Today we are waiting for Godot or the Fed.

 

Michael Kurtz of Australia’s Macquarie Research writes that Chinese demand for empty property units is “perversely rational”

 

* A Chinese Academy of Social Sciences study making the rounds lately has revived ‘China bubble’ fears by suggesting that a startling 64.5 mn urban housing units — one for every four households — is sitting empty, based on dormant electricity meter readings. Even if these numbers are accurate, fears of a property crash may be misplaced.

 

* The real risk to China’s economy may not be a property price collapse, but the way in which the supply overhang inhibits economic restructuring. To understand why demand for even empty housing units is so resilient, one needs toconsider the poor savings alternatives available to Chinese households.

* Beijing raises funds from households largely via below-‘market’ deposit interest rates in the state-owned banking system. The 12-month deposit rate is currently just 2.3%, meaningfully below CPI inflation about to pass through 3.0%, and not even in the same league with first-half nominal GDP growth of 16.7%. So bank savings is a losing proposition.

 

* This forces households to look outside the banks in search of better inflation-hedged investments. But with China’s restricted capital account, savers are mostly confined to a domestic-only palette of alternatives, chiefly property. Local governments also have avoided levying value-based property ownership taxes, relying instead on revenue from land sales to developers — so thus far the carrying cost of empty units is effectively zero.

…but overhang could inhibit financial & fiscal reform

 

* These distortions portend at least three difficult eventual reform passages for China’s property market: 1) interest rate reform, which would increase returns to bank savings and reduce property’s relative attractions; 2) capital account liberalization, which would broaden Chinese households’ access to the world of cross-border investment alternatives; and 3) the introduction of value-based property ownership taxes (to reduce local governments’ reliance on land-sale revenues), which would impose a carrying cost for empty housing for the first time.

* Tricky as these reforms may prove, each is central to the economic restructuring and efficiency improvement Beijing hopes to pull off in the next few years. So the true risk may be that by having allowed a potential property overhang to come into existence, Chinese policymakers paint themselves into a corner where essential reforms such as financial liberalization and fiscal restructuring seem too dicey to implement quickly. If so, China may be able to keep its firm property market, but at the cost of slower reform.

 

Michael’s article appeared in the Wall Street Journal August 9. Reprinted with permission.

 

The ADR market is coming back with a vengeance. Here are some wonderful new shares you soon can buy at your friendly local brokerage:

 

NXP Semiconductors of the Netherlands, NXPI, underwriter Credit Suisse;

Ambow Educational Holdings Ltd of China, AMBO, JP Morgan;

MakeMyTrip Ltd., a travel agency, of Gurgaon, India, MMY, Morgan Stanley;

China Kanghui Hlgs of Chanzhou, maker of medical devices, KH, Morgan Stanley.

 

And the NYSE began trading Emerging Markets Local Debt Fund (Ticker: ELD). This wonder from Wisdom Tree enables you to buy local-currency-denominated paper (bonds, notes, or other debt) to benefit from the yield advantage for holding rupees or reais or rubles. Of course the yield is paid because of risk. You cannot currently own renminbi, however because of exchange controls, not that that they pay off well, also because of exchange controls, as per the article above. This is not a recommendation.

 

Writes Tom McClellan, our favorite chartist: “The bond traders who have been looking forward to a Fed announcement about upcoming purchases of additional bonds are going to be disappointed by Tuesday’s post-meeting announcement. The current bond price action seems to be pricing in perfection for both deflation and a Fed response to that deflation, setting the stage for a big tipover once reality comes home.” Tom writes the www.McClellanOscillator.com Today we are waiting for Godot or the Fed.

 

More for paid subscribers follows from Britain, where I am currently, Brazil, Canada, South Korea, India, Israel, Thailand, and Belgium.