Money Flows out of China Spark Change in How China Creates Money

Money flowed out of China in August for the third time in 2012. Their standard MO of buying foreign monies from their exporters in exchange for yuan is going to have to change.

Average monthly gains in Yuan holdings is 35 billion this year compared to 232 billion monthly last year. Market liquidity supply sees big change

"For a long time, Chinese banks' yuan holdings for purchasing foreign exchange have been a channel for the central bank to create money. Now the old pattern is about to change, which means the central bank needs to find new ways to issue currency if it wants to maintain stable money supply growth," said Cao Yuanzheng, chief economist at the Bank of China Ltd.

Yuan holdings among banks for purchasing foreign exchange, an important measure of capital flows, declined by 17.4 billion yuan ($2.75 billion) in August to 25.64 trillion yuan, marking the second straight monthly fall.

The depreciation tendency once again indicates that the yuan's exchange rate is close to equilibrium, he said. "We believe that capital flows related to yuan exchange rate expectations is the most uncertain factor affecting overall capital flows," said Wang Tao, head of China economic research at UBS Securities Co Ltd.

If you'll recall, a lot of money poured into Yuan purely due to the expectation that it would appreciate. Now that the signs are toward depreciation, this speculative bet is being taken off the table, triggering outflows.

"The financial account deficit plus a lower current account surplus means that China may have entered a new era, that is, the stagnant growth of foreign exchange reserves."

The central bank has been increasing its use of short-term money market tools such as reverse repurchase transactions to ease liquidity tension, after it last cut the RRR in May by 50 basis points to 20 percent for major banks. It injected massive liquidity through another round of reverse repurchase operation in the last week of September. From Sept 24 to 27, it injected 365 billion yuan, a record high weekly injection through open market operations.

Buying treasury bonds in the secondary market would become a major channel for the central bank to create money in the future, China Business News reported, citing an anonymous analyst close to central bank decision-makers.

But controlling liquidity through purchases and sales of treasury bonds requires a bigger and more mature secondary market. Otherwise, large-scale purchases made by the central bank would raise interest rates and spur the issuance cost of such bonds, said the analyst.

"Currently, central bank bills and treasury bonds are in separate markets. Only if China completely frees interest rates could the two markets be linked and the central bank could operate like the US Federal Reserve," Zhao said.

Before the sterilization of foreign exchange fluctuations became a mainstream channel to issue currency, re-lending to commercial lenders was the main tool of China's central bank to create money, accounting for 80 percent of newly injected money in the 1990s.

Wenzhou Property Speculators are Trapped

From boom to bust in Wenzhou

About 80 percent of speculators from the prefecture-level city in southeastern Zhejiang have been trapped by their property investments that have recently depreciated 30 to 50 percent from levels in 2010, state media reported.

"They will be insolvent either selling the houses or holding them," China National Radio said.

Their speculative activities domestically have been blamed for soaring real estate prices in China, where they have been nicknamed "locusts."

Hot money poured into the burgeoning real estate industry as a result of an investment of 900 billion yuan (HK$1.11 trillion) out of the 4 trillion yuan stimulus package into the sector, amid easy borrowing in a loose credit environment. From 2007 to 2009, Wenzhou's wealthy banded together to snap up floors of houses in Shanghai, Hangzhou and other cities.

Veteran Wenzhou speculator Zhang Ming said he borrowed 30 million yuan from friends and relatives, who put up their own firms and properties to secure mortgages from banks. "In 2010, I spent 38 million yuan buying four floors of houses in Wenzhou. But now, I cannot sell them for even 20 million yuan," he lamented.

But some analysts warned of a potential credit default by the end of the year, as more than 70 percent of the funds tied up in property speculation came from underground loans and banks.

Tune is Changing in Toronto: Gen Y should Rent

In 1981 62.1% of households owned by 2001 65.8% by 2006 68.4% did so. Since then it has most likely risen. (ref). New blood is essential to keeping that rate from falling. Why Gen Y should tough it out in the rental market

Renting is the obvious alternative for someone who is unready for the financial blood-sucking that home ownership entails.

Tell us how you really feel.

Renting isn’t a quick and easy alternative to buying, though. Canada Mortgage and Housing Corp.’s latest report on the rental market says the national average vacancy rate for apartments was 2.3 per cent in April, which compares to 2.5 per cent a year earlier and a long-term average of 3.2 per cent. Regina, Winnipeg and Montreal are among the cities with smaller vacancy rates than the national average, but Toronto stands out on the low side at 1.5 per cent in April. The city’s vacancy rate for condos is even lower at 1 per cent.

I personally know of Chinese condo owners who have given up on having renters. Hard to imagine with 58,000 condos coming in Toronto that the vacancy numbers are relevant except for house rentals.

CMHC measures rental costs in terms of two-bedroom apartments. Toronto’s average was $1,164 per month last spring, second to Vancouver’s $1,210. You could carry a $250,000 mortgage at today’s five-year rates for those rents, not that there’s much of anything in this price zone in either city.

