China’s Home Wreck Rumblings
Chinese property shares led by mega-builder Vanke tumbled and erased Shanghai exchange gains to date as a 20 percent tax was slapped on sales just as the Communist Party Congress opened to formally tap new leadership. The GDP growth target was reaffirmed at 7.5 percent as PMI readings stayed above 50 especially for services, although officials acknowledged overcapacity in cement and steel and a rise in bank non-performing loans one-third tied to real estate directly and indirectly, including through local government financing platforms which have also moved deeply into bonds. So-called chengtou instruments outstanding are close to 2 trillion yuan, almost one-quarter of the corporate total, and come with a range of coupons and tenors within typical investment-grade ratings. Yields can be double the 4 percent average for higher-return wealth management products, where the regulator has now ordered off-balance sheet disclosure as worries mount about the “shadow” system threat with estimated assets at 40 percent of GDP. Foreign exchange has again become a profit center as capital inflows resumed on expected appreciation, aided by liberalization of offshore renimbi fixed-income quotas and of equity short-selling restrictions, which only affect listed blue-chips in an initial stage. Taiwan has now launched its own version of Hong Kong’s dim sum market as Chinatrust bank issued a Formosa bond to harness mainland currency appetite. Retail savings accounts could reach RMB 250 billion in the medium term on the island, as insurance companies clamor for paper with 10-15 year maturities. The development has shifted attention from lackluster export performance registering 1 percent GDP growth last year, as life companies continued with large portfolio outflows. The Asian and global high-tech sales outlook is brighter for 2013, as lower energy prices should also keep inflation under 2 percent with the central bank on hold.
Hong Kong land had already been subject to cooling measures as stamp duty was added to loan-to-value curbs, as prices have doubled since the 2008 crisis. The clampdown was factored into the stock market which barely budged in anticipation of another raft of mainland company offerings after 2012’s slump. Smaller banks and brokers still awaiting Beijing’s approval to list are in the pipeline, as the center tries to recapture top regional standing from Malaysia. The index has been flat as short-sellers have attacked firms suspected of fraud and questionable accounting, and new corporate governance rules step back on transparency in top executive dealings. The government asserts privacy rights for the change but activists claim conflict of interest and criminal activity will go undetected. With its “prudent fiscal stance” S&P recently re-affirmed the AAA rating, as the new council head unveils plans to use the ample surplus for social spending. He may also introduce additional taxes and a minimum-wage law while honoring the longstanding US dollar peg requiring HK$ 100 billion in intervention the last quarter to protect the structure.
