China’s Property Slump Spurs Record Loans to Builders

Cash-strapped Chinese developers are borrowing a record amount in the offshore loan market this year, adding to the highest debt loads since 2005.

Homebuilders in the world’s second-largest economy got $5.9 billion from foreign banks, up 39 percent from the same period last year, according to data compiled by Bloomberg. Builder debt has soared to 128 percent of equity, the highest since 2005, according to a Bloomberg Intelligence gauge of 84 companies. New home prices fell in July in almost all cities the government tracks and developers are missing sales targets.

“Higher leverage on the balance sheet will give developers a higher financial burden,” said Agnes Wong, credit strategist at Nomura Holdings Inc. in Hong Kong. “That means that if presales are not going as quick as they expect it can translate into trouble more easily than before.”

Premier Li Keqiang is allowing builders to expand financing channels in a bid to stem the slowdown in an economy that derived 16 percent of its growth from property development last year, according to the World Bank. Sino-Ocean Land Holdings Ltd., whose free cash flow in 2013 dropped to a third of the previous year, led the borrowing with an $800 million loan.

Sales Slide

China’s home sales fell 10.5 percent in the first seven months of the year compared to the same period in 2013 to 3 trillion yuan ($488 billion), Moody’s Investors Service said in an Aug. 29 report. New construction declined 20 percent across the country, according to an Aug. 7 report from Fitch Ratings.

Central China Real Estate Ltd., Poly Property Group Co. and Yuexiu Property Co. Ltd. were among companies taking loans offshore this year.

Pressure on real estate companies was underscored by the collapse in March of Zhejiang Xingrun Real Estate Co. Developers including China Vanke Co., the nation’s biggest, and Greentown China Holdings Ltd., the largest in the eastern province of Zhejiang, have cut prices since then to boost sales.

The slump comes as economic growth is set to cool to 7.4 percent this year, the slowest in more than two decades, according to the median estimate of economists surveyed by Bloomberg. The Purchasing Managers’ Index, a gauge of manufacturing, fell to 51.1 for August from 51.7 in July, data today showed. The yuan has fallen 1.4 percent against the dollar this year, making it the worst-performing major Asian currency.

New Channels

Standard & Poor’s has reduced ratings for six Chinese property companies and increased them for two this year. That compares with two upgrades and two downgrades in 2013, according to Bloomberg-compiled data.

The three-year facility by the Beijing-based Sino-Ocean Land, whose projects include the Ocean Landscape residential development in the capital, pays a fixed 3.1 percent coupon. That compares with the 4.5 percent yield on the company’s 2019 dollar bonds, according to prices compiled by Bloomberg.

Lenders in Asia are extending more credit to high-yield companies as they seek to increase returns as central banks in the U.S., Europe and Japan keep benchmark interest rates near zero.

“Banks often will understand the credit better and will be able to get ancillary business from the same company so they can price a little bit cheaper,” Hong Kong-based Sonia Li, head of syndicated loans of JPMorgan Chase & Co. in Asia, said in a phone interview on Aug. 19.

Costs Decline

Cheaper borrowing from global banks that until five years ago didn’t lend to high-yield developers from China is a positive development, Owen Gallimore, the Singapore-based credit strategist at Australia & New Zealand Banking Co., said in a phone interview on Aug. 20.

Chinese real estate companies have increased dollar-denominated bond issuance to $16.5 billion this year, up 38 percent from the same period in 2013, Bloomberg-compiled data show.

“Funding and liquidity have also been boosted this year by the strong offshore bond primary market, syndicated loans, and regulatory re-opening of the onshore bond market,” Gallimore said. “Defaults are therefore not likely to spike.”

Property sales may improve for the remainder of 2014, helped by a rise in mortgage lending and selective loosening of purchases restrictions, Moody’s said in its Aug. 29 report.

Concerns Mount

The rise in loan funding is cause for concern because it reduces the claims that global bond investors have on the assets of Chinese developers, Nomura’s Wong said. The trend comes just as companies issue more expensive debt in the local market, expanding their overall liabilities, she added.

The overseas borrowing also adds to debtloads exacerbated by increased issuance of securities that have no set maturity dates. Chinese companies are selling a record number of the so-called perpetual notes that can be booked as equity this year, sidestepping government efforts to reduce the world’s biggest corporate borrowings.