As tough as the rental market may be, it’s still a better option for Gen Y than buying prematurely. Renting, at least, is a finite expense each month. Housing is infinite – there are fixed costs, plus endless discretionary expenses. Buying is not the solution to difficulties in finding a place to rent, at least not without further price declines. Instead, find a roommate and pool your resources to cut rental costs.

Tough love. Although, with tightened lending rules, this may be irrelevant advice anyway.

Financial Corruption from Bubble Still Haunts U.S. Years after Crash

The saying about the tide going out applies to transparency for the financial system as well. Profits gloss over a lot of corruption. And regulatory capture and blackmail by behemoth institutions adds another layer of inertia to a fundamentally flawed system.

As part of the settlement over bad mortgage practices the banks agreed to write down debt. Good news is, they are. Bad news is, it's debt that doesn't exist anymore.

How to Erase a Debt That Isn’t There

“You are approved for a full principal forgiveness of your Home Equity Account,” says another, from Bank of America. Jackie Esposito, of Guilford, Conn., got a letter like that. But she wasn’t elated — because she doesn’t owe the money anymore. She and her husband filed for bankruptcy three years ago. The roughly $64,000 they owed Chase has been legally wiped out.

Cast your mind back to February. Five of the nation’s big banks, including Chase and Bank of America, agreed to pay $25 billion to settle state and federal claims over questionable mortgage practices and promised to work harder to help borrowers who were in trouble. To prod the banks, the government said it would give them credits against the amounts they agreed to pay.

Neil Crane is a lawyer in Hamden, Conn., who represented Ms. Esposito and her husband in their bankruptcy. He says four of his other clients have recently received letters from banks claiming to forgive discharged debt.

The banks claim it is a phrasing problem. That they are simply noting that the lien has been released.

But even this is incorrect in Ms. Esposito’s case, Mr. Crane said. Her lien was actually eliminated back in 2009, during her bankruptcy proceeding.

The loan forgiveness is taxable for the former owner, so this could be a serious problem for those caught up in this.

All of this made me wonder: are the banks’ forgiveness letters a way to gain credits for debts these institutions are improperly claiming to have extinguished? The banks say no.

And we can completely trust them on that.

An Expat Canadian: Returning home has become "downright frightening"

Human's are herd/social creatures. Bubbles are about socially constructed myths, making them harder to see from the inside. For the outsider, there is only the language of disbelief. Neil Macdonald: Why a U.S.-style housing nightmare could hit Canada

Friends and colleagues who own homes in Canada are the very pictures of smug. They seem convinced the markets in which they happily reside will keep rising forever. Or at the very least, never drop.

And any discussion of the subject usually involves condescending lectures about how Americans, who are only beginning to recover from a six-year nightmare of foreclosures, could have used a dose of Canadian common sense and prudence.

It's all about the debt.

As was the case in America when I arrived here nine years ago, Canadians have for years been so desperate to avoid being left behind by a surging housing market that they've been stretching themselves beyond reasonable financial limits to jump in, thus of course ensuring continued surges.

In the process, household debt has doubled, going from a manageable 75 per cent of household income in the early 1990s to 150 per cent today.

Worse, as the Bank of Canada has been pointing out, Canadian debt is disproportionately concentrated in the most vulnerable households, defined as those devoting 40 per cent or more of household income to paying interest charges.

. . .

The central bank's analysis suggests that if interest rates rise to 4.25 by mid-2015, fully one fifth of all Canadian debt would be held by those households least able to finance it.

"My base case expectation would be that most markets in Canada over the next two years would see a pullback of housing prices of 10 to 15 per cent."

That's Don Drummond, former chief economist at TD. Back to Neil:

If you take that tax refund into consideration, prices in Ottawa are now approaching or equal to prices in Washington, DC., a city steeped in wealth and power. Seen from this distance, by a longtime expat, that is just unmoored from reality.

Big Drop for Vancouver Prices

Garth Turner gets a bit of coverage. Big drop predicted for Vancouver real estate prices

We'll have something around a 30-to-40 per-cent decline in prices.”

Sounds about right. Still pricy, but easier to sustain.

Despite his dire outlook, the market has been robust for most of the last decade and condo marketer Cameron McNeill believes Turner will be proved wrong. “The fundamentals that are driving the market below the surface are just too strong for any sort of bubble circumstance to happen,” says McNeill.

“The fact of the matter is, in Vancouver today, you can buy a condominium and you can rent it out and you will have 40 people in line trying to rent that condominium,” McNeill says. “If you have that much desire for people to live in a condominium, I think the market's got no problem sustaining itself.”

Well, I'm convinced by the power of that argument. It is just me or is McNeill from Brooklyn?

Australian Banks Pass IMF Stress Test

Pretty stringent tests assuming 5% decline in GDP and 35% fall in house prices. Australian Banks Pass IMF Stress Test

Australia's lenders came through the global financial crisis in relatively good shape helped by conservative lending policies, strong prudential oversight, and a firm underlying economy supported by a resources boom. The country's biggest banks also managed to steer clear of the kind of exotic structured-credit products that dragged down U.S. lenders.

