.6 million barrels in April and were higher than they were when OPEC agreed to its cut late last year, said the International Energy Agency, a Paris-based group that advises governments on energy trends.”
  • “Adding to oil traders’ angst: U.S. oil production has come roaring back to life. The IEA said U.S. crude supply will grow almost 5% on average this year, and nearly 8% in 2018, potentially vaulting American producers ahead of Saudi Arabia in daily output.”
  • “’Such is the dynamism of this extraordinary, very diverse industry it is possible that growth will be faster,’ the IEA said.”
  • “Saudi energy minister Khalid al-Falih said this week that the production cuts would start having an impact this summer, accelerating a drop in stored oil that OPEC said began in January. He has said OPEC and Russia would do ‘whatever it takes’ to bring supply back in line with demand.”
  • “Daniel Yergin, vice chairman of IHS Markit and a long-time oil market watcher, said OPEC wouldn’t abandon its production-cut agreement, which took almost a year to put together through 2016.”
  • “’When OPEC and the other producers agreed to this deal, they hoped that, as the old adage says, time heals all—and time will heal the inventory problem,’ Mr. Yergin said. ‘They should now take a deep breath and realize this will take a lot more time.’”
  • “The cartel set a tough goal last December, when its officials said they wanted to cut oil-storage levels to the five-year average.”
  • “OPEC said OECD storage levels actually have been falling but by only 88 million barrels in the first four months of 2017. At that pace, it would take until March 2018 for stockpiles to fall another 250 million barrels to the five-year average.”

WSJ – Daily Shot: eia – US Wind and Solar Electricity Generation 6/15

WSJ – Beijing Gives Banks the Go-Ahead for Yet Another Lending Binge – Anjani Trivedi 6/14

  • “While Beijing is carrying out a high-profile campaign to reduce leverage in its financial markets with one hand, with the other it is encouraging more potentially reckless borrowing. This week, the regulator put pressure on the country’s big banks to lend more to small companies and farmers, while the government announced tax breaks for financial institutions that lend to rural households.”
  • “If the goal of lending to poorer customers sounds noble, the concern is that the execution will only worsen Chinese banks’ existing problems, namely high levels of bad loans and swaths of mispriced credit. Bank lending to small companies is already growing pretty fast, with non-trivial sums involved: It jumped 17% in the year through March to 27.8 trillion yuan ($4.084 trillion). That compares favorably with the 7% rise in loans to large- and medium-size companies over the same period.”
  • “But lending standards are set to get even looser. Banks have been told they should tolerate higher nonperforming loan ratios for small companies and agriculture-related lending, meaning they need to worry less about credit quality. The regulator also asked banks to keep interest rates on such loans at an ‘appropriate’ level—effectively allowing banks to ignore the proper pricing of risk.”
  • “This all flies in the face of efforts to cull bad credit from the economy. Chinese banks are already given plenty of leeway to classify loans how they like: The new measures may only encourage them to avoid writing off bad debt. It isn’t clear, either, how allowing small businesses and farmers to borrow even more will help China Inc. cure its addiction to debt-fueled growth.”

WSJ – Chinese Banks Limit Exposure to Anbang – James T. Areddy 6/15

  • “A number of banks have slowed marketing of Anbang-branded investments to their customers in recent days, according to people with knowledge of the situation.”

April 26, 2017

If you were to read only one thing…

WSJ – Another Bubble Bursts in Hong Kong – Jacky Wong 4/25

  • This one is the article in its entirety.
  • “Hong Kong’s stock market is becoming a byword for dangerous bubble-blowing.”
  • “The latest stock to burst is Fullshare Holdings, a Chinese property developer valued at around $7 billion. Its stock slumped 12% on Tuesday, before the company suspended trading in its shares. The plunge came after California-based short seller Glaucus Research, which has shorted Fullshare, published a report claiming the stock is ‘one of the largest stock manipulation schemes trading on any exchange anywhere in the world.’ Fullshare declined to comment, but said it would release a statement at a later point.”
  • “Glaucus’s claim, which is based on analysis of trading patterns and Chinese filings, may be hard to prove. But in truth, investors should have spotted problems at Fullshare a while back. The company, which was valued at an eye-watering ten times book value as recently as last autumn, has generated most of its profits recently from paper gains on its 8.2% stake in another developer Zall Group , whose share price tripled last year. The problem? Zall in turn earns most of its profit from a reciprocal 3.5% stake in Fullshare, whose shares doubled last year. The bubbles in both companies’ stocks have fed on each other, giving a false image of how their businesses are doing.”
  • “Zall declined to comment.”
  • “If that weren’t enough, trading in Fullshare has also shown some unusual patterns. Glaucus says the stock has shown abnormally high returns in the final hour of trading—a pattern that was seen in previous Hong Kong stock bubbles such as Hanergy and Tech Pro. A look at trading data from FactSet from January to April this year seems to confirm the thesis. An investor buying Fullshare’s stock one hour before the market close and selling it at close, would have made a 44% return over the period. A simple buy-and-hold strategy, however, would have lost the investor 14%.”
  • More risky still is the way both Fullshare and Zall have loaded up on debt using their overpriced stocks. As of December, Zall had pledged all its Fullshare stocks in return for a loan. Fullshare had likewise pledged a large portion of its financial assets, which are mainly Zall shares. Zall’s chairman has also pledged 8% of the company’s shares to borrow money. If lenders to the companies are worried about the value of their collateral, they could dump the shares into the market, potentially leading to a stampede—similar to the recent fate of China Huishan Dairy, whose shares dropped 85% in an hour last month.”
  • Who could suffer when the bubble finally pops? Passive funds that were forced to buy the company when MSCI added the stock to its indexes in November. Vanguard, for example, owns 1.4% while BlackRock has 0.9%, according to FactSet.
  • “Fullshare’s stock price has never been sustainable given its high valuation and lack of a strong underlying business, but the latest report could be the final straw.”
  • Shenanigans…

Perspective

Economist – The tempest: Workers in southern Europe are stuck in lousy jobs 4/20

  • “Dead-end, fixed-term jobs have haunted southern Europe for decades. In 2015 over half of employed 15-to-29 years olds in Spain were on temporary contracts, compared to two-fifths in Italy and just under a quarter in Greece; the average across the European Union is 14%.”
  • Economist_European temporary employment_4-20-17
  • Economist_European changes in temporary employment_4-20-17

Worthy Insights / Opinion Pieces / Advice

The Reformed Broker – Contra Einhorn – Joshua Brown 4/25

  • “More importantly, when Einhorn asserts that ‘There was no catalyst that we know of that burst the dot-com bubble in March 2000,’ he’s not correct. There was one. It was a Barron’s article, published over the weekend leading into Monday, March 20th. That was the top for the Nasdaq Composite (the rest of the market – aka ‘Old Economy’ stocks had already begun selling off as no one wanted anything non-dot com).”
  • “The article was called ‘Burning Fast‘ by Jack Willoughby and it may have been the most important piece of investment journalism ever up until that time.”

NYT – The Low-Inflation World May Be Sticking Around Longer Than Expected – Neil Irwin 4/26

Markets / Economy

FT – The five markets charts that matter for investors – FT Reporters 4/26

  • “The problem the US now faces is it has to normalize interest rates, but with the smallest 50% of companies already spending 30% of profits (and at peak EBIT) on interest rate costs, any move upwards is likely to push up interest cost to dangerous levels.” – Andrew Lapthorne, Societe Generale
  • FT_Interest rate costs as percentage of earnings for US non-financial cos_4-26-2017

Real Estate

WSJ – Concern Over Manhattan’s One Vanderbilt Project Grows – Peter Grant 4/25

WSJ – Rising Home Prices Raise Concerns of Overheating – Laura Kusisto 4/26

WSJ_Rising US Home prices_4-26-17

Tech

Economist – Cloning voices: Imitating people’s speech patterns precisely could bring trouble 4/20

Asia – excluding China and Japan

Economist – The rise of intolerance: Indonesia has been mercifully resistant to extremism-until now 4/20

  • “A local election shows how the unscrupulous can manipulate religion to win office.”

Britain

FT – UK public finance: councils build a credit bubble – John Plender 4/25

  • “UK local councils are engaging in what is known in the financial jargon familiar to hedge fund managers as a carry trade – a form of arbitrage whereby they borrow at rates much lower than private sector borrowers can obtain in order to invest in property that shows a much higher yield. Money borrowed at 2.5% or so is typically going into property yielding 6-8% or more.”

