China's Exports Hit Hard

The current climate is growing more difficult than the 2008 crisis. Profits slipped 5.4% year on year for July. China's export hub hit hard by global economic slowdown

In the first seven months of this year, profits for industrial firms fell 2.7 per cent from the same period last year to 2.68 trillion yuan. It is 0.5 percentage points more than the decrease for the first six months.

In the first seven months, state-owned and state- controlled industrial enterprises saw their profits fall 12.2 per cent from a year earlier to 784.7 billion yuan, (about $124 billion).

This is interesting. Non-state owned industrial, because of its long-term uncertain access to capital and influence, could be presumed to be operating more leanly.

But it has witnessed a rise in bankruptcies that is even "more serious" than the 2008-09 financial crisis, said Zhou Dewen, Chairman of the Wenzhou SME Development Association.

"We have about 3,000 members and more than 10 per cent have closed down and about 20 per cent are struggling," Zhou said.

These are SMEs. Larger companies are better able to adapt, based on the stats below:

According to a report released by the financial and economic committee of Zhejiang Provincial People's Congress, 140 out of 3,998 large enterprises in Wenzhou closed in the first half of the year while 57 percent of those large companies cut production.

Meanwhile Rate Swaps again hit a three month high. Reuters article. Those capitalists (just like in the rest of the world) just hanging on the government's every currency and liquidity move.

China's piles of unsold goods

All the makings of an overshoot. China Confronts Mounting Piles of Unsold Goods

But the main nongovernment survey of manufacturers in China showed on Thursday that inventories of finished goods rose much faster in August than in any month since the survey began in April 2004. The previous record for rising inventories, according to the HSBC/Markit survey, had been set in June. May and July also showed increases.

“Across the manufacturing industries we look at, people were expecting more sales over the summer, and it just didn’t happen,” said Anne Stevenson-Yang, the research director for J Capital Research, an economic analysis firm in Hong Kong. With inventories extremely high and factories now cutting production, she added, “Things are kind of crawling to a halt.”

Inventories of unsold cars are soaring at dealerships across the nation, and the Chinese industry’s problems show every sign of growing worse, not better. So many auto factories have opened in China in the last two years that the industry is operating at only about 65 percent of capacity — far below the 80 percent usually needed for profitability.

Yet so many new factories are being built that, according to the Chinese government’s National Development and Reform Commission, the country’s auto manufacturing capacity is on track to increase again in the next three years by an amount equal to all the auto factories in Japan, or nearly all the auto factories in the United States.

And municipalities are eager to limit registrations in a desperate attempt to cut traffic and pollution.

Chinese Manufacturing Slows Even More in August

Manufacturing in China Slows Further Preliminary reading falls to 47.8 from 49.3 last month. Anything under 50 demonstrates contraction. With the SME liquidity issues, this is not a surprise.

Many analysts had expected the August reading to stabilize, or even edge up slightly. Yao Wei, a China economist at Société Générale in Hong Kong, described the result as “just awful” in a research note.

I have no idea what made them think the number would go up. The government has signaled repeatedly that they will not stimulate enough to cause more bubbling in the economy. We're still in bubble stage now, so there is only softening the landing.

New export orders, which are also captured in the monthly survey, sagged sharply as the crisis in Europe ate into export demand, indicating that Chinese exports are likely to languish for some time. Exports edged up just 1 percent in July compared to a year earlier, official data released earlier this month showed. Further cause for concern, Mr. Qu noted, was that domestic demand, also failed to show a meaningful improvement in August.

Gravity is making itself felt on property prices worldwide

Gravity has taken hold of property markets around the world. And this is still under the effects of unusually low interest rates.

Searching for Solid Ground

AFTER years of dizzying ascents, a big dose of gravity has hit residential-property markets around the world. According to The Economist’s latest round-up, year-on-year prices are now falling in 12 of the 21 countries we track; in five of the other nine, prices are rising at a slower rate than they were a year ago.

The standouts on overvalued:
Hong Kong 64%
Canada 54%
New Zealand 44%
Belgium 55%
Singapore 58%
France 43%
Australia 36%

Even places like Sweden and Netherlands at 25% overvalued have some pain coming before they reach ground level. And Spain still has nearly that far to go despite already falling 22%.

Bank of Canada Speech on Debt and Risk

A summary of the speech is here: The BoC’s Coté On Risk & Household Debt

If interest rates were to rise to 4.25% by mid-2015, then: the share of highly indebted households would rise from slightly above 6% in 2011 to roughly 10% by 2016 the proportion of debt held by these households would rise from 11.5% to about 20% over the same period.

Something to note on this chart. In the late nineties during the dot com era, far more credit growth was directed at business than households. The lines swap just as the housing bubble gets going in Canada, which is around 2002. Same thing back in the eighties. They were a time of heavy investment in business.

Economies make a choice, as directed by policymakers creating incentives, to either borrow from the future for industry to make things better and cheaper, or for larger houses with more granite and imported tile. Or in the case of Toronto, a spare 10-20,000 shoeboxes in the sky.

Delving into REIV's reported median price rise

Median quarterly prices are up 26% in Balwyn. Or are they?

How to separate facts from fluff about Melbourne’s property market: Mal James

The REIV’s June quarter median was based on 43 sales – fully 25% had no sale price recorded next to them. Not just undisclosed. But blank. Agents voluntarily provide this information. So the REIV had to ignore a full quarter of the June quarter’s transactions to come up with its median house price.

Why so many unrecorded prices? Well, in a weaker market like we’ve got now, agents and sellers become reluctant to record all sale prices for reasons of ego or business.

The way the REIV came up with that price was to take a statistical average of the two middle sales. One of those sales was $1.37 million (40 Jurang Street with Jellis Craig) and the other was $1.71 million (6 Eyre Street with Kay and Burton). That’s a huuuuge gap, a difference of nearly 25% – so some may say it’s a bit of a stretch to say Balwyn had a $1,540,000 median price based on those two sales.

What if one more of those mysterious Balwyn unrecorded price results had been recorded, and it was below $1,370,000? That would have made the “median” price in Balwyn to $1,370,000, and the median price “growth” would have dropped from 20% to 7%.

If another four or five of those undisclosed price sales had been in the lower half of the pool of results the median price results may well have been lower than the previous year’s median in Balwyn. In other words, what we may well have had is not an increase but a fall in price June quarter 2011 to June quarter 2012.

Developer hacking the mortgage rules

Colwood developer offers 'new kind of mortgage'

"The equity mortgage is the next revolution in homepurchase financing."

Homebuyers will need 10 per cent of the purchasing price, but League Financial will then loan them an additional 10 to 25 per cent in order to qualify for a 65 to 80 per cent conventional mortgage.

Shades of U.S.A. circa 2006. The developers aren't sacrificing anything. Nada. They set the price, you'll recall. All they have to do in this scenario is set the price higher by the amount of the "gift". And voila, the developer books a sale and someone else is on the hook for the risk. Although, not clear who in this case. Is the bank's nose plugged up enough to think this passes a sniff test?

Part of the reduction in risk reflected in a larger downpayment is not some magical higher equity number it is the risk exposure to the buyer's personal capital investment during the buying decision processes as well as a test of ability to save.

Gant said League's equity mortgage results in monthly payments up to 40 per cent lower than a CMHC-insured 25-year mortgage because no payment of interest or principle is required.

"Equity mortgage covers the majority of the downpayment, but ... there is no monthly payment for it," he said. "Relying solely on debt is old fashioned and just plain dangerous."

I can't come up with a response to this except to observe that satire is dead.

Hat tip: Patriotz commenting at vancouvercondo.info

Yuan weakness may preclude more easing

Here's a shift, the Yuan might soon be OVERvalued. According to this article, the market is pricing it in. China’s softening yuan could block rate cuts

Recent data showing that China is experiencing capital outflows as its economy slows could mean an important shift is taking place, he said, noting that the yuan’s long upward march against the dollar appears to have ended earlier this year.

