Shocking: Chinese real estate prices are actually falling
Real estate prices fell in 64 of the 70 cities surveyed. This is the largest decline since records began in 2005. This is bad news for the global economy
I had written about the problems with Chinese real estate a few months ago. Normally I do not discuss a particular subject more than once a year, but it appears that this problem will only get worse.
When I wrote the piece, prices of Chinese real estate were still rising, perhaps at a slower pace than in years past, but rising. This is no longer true. They have now been falling for the past three months. It is not just the third and fourth tier cities that are having problems. They fell in 64 of the 70 cities surveyed. This is the largest proportion of declines since records began in 2005. The fall between June and July was .9%, the fastest decline over the three months. So the fall may be accelerating.
Housing sales are also falling. They have fallen 10.5% in this year, this figure too, is accelerating. Sales fell 16.3% in July, down sharply from June. The drop has continued into August. Data from 42 large cities showed a 20 % year on year decrease in home sales in the first 17 days of August.
The falling prices are beginning to cause a bit of unrest. There was a protest at the Shanghai offices of the developer Greentown China Holdings. It dropped prices 25% in five days. Naturally the people who had purchased their properties before the price drop were a bit upset. There were also protests in Jinan, south of Beijing, when another developer also cut prices by 25%.
Falling prices are rather new phenomena in China. With the exception of a short period in 2012, housing prices have been rising. There has never been any real correction since people were first allowed to own their homes 15 years ago. Prices have increased 500% since 2008 and are some of the most expensive in the world, relative to household income.
Housing is also a major component of the Chinese economy. The construction and real estate industries make up 13% of GDP compared to just 3.2% in the US. If you include cement, steel, chemicals and furniture and other industries that impact real estate, the figure rises to 20% a full one fifth of GDP.
The real estate industry is not only a large part of China’s GDP, it is also central to local government revenues. It is estimated that land sales make up 60% of all local government income. Real estate taxes, where they exist, are only experimental programs.
There is also plenty of inventory to work through. At the end of 2013 there were 4.863 billion meters of residential housing under construction. If we assume that sales average the same number as between 2009 and 2012, an assumption that may no longer be valid, then it would take 5 years to deplete the inventory assuming no new developments after 2014. Unsold inventory in 14 large cities jumped by 30% since the beginning of 2014.
Property developers are trying to deal with the inventory in different ways. One is to hold back property from the market. The number of homes added to the market in July dropped 25% from June. They are slowing construction. New building construction dropped 18.6% in the first 5 months of 2014. They are also adding incentives. These include no down payments and guarantees to buyback properties at the sales price in five years. And as a last resort they cut prices, but in smaller cities these discounts do not increase sales.
The slow sales and large inventories have hurt developers' cash flows. Cash and cash equivalents at 137 listed mainland developers, excluding the four largest, were sufficient to cover just 74% of their short term liabilities in the first quarter.
Naturally the government is concerned with the present housing slump. They faced a similar slow down in 2011-2012. At that time the solution was to expand credit. The present slump is in part a reaction to the 2013 credit expansion. To slow the markets the government has been slowing credit. Can they reverse course and get the market moving again?
Perhaps, but it will be more difficult. China has been expanding credit since 2008. It is now more than 250% bigger than their economy.. While the absolute level of debt is not that high compared to other counties, the US has a ratio of 277%, the speed of the build up is. The US present debt levels haven’t grown that much in the past 5 years. China’s debt has expanded by 150%. Rapid build-up of debt in such a magnitude in such a short period has almost always been followed by financial turmoil in other economies.
The banks are also having trouble finding new money. They have been subject to huge outflows as competition from trust companies and new online banking offer higher interest payments. Their bad loans are rising and they have been forced to sell Rmb 90 billion ($14 billion) worth of bonds to shore up their balance sheets.
The other recent source of loans, trust companies, is drying up. Chinese regulators have issued a series of new rules that have slowed their growth. Problems with several trust companies and the increased government scrutiny have made them more cautious. There have been defaults, but these have been followed by bailouts, which may not continue.
Even President Xi Jinping’s crackdown on corruption is having a detrimental effect. Government officials make up as much as 20% of the luxury housing market. They used ill gotten gains to invest in real estate. They have stopped buying and are actively selling their houses at discounts of 5% to 10%.
To slow the rapid rise of real estate prices many towns had instituted restrictions. Thirty cities have eased these curbs, but it hasn’t helped. Buyers have realized that prices could go down and won’t take the risk.
The impact of a Chinese real estate decline will not be limited to China. There is a more direct impact than just the falling demand from a slowing Chinese economy. Asian companies have issued bonds worth $150 billion last year. They had sold $100 billion by last June. Up to half of the issues are from Chinese companies. Thanks to rock bottom interest rates, much of the demand for Asian bonds comes from the US. Chinese developers have also participated in this market. They have sold $50 billion worth since 2010.
A slowing Chinese real estate market would not be good news for the world economy. It might become far worse since the world economy already has enough problems. The Eurozone, Japan, Russia, Brazil are either slowing or in recession. The massive amounts of free money that has been swirling around the globe for the past five years have possibly created several asset bubbles, which depending on the country could include equities, bonds, and real estate. The ability of governments, specifically the Chinese government, to stimulate growth with more debt is constrained. Capitalism is a two way street. So despite the promises of central bankers the long awaited recovery might actually be something quite different. 
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and speaks four languages.) 