China

NYT – Debt Crisis Shakes Chinese Town, Pointing to Wider Problems – Keith Bradsher 4/25

  • “The problem: Local companies had agreed to guarantee hundreds of millions of dollars of one another’s loans. When some of those loans went bad, the impact rippled across the city.”
  • “Zouping’s plight offers a sobering example of the problems that could lurk within China’s vast and murky debt load. A nearly decade-long Chinese lending spree drove growth but burdened the economy with one of the world’s heaviest debt loads, equal to $21,600 worth of bank loans, bonds and other obligations for every man, woman and child in the country. Debt in China has expanded twice as fast as the overall economy since 2008.”
  • “China, the world’s second-largest economy after the United States, has considerable firepower to address any financial crisis. But many economists worry that hidden debt bombs could expose the breadth and severity of the problem.”
  • “The Chinese government has begun an urgent effort to discourage companies from guaranteeing one another’s bank debts, ordering local banking regulators across the country to file comprehensive reports by the end of the month on the problem. But sussing out the extent could be difficult.”

FT – China’s steel battles with west set to intensify – Lucy Hornby 4/25

  • “China’s steel battles in Europe and North America are likely to be only a prelude of bigger future fights as softening domestic demand unleashes a flood of output on to world markets. “
  • “China’s steel industry is the world’s largest, by far: at 808m tons last year it accounted for half of global production.”
  • FT_World steel production 2016_4-25-2017
  • “About 90% of Chinese mill output to date has been absorbed at home — but domestic consumption peaked in 2013. As China’s economic growth slows and infrastructure and property construction hits saturation point, more steel is poised to flow to global markets.”
  • “Last year China exported 109m tons, or 14% of its output — more than the total output of ArcelorMittal, the world’s largest steelmaker.”
  • FT_China steel consumption and exports_4-25-2017
  • “Because China’s steel industry is so big, every increase of 1% in exports is almost the equivalent of the entire export market for American steel mills.”
  • “But China is not a big source of American steel imports. ‘They are actually more worried about competition in third countries. It’s not so much about the Chinese presence in the US market,’ said Mei Xinyu, a strategist for the Chinese ministry of commerce.”
  • FT_Source of US steel imports_4-25-2017
  • FT_China steel export destinations_4-25-2017
  • “A pick-up in Chinese consumption this year could stave off the deluge for now. But unless there is a drastic cut in Chinese output, the prospect of a flood of Chinese steel on to global markets is not going away.”

Other Links

WSJ – Growing Homelessness Problems Spur Interest in Tiny Houses – Zusha Elinson 4/26

March 24 – March 30, 2017

Shale markets to the financial markets – can I get some more money please… Slow housing recovery sapping GDP growth. China’s smartphone users flock to risky investments.

Headlines

FT – Chile heads for first recession since 2009 3/23. The Chilean economy contracted 0.4% in the fourth quarter of 2016 and it is looking like there will be another contraction in the first quarter of 2017 due to a strike at Escondida (the world’s largest copper mine) which would put the country in a technical recession, it’s first since 2009.

WSJ – Former South Korean President Park Geun-hye Is Arrested in Corruption Probe 3/30. First she was impeached and now arrested…geez.

Special Reports / Opinion Pieces

Briefs

  • Gloria Cheung and Don Weinland of the Financial Times highlighted recent restrictions by UnionPay barring Chinese from buying HK property with plastic.
    • “Chinese citizens have been barred from using their debit and credit cards to buy property in Hong Kong in the latest attempt by Beijing to curb capital flight.”
    • “The use of Chinese credit cards to pay for a portion of property transactions is widespread in Hong Kong. Willy Liu, chief executive of local real estate agent Ricacorp, said 15-20% of new property buyers were mainland Chinese. The majority use UnionPay (China’s sole clearing house for bank card transactions) cards to pay for 5% of the home price as a mortgage deposit in Hong Kong.”
    • “Most of those transactions are worth at least HK$500,000 ($64,371), Mr. Liu said, surpassing the $50,000 annual limit for personal foreign exchange imposed by China’s regulators.”
    • However, agents don’t expect the curbs to have much effect on Hong Kong property.
    • “UnionPay cards have been a common conduit for mainland Chinese to move cash offshore, and the company has sought to shutter those channels. In October, it said it had barred the use of its credit and debit cards to purchase investment-linked insurance products.”
    • “Investment-linked insurance products often have a cash value that allows customers to cash out after a set period. The business was viewed by Chinese regulators as a means of moving money offshore.”
    • “The insurance policies bought by Chinese customers last year were much larger than those bought by other customers. Average single-paid premiums for life and investment-linked policies bought by Chinese were HK$3.7m-HK$6.1m ($477,000-$786,000), Moody’s said in a report this year.”
  • David Blood of the Financial Times illustrated that fake news is shared as widely as the real thing.
    • “Nearly a quarter of web content shared on Twitter by users in the battleground state of Michigan during the final days of last year’s US election campaign was so-called fake news, according to a University of Oxford study.”
    • “Researchers at the Oxford Internet Institute (OII) also determined that these users shared approximately as many fake news items as ‘professional news’ over the same period.”
    • “The report, published on Monday, concludes that links to fake news stories accounted for 23% of the links tweeted by a sample of 140,000 Michigan-based users during the ten days up to November 11 last year.”
  • Bryan Harris and Kang Buseong of the Financial Times covered the how South Korea has joined the ranks of the world’s most polluted countries.
    • “South Korea has joined the ranks of the world’s most polluted countries, with air pollution in the first months of this year soaring to record levels.”
    • “Long associated with Asian capitals such as Beijing or Delhi, hazardous smog has for weeks blanketed Seoul – a city now appearing among the world’s three most polluted in daily rankings.”
    • “Already this year authorities in South Korea have issued 85 ultrafine dust (PM2.5) warnings, up more than 100% from the 41 advisories in the same period last year.”
    • “An OECD report found that up to 9m South Koreans could die prematurely by 2060 as a result of current levels of air pollution – the worst projection among members of the group of mainly rich countries.”
    • “Many in South Korea blame pollutants wafting in from China – but experts say much of the pollution is homegrown.”
    • “The South Korean environment ministry attributes up to 80% of the fine dust to overseas sources during periods of pronounced pollution.”
    • “But Prof. Kim (Kim Shin-do, a professor of environmental engineering at the University of Seoul) believes China is to blame for only 20% of South Korea’s fine dust. Environmental group Greenpeace puts the figure at 30%.”
    • “Much of the country’s pollutants come from vehicle emissions and construction or industrial sites. Power plants also play a crucial role – and energy officials are pushing to develop even more coal-powered capacity.”
  • Don Weinland and Javier Espinoza of the Financial Times highlighted the shock waves that have resulted in the global M&A world due to Chinese capital constraints.
    • “In the space of 12 months, China’s companies have gone from being the most prolific and sought after bidders in international dealmaking to some of the most unreliable and sometimes even unwelcome, according to senior bankers and lawyers.”
    • “The stark change reflects the regulatory crackdown in China on outbound transactions since the start of 2017, which has been part of a coordinated effort to stem the hundreds of billions of dollars in capital pouring out of the country.”
    • “In the first three months of the year, the value of announced outbound deals from China dropped sharply to $23.8bn, according to Thomson Reuters data, its lowest level since 2014.”
    • “In 2016, Chinese companies agreed [to] about $222bn worth of deals…”
    • Bottom line, the restrictions put in place by the State Administration of Foreign Exchange (SAFE) to limit acquisitions of non-core lines of business are working.
    • Granted, “groups with sizeable assets overseas, such as the airlines and hospitality conglomerate HNA Group, have continued to ink deals at a ravenous pace this year.”

Graphics

FT – Struggling Sears signals decline of US malls – Gary Silverman, Lindsay Whipp and Joe Rennison 3/24

WSJ – Why China’s Latest Cash Crunch Is Scarier This Time – Anjani Trivedi 3/24

WSJ – Daily Shot: Insider Sentiment 3/26

Bloomberg – Manhattan Landlords Are Turning to Retailer Giveaways – Sarah Mulholland 3/28

WSJ – Daily Shot: Moody’s Investors Service – Plateauing US auto sales 3/27

WSJ – Daily Shot: BMO Wealth Management – World Housing Affordability 3/28

WSJ – Daily Shot: Moody’s – Share of property as a component of household wealth in China 3/29

WSJ – Daily Shot: Saudi Arabia Foreign Exchange Reserves 3/29

Featured

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

America’s shale firms don’t give a frack about financial returns. Schumpeter. The Economist. 25 Mar. 2017.