That may drive up developers’ financing costs in part because the securities “generally start with a base dividend rate of about 8 percent per annum,” according to an Aug. 29 report by Robert Hing Fong, an analyst in the China team of Bloomberg Intelligence. Agile Property Holdings Ltd., which borrowed $520 million from foreign banks this year, had 4.48 billion yuan of the notes as of June, according to the report.

Chinese property companies may need to raise funds to cushion against any worse-than-expected sales slumps this half, Du Jinsong, an analyst at Credit Suisse Group AG, said in an interview Aug. 28.

The latest sign of demand for fresh funds in the industry came last week when Country Garden Holdings Co., controlled by China’s richest woman Yang Huiyan, announced plans for a share sale. The developer plans to raise HK$3.18 billion ($410 million) in a discounted share sale to refinance debt, including notes maturing in September, according to an Aug. 27 filing.

“On one hand it is definitely good that they are still able to get bank money,” Wong at Nomura said about Chinese builders in general. “But on the other hand they now have higher debt sitting on the balance sheet.”


How long can America burn up wealth?

Abandoned Packard Automobile Factory - Photo by Albert DuceHow long can this nation continue to consume more wealth than it produces?

The trade deficit is one of the biggest reasons for the decline of the U.S. economy, but many Americans don’t even understand what it is.

We are buying far more stuff from the rest of the world than they are buying from us.  That means that money is constantly leaving the country than is coming into the country.  In order to keep the game going, the nations whose products we purchase lend us the money to buy those products my purchasing our debt. Lately, we just have the Federal Reserve create new money.  Our current debt-fueled lifestyle is dependent on this cycle continuing.  In order to live like we do, we must consume more wealth than we produce.  If someday we are forced to only live on the wealth that we create, it will require a massive adjustment in our standard of living.  We have become great at consuming wealth but not so great at creating it.

But as a result of running gigantic trade deficits year after year, we have lost tens of thousands of businesses and millions of jobs. America is being deindustrialized at a staggering pace.

When the trade deficit increases, it means that even more wealth, even more jobs and even more businesses have left the United States.

In essence, we have gotten poorer as a nation.

Have you ever wondered how China has gotten so wealthy?

Just a few decades ago, they were basically a joke economically.

So how in the world did they get so powerful?

Well, one of the primary ways that they did it was by selling us far more stuff than we sold to them.  If we had refused to do business with communist China, they never would have become what they have become today.  It was our decisions that allowed China to become an economic powerhouse.

Last year, we sold 122 billion dollars of stuff to China.

That sounds like a lot until you learn that China sold 440 billion dollars of stuff to us.

We fill up our shopping carts with cheap goods that are “made in China”, and they pile up mountains of money which they lend back to us so that we can buy more.

Who is winning the game?

Following are the yearly trade deficits with China since 1990.  Can spot the trend?

1990: 10 billion dollars

1991: 12 billion dollars

1992: 18 billion dollars

1993: 22 billion dollars

1994: 29 billion dollars

1995: 33 billion dollars

1996: 39 billion dollars

1997: 49 billion dollars

1998: 56 billion dollars

1999: 68 billion dollars

2000: 83 billion dollars

2001: 83 billion dollars

2002: 103 billion dollars

2003: 124 billion dollars

2004: 162 billion dollars

2005: 202 billion dollars

2006: 234 billion dollars

2007: 258 billion dollars

2008: 268 billion dollars

2009: 226 billion dollars

2010: 273 billion dollars

2011: 295 billion dollars

2012: 315 billion dollars

2013: 318 billion dollars

It has been estimated that the U.S. economy loses approximately 9,000 jobs for every 1 billion dollars of goods that are imported from overseas, and according to the Economic Policy Institute, America is losing about half a million jobs to China every single year.

Considering the high level of unemployment that we now have in this country, can we really afford to be doing that?

Overall, the United States has accumulated a total trade deficit with the rest of the world of more than 8 trillion dollars since 1975.

As a result, we have lost tens of thousands of businesses and millions of jobs. Our economic infrastructure has been gutted.

