The Boys In The Bubble
Jul. 29th, 2010 01:21 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksI came across a couple of very interesting pieces on China yesterday, at:
http://www.nakedcapitalism.com/2010/07/just-how-risky-are-china%E2%80%99s-housing-markets.html
which gave some frightening tales from the ground of how (and why) the Chinese property market is walking down a path not dissimilar to tulip mania.
Unfortunately I'm not sufficiently au fait with the workings of "capitalism with a Chinese face" to conclude what the implications will be. In the West it would be a straightforward property crash, but China is, well, different.
The simplest evidence of tulip mania is that people are buying up houses and leaving them empty because they are seen as a "store of wealth". In a land not quite so far into post-industrial capitalism as the west is, conservation of wealth is an important and worrisome matter for people who suddenly find themselves significantly well-off. Property was, unsurprisingly, seen by the newly-rich in China as a relatively safe way to conserve some wealth. However, this tied in with the development of new borrowing facilities. In other words, the country went from effectively zero leveraging to 1000% leveraging. So, now we got a progression not dissimilar to that of derivatives, even though no derivatives were involved.* First of all the property market became a hedge investment for those with money. Then the property market did well because quite a large number of people were newly wealthy. And then other people saw what looked like the opportunity for a quick yuan, and borrowed money to buy property. More often than not, it was left empty, to make a quick sale easier after the price went up.
Well, if you are buying houses on borrowed money and no-one is living in them or making use of them, you might as well be buying a tulip bulb.
This is not a single-sided argument; defenders of the faith will come up with any number of explanations why it won't end in tears. It so happens that many of these are not dissimilar to the arguments used here before the property bubble burst. But (in the support of those making such arguments) the UK property market did not collapse to the extent that fundamentals would have suggested, so perhaps the China property market won't either.
Looked at in a simplistic old-fashioned way, it's all heading for a Chinese disaster. But looked at in a Chinese way, it might not. After all, in the early days of Chinese "new capitalism", the old ways of the communist cadres brought about another near-disaster. The banks, such as Agricultural Bank of China, had bank managers who thought it unwise to refuse loans to local party officials. And the party officials saw no reason to pay back these loans. Eventually it became clear (when the non-performing loan ratio in 2000 exceeded 50%) that much of the rural Chinese banking system was bust. China's solution? Sell off stakes in these banks to foreigners! The west was so desperate to get into China that it was willing to swallow the bad debts, and pay more money besdes, to get a foothold.
Well, when you consider what a huge surplus China has at the moment, based mainly in US dollars and euros, and when you consider that one of its biggest problems is what to do with this surplus without causing political unrest, one way to get round it would be to get rid of some of the huge developing bad debts by palming them off to foreign financial institutions. The current estimate of dubious loans to local government vehicles currently stands at about CNY1.5trn -- $230bn to you and me. If we double that to allow for bad debts in the mortgage sector, then we are looking at $450bn in money that the Chinese might need to find to stop the local economy sinking into recession.
Even in the land of massive trade surpluses, China would find this a hefty wedge. It had a trade surplus of nearly $200bn last year and nearly $300bn the year before that. More than two years' worth of trade surpluses is more than enough to bash China into a recession.
But there are "mix'n'match' solutions available. A bit of inflation here, a bit of foreign investment there, an amortization of the debts over a decade, for example. That might bring the annual requirement down to about $30bn. Which, at about 10% to 15% of the trade surplus, is perfectly manageable.
This all seems a bit paradoxical, in theat the US needs China to solve its recession, and China needs the US. Why therefore can't they do it internally?
Darned if I know.
*This, BTW, is a good example of how it isn't derivatives per se that cause the trouble, but the uses to which they are put.
+++++++++++++
Peston today (http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/07/bigco_not_rescuing_britain_yet.html) reports on the half-year figures of several of the Big UK Companies, noting implicitly that QE has, indeed, benefited those with access to the capital markets at the expense of those who do not have such access.
