Time to Buy a House?

1. A historical review on real estate industry

Real estate has been the most profitable area for investment over the past decade as housing prices in metropolises soared, according to a new survey. The housing prices of Beijing rose from an average of 7,300 yuan ($1,122) per square meter to 35,000 yuan ($5,380) over the past decade, and prices in Shanghai rose from an average of 7,000 yuan per square meter to 39,000 yuan. In real estate industry, having the housing price increased dramatically, it is definitely attractive for people in metropolis to make such a good investment.

During the same period, the yearly expenditure per capita of Chinese residents rose from 6,400 yuan to 17,800 yuan, an increase of less than two times, according to the survey conducted by China Central Television along with National Bureau of Statistics and China Post Group Corporation. A total of 100,000 households in 31 provinces, autonomous regions and municipalities were surveyed on their decisions towards spending and investment as well as their concerns.

In terms of household spending in the past decade, nearly one third of Chinese families’ money went into savings, followed by residential property (28 percent) and insurance (24 percent), and only five percent were spent on securities investment.

Historically, house price increased a lot and people’s spending increased as well.

Photo taken on Feb 17, 2016 shows a cluster of residential buildings under construction in Shijiazhuang, capital of north China’s Hebei province. China’s housing market continued to warm in January, with more than half of surveyed major cities reporting month-on-month rises in new home prices. Of 70 large and medium sized cities surveyed in January, new home prices climbed month on month in 38, compared with 39 the previous month, the National Bureau of Statistics (NBS) said Friday. (Xinhua/Mou Yu)

2.Trend of housing price in recent years

Although the “golden era” of the real estate market has drawn to an end, the market will not cool down in years to come, especially in first-tier cities.

Latest home price data suggest an uneven recovery in China’s housing market, with first-tier cities leading price increases. Of the 70 cities monitored in January, new house prices climbed in 38, compared with 39 in the previous month, said by the National Bureau of Statistics (NBS). There were 24 declines, down from 27 in December, according to NBS data. On an annualized basis, 25 cities posted increase with 45 falls, compared with 21 and 49 in December. New-home prices rose most, 52.7 percent year on year, in Shenzhen, followed by Shanghai (21.4 percent) and Beijing (11.3 percent). Zhanjiang in Guangdong Province performed worst, falling 4.9 percent.

Prices for existing homes also warmed up last month, with 37 cities up and 25 down. The average annual increase in first-tier cities was more than 20 percent, while prices in most third-tier cities fell. A huge overhang of unsold homes continues to limit increases in smaller cities.

Prices in first-tier cities will continue to rise, but huge increases will not be sustained because the market is close to saturation.  Besides, there are already signs of overheating in the countries’ key cities while sales in smaller cities are still falling. Property took a downturn in 2014 with weak demand and a supply glut. Sales and prices fell and investment slowed, while the stock of unsold grew. There were 719 million square meters of unsold homes at the end of 2015, enough to house nearly 24 million people at the Ministry of Housing and Urban-rural Development estimate of 30 square meters of living space per capita. Taking homes under construction into account, China’s housing inventory would hit 5.87 billion square meters by the end of last year, requiring at least five years to clear.

Homebuyers at the sales center of a property project in Nanjing, Jiangsu province, on Monday. Cities like Nanjing and Shanghai have announced preferential housing tax policies, which have ignited local enthusiasm for home-buying. [Photo provided to China Daily]

3.Why this trend?

Why Prices in first-tier cities rise while prices in smaller cities fall?

On one hand, the government work report said China will continue to promote supply-side structural reform in 2016. In order to maintain the value of property and land, guarantee the stability of the real estate market, and ensure the whole national economy sustainability, the government implemented some steps to support the reform. This includes less land supply across the country, and the implementation of policies that encourage more people to buy condominium. However, the first-tier cities do not have many vacant houses, once the land supply decreased, it will definitely cause a decline in the house supply. With the high demand  and low supply of houses, the housing prices of real estate keep increasing, which satisfies people’s expectation of having higher housing prices. Therefore,more fundings will flow into first-tier cities where the risk of investment is low and the housing price is high.