Just look at what has happened to manufacturing jobs in America.  Back in the 1980s, more than 20 percent of the jobs in the United States were manufacturing jobs.  Today, only about 9 percent of the jobs in the United States are manufacturing jobs.

And we have fewer Americans working in manufacturing today than we did in 1950 even though our population has more than doubled since then…


Many people find this statistic hard to believe, but the United States has lost a total of more than 56,000 manufacturing facilities since 2001.

Millions of good paying jobs have been lost.

As a result, the middle class is disappearing and at this point 9 out of the top 10 occupations in America pay less than $35,000 a year.

For a long time, U.S. consumers attempted to keep up their middle class lifestyles by accumulating debt, but now it is apparent that middle class consumers are tapped out.

In response, major retailers are closing thousands of stores in poor and middle class neighborhoods all over the country.  You can see some amazing photos of America’s abandoned shopping malls right here.

If we could start reducing the size of our trade deficit, that would go a long way toward getting the United States back on the right economic path.

Unfortunately, Barack Obama has been negotiating a treaty in secret which is going to send the deindustrialization of America into overdrive.  The Trans-Pacific Partnership is being called the “NAFTA of the Pacific”, and it is going to result in millions more good jobs being sent to the other side of the planet where it is legal to pay slave labor wages.

According to Professor Alan Blinder of Princeton University, 40 million more U.S. jobs could be sent offshore over the next two decades if current trends continue.

So what will this country look like when we lose tens of millions more jobs than we already have?

U.S. workers are being merged into a giant global labor pool where they must compete directly for jobs with people making less than a dollar an hour with no benefits.

Obama tells us that globalization is good for us and that Americans need to be ready to adjust to a “level playing field”.

The quality of our jobs has already been declining for decades, and if we continue down this path the quality of our jobs is going to get a whole lot worse and our economic infrastructure will continue to be absolutely gutted.

At one time, the city of Detroit was the greatest manufacturing city on the entire planet and it had the highest per capita income in the United States.  But today, it is a rotting, decaying hellhole that the rest of the world laughs at.

In the end, the rest of the nation is going to suffer the same fate as Detroit unless Americans are willing to stand up and fight for their economy while they still can.

Auto Loans: Once a Boon for America, Now…

Submitted By Fabius Maximus

One of the many oddities of this cycle is that many things that were good during the post-WW2 era have become bad in the era now starting (unrecognizably so, as we remain unaware of our changed circumstances). Like debt. Such as auto loans. Our use of debt gives clues to our future..

Consumer debt in the old world, and the new

During the post-WW2 era increasing debt supercharged economic growth for the young and rapidly-growing West. But after 60 years of this our societies now carry massive debt loads, both public and private — while the numbers of elderly grow (who experience a crash of income upon retirement, plus rising costs to society for their pensions and health care). Carrying our current load might prove difficult; adding to it now is madness.

Plus, there are other factors in play. Fifty years of growing inequality, for still poorly-understood reasons, have hollowed out the middle class — diminishing their ability to carry their existing debt, making them dependent on borrowing to maintain their lifestyle.

Some take another step beyond borrowing. Borrowing to buy cars and homes results in slowly accumulating equity, one of the most common ways middle class households save. Increasingly Americans abandon buying with debt for renting. Rent homes instead of owning. Renting cars (leasing) instead of owning.

Automobile sales point to our new world

Accelerating borrowing was a natural leading indicator of economic recoveries during the post-WW2 era. So economists see the waves of desperate borrowing by consumers since 2000 as a good thing. Hence their excitement about the subprime lending boom that drove the housing bubble. Such as today’s subprime borrowing to buy cars.

The extreme case of this blindness to our changed conditions is glee about the shift to renting cars (aka leasing). It shows vibrant demand for cars! As we see in this excerpt from a report by BofA-Merrill global economist Ethan Harris, 6 August 2014, showing that after mid-2012 leasing grew faster than total spending on vehicles (2012 saw many such transition points for the US economy).


Households go for the low capital option: leasing soars:

Household outlays on leasing are booming at a 20% yoy pace — a clear sign that demand for vehicles is alive and kicking. With average lease payments lower than typical monthly ownership costs and with a down-payment not typically required to enter into a lease, the surge in vehicle leasing is likely a sign that financial restraints are still holding back some would-be buyers. Thus, as the economy improves, bottled-up household demand for vehicles could translate to higher sales.

