China Tumbles On Real-Estate Inflation Curbs: Biggest Property Index Drop Since 2008; Japan Downgraded On Abenomics

Tyler Durden's picture

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:


Then some more musings on central planning:


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:


And the punchline:


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.

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Say What Again's picture

This gives new meaning to "sweet & sour" pork

markmotive's picture

China, Japan...all we need is Europe back in the news and markets go to shit

Europe is in Worse Shape Than Everyone Thinks:

natty light's picture

That's funny you dug out that picture of the building that fell over.

pods's picture

It is messy when they fall over like that.  Better to have them drop straight down in their footprint.


Matt's picture

Is that a wooden foundation on those apartment buildings?!

Vlad Tepid's picture

As long as there won't be inflation of the dong.

Rogue Trooper's picture

I wonder where our ChiCom troll Anonymous is?  Perhaps no no more than track lube for glorious PLA Type 99 while squating on kerbside eating his own shitizim????

buzzsaw99's picture

the boj should buy ten million prius per year too [/sarc]

Rogue Trooper's picture

Krugmanism GENIUS Buzz... the PLA could also use them for target practice for the T99 crews in preparation for the glorious assault on Japan. I, for one, would watch on youtube.  If only for the pleasure of watching the destruction of such a dumb peace of car-trash that looks like a reject from the late 70's Logans Run TeeVee series.... bullish.

See what I mean....


buzzsaw99's picture

They could build huge catapults and fling them toward China in the coming trade wars.

philipat's picture

Au contraire, I would actually regard China's move as very positive. But of course, nowdays black is white.

new game's picture

in the course of time this will go down as a another centraly planned nightmare.

they will get just what they deserve-government run by manipulators ignoring

misses economics - the markets will eat them for lunch eventually.

attention shalom: YOU ARE NOT IN CONTROL...

abe is another keyns idiot.

they never learn, but ironically they are the gatekeepers of irresponsible money.

make money off their stupidity-don't hope it fails, just profit from it...

philipat's picture

Are you talking about China or The US??

Uber Vandal's picture

This is from almost a week ago, and looks like yes, this is how it starts.

I wonder how long before this is spun to be a consequence of the "sequester" as well?

laomei's picture

The thing about the tax, is that the obvious loophole will be to have a "contract price" and then a "real price".  Any tax will be paid by the buyer anyways.  But on the large scale, these regulations are a good thing by and large.


The real boon will be for new-home sales which are obviously exempt from capital gains, as well as a decrease in rental prices as more units end up on the market because flipping just got a bit less profitable.  I also see this cutting short-term speculation out of the market.  It's all a good thing that has minimal impact on normal people and hits hardest the assholes who have been driving up prices in the cities.

YuShun's picture


The new Chinese 20% capital gains tax on real estate, if it sticks, will claw back a lot
of profits from the very wealthy who got rich during the 1980s & 1990s, and have
much of their wealth in large numbers of condos  in luxury apartment complexes.   
Something similar in America would be a quick decision to impose a retroactive
surtax of 20% on Wall Street bonuses received during the past dozen years.


Edward Fiatski's picture

...Aaaand no fucks were given by the market. GJ Kuroda.

Next time, announce that another Fuku-fuck-you is on its way to Tokyo, we'll do the rest - see that sexy hammer hanging around 03/2011? You bet. Wait... that was Deflation!

Deflation, Deflation, Deflation!

disabledvet's picture

"and the world is being flooded with expensive DEBT" not at the clueless dope writing this claims "worthless dollars." You're bowing down before mighty banks that no longer exist Tylers Durden. Your expressions of fealty go unanswered.

Downtoolong's picture

The spot on 60 Minutes about the real estate bubble in China was mind blowing. Whole cities with mega malls that are five years old and never once occupied. It felt like looking out over a battle field at a million dead bodies. Tell me you wouldn't rather own gold than that shit Warren.

I loved the part where they put up fake signs to give the impression big brand name retailers from the U.S. and Europe had already bought in. Nope. It's a scam, inside a con, warapped in a fraud. And yet, some muppets are still trying to buy in. It just goes to show what can happen when all your attention is drawn and focused on a single price or index. You can't see the forest for the tree. You know, like the Dow and S&P.

Cheeseus Sonofdog's picture



".......Gillem Tulloch is a Hong Kong based financial analyst who was one of the first to draw attention to the housing bubble in China. He's showing us around the new eastern district of Zhengzhou, in one of the most populated provinces in China - not that you'd know it. We found what they call a "ghost city" of new towers with no residents, desolate condos and vacant subdivisions uninhabited for miles, and miles, and miles, and miles of empty apartments......."

Schmuck Raker's picture

There's never been a better time to buy!

These low prices can't last long, buy now!

Only a fool wouldn't buy at these levels!

Lord Of Finance's picture

Not to worry fellow comrades. They still a people republic of China, just like a Soviet Union, they sure able to make a mistake in economic data reporting disappear. The person who make a report shall disappear as well. Next report show much improvement.