“Shale’s second coming is testament to Texan grit. But the industry’s never-say-die spirit may explain why it has done next to nothing about its dire finances. The business has burned up cash for 34 of the last 40 quarters, according to figures on the top 60 listed E&P (exploration and production) firms collected by Bloomberg, a data provider. With the exception of airlines, Chinese state enterprises and Silicon Valley unicorns-private firms valued at more than $1bn-shale firms are on an unparalleled money-losing streak. About $11bn was torched in the latest quarter, as capital expenditures exceeded cashflows. The cash-burn rate may well rise again this year.”

“Meanwhile, the prospect of rapidly rising production is rattling global energy markets.”

“When oil prices halved in just 16 weeks starting in late 2014, panic hit Texas, followed-for a while-by grim austerity. The number of drilling rigs in America dropped by 68% from peak to trough. Companies slashed investment. Over 100 firms went bankrupt, defaulting on at least $70bn of debt.”

But here we go again.

“The partial recovery in the oil price, which at one point fell as low as $26, is only one factor behind renewed enthusiasm for shale. Houston’s optimists also argue that the full geological potential of Texas’s Permian basin has only just become apparent. Some experts think it could in time produce more barrels each day than Saudi Arabia does.”

“But the fact that the industry makes huge accounting losses has not changed. It has burned up cash whether the oil price was at $100, as in 2014, or at about $50, as it was during the past three months. The biggest 60 firms in aggregate have used up $9bn per quarter on average for the past five years. As a result the industry has barely improved its finances despite raising $70bn of equity since 2014. Much of the new money got swallowed up by losses, so total debt remains high, at just over $200bn.”

Thing is E&P firms are rewarded for taking risks. “Not one of the ten biggest E&P firms, for example, puts significant emphasis in its pay scheme on how much return on capital it produces. Low interest rates make it easy for shale firms to borrow, and fee-hungry banks cheer on the spectacle. But the only way that this mania will end well is if oil prices rise sharply, bailing out the industry, or if E&P firms are bought by bigger energy firms. That is possible, but companies such as Exxon and Shell are too seasoned to pay a lot for small, unprofitable firms.”

Then there is the circular argument that they’ll produce their way out of the debt with higher production at higher or sustained prices – but the more they produce (particularly as the swing producer in a global context) the more likely it is that prices will fall.

“The oil bulls of Houston have yet to prove that they can pump oil and create value at the same time.”

Sluggish Housing Recovery Took $300 Billion Toll on U.S. Economy, Data Show. Laura Kusisto. The Wall Street Journal. 26 Mar. 2017.

“The decline in homeownership rates to near 50-year lows is partly to blame for the U.S. economy’s sluggish recovery from the last recession, new data suggests.”

“If the home-building industry had returned to the long-term average level of construction, it would have added more than $300 billion to the economy last year, or a 1.8% boost to gross domestic product, according to a study expected to be released Monday by the Rosen Consulting Group, a real-estate consultant.”

“In 2016, total spending on housing declined to 15.6% of GDP, a broad measure of goods and services produced across the U.S., compared with a 60-year average of nearly 19%. The share of spending specifically lined to new-home construction and remodeling likewise declined to 3.6% of GDP, just over half its prerecession peak in 2005.”

“If you want to get the economy going, housing is typically the flywheel.” – Ken Rosen, chairman of Rosen Consulting and chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.

“The homeownership rate stood at 63.7% in the fourth quarter of 2016, according to the U.S. Census Bureau. That was down from a high of 69.2% during the housing boom and below the 65% economist say is a normal level.”

“It is unlikely that easing credit alone would be enough to bring the share of households who own back up to historic norms. Even in hot markets where demand is strong despite tight credit standards, builders can’t construct enough homes to meet demand because of labor shortages and regulatory barriers, said Robert Dietz, chief economist at the National Association of Home Builders.”

“Tighter mortgage lending has led to sharp declines in default rates and helped produce a market in which price growth is linked to economic prosperity.”

“But some experts argue default rates are too low. Under typical conditions, similar to those in the early 2000s, about 12% of mortgages are at risk of default, but in the third quarter of 2016, just 5.1% of mortgages were at risk of default – a level that indicates that lenders aren’t making loans to thousands of people who pose little risk, according to the Urban Institute, a nonprofit think tank.”

“Mr. Rosen said many middle-class families have missed out on the appreciation that has occurred over the past five years because they haven’t been eligible for mortgages.”

“‘We’re being paternalistic in our regulatory environment and it’s forcing lower middle-class people…to rent,’ he said.”

Swipe by Swipe, Chinses Smartphone Users Flock to Risky Investments. James T. Areddy. The Wall Street Journal. 28 Mar. 2017.

“In China, about 700 million people carry a smartphone, and many of them are comfortable sending money from their screens through the world’s busiest mobile-payment networks. That has created a crowdfunding wave bigger than anywhere else, a real-time experiment in a type of online investing proponents have long pushed in the U.S.”

“A million companies in China have turned to the internet to raise money, hawking loosely regulated, often risky investments, according to one of the country’s largest online lenders.”

“Swipe by swipe, the online money supply is helping to democratize investing and loosen capital markets. It also is propping up indebted Chinese companies and inflating bubbles in asset types from bonds to plastic pellets. And it is shifting more of the risks from China’s corporate debt load onto consumers.”

“Chinese banks hold more than $20 trillion in deposits, with more than a third of the total from household savings. Online pitches…attracted roughly $200 billion in 2015 and even more last year, consulting firm McKinsey & Co. estimated.”

“In just one corner of the booming online finance sector, more than 5,700 firms are registered with the Association of Shanghai Internet Financial Industry, a quasigovernmental group, to match small lenders and borrowers.”

“In January and February, Chinese electronics maker Cosun Group failed to repay about $166 million in bonds sold through an online marketplace owned by Ant Financial Services Group. Ant is an affiliate of e-commerce giant Alibaba Group Holding Ltd and is valued by some analysts at more than $70 billion.”

“Last April, crying investors flocked to Shanghai Kuailu Investment Group to demand their money back after its 13 fundraising platforms halted redemptions for about 38,000 customers who invested more than $2 billion, according to company documents reviewed by The Wall Street Journal. It had invested in at least 20 feature films, one starring former boxer Mike Tyson.”

“The company’s owner has disappeared, and investors claim they haven’t been repaid.”

You can imagine that the government has a cautious eye on the sector; however, previously they were all for it – hence the rapid adoption.

“In a recent survey, about 70% of Chinese internet users said carrying cash is no longer a daily necessity. It is common for consumers to swipe from deal to deal on apps that advertise investment opportunities. The apps usually are connected to online payment services that supply the customer’s personal details and link to bank accounts.”

“The migration of investing onto mobile phones happened in a flash. After Alipay pioneered a way to pay for goods with mobile phones, entrepreneurs used Alipay to sell shares during the 2015 stock-market boom. Stocks crashed, but other investment options proliferated, including commodities trading and interest-bearing insurance products.”

As an aside “multiple financial firms accept nude photos of borrowers as collateral on loans to college students.”

“Online finance is part of China’s wider shadow-credit system, where borrowings totaled $9.22 trillion in 2016, equivalent to 90% of GDP, according to UBS Securities. The term shadow credit refers to lending outside the formal banking system and its regulations.”

“Many people in the industry say investors pay little attention to details, other than the advertised return. Their money often is supposed to be tied up for just days or weeks, giving investors more comfort about the risks.”

“While most borrowers have been able to repay, often with a new round of money borrowed from somewhere else, investors have suffered losses in the billions of dollars.”

As Andrew Collier, founder and managing director of research firm Orient Capital Research in Hong Kong puts it, investors “are handing over their cash to a small group of internet pioneers who are trying to find ways to lend it short-term.”

Buckle your seatbelts.