On the other hand, the market cannot sell out excess inventory in a short period of time with too much supply, then the housing prices will not continue to be high and it is very possible for the housing price everywhere to decline at the same time. If the housing price cannot stay at that amount, the investors will not be willing to put money in the real estate, even for people who highly demands for the house would like to wait for a lower price. This results in lower prices and less sales.

source:

http://www.chinadaily.com.cn/cndy/2016-03/05/content_23747966.htm

Real estate industry: To explore the second tier city-Huatai Securities-2016.03

Real estate industry: the thirteen five year plan (Draft): Six highlights in the report on the work of the government-China Merchants Securities-2016.03

 

 

 

Group Member&Photos

Group memeber:

from left to right:

Jialuan Zhang, Marcella Van Blaricum, Hongjing Zhou,  Ketong Pu, Hilary Goldsmith, Bryan Weber

Bin Zhang,  Jiadun Zhang, Guyu Li

China’s Work Report Findings and 2016 Goals

On March 5, 2016, premier of the State Council, Li Keqiang, delivered a report on the work of the government at the fourth session of the 12^th National People’s Congress of the People’s Republic of China.

2015 Achievements

In the year 2015, China’s economy still operated within an appropriate range. GDP reached 67.7 trillion yuan, representing an increase of 6.9% over the previous year. The overall employment situation remained stable, with 13.12 million new urban jobs created.

Positive progress has been made in structural adjustment. Service sector accounted for 50.5% of GDP, which exceeded half for the first time. The contribution of consumption toward economic growth reached 66.4%. High-tech industries and equipment manufacturing grew faster than other industries. Energy consumption per unit of GDP fell by 5.6%.

New driving forces for profound economic and social change grew rapidly. The penetration of the Internet into all industries paced up and emerging industries grew rapidly.

Living standards improved. Personal per capita disposable income increased by 7.4% in real terms and personal savings deposits had risen by 8.5%. In rural areas, 64.34 million people gained access to safe drinking water and the number of people living in poverty was reduced by 14.42 million. 453 items were canceled or adjusted in abolishing non-administrative approvals. 41 of the 79 restricted items of foreign investment were removed from the list.

In the past year, world economic growth fell to its lowest rate in six years. Growth in international trade slowed. Commodity prices plummeted. There was also growing volatility in the global financial market. All this had a direct impact on China’s economy. But China will not be daunted by these challenges.

 

2016 Goals

The Government Work Report outlined tasks and targets covering a variety of fields including agricultural modernization, manufacturing upgrades, pollution control, poverty reduction, energy conservation and opening up.

In 2016, China sets the GDP growth target at between 6.5 and 7 percent, taking into consideration the need to advance structural reform and create jobs.

Premier Li also said that China aims to hold this year’s consumer price growth at around 3 percent and keeps a flexible and appropriate policy in money supply. The growth of the broad measure of money supply, or M2, will be kept at about 13 percent this year.

Besides, China pursues a more proactive fiscal policy, increasing deficit-to-GDP ratio to 3 percent this year from 2.3 percent last year. The government deficit for 2016 is projected to be 2.18 trillion Yuan ($335 billion), an increase of 560 billion Yuan over last year. “The moderate increase in government deficit is projected primarily to cover tax and fee reductions for enterprises, to further reduce their burdens,” Li said.[3]

There are actions in many other aspects. For example, the government will control unemployment rate as below 4.5 percent and create more than 10 million new urban jobs. Energy consumption per unit of GDP will fall by 3.4% this year.

The government plans to raise the 2016 military budget by 7 to 8 percent to 954 billion Yuan ($146 billion). Rural poverty will be lowered from 14.42 million to 10 million or so. More than 800 billion Yuan will be invested in the railway construction. Above are the goals set for 2016.

 

Will it be a problem for China to slow down the growth rate of GDP?

Nowadays there are many analysts doubting the gradually slowed growth rate of GDP. Compared with the growth rate of 2011, which was 9.5 percent, GDP in 2015 only grew by 6.9 percent, which was 2.6 points lower. Low GDP growth rate may lead to a high unemployment rate and an unstable society. Faced with this result, some analysts asserted that China’s economy will experience hard landing and the lower growth rate can be alarming.