The resources boom is just 4.5% of GDP and 1.5% of employment. As opposed to the housing market which is over 3x annual GDP in asset value. And construction which is 9% of the workforce. Both industries are bubble driven, but the first is driven by someone else's bubble.

While profit growth has slowed in the past year--as credit demand stays subdued and higher international funding costs squeeze margins--the big four remain among the world's most profitable lenders, and are routinely praised by ratings firms for their strong balance sheets and low mortgage-arrears rates.

The biggest risk isn't to the banks, it's to sustainability of prices. 30-40% of mortgage debt is being funded from overseas. If that dries up then prices have to adjust to match. It's the next buyer that determines the price, not the previous one under rosier conditions. Not to mention the pressure on the currency from having to service that foreign debt.

The IMF also considers that Australia's central bank has plenty of room to cut interest rates if the need arises to shield the country from a sharp downturn in the global economy.

Speaking of pressure on the currency . . .

Canadians buying up Florida Real Estate

Northern flight: Canadians gobbling up Southwest Florida real estate

From July 2011 to June 2012, foreigners accounted for 19 percent of the home sales volume in Florida, led by Canadians, according to an industry report by Florida Realtors, a statewide trade group. In that year, sales to foreigners in the state reached an estimated $10.7 billion — out of a total of $58 billion. Canadians accounted for 31 percent of those foreign purchases, putting them in first place among all nationalities.

In the Cape Coral-Fort Myers market, Canadians ranked as the top country for foreign home buyers in the year ending June 30, with a 56 percent share, according to the National Association of Realtors' 2012 Profile of International Home Buying Activity. That was followed by Germany with 17 percent, then the United Kingdom and Honduras, each with 6 percent.

I wonder what percent of these buyers are taking out equity back in Canada to fund these purchases?

Glen Bigness, a Realtor with Premiere Plus Realty Co., said in an email that he sees a great number of Canadians visiting his websites.

He's in regular contact with lenders who provide loans to foreign nationals.

"Most tell me money is tight, and qualification is very narrow and stringent for them, so most deals seem to still be cash at closing," Bigness said.

His company offers a "buy and fly" program to Canadians. Buyers who spend at least $200,000 get up to $500 at closing to pay for their flight to Southwest Florida.

If you can't afford a plane ticket, how can you afford to be a long distance owner?

When these foreign markets also adjust, U.S. housing is going to find another bottom.

Deflationary Pressures Increase in China

While the money supply growth is considered high enough to prevent deflation, other measures, such as PPI, industrial output and profits are flashing warnings. Industrial output and profits are expected to continue downward through the autumn. China’s Deflation Rears Its Ugly Head

The Producer Price Index, an indicator of production output prices, retreated to its lowest level in August since November 2009, a fall of 3.5 per cent from a year earlier. It was the sixth consecutive monthly decline as it reached its lowest level in 34 months.

When PPI declined 2.9 per cent year-on-year in July, it was a warning that manufacturing companies’ income had dropped rapidly, a development that might hold back additional investment in industrial sectors and further drag down the whole economy.

In the first seven months of this year total profits of big industrial enterprises declined by 2.7 per cent from the same period in 2011 to 2.68 trillion yuan.

“Fundamental problems in the Chinese economy are starting to show and the downside risk is very hard to control,” Yuan said pessimistically.

Uncertainty over overseas demand, retreating governmental supportive policies and tightening property control have all pushed the industrial companies into a chilling environment. However, deeper problems, such as the increase in labour costs and the slumping competitiveness of Chinese business, should be given more attention, Yuan said.

Vancouver luxury market -- it's only worth what someone will pay

Luxury homes are not the best indicator for the market in general because the price is always detached from fundamentals. But sentiment is easier to gauge because the market is smaller, is more closely watched, and the swings in price are more volatile. Vancouver real estate’s million-dollar question: What sells?

Mr. Christiansen, who routinely sells houses worth millions of dollars, hasn’t seen an August this bad for sales in his entire career. He says there were only 24 sales in West Vancouver in August, compared to 80 last August, and the usual August average of around 50.

So, at normal sales rates there would be inventory of 10.6 months. But at half that sales rate, the current reality, there is 20+ months of inventory. Luxury homes are generally less substitutable for one another, but that's a very crowded market. Too much choice leads to buyer complacency.

Still, he’s wary of pricing low to start a bidding war, because these days, the bidding war might not happen. There are currently 530 houses listed in West Vancouver and buyers – about 50 per cent of them from Mainland China, according to anecdotal realtor input – are choosy.

There’s the trick. Most sellers are living with yesterday’s sales figures in mind, and they want the old top dollar. The reality is, a house is only worth what this current market will pay for it – and sometimes, that’s anybody’s guess.

It's only worth what someone will pay for it.