As we have been warning for nearly a year, the biggest threat facing China has been the fact that contrary to solemn promises, the problem of persistent, strong and very much relentless real-estate inflation has not only not been tamed but has been first and foremost on the minds of both the PBOC and the local government. After all with the entire "developed" world flooding the market every single day with countless billions in new cheap, hot money, it was inevitable that much of it would end up in the mainland Chinese real estate market. And since both the central bank and the politburo are well aware that the path from property inflation to broad price hikes, including the all critical to social stability pork and other food, is very short, it was inevitable that the issue of inflation would have to be dealt with eventually. Tonight is that "eventually", when following news from two days ago that yet another Chinese PMI indicator missed, this time the Services data which slid from 56.2 to 54.5, the government announced its most aggressive round of property curbs yet. The immediate result was that the Shanghai Stock Exchange Property Index slumped by a whopping 9.3%, the steepest drop since June 2008, and pushing it down to -11% for the year. The weakness also spread to the broader market, with the Composite closing down 3.65% the biggest drop in months, and now just barely positive, at +0.2%, year to date. We expect all 2013 gains to be promptly wiped out when tonight's risk off session resumes in earnest.
Elsewhere overnight, the Bank of Japan's new head Kuroda did what the BOJ has been doing best (and only) for the past six months - talk, talk and talk some more, this time in his parliamentary confirmation hearing. He repeated the usual tripe that only a central banker can spew with impunity. Select speech headlines from Bloomberg:
- KURODA: ENDING DEFLATION BIGGEST TASK FOR JAPAN ECONOMY
- KURODA: BOJ’S EFFORTS HAVE FAILED TO BEAT DEFLATION
- KURODA SAYS BOJ HASN’T BOUGHT ENOUGH ASSETS TO END DEFLATION
- KURODA SAYS NOT MUCH ROOM TO CUT INTEREST RATES
- KURODA SAYS BOJ EASING ISN’T AIMED AT WEAKENING THE YEN
- KURODA SAYS CAN’T DENY MONETARY POLICY AFFECTS CURRENCY MARKET
- KURODA SAYS ACHIEVING INFLATION TARGET IS BOJ’S JOB
Then some more musings on central planning:
- KURODA SAYS WAGE GROWTH NEEDED TO END DEFLATION
Perhaps Japan can just ban low wages?
On why the time for talk is ending, and why the BOJ will have to pull back its "open-ended" monetization sooner than January 1, 2014:
- KURODA: WILL CONSIDER STARTING OPEN-ENDED ASSET BUYING SOONER
And the punchline:
- KURODA SAYS WILL DO WHATEVER IT TAKES TO END DEFLATION
Ironically, the second he said that, the Yen jumped. Because the "tell me" time is over: we have now moved to show me.
Ironically, one entity that was not concerned about showing was China's rating agency Dagong, which in the aftermath of the ridiculous witch hunts against both S&P and Egan-Jones, has become the only credible source of realistic ratings. As was to be expected, a few hours ago Dagong downgraded Japan from A+ to A, with a negative outlook.
Among other things, Dagong said the Abe administration’s economic policies would "critically exacerbate the fiscal situation and cannot solve the entrenched problems constraining national wealth creation capability", that Abe's policies will "critically exacerbate the fiscal situation and cannot solve the entrenched problems constraining national wealth creation capability
and that "the economy will remain in a "prolonged slump" causing the risk of sovereign credit crisis to rise.
Hardly the truth any central planner anywhere wanted to hear.
That covers the miserable Asian session so far: we now look forward to Spanish unemployment which will likely be the only bright light in an otherwise increasingly dreary macro landscape, where over the weekend in Europe Beppe Grillo reaffirmed his campaign promises with demands to renegotiate Italy's debt and to eventually pull the country out of the Eurozone. As usual, we fully expect GETCO's algos to more than make up for the 0.5% slump observed overnight on the tiniest of BTFD hints or the most idiotic of rumors.
More on the suddenly bout of Risk-Offnest out of Asia from SocGen:
Asian stock markets started the week on a sour note, reacting to news of additional measures in mainland China to restrain real estate prices. This was arguably also the main factor driving down the Australian dollar, although the economic news reports this morning were also weak. The main exception to stock market weakness was Japan, where stocks are trading firmer despite a fractionally stronger yen. The relative stability of the yen is noteworthy, given that the proposed new BoJ governor, Mr Kuroda, reiterated in his confirmation hearing his strongly dovish bias, arguing for accelerated and broadened asset purchases. Lastly, an unexpectedly weak inflation reading in South Korea in our view boosted the chances of a rate cut by the Bank of Korea, a view that appears to be shared by the market, given the sharp decline in two-year government bond yields this morning.
Beijing intensifies the war against housing inflation
In order to tame fast-rising home prices, China’s State Council released the second harshly worded statement in less than two weeks, which was a more detailed version of the five-point action plan announced on 20 February.
Besides threatening the market again with potential expansion of home purchase restrictions and property tax trials, the central government called for higher down payment ratios as well as higher mortgage rates on purchases of second homes in cities with “excessively fast” housing inflation. For reference, the minimum down payment ratio on second-home mortgages is already as high as 60% and the minimum interest rate is 1.1 times the benchmark lending rate – 6.55% for loans of 5 years or more at the moment.
Furthermore, the authorities require that for any second-hand property, of which the original purchase price can be verified, the 20% tax on capital gains should be levied on the sale, instead of the 1% tax on the gross selling price that is more widely adopted at the moment. This rule, if implemented strictly, will increase the effective tax on housing transactions significantly.
The statement was a surprise both in terms of timing and its hawkishness. However, it didn't specify when any of these measures will start to become effective. For that we will have to wait until after the National People’s Congress meeting.
We think the immediate impact is going to be a surge in home sales in big cities, as people rush to close deals before the policy is put into place. Afterwards, property sales will probably drop substantially but property prices may not, as tighter implementation of the capital gain tax will serve to reduce the housing supply. Nonetheless, slower home sales are very likely to dent the growth momentum and overall liquidity conditions, as suggested by the housing downturn in early 2012.
Kuroda hearing points to big changes in Japan monetary policy
The government’s candidate to be the new Bank of Japan governor, Haruhiko Kuroda, certainly fulfilled expectations that he will be far more radical than his predecessor. In his confirmation hearing in the Japanese parliament he criticised past BoJ policy as insufficient to overcome deflation, and that bolder easing could have avoided years of deflation. He went on to say that the “scale and scope” of the assets the Bank has purchased so far are not enough to meet the 2% inflation target, and that more easing is needed in both quality and quantity. While underlining that monetary policy is not decided by the BoJ governor alone, he indicated that he would favour extending the maturity of JGBs to be purchased beyond the current maximum of 3 years, and that he will consider starting open-ended asset buying sooner than the current plan (January 2014). He also stated that a wide variety of asset purchases should be considered, a hint that the BoJ may in future buy more risk assets – although Mr Kuroda is likely to face stiff resistance from the BoJ bureaucrats.
While his comments clearly suggest that he will pursue a much “bolder” monetary policy, he backed certain well-known BoJ positions, such as a rejection of monetisation of government debt and purchases of government bonds directly from the government (this was something that PM Abe had suggested during the election campaign last winter). He also stuck by the line that FX intervention is the finance ministry’s responsibility, and that although monetary easing tends to weaken one’s own exchange rate, the focus is not the yen’s exchange rate but overcoming deflation. He also said that it would be difficult for the BoJ to buy foreign bonds, and stressed that it is important for Japan to have a medium-term fiscal consolidation plan.