China is already facing a battle to attract new investment.

Data released Thursday showed foreign direct investment of $7.6 billion in July, a drop of 8.7% from a year earlier.

“It now seems that the effort was also aimed at stopping investors from pulling money out of China, suggesting that the government is more concerned than it is letting on. Whether liberalization continues or capital controls reappear amid fears of a financial crisis is an open question,” said Chan.

Canadian National House Prices Down Year on Year

CREA Stats

Average sale prices in July were up from levels one year ago in about seven of every 10 local markets, but declining sales activity in Greater Vancouver continues to impact the national average price. The actual (not seasonally adjusted) national average price for homes sold in July 2012 was $353,147, down two per cent from the same month last year. Excluding Greater Vancouver from the national average price calculation yields a year-over-year increase of 1.1 per cent.

Nationally, listings are down and sales are up. The market is bifurcating with Vancouver and Lower Mainland and Montreal (and PE) on one side and everyone else on the other.

I added the 2011 inflation rate to show the real gains.

There's been a lot of squawking in the newspaper comments about use of averages (now that averages are falling so fast, not anytime before then). The national HPI and the average are pretty related as you can see in this graph. The underlying data are skewed so of course the average runs higher, until a decline is being signaled, and then it undershoots, implying that high end sales suffer first and hardest.

The Naked and the Prosecuted

"Naked Officials" are Chinese who have established their families overseas and return alone to China to work. They hold the overseas arrangement as an escape hatch.

China’s Gao Shan heads home to face charges on $130M fraud ring after eight years hiding in Vancouver

Mr. Gao is the former manager of the Bank of China branch in Harbin, a city of 10 million near the Russian border. According to Chinese authorities, between 2000 and 2004 Mr. Gao was the ringleader of a scheme to siphon cash from corporate accounts.

Only weeks before the alleged fraud was discovered, say Chinese officials, Mr. Gao boarded a plane to Canada. Just before leaving, the banker reportedly told colleagues he was merely going to Beijing for surgery. He also instructed a colleague to hold onto his cell phone and leave it on. “Mr. Gao appears to have been trying to create the illusion that he was still in China,” reads the transcript of a 2007 Canadian immigration hearing.

Suspect in huge bank fraud returns to China

Li, a friend of Gao's, is said to have lured several state-owned companies to deposit huge sums of money in Gao's branch in Harbin City. The money was then transferred by Gao to dozens of accounts controlled by Li. About 500 million yuan in cash was later withdrawn from 29 accounts in 18 banks in Harbin and Daqing, the weekly reported.

. . .

The Bank of China, other big state-owned banks and the country's financial regulatory system were called into question.

Gao's case also angered Chinese immigrants in Vancouver. The Chinese newspaper there, World News, said such cases had damaged the image of Chinese immigrants. Corrupt officials arriving in Canada were also the cause of surging property prices.

Bold mine.

Zhou Rongyao, director of the Canadian studies institute at the Chinese Academy of Social Sciences, said earlier that Canada had become a "paradise" for corrupt officials due to flaws in its immigration procedures and its judiciary inefficiency.

Back to the National Post article:

As many as 4,000 Chinese fraudsters have fled overseas in recent years, taking with them as much as $50-billion in ill-gotten funds, according to estimates by Chinese media. “Most of them are still living the high life in foreign countries,” wrote the Shanghai Daily on Tuesday.

That's the lowest estimate running. A Bank of China report last year put the number at 17-18,000 and 120 billion and that was only through 2007. Chinese prosecutors claim to have caught 18,500 officials and state company executives trying to illegally leave the country in the last twelve years. Watchdog Global Financial says China leads the world in money taken out illegally and pegs exit flows at 2.7 trillion between 2000 and 2009. (source)

The U.S. attracts far more naked officials than Canada does, but Canada does have the bonus quality of being slow to extradite to countries if the accused will face the death penalty.