Nifty, Sensex showing no signs of fatigue: Weekly Market Report
As long as Nifty stays above 7,850, the index will look to head higher
The S&P BSE Sensex closed the week that ended on 28th August at 26,638 (up 219 points or 0.83%), while the S&P CNX Nifty ended at 7,954 (up 41 points or 0.52%). Last week, we had mentioned that the Nifty and Sensex are headed higher, subject to dips. Nifty has to stay above 7,850 for the rally to continue.
On Monday, although the market opened on a positive note, by the end of the session it started giving up gains. The weakness could be attributed to news from the Supreme Court declaring the all allocations of coal blocks, from 1993 till 2010,  illegal. Nifty closed at 7,906 (down 7 points or 0.09%).
Finance Ministry said it is considering a bifurcation of the post of chairman and managing director in public sector banks to strengthen corporate governance in light of recent cases of corruption.
US Federal Reserve Chairwoman Janet Yellen in her speech on Friday said, early rate hikes are possible, but it will depend on how the economy evolves in the next few months.
On Tuesday the indecisiveness on the bourses continued, with the Nifty closing marginally lower for the second consecutive session. Nifty closed at 7,905 (down 2 points or 0.02%). The highlight of the day was the Competition Commission of India (CCI) levying a total penalty of Rs2,544.64 crore on 14 car makers, at the rate of 2% of the average turnover. The penalty is to be deposited within 60 days of receipt of the order. They were penalised for having a monopolistic control over the spare parts and diagnostic tools of their respective brands. The car companies charged arbitrary and high prices for their spare parts. They were also found to be using their dominant position in the market for spare parts and diagnostic tools to protect their market for repair services, thereby distorting fair competition.
Department of Industrial Policy and Promotion (DIPP) on Tuesday notified an increase in the foreign direct investment (FDI) limit to 49% from 26% in the defence sector.
Ahead of August futures and options expiry, on Wednesday the indices moved in a range for most of the trading session. Nifty closed at 7,936 (up 31 points or 0.40%).
Nifty again managed to close in the positive on Thursday after increased volatility especially at the end of the session. Nifty closed at 7,954 (up 18 points or 0.23%).
Global credit rating agency Moody's Investors Service said that, India's sovereign ratings are constrained by persistently high inflation. Without a significant increase in food output, the risk from continued inflation could limit India's growth prospects, Moody's said.
DIPP on Wednesday issued a notification allowing 100% FDI through the automatic route in railway infrastructure.
There are reports that the Economic Offence Wing (EOW) of Mumbai Police is probing the role of public sector banks in relation to the fixed deposit (FD) scam.
The stock markets were closed on Friday for Ganesh Chaturthi. Data released on Friday showed that gross domestic product (GDP) grew by a better-than-expected 5.7% in April-June, sharply higher than 4.6% in the previous quarter, signalling a revival in the economy.
For the week, among the other indices on the NSE, the top two performers were FMCG (3%) and Auto (1%), while the worst two performers were Realty (6%) and Metal (5%).
Among the Nifty stocks, the top five stocks for the week were BHEL (6%); Hindustan Unilever (5%); Dr Reddy's Lab (4%); ITC (3%) and BPCL (3%), while the top five losers were Jindal Steel (21%); DLF (9%); Tata Power (8%); Hindalco (7%) and Bank of Baroda (5%).
Of the 1,517 companies on the NSE, 561 companies closed in the green, 925 companies closed in the red, while 31 companies closed flat.
Out of the 27 main sectors tracked by Moneylife, the top five and the bottom five sectors for this week were:


SAT upholds NSE decision to refuse Emkay Global's plea

According to SAT, if trades are executed due to negligence or breach of duty they cannot be considered material mistake and therefore not qualify for annulment


Holding on to the sanctity of trades on the exchanges, the Securities Appellate Tribunal (SAT) on Thursday upheld National Stock Exchange (NSE)'s decision to refuse Emkay Global Financial Services plea for annulment of erroneous trades executed in October 2012.

At the same time, SAT has asked NSE to review trades executed by Emkay with two brokers - Inventure Growth and Securities and Prakash K Shah Shares and Securities.

The case relates to orders entered by a dealer of Emkay on 5 October 2012, that had led to a flash-crash of over 900 points (fall of 15.5%) in the NSE's benchmark index Nifty, forcing the bourse to temporarily halt trading.

Emkay had approached SAT after NSE refused to accept its request for annulment of the erroneous trades.

In a final ruling dated 26th August, SAT has upheld NSE's contention that norms related to trades on exchange should be inviolable "to ensure sanctity of dealings on the exchange".

"If trades are executed due to negligence or breach of duty they cannot be considered material mistake and therefore not qualify for annulment," SAT said.

As per the tribunal, 'material mistake in the trade' would be attributable to unforeseen circumstances, which vitiate sanctity of the trades executed on exchange.

"Breach of duty/negligence would not be unforeseen circumstance that can be said to vitiate the trades executed on the exchange," SAT said.

Among others, SAT noted that Emkay had not installed a "validation mechanism" before entering sell orders and was also negligent in transmitting erroneous trades from the dealer's terminal to the NSE's server by ignoring four to five level checks that were available in the system.

Moreover, SAT also rejected Emkay's contention that NSE's trading system was faulty and in violation of market norms on grounds that the matter was pending before Sebi and it "would not be proper" for the tribunal to comment on the same.

However, SAT noted that while Emkay Global during the trades had incurred losses of Rs51 crore on account of sell orders, two counter-parties - Inventure Growth and Securities and Prakash K Shah Shares and Securities - had made huge profits running into several crores of rupees.

According to SAT, violations committed by - Inventure Growth and Prakash K Shah Shares - "were serious violations" and NSE should have considered that the trades were "vitiated" on account of such violations by the two brokers.

Accordingly, the matter in this regard has been remanded back to NSE for fresh consideration.


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