However, it should be noted that the development level of China’s economy is entering a brand-new situation. Shifts in economy growth rate are normal and healthy. The Chinese economy “faces relatively serious risks and challenges” but remains healthy, and policymakers have ample policy options at hand to cope with the “complicated situation” this year, said Xu Shaoshi, head of the National Development and Reform Commission, the top economic planning body.[4] China’s economy isn’t headed for a hard landing and isn’t dragging on the global economy, China’s top economic planner said on Sunday, but uncertainty and instability in the global economy do pose a risk to the country’s growth. Premier Li Keqiang says China has the confidence to handle the complexities both at home and abroad while pressing ahead with reforms. The government will expand domestic consumption and use effective investment to support growth this year, while opening manufacturing and services to foreign investors. As China’s economy faces greater difficulties and challenges this year with downward pressure increasing, many people doubt whether China can stabilize the growth rate of above 6.5% in the following five-year plan. In the development of economy, entrepreneurs are always the most sensitive. Enterprise is the basic cell of the economy. As the international market is shrinking, business cost is rising, and small companies are facing financing difficulties, many enterprises currently do encounter obstacles. To further develop economy, an urgent need is to boost the confidence of those entrepreneurs.

Generally speaking, China’s economic long-term development is still moving towards a positive direction. Adjustment in the growth rate of economy is reasonable. In the global environment, China still possesses positive features. The overall situation of finance and economics is healthy. The government has enormous foreign exchange reservations and national assets. The space for macroeconomic control is large. These characteristics are rare in the whole world. In the new five-year plan, new developing perception is forming. We need to put more efforts and capital to develop innovation in order to further boost economy. Besides, the government should focus on balancing the economy level between western China and eastern China. They should also pay attention to environmentally harmonious development. These new trends are beneficial for China to go even further.

Sources:

[1] “Report on the Work of the Government”, March 5, 2016

[2] http://www.reuters.com/article/us-china-parliament-economy-challenges-idUSKCN0W704R

[3] http://www.chinadaily.com.cn/business/2016-03/06/content_23756899.htm

[4] http://www.chinadaily.com.cn/business/2016-03/06/content_23757938.htm

 

 

Accountability in China’s securities market: Xiao Gang and Liu Shiyu

As China’s economic woes grow, Beijing fired lead securities chief Xiao Gang. Xiao had long been a controversial figure, bearing a lot of public responsibility for the securities market bubble’s swell (2013-2014) and ultimate burst (2015). Over $5 trillion in wealth has been lost under his watch (since the market’s peak in June 2015).

Critics argued that while prices soared (at unsustainable levels), Xiao should have been conservative in response. Instead, Xiao cited the bull market as an appropriate response to upcoming market reforms in China (despite said reforms being remarkably vague/opaque). Moreover, Xiao argued the use of leverage as under control when in reality, it soared to unprecedented levels and exacerbated forthcoming losses.

Specifically, Xiao has been acutely criticized for the implementation of circuit breakers that attempted to curb volatility but exacerbated the market sell off (in January 2016). Despite rumors that Xiao would resign after the failure of this suggested instrument, he issued a rigid defense of his record only a few weeks before his removal.

The ultimate firing of Xiao as securities chief is significant for China (in particular). To date, public officials remaining on the right side of political battles were almost guaranteed job security (underperformers are typically shuffled to lower-profile positions, versus an outright removal). As a result, the ousting of Xiao over two years before the official end of his term is a shock. It is rare to see a public reversal for the Communist Party and this action is uncharacteristically risky. In terms of Xi Jinping, it could intensify the image of an unstable economy (and corresponding ‘grasping at straws’ or desperate measures to provide stability). Moreover, Xiao acted as kind of buffer between the market and premier Li Keqiang. Despite the appointment of a new securities chief, Liu Shiyu, more blame could now flow north.

Xiao’s successor, Mr. Liu, is the former chairman of the Agricultural Bank of China. He enters the position faced with increasing difficulties. Although blue chip stocks have lost over 40% of their value since June 2015, some analysts forecast even greater losses/further corrections (The Economist notes that small cap stocks in the Chinese markets are trading at 90x last year’s earnings, when 40x would be a much more reasonable multiple). Liu is also charged with transforming China’s method of dealing with IPO’s — transitioning from an authorization system (which some argue allowed for significant corruption) to a registration system (which others argue could also fall prey to corruption via abuse of the system by unethical firms).

