China just announced that its Q2 GDP came in at 10.3%, just below a consensus estimate of 10.5%. Surprisingly, for some odd reason the market seems to believe this "data." Although in retrospect, based on China's bottom up GDP goalseeking, the number, which we will show in a second is completely irrelevant, could very easily be true, based on two just announced stunners about the Chinese economy. The first comes from Fitch, which in a report released today titled Informal Securitisation Increasingly Distorting Credit Data, uncovers that China has in fact been massively underrepresenting the actual amount of new loans in the first half of 2010, courtesy of precisely the kinds of securitization deals that blew up half of our own banking system: "Adjusted for informal securitisation activity, Fitch estimates that the net amount of new CNY loans extended in H110 was closer to CNY5.9trn, or 28% above the official figure of CNY4.6trn...on a flow basis the volume of credit being shifted off balance sheets in recent times has been large and rising. Activity also is largely concentrated among just a few dozen banks, and institution?specific exposure is often much higher." And some are wondering why China's AgBank was scrambling to raise $20 billion via a hurried IPO... Yet this data pales in comparison with disclosure from a recent article in South China Morning Post, in which an economist at the Chinese Academy of Social Sciences noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country! This number is five times larger than the roughly 12 million in total US public (3.89 million) and shadow (8 million as estimated by Morgan Stanley) home inventory available currently. Forget Stephen Roach - China is covertly funding and creating a housing bubble that is at least 5 times as big as that of the United States. We leave it up to you to imagine the consequences of that particular bubble's bursting...
The Fitch report is pretty self-explanatory (presented below) but here is a section that highlights that China's banks are increasingly becoming more opaque in data presentation, which one can assume is due to their unwillingness to reveal the true state of affairs. Of course the same tactic worked very well for our own subprime sector... until virtually every company in the space went bankrupt in the span of 3 weeks in 2007.
Already Weak Disclosure is Getting Even Worse
Data on the sale and re-packaging of loans into CWMPs has always been sparse, but, historically, observers have been able to track activity by the number of CWMPs issued each month using information collected by small third-party data providers. However, as public scrutiny of informal securitisation has risen, Fitch has observed a noticeable worsening of Chinese banks’ already poor disclosure of this activity.
Some banks very actively engaged in transactions last year are showing up in 2010 data as minimally involved, yet the bank’s own salespeople (responding to Fitch’s enquiries) state that business remains as strong as ever. Meanwhile, private placements of products to institutional investors are becoming more commonplace, most of which are never disclosed to any entity but the CBRC. Because of this worsening in disclosure, data from third-party providers is capturing less and less transaction flow, with as much as 40% of deals in H110 going uncaptured, versus less than 10% prior to end?2009.
As for actual issuance metrics, as Fitch says, the "volume of credit being re?packaged on the rise."
Data on the number of outstanding CWMPs and CTPs shows net issuance accelerating in H209 as credit conditions tightened, followed by a flattening out in H110 (Chart 3). While the recent moderation in part reflects the looser credit environment in H110, the significant worsening in disclosure in 2010 also has been a major factor distorting recent data. Indeed, when historical figures are adjusted to strip out the entity that most conspicuously dropped out of issuance figures in 2010, net product issuance swings from −7% to +1% in H110.
There is much more in the full report, presented below.
Yet the real shocker of the day comes from the following article in the South China Morning Post, presented below in its entirety, and without comments. None are needed.
64.5 million mainland houses lying vacant: economist
Mainland’s property market remains dangerously overheated and failing to tame the speculative bubble could threaten financial and social stability, a prominent economist said in an official newspaper on Friday.
Yi Xianrong, an economist at the Chinese Academy of Social Sciences, a government think tank in Beijing, noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country, many of them bought up by people wagering on a constantly rising property market.
In the overseas edition of the People’s Daily, Yi said the ”shocking” level of empty housing showed the dangers brought by the country’s property boom, which the central government has been trying to cool.
“If this outsized property bubble does not burst, it will hurt residents’ well-being, and also affect national financial security and co-ordinated national economic development,” wrote Yi.
He wrote that the overheated property market was creating ”misallocation of resources, price distortions, squandering of wealth … and is magnifying national financial risks, so that the economic structure cannot be adjusted, ultimately leading to overall social instability.”
The People’s Daily’s overseas edition is a small-circulation offshoot that tends to be more forthright than the main, domestic edition. While the paper is not an unerring mirror of official policy, Yi’s commentary suggests that the real estate market remains a worry for policy-makers.
Beijing announced a slew of measures in past months to cool the property market, including raising down-payments and mortgage rates, and that has already caused deal volumes to drop and property inflation to slow in many cities.
Nationwide, property prices rose 0.2 per cent in May from a month earlier, and were 12.4 per cent higher than a year earlier. The increases were smaller than in April.
Property prices will fall within a few months as government steps to cool the real estate market bite deeper, Xu Shaoshi, the minister of land and resources, said on Sunday.
Yi suggested that more robust steps are needed to beat back property price rises fuelled by speculation.
“The problem now is that investment in the domestic property market has completely overturned China’s traditional concepts of wealth management and investment and its price formation system,” he wrote.
Full Fitch report: