Wednesday, Sep 02, 2015

London property will be mortally damaged during the great unwind

ICIS Chemicals: China fooled the world, and now comes the Great Unwinding

It is exactly a year since we forecast that a Great Unwinding of stimulus policies was underway, due to a major slowdown in China....Those who have chased London house prices into the stratosphere may come to learn a similar lesson, as the Chinese buyers who have powered demand for new-build houses in the city centre exit their positions.

Posted by hpwatcher @ 06:30 PM (4365 views)
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1. hpwatcher said...

Today, it is clear that risks are rising in all these areas. And fewer people now believe that the problems can be magically wished away by a further round of stimulus even if this was economically and politically possible.


Our view is that markets are beginning to recognise that China fooled the world with its stimulus programme. Contrary to popular belief, China did not suddenly become middle-class by Western standards in 2009. Instead, aided by developed country stimulus, its easy-lending policy created a global commodity super-bubble to rival, and perhaps even exceed, the US dot-com bubble in 2000 and the US subprime bubble in 2008.

Wednesday, September 2, 2015 05:33PM Report Comment
 

2. icarus said...

Too much blame on China, too little blame on shadow-bank/QE/ZIRP-driven speculation in emerging markets.

Back in 2009 the 'advanced economies' (AE) used little fiscal stimulus and lots of monetary/liquidity stimulus, which had little or no effect on their economies other than bank bailouts. This AE weakness caused the carry trade to speculate with this 'free money' in higher-yielding emerging markets. These markets, especially in Latin America, grew on the back of this huge speculative inflow and on the demand from China, which grew fast on the back of its huge fiscal and liquidity stimulus. Shadow banks (hedge funds, private equity, asset&wealth management, boutique banks, trust companies REITs etc.) are the conduits for this carry trade and their main strategy is 'pump-and-dump' - quick entry, quick exit after driving up the price - and the use of debt to do this.

The taper-tantrum mentioned in the article did indeed have profound effects, initially especially on Latin America. According to the BIS hundreds of billions of dollars flowed annually into L America between 2010 and 2013 - into the real economy and into asset speculation, with assets surging from this investment flow itself. This all went into reverse as China slowed at about the same time as the Fed's "taper QE, IR rises on the way" announcement in early 2013 to try to cool the bubbles QE/ZIRP had created. Investment was pulled out of L America and boosted instead western financial assets such as US stock and junk bond markets, the London area construction bubble and southern eurozone sovereign bonds. L American currencies, stock/asset markets and economies quickly went down the pan and their efforts to stem capital flight - IR rises - were counter-productive. And they were stuck with a mountain of debt and 'austerity' type demands for repayment.

The slowing of China itself was due in large part to this AE/QE/shadow bank speculation and money sloshing back and forth. Yes, China itself followed its fiscal stimulus in 2009-10 with a huge liquidity stimulus, but this was topped up enormously by debt-fuelled shadow bank inflows. Much of China's central bank loans went to state-owned enterprises. The shadow banking sector in China (total assets under management) grew from a few hundred billion dollars in 2008 to almost 10 trillion, according to Nomura researchers, in 2014 and went mostly to local governments for infrastructure spending, industrial and commercial enterprises, real estate and financial institutions and to investors in stock and bond markets. Local government debt in particular has risen by 70% since 2010. In general shadow bank credit has gone mostly to those sectors of Chinas economy where debt has accelerated fastest and produced financial bubbles. China's total debt rose from 130% of GDP to more than 240% of GDP over this period. That growth has been almost exclusively private sector debt, with much of that provided by the shadow banking sector, and much of it short-term requiring frequent re-financing. China was the perfect opportunity for the global financial elite - very big and with poor monitoring and regulation of capital inflows, so China had an unplanned 'let a hundred hedge funds bloom' policy.

And what of the ultra-high-net-worth individuals who are behind the unregulated shadow banks? The carry trade was responsible for maybe a (levered up) trillion dollars sitting in China's stock markets (at ridiculously high P/Es) sucking in the 'retail investors' whose function is to be left holding the funny paper after the smart money exits. When the tectonic plates started to move the big money guys swerved their margin calls and got closed out at acceptable levels, aided by their chums in the big securities firms charged with overseeing an orderly bubble deflation. (Is the rmb revaluation a pre-emptive move to wind down the carry trade before the Fed pulls the plug with an IR rise?)

As for London properties there may be Chinese deleveraging on such properties to meet Chinese stock market margin calls, but on the other side they may be meeting such calls by selling their shares at a loss - and the capital of the big-money boys is probably still intact.

Thursday, September 3, 2015 10:37AM Report Comment
 

3. icarus said...

"devaluation", not "revaluation" penultimate paragraph.

Thursday, September 3, 2015 10:53AM Report Comment
 

4. libertas said...

The unwinding in stimulus is in effect the ending of UK and US efforts to devalue the Dollar and Sterling.

The results of it will be capital flooding back to said countries, causing prices to rise plus, the value of said currencies to rise. It is causing turmoil elsewhere, but frankly, their loss, this time, is our gain, reversing decades of capital flowing out to places like China. A reversal of the economic cycle, as it always does.

Sunday, September 6, 2015 08:20PM Report Comment
 

5. icarus said...

"The world is falling apart, but so what if my house go up in value".

Monday, September 7, 2015 11:39AM Report Comment
 

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