As Peston observes, it's becoming increasingly clear that any recovery that is taking place is extremely unbalanced. In global terms, this would be great, assuming that all other countries acted the same way. But, of course, they won't. The risk of the Conservative "Free Trade" recovery plan is that it will contribute a lot to global recovery in places such as Bangladesh and Nigeria, but not very much to the economies of Camden Town and Peckham.
Heading into my normal "invest in bits" line, I'd like to see any government attempts to rebalance this by development of infrastructure -- railways, roads, water, telecommunications -- rather than just announcing a few extra million quid for the police, NHS, education or the like. But I'd accept that this is very much "horses for courses". It's hard to compare the value of people living a bit longer on average in an old people's home with a slightly better quality of life with that of installing fibre-optic broadband for all. It really is apples and oranges.
+++++++++++++++
You have to feel sorry for Stephanie Flanders. When she got the job as head economics honcho at the BBC. she must have thought that this would give her a relatively stable job, usually at BBC Television Centre, with time to get home for the toddler's tea.
Next thing you know, she wakes up in the middle of India on a trade mission with George Osborne. "Kill me now" indeed.
Flanders observed, as I pointed out a few weeks ago in response to the Conservative-Liberal recovery plan, that the solution for the UK was not a global solution; that it effectively required the UK to export its way out of difficulty.
So, off everyone heads to India to try to get the developing world to buy British goods.
The thing is, the one area where India won't buy British goods is financial services. So why on earth were all of the businessmen accompanying Osborne and Cameron from the world of finance, "the likes of Peter Sands, of Standard Chartered, and Xavier Rolet of the London Stock Exchange".
I've been writing about India's effective closed door to foreign companies trying to get into the financial services sector for nigh on a decade. It doesn't matter what an Indian prime minister promises. He or she hasn't got a snowball's chance in hell of getting it through the Lok Sabha. What India wants are people who can get a proper infrastructure up and running -- broadband, efficient railways, an efficient road system, and the like. It's not as if we don't have these people. But we didn't send them on this road trip.
Instead, Osborne is lobbying for a relaxation on the financial services restrictions -- which shows an intrinsic misunderstanding of how Indian politics works. The Indian fiancne minister and PM won't tell Osborne this to his face (that is not the Indian way), so Osborne will probably come away thinking that progress has been made. But, let me assure him, nothing will be done. The issue has, as Flanders termed it "been bogged down in parliament" since before 2000, and many is the time a finance minister has promised that changes in the rules would go through "this year", and many is the time the left-leaning parties have said "I don't think so".
I wonder how long it will be before Osborne and Cameron see the light on that one.
Not before they land at London Airport, that's for sure.
_________________
http://www.nakedcapitalism.com/2010/07/just-how-risky-are-china%E2%80%99s-housing-markets.html
which gave some frightening tales from the ground of how (and why) the Chinese property market is walking down a path not dissimilar to tulip mania.
Unfortunately I'm not sufficiently au fait with the workings of "capitalism with a Chinese face" to conclude what the implications will be. In the West it would be a straightforward property crash, but China is, well, different.
The simplest evidence of tulip mania is that people are buying up houses and leaving them empty because they are seen as a "store of wealth". In a land not quite so far into post-industrial capitalism as the west is, conservation of wealth is an important and worrisome matter for people who suddenly find themselves significantly well-off. Property was, unsurprisingly, seen by the newly-rich in China as a relatively safe way to conserve some wealth. However, this tied in with the development of new borrowing facilities. In other words, the country went from effectively zero leveraging to 1000% leveraging. So, now we got a progression not dissimilar to that of derivatives, even though no derivatives were involved.* First of all the property market became a hedge investment for those with money. Then the property market did well because quite a large number of people were newly wealthy. And then other people saw what looked like the opportunity for a quick yuan, and borrowed money to buy property. More often than not, it was left empty, to make a quick sale easier after the price went up.
Well, if you are buying houses on borrowed money and no-one is living in them or making use of them, you might as well be buying a tulip bulb.
This is not a single-sided argument; defenders of the faith will come up with any number of explanations why it won't end in tears. It so happens that many of these are not dissimilar to the arguments used here before the property bubble burst. But (in the support of those making such arguments) the UK property market did not collapse to the extent that fundamentals would have suggested, so perhaps the China property market won't either.
