Build a hotel in 6 days! China’s housing bubble?

This week The Economist had a good article on the Chinese housing market. It seems that the biggest concern is the massive increase in the potential supply of housing. Barclays Capital have indicated that 40% of the skyscrapers due for completion in the next 6 years will be in China, increasing the number of tall buildings in Chinese cities by more than half. To give you an idea of the speed that the Chinese work at, a 15 storey prefabricated hotel in Changsha was erected in just 6 days – see below.

Within China incomes have mirrored increases in house prices (interesting to note Australia and New Zealand on this graph) but in the bigger cities this has not been the case and the recent IMF report suggested that “city prices appear to be increasingly disconnected from fundamentals”. In order to put try and quell house prices the Chinese government have done the following:
* first homebuyers need a 30% deposit as a downpayment
* if you buy a third or subsequent home you will not be able to get a mortgage.

With all this supply you need to have demand which in most countries often comes in the form of speculative investors looking for a capital gain. The government has been trying to restrict this practice by the following:
* restricting mortgages taken out for investment purposes
* banning state owned enterprises from buying land
* banks have to put money into an account that is held by a third party and is only released at certain milestones – known as escrow accounts
* for developers downpayments are now 60-70% of the land’s value

However this has led some developers to borrow money from offshore and restrictions or rules are open to corruption especially in the smaller cities.

Nevertheless, these efforts by the government have had some success with house inflation running at 6.4% – the CPI in China rose 4.9 percent year on year in January 2011. And its exposure to mortgages and loans are not at the levels seen in developed countries. According to the IMF, mortgages accounted for 20% of outstanding loans in Chinese banks. This is compared with 52% in Hong Kong and 57% in the USA. But The Economist argues that mortgage debt is rising from a low base; and a property bust could spillover into other fields to which banks have lots of exposure.

Get those printing presses rolling

US Fed has decided on some serious quantative easing in an attempt to revitalise an economic recovery that the central bank admitted was turning out “more modest” than expected. It said it would pump new money into the markets at a rate equivalent to about $200bn a year, and it left the duration of its efforts open-ended. Quantitative easing (QE) is the central bank practice of printing new money and using it to buy bonds on the open market. It is designed to push market interest rates lower when traditional tools, such as official interest rates, have been exhausted. The Fed kept rates at 0 to 0.25 per cent, where they have been since December 2008. The intensity of the debate over whether the Fed should resume quantitative easing increased after the July unemployment figures which showed a 131,000 drop in the number of jobs overall. This material is very appropriate for Unit 7 of the A2 course – Macro Policies. Click here to view BBC news. Below is a cartoon showing Ben Bernanke (US Fed Chairman) using a “helicopter drop” of money into the economy to fight deflation.

Credit Rating Agencies

A credit rating agency evaluates the credit worthiness of an individual, corporation, or even a country. The credit rating that they receive is considered from the financial past and current assets and liabilities. Naturally, a credit rating informs a lender or investor the prospect of the subject being able to pay back a loan. The credit rating of a corporation is a financial pointer to possible investors of debt securities such as bonds. These are assigned by credit rating agencies such as Standard & Poor’s, Moody’s or Fitch.

When the word ‘superpower’ is mentioned one thinks of the United States and more recently China. However in the financial world the credit rating agency Moody’s seems to have fallen under this banner. Along with its rivals Standard & Poor and Fitch, Moody’s exert significant pressure in the financial markets. Since these agencies assess risk they are the semi-official forecasters of how all the big companies and indeed governments will perform. Subsequently it is not surprising that the rating agencies have been criticised for their role in the recent credit crisis.