Other Interesting Articles

Bloomberg Businessweek

The Economist

 

Bloomberg – Deutsche Bank in Bind Over How to Modify $300 Million Trump Debt 3/27

Economist – Anti-corruption demonstrations sweep across Russia 3/27
FT – Emerging market government debt rush before US rates rise further 3/23

FT – Property developer Kaisa surges 70% after exiting two-year suspension 3/26

FT – Hedge fund closures hold nuggets for stock market investors 3/27

FT – US producers build up sales hedges as oil falls 3/27

the guardian – A world without retirement 3/29

Mauldin Economics: Outside the Box – Raoul Pal, Paying Attention 3/29

NYT – China’s New Limits on Money Outflows Hit a Would-Be Paradise 3/24

NYT – Amazon’s Ambitions Unboxed: Stores for Furniture, Appliances and More 3/25

WSJ – China Tanked Oil Once, It Can Do It Again 3/27

WSJ – Spoiled-Milk Lending Flows to a Chinese Insurance Giant 3/27

WSJ – China’s Booming Car Market Fueled by Credit 3/28

 

January 26 – February 2, 2017

There is a lot of money sloshing around between football (soccer) teams to trade players.  Chinese football club worth more than AC Milan?  Bad credit – no problem.

Headlines

FT – Rock-bottom rates squeeze German lenders 2/1. Interest rate sensitive German lenders continue to be squeezed by low-to-negative interest rates, if this keeps up, many are going to have a hard time making a profit.

NYT – Tesla Gives the California Power Grid a Battery Boost 1/30. Utility level electricity battery storage coming to a town near you.

FT – Microsoft issues biggest bond of the year in debt market boom 1/30. Microsoft just borrowed another $17bn on Monday as they and others seek to tap debt markets before pending rate increases – already $600bn has been issued in 2017.

Special Reports / Opinion Pieces

Briefs

  • Eric Platt of the Financial Times illustrated the drop in negative-yielding debt, now below $10tn.
    • “Roughly $9.6tn of bonds trade in negative territory, down from nearly $14tn four months ago and $10.7tn near the end of December, as rising inflation expectations and hopes of a rebound in economic activity propels yields higher.”
    • ft_negative-yielding-debt_1-27-17
    • “European and Japanese sovereign debt comprise the vast majority of negative-yielding securities, while some $514m of euro-denominated corporate bonds also trade with a yield below zero. That figure is down from $916m in September.”
    • “The declining value of debt trading with a negative yield also reflects a stronger US dollar, which makes foreign obligations appear smaller when converted back to the greenback.”
  • Don Weinland of the Financial Times covered the risks to Chinese banks from the One Belt, One Road initiative as reported by Fitch Ratings.
    • Fitch Ratings recently issued a report pointing to the risks that Chinese lenders are facing in funding the One Belt, One Road (Obor) initiative.  Indicating that “the investments have been driven more by China’s desire to exert global influence than focusing on real demand for infrastructure.”
    • “‘The lack of commercial imperatives behind Obor projects means that it is highly uncertain whether future project returns will be sufficient to fully cover repayments to Chinese creditors,’ Fitch said on Thursday.”
    • Why… “credit ratings for countries where China has big infrastructure plans provide a gauge for the projects’ underlying creditworthiness, Fitch said. Most of the countries are of speculative sovereign-rating grade but several, such as Laos, are not rated at all.”
    • However, to be clear it appears that only Fitch is humbugging the Obor initiative whereas the other ratings agencies are praising it, especially as the U.S. appears to be getting out of global infrastructure investment business.
  • Tom Mitchell of the Financial Times illustrated the renminbi’s retreat as an international payment currency.
    • “The Society for Worldwide Interbank Financial Telecommunication (Swift) said the value of international renminbi payments fell 29.5% compared with 2015.”
    • “The renminbi was only the sixth most used currency in 2016 despite its formal recognition in October by the International Monetary Fund as a global reserve currency, alongside the dollar, euro, yen and sterling.”
    • “The Swift rankings are the latest sign that Beijing’s global ambitions for the renminbi have been put on hold as the People’s Bank of China focuses instead on stemming both the redbacks’s fall against the dollar and steady erosion of the country’s foreign exchange reserves, which have declined 25% to $3tn since 2014.”
    • ft_currencies-used-for-international-payments_1-26-17
  • Emily Cadman, Sharon Smyth, Dingman Zhang, Prashant Gopal, and Emma Dong of Bloomberg News highlighted how China’s army of global homebuyers is suddenly short on cash.
    • “China’s escalating crackdown on capital outflows is sending shudders through property markets around the world.”
    • “Less than a month after China announced fresh curbs on overseas payments, anecdotal reports from realtors, homeowners and developers suggest the restrictions are already weighing on the world’s biggest real estate buying spree. While no one expects Chinese demand to disappear anytime soon, the clampdown is deterring first-time buyers who lack offshore assets and the expertise to skirt tighter capital controls.”
    • “Among other requirements, SAFE (State Administration of Foreign Exchange) said all buyers of foreign exchange must now sign a pledge that they won’t use their $50,000 quotas for offshore property investment. Violators will be added to a government watch list, denied access to foreign currency for three years and subject to money-laundering investigations, SAFE said.”
    • “At The Spire in London, a 67-story tower with sweeping views of the River Thames and flats starting at 595,000 pounds ($751,901), prospective buyers were caught off guard by the new rules. Less than 70% of clients who signed purchase contracts last year have made their initial payments, with the rest now facing ‘problems,’ a press official at Greenland Holdings Corp., the project’s Shanghai-based developer, said on Jan. 12.”
  • Gabriel Wildau of the Financial Times pointed to the record $33bn of foreign real estate acquisitions by Chinese in 2016.
    • Prior to the new restrictions from SAFE, “overseas investment from China in residential, commercial and industrial property totaled $33bn in 2016, up 53% from a year earlier, according to global real estate group JLL, as Chinese buyers snapped up office buildings, hotels and residential land.”
    • ft_china-outbound-re-investment_1-28-17
    • “The biggest deal of the year was Anbang Insurance Group’s $6.5bn purchase of Strategic Hotels and Resorts from private equity group Blackstone.”
    • “A survey by the Hurun Report found that property is the most popular form of overseas investment for Chinese with $1.5m or more. Of this group, 60% plan to invest in property over the next three years, implying 800,000 prospective buyers.”
    • “‘Prices in major Chinese cities have risen so fast in the past year that an overseas house seems to offer good bang for your buck,’ Rupert Hoogewerf, chairman of the Hurun Report, said in October.”
  • Kim Slowey of ConstructionDIVE reported on another record year for the construction delivery of global skyscrapers.
    • “The Council on Tall Buildings and Urban Habitat’s annual review of the world’s tall buildings – 656 feet (200 meters) or higher – found that 128 were completed in 2016, the third straight year that the number of completed skyscrapers has broken the record.”
    • “In a country-by-country breakdown, China was home to the most tall-building projects (84) in 2016, followed by the United States (7), South Korea (6), Indonesia (5), the Philippines (4) and Qatar (4).”
    • “The tallest building completed in 2016 was the 1,739-foot-high Guangzhou CTF Financial Centre in Guangzhou, China, while the tallest towers built in the U.S. were both in New York City – 30 Park Place (926 feet) and 10 Hudson Yards (879 feet).”

Graphics

WSJ – Daily Shot: FRED Average Sales Price for New Homes Sold in US 01/26

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WSJ – Trump Orders Wall at Mexican Border – Laura Meckler 1/25

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FT – HK renminbi deposits fall at record pace in December – Hudson Lockett 1/27

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WSJ – Daily Shot: Cost of Borrowing – Pan Europe 01/29

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MarketWatch – The most corrupt countries in the world – Shawn Langlois 1/28

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FT – US universities’ endowments shrink as investments lose money – Stephen Foley 1/30

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WSJ – Daily Shot: Japan 10yr Government Bond Yield 02/01

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It’s a mad, mad, mad, Maduro world – Venezuela’s leaders ignore reality – 1/26

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Featured

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

China spree pushes football transfer spending to record $4.8bn. Murad Ahmed. Financial Times. 26 Jan. 2017.

What happens when Xi Jinping decrees that he wants China to become a great football nation… entrepreneurs and politicians do their best to oblige.

“Chinese football clubs splashed out more than $450m in transfer fees (the fee one club pays to another club to poach talent) last year, a spree that helped global spending on the acquisition of players reach a record high.”