It is important to think about the firing and new appointment not only in terms of technicalities (Liu’s professional history, competency, political network and ultimate ability to right some of Xiao’s perceived wrongs) but also in terms of what this is meant to signify to the world. Perhaps this is an attempt, from Beijing, to display their resolve in stimulating economic/financial growth that is flagging. Xiao watched over the worst start to a year in the 25 year history of China’s modern stock market, does his removal signal the government’s commitment to steadying the market? Is it an attempt to sedate spooked investors?

An important caveat amongst this discussion – in terms of Xiao’s missteps and Liu’s ability to correct them (despite his minimal experience in equity markets) – is the limited independence for China’s securities chief at large. Was Xiao, in reality, a scapegoat working at the pleasure of China’s leadership? Were the major decisions (in terms of propping up the market, allowing massive levels of leverage, implementing circuit breakers) made by Chinese leaders versus Xiao? And if so, how much will actually change with the new appointment? Throughout the recent volatility, the Chinese government has been criticized for perceived policy missteps and as markets liberalize, China’s image is critical. The Communist Party has fired their financial markets figurehead to signal dissatisfaction (or change) but what is the real impact?

The economic policies issued in the next few months will be critical to answering some of the questions posed above. Will the current party, under Mr. Xi, increase state control over markets? Without significant change, any short term gains (due to the change in the guard) could be followed by further corrections.

 

Sources:

1. http://www.wsj.com/articles/china-securities-regulator-catches-heat-for-failed-selloff-mechanism-1452257259?cb=logged0.17360714939422905
2. http://www.wsj.com/articles/chinas-top-securities-regulator-to-step-down-1455883897
3. http://www.economist.com/news/finance-and-economics/21693608-rare-episode-accountability-after-almighty-crash-fail-chief
4. http://www.nytimes.com/2016/02/20/business/dealbook/china-securities-regulatory-commission-xiao-gang-resigns.html?_r=0
5. http://www.ft.com/intl/cms/s/0/6a2500d8-d869-11e5-a72f-1e7744c66818.html#axzz41WEPOnpk
6. http://www.nytimes.com/2016/02/21/world/asia/xiao-gang-china-securities-regulatory-commission.html

Shining Light onto China’s Shadow Banking

In 2015, growth in the shadow banking sector in China came under the spotlight when one of China’s top brokerage firms, CITIC, sought legal redress after the issuer of one of its wealth management products missed a 7 million yuan ($USD1.12M) payment.[1] Our blog post this week provides explanation of what shadow banking is and how China’s state-owned banks were involved in shadow banking through the use of entrusted loans. We hope to peel back the nefarious labels and expose a new perspective to shadow banking in China.

There have been other recent scandals; for example, in 2014 when state-owned Industrial and Commercial Bank of China (ICBC) announced it would not rescue investors in an off-balance-sheet “Credit Equals Gold #1” product that used funds to make a loan to unlisted coal Company Shanxi Zhenfu Energy Group Ltd in 2010[2]. This earlier scandal sparked contagion fears, pushing the Shanghai composite to six month lows in January 2014[3]. With two big scares in two years, shadow banking in China has made investors concerned, but should they be?

What is Shadow Banking?

Shadow banking is a global phenomenon that the International Monetary Fund (IMF) estimates accounts for one fourth of money transfers between savers and borrowers worldwide.[4] While known to the public as a form of dodgy deals, shadow banking generally refers to alternatives to bank financing explaining why this number is larger than you might think. The public became familiar with the term shadow banking as a result of the global financial crisis and subprime mortgage crisis. During this time, banks were involved in shadow banking through the use of securitization vehicles (mortgage-backed loans sold in tranches as securities). It is considered an alternative form of financing because it isn’t depository banking; where deposited balances are then loaned to the public. Non-deposit banking has fewer regulations that helped spur both the subprime mortgage crisis and the recent China shadow banking market.

Simply, it’s financing outside, or only loosely linked to, the traditional system of regulated depository institutions. As mentioned before, it can be securitization vehicles as well as, money market mutual funds, investment banks, commercial paper and mortgage companies[5]. The key distinction from traditional capital sources is limited regulator oversight or safety nets such as central banks facilities upon which financiers can rely.