Yes, in our society demand is “alive and kicking” by subprime households for cars bought with low-rate loans on easy terms — or even just renting (aka leasing). But does it point to an economic recovery — or exhaustion?.

The terms are very easy

Turning back to people at least attempting to buy, there are four dimensions to consumer loans: the creditworthiness of the borrower, the interest rate of the loan, the length of the loan, and the collateral (the loan to value ratio). A report by Experian Automotive, June 2014, describes the first three.

… average automotive loan term reached an all-time high of 66 months … loans with terms 73-84 months grew to 25% of all loans originated during the quarter. …

The average amount financed for a new vehicle loan also reached an all-time high of $27,612 in Q1 2014, up $964 from the previous year. In addition, the average monthly payment for a new vehicle loan reached its highest point on record at $474 in Q1 2014, up from $459 in Q1 2013.

… Market share for nonprime, subprime and deep subprime new vehicle loans in Q1 2014 rose to 34%.

Six- and seven-year-long auto loans! At what point will the borrower have equity in their cars? Especially since these are probably the subprime borrowers that make up 1/3 of auto lending.

The fourth factor is equally ugly. Lenders are lending more than the value of the collateral (i.e., including closing costs and rolling over the deficit of the buyers’ trade-in). These are averages; half of loans have even higher LTVs. From Semiannual Risk Perspective, Office of the Comptroller of the Currency, Spring 2014:


Why are these numbers important?

The changing nature of auto sales tell us much about ourselves. They show how economists do not see the new era beginning. They imply slower growth in the future, as a household’s longer loans with smaller down payments push out their ability to buy their next car. They tell us something about the recovery.

Auto sales have been a major driver of the recovery. Most economists expect auto sales to continue growing, helping power the long-awaited acceleration from slow ~2 percent growth to 3percent or beyond. So the sustainability of auto sales — and the borrowing and leasing that fuels them — matter.

The following charts show the importance of auto loans to auto sales, and of auto sales to consumer sales.

Flow of Auto Loans

Second, since the crash, auto sales have grown much faster than overall consumer spending.

Strong Auto Spending

Auto sales have been one of the few drivers of this recovery. They have been pushed up by easy credit, longer terms, lower credit quality, and sky-high loan-to-value ratios. But these loans lock the buyer out of the market for years to come. Charge-off for lenders will rise, and in response lenders will re-tighten their underwriting standards. And outstanding auto loans, once useful in the prior era, will become malignant.

The US economy has repeatedly failed to resume normal growth after the crash. But potentially worse is the decline in long-term growth estimates.


A Financial Storm Approaches

It is so easy for a country to print money… Said another way, it is so easy for a government to create inflation.

Because it’s so easy, nobody believes that DEFLATION – the opposite of inflation – is possible.

But it is

Financial StormEarlier this week, Republican politicians proposed a bill that would limit the powers of the Federal Reserve.

We are all for limiting the powers of government… But if the Fed’s powers are limited, its ability to print money would be limited… If this happens, persistent deflation could be an outcome – and that could trigger a financial storm that nobody is expecting.

“The most likely path of the Federal Reserve policy in the years ahead is the continuation of massive money printing to fend off deflation,” Jim Rickards writes in his excellent book The Death of Money. However, “the Fed may reach the political limits of printing.”

This is a scary thought for the Fed.

“Deflation is the Federal Reserve’s worst nightmare for many reasons,” Rickards explains. The new bill proposed by the Republicans is an example of the Fed reaching the political limits of money printing.

For one, “Deflation increases the value of government debt, making it harder to repay. If deflation is not reversed, there will be an outright default on the national debt, rather than the less traumatic outcome of default-by-inflation.”

Even worse, deflation “feeds on itself and is nearly impossible for the Fed to reverse.”

If deflation actually takes hold, how can we get out of it?

Rickards explains it: “The only way to break deflation is for the United States to declare, by executive order, that gold’s price is, say, $7,000 per ounce, possibly higher.”
Deflation can be broken when the dollar is devalued against gold, as occurred in 1933 when the United States revalued gold from $20.67 per ounce to $35.00 per ounce… If the United States faces severe deflation again, the antidote of dollar devaluation against gold will be the same, because there is no other solution when printing money fails.”