“According to Fifa’s Transfer Matching System, an arm of the sport’s world governing body, the total spent on transfer fees worldwide hit $4.8bn in 2016, a 14.3% increase compared with the year before.”

“Among the recent deals, Shanghai SIPG bought Brazilian midfielder Oscar from Chelsea for $63m.”

Granted, Chinese authorities have caught on to the reality that a lot of cash is leaving China in pursuit of football clubs, talent and media rights.  Hence, “Chinese sporting authorities have sought to crack down on spending on players,… with efforts such as cutting the number of foreign footballers allowed to play in each match from four to three per team.”

Regardless, the transfer fees paid by China are still behind that of England, Germany, Spain, and Italy – especially the English clubs that “spent $1.37bn on transfer fees in 2016, an 8.7% increase on the year. This included the world-record signing of Paul Pogba worth up to 110m, by Manchester United from Italy’s Juventus last August.”

Still it seems that the Spaniards have the best farming system (or acquirers of talent from an investment standpoint) in that they “were the largest seller of players, receiving $554.5m in transfer fees last year, more than the $508.7m they spent on players.”

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Chinese football club is worth more than AC Milan. Ben Bland and Murad Ahmed. Financial Times. 26 Jan. 2017.

More to the story about football in China.

“A football club in the Chinese Super League has been sold to a local property developer at an equity valuation of more than $800m, suggesting it is worth more than European giants such as AC Milan and Atletico Madrid.”

“The high price put on Beijing Guoan, the top team in the capital, underlines the investment surge in football in China, despite recent efforts by the government to crack down on what it called ‘irrational’ spending on foreign players.”

“Sinobo Land, a little-known property developer, is buying 64% of the club for Rmb3.6bn from current owner Citic, a state-owned investment group, giving it a valuation of Rmb5.6bn ($807m).”

“Football industry analysts said that the premium paid for the club, which finished fifth in last season’s CSL, could not be justified based on its sporting performance or immediate commercial prospects.”

However, the team is in Beijing, regularly attracts 40,000 attendees to each match, and President Xi Jinping has aspirations for China to host a World Cup and win.  So maybe it’s not too far of a stretch.

I suppose it’s less ostentatious than paying $400m for a 13% stake in Manchester City (Li Ruigang in 2015).

Risky corporate borrowers make hay as yields slide. Eric Platt and Joe Rennison. Financial Times. 26 Jan. 2017.

“The combination of rebounding commodity prices and hopes for faster US economic growth under Donald Trump is helping some of the riskiest corporate borrowers secure cheaper financing and underlines investors’ growing stomach for risk.”

“An expanding list of companies with a triple-C rating – deep within speculative territory – have been able to lock in borrowing costs below 7%, as yields have fallen over the past 10 months.”

“Investors’ appetite for the lowest rated segments of the corporate debt market touched a fresh peak on Wednesday, when a triple-C rated company came close to selling bonds with a yield of just 6%. Last February, triple-C paper traded with a yield of 18.57%, according to Bloomberg Barclays Indices. That figure has nearly halved to 9.36% today.”

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“‘It seems there is insatiable demand for yield,’ said Kevin Lorenz, a high-yield portfolio manager with TIAA CREF. ‘Triple-Cs are routinely pricing at 7% or less. The compensation you get paid to take risk is getting narrower and narrower, much like in 1997-98 and 2004-2006.'”

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“High-yield groups have raised $25bn in the US so far this year – up more than fivefold from 2016 – including $3.4bn from triple-C rated issuers, according to Dealogic. It marks the greatest haul from triple-C groups at the start of a year since 2011.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bisnow – How Stadium Development is Killing Loyalty in American Sports 2/1

Economist – India flirts with a UBI 2/2

Economist – How to get rich in America 2/2

FT – Shark antibodies join battle against Alzheimer’s 1/25

FT – German bond yields hit year-high in broad sell-off 1/26

FT – China spells out curbs on capital outflows 1/27

FT – Sleepy Saudi sovereign wealth fund wakes and shakes global finance 1/28

FT – Asia borrowing binge hits record high in January 1/29

FT – Bonds start year at breakneck pace, but higher rates loom 1/29

FT – Fitbit: huffing and puffing 1/30

FT – Renminbi internationalization remains elusive 1/30

FT – Are tougher times for Wall Street’s ‘Flash Boys’ here to stay? 1/30

FT – Chinese billionaire abducted from Hong Kong 1/31

FT – Xiao Jianhua, student leader who became an abducted tycoon 1/31

FT – Derivatives ‘Big Bang’ catches market off guard 2/1

FT – US university endowment woes put spotlight on hedge funds 2/1

FT – Chinese defaults: failing better 2/1

NYT – A Costly Drug, Missing a Dose of Disclosure 1/27

NYT – In America’s Heartland, Discussing Climate Change Without Saying ‘Climate Change’ 1/28

NYT – For Couriers, China’s E-Commerce Boom Can Be a Tough Road 1/31

WSJ – India’s Growth Doesn’t Have a Story 1/26

WSJ – Accused Ponzi Schemer Not Sleeping Easy 1/27

WSJ – Here’s What Can Drive the Economy Higher 1/27

WSJ – Suburban Offices Woo Millennials With Food, Fitness and Fun 1/29

WSJ – The Coming Squeeze on Profit Margins 1/30
WSJ – Young People Lose Confidence In Their Prospects as Homeowners 2/1

 

 

December 2 – December 8, 2016

Inflation running away in Venezuela. The ‘whale’ in the market is you – or really your proxy by way of the government. Barbarian insurers in China are pissing off the securities regulators. China’s banks hiding more than $2tn in loans. A rise in US interest rates are likely to put the hurt on China (among other places).

I know, lots of featured articles this week…

Headlines

  • WSJ – China Debts Just Keep on Rolling 12/6. Earlier this year Chinese corporate-bond defaults were taking off and now – all of a sudden – defaults are gone and companies are issuing lots more debt and at lower rates – some of which are the same companies that were on the edge of default; go figure.
  • FT – Profits in China: not safe 12/6. Now that the new rules from China’s State Administration of Foreign Exchange are taking effect, foreign companies are having difficulties repatriating earnings.

Special Reports / Opinion Pieces

Briefs

  • James Kynge of the Financial Times drew parallels between China’s current liquidity flood and those during the times of the Mongols and Chairman Mao.
    • “The dimensions of China’s liquidity splurge are startling. Ousmene Jacques Mandeng, formerly with the International Monetary Fund, has calculated that between 2007 and 2015 China created 63%, or $16.1tn, of the growth in the world’s supply of money.
    • “China now has more money coursing through the arteries of its economy than the eurozone and Japan combined – and almost as much as the US and the eurozone combined. Since the financial crisis, commentators have focused on the efforts of the US, European and Japanese central banks to print money through ‘quantitative easing’, but China’s output has eclipsed them all.”
    • However, “the main issue is that debts are piling up almost as fast as China generates money to service them, creating what Jonathan Anderson of the Emerging Advisors Group calls a ‘debt funding bubble.'”
    • We shall see where we go from here.
  • Jacky Wong of The Wall Street Journal pointed out that passive investors are getting sucked into Hong Kong market failures by way of their market funds.
    • Bottom line, be very cautious of investing in companies with a thin float (very little shares traded), with a few insiders controlling most of the shares, and a large part of revenues generated from related entities… That goes the same for investing in passive index funds that invest in the same companies…
  • Oshrat Carmiel of Bloomberg highlighted that condominiums in NYC’s tallest luxury tower are being discounted by millions of dollars.
    • “At 432 Park Ave., buyers who signed contracts and completed those purchases this year got price reductions averaging 10%, according to an analysis by appraiser Miller Samuel Inc. In one of the most recent big transactions to close, a penthouse on the 88th floor sold for $60.9 million, a 20% markdown from what developers initially sought, city property records made public Dec. 2 show.”
    • “As new high-end projects mushroom across the skyline, developers of ones that came to market earlier are cutting deals to unload units before competition gets even more heated.”
    • “The building isn’t the only recently completed ultra-luxury tower that’s lowered prices. A few blocks away on 57th Street, a 4,193-square foot apartment at Extell Development Co.’s One57 sold in October for $21.6 million, or 24% off the last asking price, according to listing website StreetEasy.”