Shadow Banking in China

In China, shadow banking typically takes the form of entrusted loans, an off-balance sheet lending mechanism that skirts loan-to-deposit rules in order to service demand for bank loans that the government banking system will not meet. It grew rapidly from 2009, when the government responded to a sharp drop in foreign direct investment with a $586B stimulus package. Financed only partially (30%) by the central government, local governments were left to spend the stimulus, after first financing the remainder of the funds. Unable to borrow, they took on debt from banks and shadow banking institutions.[6] The government is also leading a transition from state ownership to capitalism, attempting to shift economic growth from state owned enterprises to smaller private business, but banking regulations have not supported this development in the government sanctioned banking sector. In particular, the People’s Bank of China (PBOC) imposes caps on the lending volumes and constrains the loans to deposits ratio to 75%. Regulators also discourage lending to certain industries.

This topic gets complicated fast, so let’s bring in an example. You’re an entrepreneur trying to open an assembly factory in Guangdong province. You are looking for a loan to start your operation, so you seek normal Chinese routes. You go to Chinese banks to get the loan, but your operation is too small to get a loan from ICBC, Guangdong Development Bank or Bank of China. Ministers, province officials and your mayor don’t have the time for such a small company. What do you do next? You go find an alternative source of capital like an agent bank that will do an entrusted loan; this type of loan links excess capital holders with capital deficient firms outside of deposit banks. You need money, I want to give it and earn interest, let’s make a deal. Seems relatively harmless, right? This is shadow banking in China.

Why does Shadow Banking exist?

As you can see from the example, it’s not a difficult concept and it’s good for the economy. The big state-owned Chinese banks would only approve big loans; small business could never prosper. In 2001, the People’s Bank of China approved entrusted loans[7] allowing the big four to act as agents in entrusted loans. Not using Chinese bank capital, but using their connections to make the market for smaller loans. This alternative form of banking got a lot of attention because 1) it provided liquidity to the many small companies trying to create a presence in China, 2) it was relatively simple because banks just play matchmaker, and 3) banks made a percentage off the interest for playing the role of trustee in the deal.

None of this is really ‘shadowy,’ in fact, the big banks don’t even try to hide that they facilitate these loans as the agent back. You can even find it prominently advertised on many of the bank’s webpages; here’s ICBC’s for example.

Where it went wrong?

So the biggest issue that have gotten the state-owned banks in trouble is that they are acting as trustee, meaning they play a role even after the deal is done. The agent bank in entrusted loans is responsible for collection of principle and interest. So when CITIC missed a payment to investors because of non-performing loans it is because the borrower failed to pay, not because the bank ran out of money. The problem that the state-owned banks are seeing is that they made many entrusted loans and with the slowdown if China’s economy, some of the borrowers are missing repayment; the trust isn’t being paid so the bank can’t distribute the interest and principal.

New Regulation

The biggest issue with China and their entrusted loans is that it is still off-balance sheet financing, meaning the bank doesn’t report sizes of loans or number of deals. Instead, they collect revenue from each trust they facilitate. The IMF and PBOC are concerned because while the state-owned banks have little exposure to the risk, the overall economy may be exposed because of these deals. The China Banking Regulatory Commission made the news later in the week when they released a draft of proposed rules to regulate entrusted loans.[8] So while a little bit more oversight and reporting may be needed, shadow banking in China isn’t all bad; the banks are providing liquidity to smaller companies hoping to employ Chinese labor and create a footprint in the Asian market.

[1] http://www.reuters.com/article/citic-securities-wmp-idUSL4N0VK4KU20150210

[2] http://www.reuters.com/article/china-icbc-idUSL3N0KQ1MT20140116

[3] http://www.zerohedge.com/news/2014-01-16/chinese-stocks-tumble-contagion-concerns-first-shadow-banking-default

[4] International Monetary Fund, “Global Financial Stability Report,” October 2014, p 66

[5] Bryan Noeth & Rajdeep Sengupta (2011). “Is Shadow Banking Really Banking?”.The Regional Economist, Federal Reserve Bank of St. Louis. October: 8-13.

[6] http://thediplomat.com/2015/11/the-rise-and-fall-of-shadow-banking-in-china/

[7] James R. Barth, John A. Tatom, Glenn Yago. “China’s Emerging Financial Markets: Challenges and Opportunities.” Springer Science & Business Media, 2 Dec 2009.