To be clear, Rickards isn’t actually predicting deflation…

He says we’re in an epic battle between inflation and deflation… where the government desperately wants to create inflation.

Conventional wisdom dictates that the government will succeed in creating inflation. But Rickards’ book describes an eye-opening, credible argument on deflation could actually take hold.

The actions this week by House Republicans suggest that Rickards is right – there is a legitimate risk that the Fed “may reach the political limits of money printing.”

We highly recommend you pick up  The Death of Money… It will open your eyes…

Roadblocks to Recovery in America

The number one problem in this country is excessive debt, debt at all levels – consumer, business, financial and government.

The bottom line, and despite all the plausible arguments to the contrary, we have too much public and private debt relative to the nation’s gross domestic product (GDP). Worse yet, an increasing portion of this debt is unproductive or even counter-productive.

In simple terms, the purpose of taking on debt is to generate future income. Part of that future income is productive, part of it is used to service and, presumably, pay down the debt. But the debt incurred today, especially at the government level, is taken on solely for the purpose of “propping up” the status quo. It is unlikely we will be able to generate the future income necessary to service this debt.

RoadblockIt is already affecting us. In the last fifteen years, debt-to-GDP ratio has risen from roughly 250 percent to more than one hundred points higher, 360 percent today, and our standard of living is no higher. I define “standard of living” in this case as median household income. We’ve taken on the debt, it’s bought modest gains in GDP, but it has not improved the welfare of the majority of our people.

This isn’t the first time the United States has been here before. We’ve seen three periods of excessive government debt:

In the 1820s and 1830s

Again in the 1860s

The early part of the 20th century

We survived those situations which probably seemed quite impossible at the time. This is really the fourth episode of extreme indebtedness to face our nation. These periods have occurred at very long, irregular intervals. That’s one of the difficulties, people weren’t alive at the time of the prior ones.

The first period of government indebtedness occurred in the 1820s and the 1830s, when we were building our early transportation infrastructure – canals, turnpikes and steamship lines. Initially, there was good value derived from the debt. But then the infrastructure was overbuilt and the credit available was used to finance living beyond our means.

The panic occurred in 1838. The bubble burst and speculative real estate prices collapsed. The economy experienced a difficult time all the way to the American Civil War. But we eventually saved, paid down the debt, and recovered.

The next major episode was in the 1860s – building the railroads. Initially the debt accumulation served a good purpose. Frist, we built what was known as the central route. Then we built northern and southern routes, and a whole host of feeder lines. A host of abuses followed – real-estate and stock market speculation, lavish consumption and living beyond our means. All of the railroads failed except one, and it was the one that was not financed by the government. Government involvement was significant in developing the rail system. Government created the incentives, but the private sector bet on the incentives. Government-manipulated incentives drove over-investment. Government incentives drove over-consumption and speculation.

The most infamous debt related crash occurred in the 1920s. Again, the incentive for the over-speculation was excessive liquidity created by the Federal Reserve. The Federal Reserve was newly established at that time, it had just come into existence in 1913. Interestingly, there were some Federal Reserve officials that were aware that the problem was out of control, but they were drowned out, because everybody was having too much of a good time. The Great Depression followed. The US economy didn’t recover until we entered World War II.

The forced austerity of World War II pushed the saving rate up to 25 percent. We repaid the debt, and this laid the foundation for the post-World War II boom.

The fourth episode has occurred in the last 20 years. Again, the incentives came from the government sector, mainly the Federal Reserve. The federal government also played its hand through two government-sponsored corporations – Fanny Mae and Freddy Mac. The perceived safety these agencies provided in the mortgage business allowed the bundling and “slicing and dicing” of mortgages. This created the façade that the mortgage was safe and secure regardless of how poor the fundamental characteristics of any individual loan were. Of course, that was a false notion, and so we have now had another very difficult time period and we are certainly not getting a normal recovery. The standard of living is continuing to fall, in spite of gains in GDP. We have a much more dramatic monetary and fiscal response, but therein lies the problem. We are not achieving a rise in the saving rate, the austerity that’s needed.