Graphics

WSJ – Daily Shot – 12/02

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Economist – Discounting the bull: Stock analysts’ forecasts tend to be wrong in reassuringly predictable ways 12/1

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WSJ – China’s Yuan and the Trillion-Dollar Numbers Game – Nathaniel Taplin 12/7

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NYT – A Bigger Economic Pie, but a Smaller Slice for Half of the U.S. – Patricia Cohen 12/6

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WSJ – Daily Shot: Bloomberg Barclays US Corporate High Yield Average OAS 12/8

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Featured

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

Venezuela struggles to tame triple-digit inflation. Andres Schipani. Financial Times. 5 Dec. 2016.

“In an echo of Wiemar Germany, Venezuelan shopkeepers have resorted to weighing banknotes instead of counting them. In defiance of official pegs, the local currency has tanked on the black market, losing a jaw-dropping 62% of its value in November, making bills in circulation in the country virtually worthless.”

“The biggest note in use is the 100 bolivar bill, which is worth roughly 2 US cents on the black market.”

As a result vendors are counting money with weight scales rather than waste the day away counting notes. The rule of thumb “100 notes of any denomination of Venezuela’s currency weigh 110 grams.”

“In the midst of a collapse in the parallel market (there are two local exchange rates – one used for priority imports and the other for everything else) and crippled by triple-digit inflation, the country’s central bank said it would begin circulating higher-denomination notes, including 500, 1,000, 2,000, 5,000, 10,000 and 20,000 bolivares, next week.”

“Carlos Miguel Alvarez, a senior economist with the Caracas-based Ecoanalitica, sees the measure as shortsighted. ‘The new bills may facilitate transactions, but unless the inflationary economic distortions are corrected, they won’t last very long as relief.'”

“Economists list those distortions as currency and price controls, coupled with lower oil prices, mismanagement and a relentless printing press. Venezuela’s central bank has kept inflation data under wraps for a year, but Mr. Alvarez forecast it would top 511% this year. The IMF puts 2016 inflation at 476%.

“Now prices in certain stores can change daily. Some observers are comparing the issuance of larger Venezuelan bank notes with Zimbabwe’s decision to print a new currency to tackle a collapse of trust in its financial system.”

There’s a Big New Investor in Stock Markets: The State. Gregor Stuart Hunter and Kosaku Narioka. The Wall Street Journal. 5 Dec. 2016.

“Two of the world’s most important stock markets have a big new investor: the state.”

“About 30% of all the companies in Japan’s three main equity indexes now count the country’s central bank as one of their top 10 shareholders, according to a Wall Street Journal analysis of data as of the end of September. Six years ago, the Bank of Japan’s presence in the market was trivial.”

“In China, two major state-owned investment funds that are part of the so-called national team have become top 10 shareholders in 39% of listed companies over the past year, according to UBS, which analyzed shareholdings as of the end of September.”

“The new wave of state buying is unique in that it is aimed primarily at propping up markets and economies.” AKA helicopter money.

“Traders say the buying distorts stock values as investors build strategies around government actions rather than company fundamentals. The state’s indiscriminate purchases also might reduce pressure on managements to fix problems that otherwise could weigh on their stock. And then there is the question of how governments will ultimately wind down their holdings, a concern that some say could be deterring investors with a longer-term outlook.”

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“The BOJ (Bank of Japan) started buying exchange-traded funds that track equity indexes in December 2010. In July, it boosted its target to roughly ¥6 trillion ($53 billion) worth of ETFs each year. Its holdings had swelled to about ¥13 trillion by late November – equal to around two-thirds of the money held by all Japanese ETFs, according to a Journal analysis of data from the central bank and Morningstar.”

“In China, Central Huijin Asset Management, part of China’s main sovereign-wealth fund, and China Securities Finance Corp., which provides margin financing to the country’s brokerages, have been buying shares to support Chinese stock markets since the rout during the summer of 2015.”

“Any suggestion that the national team is active can produce a frenzy of buying among mom-and-pop investors, said Sean Taylor, chief investment officer for Asia-Pacific at Deutsche Asset Management.”

“Others say the national team’s presence has made the market more dull. Big state-backed funds have been selling down blue-chip shareholdings whenever the market rallies for a few sessions in a row, then buying them back if any selloff steepens. The main Shanghai market has traded in a much narrower range this year than in 2015…”

All this distortion can’t be good.

China’s regulators lose patience with ‘barbarian’ insurers. FT Confidential Research. Financial Times. 6 Dec. 2016.

“The chairman of the China Securities Regulatory Commission (CSRC) has sustained a public attack on aggressive stock purchases on the secondary market in recent months. Liu Shiyu, a former central bank deputy head, has accused this new breed of Chinese corporate raider of using illegal funds and morphing from ‘strangers at the gate to barbarians and finally to industry thieves.'”

“As we (Financial Times Confidential Research – FTCR) have noted, the most aggressive buyers in the A-share markets, such as Anbang Life, Foresea Life and Evergrande Life, have tended to be aggressive sellers of universal life insurance products, short-term life policies that are very similar to wealth management products but with an added life insurance component.”

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“Regulators worry that such policies are being sold primarily as high-yielding, short-term investment products, rather than long-term, conservative insurance products, and that their high returns are being achieved by means of high-risk, aggressive stock purchases designed to ramp up stock prices.”

“The insurers need to invest aggressively to match the generous returns offered by universal life insurance products.” However, “slowing sales of such products will pose a challenge in the coming year. The insurers depend on customers rolling over short-term policies to remain solvent; if they do not, insurers will be forced to sell their newly-acquired stakes, undermining their business model.”

The FTCR group does “not think Mr. Liu’s harangue marks an end to this battle. There is too much money involved and some insurance executives reportedly have better connections than their regulators.”

China’s Banks Are Hiding More Than $2 Trillion in Loans. Lingling Wei. The Wall Street Journal. 7 Dec. 2016.

Want to expand credit but not have the liability show up on your balance sheet?  Well, in China make it an “‘investment receivable,’ a loosely regulated category of assets that allows bank officials to set aside little or nothing for potential losses.”

“As of June, 32 publicly traded Chinese banks had a total of $2 trillion in investment receivables, up from $334 billion at the end of 2011, according to a tally by The Wall Street Journal of the latest available information from data provider Wind Information Co.”

“The investments are equivalent to 20% of the same banks’ total loans in dollar terms, up from 6% at the end of 2011. The 32 banks have about 70% of all the banking assets in China.”

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“The rapid growth in banks’ off-balance-sheet and investment activities, in essence, means hidden credit risks and could threaten financial safety.” – Shang Fulin, China’s top banking regulator

“Economists at Swiss bank UBS AG estimate as much as $2.4 trillion (16.5 trillion yuan) was ‘missing’ from the broadest measurement of credit disclosed by China’s central bank last year, up from $712 billion (4.9 trillion yuan) in 2014. The discrepancy is largely because Chinese commercial banks use so-called shadow lenders to mask loans as investments, the economists said.”

“If Chinese banks were required to count their investment receivables as loans, the banks would need to raise as much as $212 billion in capital, estimates UBS analyst Jason Bedford. That is not far short of the $262 billion raised by all Chinese banks in 2015.”

“As a result, the analyst said, ‘we expect any capital impact [on banks] to be dragged out over years to avoid a shock to the system.'”

“‘All banks are trying to move [loans] off balance sheets,’ said an official at Bank of Nanjing, nodding to a common belief that in China that Beijing always will stand behind the country’s banks. ‘The only risk we have is sovereign risk.'”

US interest rate rises set to expose China’s frailties. James Kynge. Financial Times. 7 Dec. 2016.

China is readying itself to tighten its monetary policy as the U.S. looks to do the same; however, right now isn’t the best time…

“The vast size of China’s debt mountain – which stands at over 250% of gross domestic product, up from 125% in 2008 – means that even minor increases in short-term interest rates may squeeze corporate activity and precipitate defaults, thereby hampering economic growth.”

“Alex Wolf, emerging markets economist at Standard Life Investments, argues that default risks are rising because more and more corporations are relying on the short-term money market to raise the finance they need to repay existing debts.”

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“Estimates by Fitch, the rating agency, reveal a level of pain in corporate China that is not hinted at by official statistics. Some 15% to 21% of loans in the Chinese banking system are already non-performing, Fitch estimates, compared with official numbers of less than 2%.”

In this context, it is unsurprising that foreign exchange reserved declined by nearly $70bn in November.