Looked at in a simplistic old-fashioned way, it's all heading for a Chinese disaster. But looked at in a Chinese way, it might not. After all, in the early days of Chinese "new capitalism", the old ways of the communist cadres brought about another near-disaster. The banks, such as Agricultural Bank of China, had bank managers who thought it unwise to refuse loans to local party officials. And the party officials saw no reason to pay back these loans. Eventually it became clear (when the non-performing loan ratio in 2000 exceeded 50%) that much of the rural Chinese banking system was bust. China's solution? Sell off stakes in these banks to foreigners! The west was so desperate to get into China that it was willing to swallow the bad debts, and pay more money besdes, to get a foothold.
Well, when you consider what a huge surplus China has at the moment, based mainly in US dollars and euros, and when you consider that one of its biggest problems is what to do with this surplus without causing political unrest, one way to get round it would be to get rid of some of the huge developing bad debts by palming them off to foreign financial institutions. The current estimate of dubious loans to local government vehicles currently stands at about CNY1.5trn -- $230bn to you and me. If we double that to allow for bad debts in the mortgage sector, then we are looking at $450bn in money that the Chinese might need to find to stop the local economy sinking into recession.
Even in the land of massive trade surpluses, China would find this a hefty wedge. It had a trade surplus of nearly $200bn last year and nearly $300bn the year before that. More than two years' worth of trade surpluses is more than enough to bash China into a recession.
But there are "mix'n'match' solutions available. A bit of inflation here, a bit of foreign investment there, an amortization of the debts over a decade, for example. That might bring the annual requirement down to about $30bn. Which, at about 10% to 15% of the trade surplus, is perfectly manageable.
This all seems a bit paradoxical, in theat the US needs China to solve its recession, and China needs the US. Why therefore can't they do it internally?
Darned if I know.
*This, BTW, is a good example of how it isn't derivatives per se that cause the trouble, but the uses to which they are put.
+++++++++++++
Peston today (http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/07/bigco_not_rescuing_britain_yet.html) reports on the half-year figures of several of the Big UK Companies, noting implicitly that QE has, indeed, benefited those with access to the capital markets at the expense of those who do not have such access.
As Peston observes, it's becoming increasingly clear that any recovery that is taking place is extremely unbalanced. In global terms, this would be great, assuming that all other countries acted the same way. But, of course, they won't. The risk of the Conservative "Free Trade" recovery plan is that it will contribute a lot to global recovery in places such as Bangladesh and Nigeria, but not very much to the economies of Camden Town and Peckham.
Heading into my normal "invest in bits" line, I'd like to see any government attempts to rebalance this by development of infrastructure -- railways, roads, water, telecommunications -- rather than just announcing a few extra million quid for the police, NHS, education or the like. But I'd accept that this is very much "horses for courses". It's hard to compare the value of people living a bit longer on average in an old people's home with a slightly better quality of life with that of installing fibre-optic broadband for all. It really is apples and oranges.
+++++++++++++++
You have to feel sorry for Stephanie Flanders. When she got the job as head economics honcho at the BBC. she must have thought that this would give her a relatively stable job, usually at BBC Television Centre, with time to get home for the toddler's tea.
Next thing you know, she wakes up in the middle of India on a trade mission with George Osborne. "Kill me now" indeed.
Flanders observed, as I pointed out a few weeks ago in response to the Conservative-Liberal recovery plan, that the solution for the UK was not a global solution; that it effectively required the UK to export its way out of difficulty.
So, off everyone heads to India to try to get the developing world to buy British goods.
The thing is, the one area where India won't buy British goods is financial services. So why on earth were all of the businessmen accompanying Osborne and Cameron from the world of finance, "the likes of Peter Sands, of Standard Chartered, and Xavier Rolet of the London Stock Exchange".
I've been writing about India's effective closed door to foreign companies trying to get into the financial services sector for nigh on a decade. It doesn't matter what an Indian prime minister promises. He or she hasn't got a snowball's chance in hell of getting it through the Lok Sabha. What India wants are people who can get a proper infrastructure up and running -- broadband, efficient railways, an efficient road system, and the like. It's not as if we don't have these people. But we didn't send them on this road trip.
