The Basle Committee’s Staggering Property Pronouncement

In its annual report the BIS, while lauding developing economies for crisis “escape,” cited growing imbalance risks including “staggeringly rapid” property price and private debt rises. It commented that cross-border financial flows in net and gross terms were again stoking instability with current account surplus and deficit countries refusing overdue savings and exchange rate adjustments. Macroeconomic policies should be the main levers of change, but increasingly regulatory measures and capital controls have assumed the responsibility. The credibility fight has taken greater importance with monetary stances often seen as lagging commodity and credit-induced inflation. Central banks are also grappling with Basel III’s new proposals in liquidity and other areas, and as in China’s case a large and unmonitored “shadow banking” system with close formal institution links. In global supervisory data “serious” gaps remain across the board at the firm, commercial transaction and national account levels which could be compiled in aggregate in an initial phase to flag vulnerabilities, the agency urges. In Asia a caution light could be flashing with the double-digit run-up in property credit in Singapore not seen since the late 1990s crash. It is now equivalent to 40 percent of GDP and ahead of income gains, and housing and oversight authorities have introduced steps to brake momentum. Overall lending was up 25 percent in the latest monthly number, and with the currency the main monetary tool, administrative controls are the handiest cooling means. The segment has driven inflation to 5 percent, but services and construction are key output and employment linchpins as industrial production weakens elsewhere. Bank and developer share listings have suffered with recent overheating disquiet, while bond fund managers there have pared regional allocations notably to Chinese high-yield issuers. Their spreads widened 100 basis points since May on the CEMBI benchmark with yields for recent entrants heading toward 15 percent. Along with reservations about the sector and the mainland’s soft landing prospects generally, disclosure and corporate governance scandals have hit prominent members like Sino Forest, which is under criminal investigation for US filings.

In the corporate debt universe the comparison risk-return group often cited with these events are Kazakh banks, with one-quarter of their mostly business and residential construction portfolios still non-performing after state rescues. BTA, which had imposed an 80 percent haircut on foreign creditors, was forced to release a statement in June after poor earnings that it could meet upcoming repayments. Subordinated instruments are trading in the distressed range after a previous rally as investors stagger at the continuing blast from the original default rubble.