“The Institute of International Finance, a global association of financial institutions, calculates that in the first 10 months of this year net capital outflows from China totaled $530bn, with October marking the 33rd straight month in which more money left the country than flowed in.”

Property companies are also finding themselves on the short-end of the stick.

“In November, property developers issued only Rmb12bn ($1.7bn) in bonds, down from a monthly average of Rmb86bn from January to September, according to FT Confidential Research, a unit of the Financial Times.”

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Other Interesting Articles

Bloomberg Businessweek

The Economist

FT – Meitu: snap appy 12/2

FT – Think twice before picking Uber as a business model 12/4

FT – Foreign companies in China hit by new exchange controls 12/6

NYT – ‘They Are Slaughtering Us Like Animals’: Inside President Rodrigo Duterte’s brutal antidrug campaign in the Philippines 12/7

WSJ – Baby Boomers vs. Millennials: The Uneven Jobs Recovery 12/1

WSJ – Credit Restrictions Cost Home Buyers ‘Deal of a Lifetime’ 12/4

WSJ – India’s Central Bank Can’t Cut It 12/7

 

November 18 – November 24, 2016

Chinese mainland real estate companies pricing out local developers in Hong Kong.

Happy Thanksgiving everyone and thanks for reading.

Headlines

Special Reports / Opinion Pieces

Briefs

  • Esther Fung of the Wall Street Journal highlighted that some property landlords are making deals with Uber and Lyft to allow for or make up for parking shortages.
    • “Ride services such as Uber and Lyft, along with the promise of driverless cars, represent the ‘single biggest game-changer for real estate’ over the next several decades, said Dave Bragg, an analyst at real-estate research firm Green Street Advisors.”
    • “In all, Green Street estimates parking needs will be cut in half over the next 30 years amid an anticipated decline in vehicle ownership, eliminating the need for 75 billion square feet of parking space.”
    • “Green Street expects mass adoption to begin around 2030 and to be completed 15 years later. Uber already has suggested its entire fleet would be driverless by 2030.”
    • Are the Uber drivers savvy to this?

 Graphics

FT – Italian 10-year bonds on course for worst month since 2012 – Mehreen Khan 11/17

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NYT – As American as Apple Pie? The Rural Vote’s Disproportionate Slice of Power – Emily Badger 11/20

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Visual Capitalist – How Much Government Debt Rests Upon Your Shoulders – Jeff Desjardins 11/23

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Featured

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

Mainland money distorting Hong Kong land prices, tycoon warns. Ben Bland. Financial Times. 24 Nov. 2016.

An interesting thing when local developers are priced out of a market by aggressive and seemingly foolhardy outsiders. What’s noteworthy is who is making the statement and how much development property sites are now going for in Hong Kong – despite its troubles.

“Lui Che-woo this month lost out in an auction for a Hong Kong site that was acquired by a subsidiary of HNA, the acquisitive (Chinese) mainland conglomerate, at double the price paid for a similar site in 2014.” 

Lui Chee-woo is head of Galaxy Entertainment and happens to be worth $11bn according to Forbes. HNA is a Chinese conglomerate with business lines that include aviation (Hainan Airlines), real estate, financial services, etc.  HNA also recently acquired a 25% stake in Hilton Worldwide from Blackstone for about $6.5bn in October.

“The site went for about HK$13,500 (USD $1,740) per square foot – similar to the going rate for completed apartments nearby.” 

That’s per buildable square foot folks…add another $1,000 psf in direct construction costs (probably around that amount to attain a finish level worthy of these price points), plus another $1,000+ psf or so in soft costs (you’ll need brand name architects to be consistent with the message), financing, and profit, and you’re at around $4,000+psf.  Not unheard of in this market, but consider the comps at around 50% of this…

“Mainland developers acquired 44% of the residential land sold by the Hong Kong government last year, up from just 7% in 2012, according to calculations by Spacious, a property listings website. In the year to date, mainland companies have bought 39% of the land auctioned.” 

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Bottom line, different folks/companies have different return metrics and objectives…

Other Interesting Articles

Bloomberg Businessweek

The Economist

A Wealth of Common Sense – How Bad Could Bond Market Losses Get? 11/20

Economist – You may be higher up the global wealth pyramid than you think 11/23

FT – China’s hairy crab scandal reveals depth of pollution crisis 11/17

FT – Jared Kushner, favored son-in-law of Donald Trump 11/18

FT – Blackstone looks to sell $2.3bn Japan property portfolio to Anbang 11/21

FT – Honeymoon is over for new Saudi leader as reform pain kicks in 11/22

NYT – Donald Trump’s Son-in-Law, Jared Kushner, Tests Legal Path to White House Job 11/17

NYT – Quit Social Media. Your Career May Depend on It. 11/19

NYT – Italy’s Banks Are in a Slow-Motion Crisis. And Europe May Pay. 11/19

NYT – Dallas Stares Down a Texas-Size Threat of Bankruptcy 11/20

NYT – Gender Colors Outrage Over Scandal Involving South Korea’s President 11/21

NYT – Mortgage Rates’ Rise Catches Home Buyers – and Lenders – Off Guard 11/23

WP – The North Pole is an insane 36 degrees warmer than normal as winter descends 11/17

WSJ – China Cracks Down on Home Buyers With Fake Divorces 11/22

WSJ – Rising Rates Threaten Global Property Investments 11/22

July 15 – July 21, 2016

Helicopter money coming to Japan? GMO on EU immigration and the Brexit. Hong Kong and China at a cross road.  ECB coming up against its quantitative easing boundaries.

Headlines

Briefs

    • China’s 2nd quarter gross domestic product came in at 6.7%, which is 10 basis points higher than forecast; however, the concern is where that growth has come from.
    • “Figures from the People’s Bank of China the same day showed that money supply growth was faster than expected, reaching levels last seen post 2008. New loans also rose by over $200bn, more than $50bn higher than economists’ estimates.”
    • Bottom line, “the reversion to state-led growth is unsustainable. Should China continue to shun reforms in favor of a quick fix, the short-term benefits of stabilized growth will be outweighed by the cost of persistent imbalances.”
    • The World Federation of Advertisers “estimates that between 10 and 30% of online advertising slots are never seen by consumers because of fraud, and forecasts that marketers could lose as much as $50bn a year by 2025 unless they take radical action. At that scale, the fraud would rank as one of the biggest sources of funds for criminal networks, even approaching the size of the market for some illegal drugs.”
    • “Global spending on online advertising has almost doubled in the past four years – reaching $159bn in 2015, according to research group eMarketer. This money underpins the internet economy and supports trillions of dollars of equity in media and technology.”
    • “Google, the biggest player in the online ad industry, generated revenues of $67bn from it last year.”
    • Bottom line, digital ad platforms and major buyers of online ads are emphatically building methods to track and prevent fraud and where they can and to the event that they can’t expect the federal government to step in.
  • Mark Heschmeyer of CoStar reported on Simon, WP Glimcher turning over the keys on two malls to their respective lenders.
    • Goes to show that just because a company is worth several billion dollars, doesn’t mean they pay back all their debts.
    • “While the overall retail property sector appears to be strengthening, a handful of loans for lower-quality shopping centers and malls financed at the height of the previous CRE cycle are coming due now and proving to be a thorn in the side of publicly traded REITs.”
    • “Simon Property Group and WP Glimcher both turned malls back over to the lenders this week, and Kimco Realty Corp. disclosed that it doesn’t expect one of its joint venture-owned malls will be able to refinance a loan set to come due this fall.”
    • “All three of the malls involved in the foreclosure actions were last financed in 2006 and securitized in mortgage backed bond conduits.”
    • As the saying goes, don’t hate the player, hate the game.

Special Reports

Graphics

FT – Do sovereign credit ratings still matter? 7/14

FT_Decline of AAA rating countries_7-14-16

FT_Declining government yields_7-14-16

FT – US oil rig count rises for third-straight week 7/15

FT_US oil rig count_7-15-16

FT – Auto sales and the oil price: the Great Unwinding continues beyondbrics – Paul Hodges 7/18

FT_Energy consumption in the US_7-18-16

Temporary work – How the 2% lives: Temping is on the increase, affecting temps and staff workers alike

Economist_US temporary employment_7-16-16

FT – Independent Chinese PMI gauge suspended indefinitely – Hudson Lockett 7/20

FT_China Minxin PMI vs official_7-20-16

Featured

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

Japan flirts with helicopter money. Gavyn Davies. Financial Times. 17 Jul. 2016.