Instead, Osborne is lobbying for a relaxation on the financial services restrictions -- which shows an intrinsic misunderstanding of how Indian politics works. The Indian fiancne minister and PM won't tell Osborne this to his face (that is not the Indian way), so Osborne will probably come away thinking that progress has been made. But, let me assure him, nothing will be done. The issue has, as Flanders termed it "been bogged down in parliament" since before 2000, and many is the time a finance minister has promised that changes in the rules would go through "this year", and many is the time the left-leaning parties have said "I don't think so".
I wonder how long it will be before Osborne and Cameron see the light on that one.
Not before they land at London Airport, that's for sure.
_________________
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
Property prices
Date: 2010-07-29 04:05 pm (UTC)Similar properties are in the paper at 20% less and in practice are realising 25-30% less than our neighbours are expecting to get. I think they might be in for a long wait!
no subject
Date: 2010-07-29 07:29 pm (UTC)It basically boiled down to Cameron -> Pak Bad -> Face Time -> I'm Ready For The Cameras Now, Mr De Mille! So, nothing new or thoughtful there, then.
As for China, well, I keep banging on about this. Nasty things are going to happen, and they're going to happen far more quickly than anybody assumes. The regional government imbalances are almost beyond control, and they'll certainly get far worse if the Renmimbi ever gets close to a realistic value.
However, taking your specific point about a huge investment in "safe" property which is then left empty. I think it's fair to assume that anybody in China with spare capital to invest in property will also have bought shares, bonds, property, etc in the debtor countries (which means us).
If they get a hit on their domestic investments (a hit being some sort of call from the bank), then I'd assume they'll liquidate assets abroad to cover that hit.
Which should be interesting.
Commanding Depths
Date: 2010-07-29 08:46 pm (UTC)But what does all this meaningful talk mean (2nd degree)?
I think it's fair to say that there's an imbalance between those (large) companies who have benefited from QE (via better terms on the markets) and those (small to medium) companies who have not.
Many people would frame this imbalance in moral terms, but not I. I'm a libertarian anarchist, for God's sake: they can all go to Hell, on an equal basis.
However, in terms of pure political economy, this is obviously something of an issue. Naive septuagenarians, such as say Mr Cable, would solve it by insisting that banks lend more whilst saving more in terms of their capital base. This is non-viable, as they say in the CIA when their cover has been blown.
And you can't even "invest in winners," as successive governments since the Second World War have shown. Well, you probably can. But you wouldn't let a random bunch of 650 idiots, backed by the Civil Service, do this.
So, thinks I to myself (I do this often. My doctor recommends it), why not set up a National Loser Bank? It'd be quite cheap, actually. Ignoring all the other stupid waste that New Labour managed on PFIs and various bureaucracy, you could just laser in on the now defunct Partnership for Schools. Yes, I know, it was a PFI. But the point is, it was an infrastructure program costed at something like £45 billion.
I reckon you could start a pretty decent National Loser Bank for, say, 25% of that.
The beauty of this is that you don't actually want the bank to make money. In fact, you'd be happy for it to lose a controlled amount of money, say 10%. All it needs to do is to throw money at SMEs (not winners as such, but I suppose you'd have to get someone like Challinger to examine the cash-flow and EBITDA to make sure they're not total losers), set up a couple of off-shore special purpose vehicles, and work with reputable types like Lloyds insurers to produce a transparent version of CDOs and CDSs.
I await, like Oswald Mosley, the acclamation of my people. My time will come.
Re: Commanding Depths
Date: 2010-07-30 02:59 pm (UTC)Re: Commanding Depths
Date: 2010-07-30 03:19 pm (UTC)Such a scheme would indubitably depend on a crack team of bushy-tailed, bright-eyed subject matter experts whose idea of a good time is to stick their hand underneath the bonnet.
No government would ever go for that. Instead, we'd end up with a bunch of superannuated old gits like you and me in charge.
Still, it'd be fun...