[8] http://www.reuters.com/article/china-banks-loans-idUSL4N0UY0N120150119

Article One – Circuit Breaker, a four day old mechanism

“Circuit breakers” halted trading in Chinese market during the first several days in January of 2016.

Let’s review it quickly. How does it work?

If stocks fall (or rise) beyond a certain threshold, a computer halts trading for a period of time or the rest of the day.

Why? To clam down nervous traders.

Does it work? Sometimes yes, sometimes no.

In China, they were triggered twice after its release.

The results? Traders got even more nervous and regulators finally have removed the four day old circuit breakers.

The measures were announced in December after a summer of dramatic market losses (nearly from 5178 to 3536) – used for the first time on Monday and again on Thursday. They automatically stop trading in stock markets that drop or appreciate too sharply – a 15-minute break if the CSI 300 Index moves 5% from the market’s previous close, or a whole-day halt if it moves 7% or more. It was supposedly introduced to limit panic buying and selling – which is more likely in small investor-dominated markets like China’s – but critics say they only add to selling pressure the next day.

Why bring in fusing mechanism?

The circuit-breakers were designed to “protect investors and calm markets”, according to regulators, but they have had the opposite effect.

Domestic market has experience a bull market from the initial of 2015 to the summer of that year. And the index has soared to 5178 points at the peak. However, shanghai composite index quickly slumped below 3000 points in the following two months. This huge reverse not only lock in so many investors but also press the management. Though China government has released a series policy to rescue the market, the consequence and influence was limited. Under this condition, China started to follow the mechanism made by U.S. market, hoping it can prevent the share price fluctuate too severe in the short run.

The Impacts

Though the fusing mechanism indeed has some advantages in theoretical, such as risk control effect and stable the market. When the market was halted, investors has more time to calm down and make clear decisions. Management hope the mechanism can prevent the share price rise and drop suddenly and sharply. However, it is China, and our market is different from mature market in U.S.

The decision by China’s regulators to suspend the brand new circuit-breaker mechanism, which only came into effect after twice trading halt, tells you just how difficult it is to manage or control financial markets.

We think circuit-breakers is a totally mistake, because our market already have price limiting mechanism and we carry out T+1 trading system. Without circuit-breakers, capital can pull up stocks which lied on down limit. Fusing directly make a real that less capital can beat the market down, and the money want to enter at the bottom has no opportunity. In other words, the fusing strangled the liquidity, and may cause hyper inertial fell in the following trading days. If our trading system is T+0, then fusing is reasonable, and if we don’t have price limiting, then fusing is also acceptable. It’s like the famous impossible trinity, we cannot implement the three regulations at the same time.

The whole market is based on liquidity, and govern by non-interference is preferable.

Generally, the circuit-breakers has several impacts on China market:

1. Mutual funds in domestic may face huge apply for redemption
2. Valuation may exist bias when the market was halted
3. The market may overreaction to the halted, and cause inertial fell subsequently

Why it failed? 

Reality is cruel, in two trading days, the mechanism has been triggered, and cause eight trillion RMB evaporated, according to the statistic. Small investors has lost 160,000 on average. The fusing failed.

We have to say fusing itself is aimed to stable the market, but it failed to reflect the real thoughts of transaction, and further influence the real share price. On the other hand, it has magnet effect, which means investor will process fire sell when the market nearly halted. So this mechanism cannot calm investor down but may push them overreact on the contrary. And all of this has high correlation with China macro economy.

First, prohibition on reduction of non-tradable shares will due on 8^th Jan, and government didn’t bring in any substantive policies. The market has so much pressure.

In addition, A share has a high correlation with the trends of CNY, especially after CNY went weak from the summer of last year. After the new year’s day, the CNY decline speeds up and beyond the public expectations, thus also bring too much pressure on the market.

Words in the End

Under the current markets, the most crucial and important things is to rebuild the confidence. Only rebuild the confidence, the market will reverse. In China, we still need different policies to stimulate the market. But we need the positive one benefit to rebuild confidence, not harm it further.

Group Member List – Team Alpha

Bin Zhang, Bryan Weber, Guyu Li, Hilary Goldsmith, Hongjing Zhou, Ketong Pu, Marcella Van Blaricum, Jiadun Zhang, Jialuan Zhang