“Whether or not they choose to admit it the Abe government is on the verge of becoming the first government of a major developed economy to monetize its government debt on a permanent basis since 1945.”

“There are many ways of defining helicopter money, but the essential feature is that it involves an increase in the budget deficit which is financed by a permanent increase in the central bank’s monetary base, not by the issuance of government debt.”

“This is different from quantitative easing, since QE involves the ‘temporary’ purchase of government debt, which is subsequently sold back into the market, at least in theory. And QE does not necessarily need to involve any increase in the budget deficit…”

While “the direct financing of a government deficit by the Bank of Japan is illegal, under Article 5 of the Public Finance Act.” It looks like the government is coming up with a work-a-round.

One method proposed is the issuance of perpetual bonds “…which basically involves the central bank printing money and giving it to the government to spend as it chooses. There would be no buyers of this debt in the open market, but it could presumably sit on the BoJ balance sheet forever at face value.”

Thing is, that “there is no doubt that the BoJ is now monetizing much of the increase in government debt needed to fund ¥10 trillion fiscal stimulus planned by the government. Since the market fully expects the BoJ’s debt purchases to be permanent, it is helicopter money by any other name.”

Why do this when the labor market is at close to full employment?  Basically the inflation expectations in Japan are REALLY low and the BoJ is seeking to reduce its vulnerability to “…any new deflationary shock, from China for example.”

The key point that helicopter money will confer is that debt sustainability (which is why the sales tax increases have been/are being implemented) is not the priority. Rather that Japan will live with whatever debt level it takes to achieve inflation.

“The key problem is that it might restore inflation far too well. It is very difficult to calibrate the amount of helicopter money that is needed to hit the inflation target.”

Expect the delicate dance to continue, which may fail to get Japan out of its deflationary rut.

Immigration and Brexit. Jeremy Grantham. GMO. Jul. 2016.

While this is piece is a commentary on immigration and the Brexit, I think it does a good job of presenting the scale of the immigration challenge that the EU is facing.  I will only highlight two specific items (the full commentary is a good read) for brevity.  1) Grantham’s stance on the markets “despite brutal and widespread asset overpricing, there are still no signs of an equity bubble about to break…” and 2) some of his thoughts on immigration to the EU.

“The truth about immigration to the EU, in my view, is bitter. As covered in earlier quarterlies, I believe Africa and parts of the Near East are beginning to fail as civilized states.”

“They are failing under the pressure of populations that have multiplied by 5 to 10 times since I was born; climate for growing food that is deteriorating at an accelerating rate; degraded soils; insufficient unpolluted water; bad governance; and lack of infrastructure. Country after country is tilting into rolling failure.”

“This is producing in these failing states increasing numbers of desperate people, mainly young men, willing to risk money and their lives to attempt an entry into the EU.”

“For the best example of the non-compute intractability of this problem, consider Nigeria. It had 21 million people when I was born and now has 187 million. In a recent poll, 40% of Nigerians (75 million) said they would like to emigrate, mostly to the UK (population of 64 million). Difficult. But the official UN estimate for Nigeria’s population in 2100 is over 800 million! (They still have a fertility rate of six children per woman). Without discussing the likelihood of ever reaching 800 million, I suspect you will understand the problem at hand. Impossible.”

“I wrote two years ago that this immigration pressure would stress Europe and that the first victim would be Western Europe’s liberal traditions. Well, this is happening in real time as they say, far faster than I expected. It will only get worse as hundreds of thousands of refugees becomes millions.”

Hong Kong: One country, two economies. Ben Bland. Financial Times. 19 Jul. 2016.

Integration of Hong Kong with the Chinese mainland continues to be a delicate issue that is being stressed by a slowdown in the Chinese economy.

As Lily Lo, an economist at DBS, a Singaporean bank, put it “Hong Kong is really dependent on China and external trade. The Chinese economy is slowing down and this is a structural slowdown so we don’t think there will be a V-shaped recovery any time soon. There’s no quick fix.”

Further, as China has opened its economy more and more, Hong Kong is no longer the only or primary route to do business with China.  “Its container port, which was the world’s busiest in the 2000s, has fallen to fifth place, overtaken by Shanghai, Shenzhen and Ningbo.”

“Mr. Tsang (John Tsang, the financial secretary of Hong Kong) and Li Ka-shing, the billionaire whose interests in Hong Kong stretch from ports to property and retail to telecoms, have both warned that the economic outlook is worse than that faced during the Sars epidemic in 2003, which killed 299 people and prompted the last sharp slowdown.”

“Chow Tai Fook, the biggest jeweler in the world by market capitalization, is seen as a bellwether for mainland demand for Hong Kong’s luxury goods. Its sales in Hong Kong and Macau fell on an annualized basis by 22% in the three months to the end of June.”

FT_Hong Kong retail sales_7-19-16 

“Yu Kam-hung, managing director of investment properties at CBRE, an estate agent, predicts that prices could fall up to 10% over the next year, and they are already 10 to 15% off their peak of 18 months ago.”

Then of course it doesn’t help that “there is a deep-seated animosity to (Chinese) mainlanders in Hong Kong. So why would they want to go somewhere they are not welcome when there are so many other choices.” – Shaun Rein, China Market Research in Shanghai

ECB faces QE dilemma after Brexit vote. Claire Jones and Elaine Moore. Financial Times. 20 Jul. 2016.

It wasn’t long after the Brexit referendum vote that government bond yields in the safest markets dropped even further (see graphic on Sovereign credit ratings above).  Problem is that the current structure in place within the European Central Bank (ECB) is reaching its limits.

Currently the ECB is buying €80bn a month in European member country debt to stimulate the overall European economy (aka Quantitative Easing or QE).

Well, “under current rules, the scale of purchases under QE match the size of a member state’s economy, meaning that Germany’s Bundesbank must buy around €10bn of government debt each month – more than any other central bank in the region.”

“But because of the recent bond market shifts, more than 50% of German bonds previously eligible for QE have now become too expensive for the Bundesbank to purchase, yielding less than the ECB’s self-imposed floor of minus 0.4%, according to data from Bank of America Merrill Lynch.”

FT_ECB looking for more bond options_7-20-16

So, now the ECB is essentially faced with three primary options (there are other options – see “Five ways to change the rules within the article).

  1. Scrap the minus 0.4% floor. The “economists at Goldman Sachs calculate (this) would buy the ECB the most time, enabling the Bundesbank to keep buying for up to another 18 months.”
    • “The option, however, would expose the eurozone’s central banks to heavy losses, which they have until now avoided because the minus 0.4% floor mirrors the ECB’s deposit rate charged on banks’ reserves.”
  1. “Scrap the rule that bond purchases match the size of a member states’ economy.”
    • “But such a shift would open the way to buying more bonds from the most indebted countries, and would so be the most controversial of the fixes. Nowhere would it attract more criticism in Germany, where the change would be viewed as a bailout by the back door for profligate member states.”
  1. End QE.

Don’t know if the EU or the world is ready for that.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Blackstone Said to Plan Invitation Homes IPO for First Half 2017 7/17

CoStar – Internet Commerce Drives Strongest Surge in Demand for US Industrial Space Since 2001 7/20

FT – The chronic spin that blights China’s economy 7/14

FT – New wealth management products power Anbang and rivals 7/17

FT – Major cities drive China property price gains 7/17

FT – Trump leads the west’s flight from dignity 7/17

FT – Apple Watch sales fall 55% as consumers mark time on category 7/21

InvestmentNews – REIT with a twist – and a high commission – is new darling of independent brokers-dealers 7/14

NYT – The Risk of Building on Real Estate Funds’ Profitable Past 7/15

NYT – Why Land and Homes Actually Tend to Be Disappointing Investments 7/15

NYT – Vast Purge in Turkey as Thousands Are Detained in Post-Coup Backlash 7/18

WSJ – Surprise: The Economy Is Looking Much Better 7/14

WSJ – China Economy Tilts Further in Wrong Direction 7/15

WSJ – Japan and Helicopter Money: Fan Blades Aren’t Turning Just Yet 7/17

WSJ – Big Chinese Developers Push Into Hong Kong Market 7/19