More Evidence of a Sharp Slowdown in China Emerges

As an update to our recent missive on China, there is now more evidence of a bursting property bubble as well as a more general economic slowdown.

BHP Billiton is reconsidering its planned iron ore related investment expansions as imports into China are declining due to falling steel production and a slowdown in car sales. 

Meanwhile, house prices have lately been falling in 45 of 70 Chinese cities, with property sales in free-fall. As the FT Alphaville Blog reports on this, quoting from a Societe Generale report:

 

“Chinese property sales and prices have made for dour reading recently. Property sales value contracted 20% year on year in the two months ending in February. This is not only the worst result since the property slide in 2008 – it’s the worst result since the series began in 2006.

It’s particularly worrying to note that the slope of the fall is as sharp as the decline in January 2008. Back then, sales fell by a further 20% year on year after the January decline. This time, the comparables are a bit better, since property sales were rising through 2007, and have been stagnant over 2011. But if we assume that the monthly sales patterns in 2008 repeat in 2012, then sales should trough at around -24% year on year

Chinese property prices released today made for equally glum reading.Prices fell in 45 of 70 cities in February from January, according to prices released on Sunday by the statistics bureau. The average decline across the cities is now around 1.5% year on year. This is similar to the 1.3% drop seen in the old series (shown in red on Chart 2), but arguably the results are a lot worse.

 

(emphasis added)

Here are the two charts referenced above:

 


 

China property sales

 


China property prices

 


 

It sure looks like the slowdown in China's economy is intensifying.

 

Australia's new Mining 'Super Tax'

Also interesting in this context is a chart we have come across that depicts the correlation between China's steel production and the external value of the Australian dollar (hat tip to 'Also sprach Analyst'):

 


 

China's steel production sand the the Australian dollar: a close correlation.

 


 

This makes it all the more ironic that Australia's socialist government has just enacted a 30% 'super tax' on coal and iron ore production in order to, you guessed it, 'diminish those excessive profits' and obtain a 'fair share' for the bureaucrats to squander. This example of 'resource nationalism' is bound to backfire mightily. It once again proves that government bureaucrats and politicians are economically illiterate. They expect mining companies to shoulder the immense risks associated with capital intensive projects,  but want to deny them the rewards during good times.  Naturally this nonsense is hailed as great progress by interventionist apologists in academe (see below). The projections regarding the likely revenue increases from this tax will likely never come true. Moreover, Australia probably can bid a good part of its mining boom adieu now. Note also here that the institution of this tax highly likely to turn out to be extremely ill-timed, as iron ore and coal prices are probably going to slump in the wake of China's slowdown. Will the government give anything back to the mining firms in the event of a bust? We don't think so.

From the Bloomberg article linked above:

 

“Australia passed legislation that will reap about $11 billion in taxes within three years from BHP Billiton Ltd. (BHP), Rio Tinto Group and other iron-ore and coal miners as the government seeks to turn its budget to surplus.

Prime Minister Julia Gillard’s Minerals Resource Rent Tax was passed in the upper house yesterday and will become law on July 1 after receiving backing from the ruling Labor party and the Greens, who hold the balance of power in the Senate.

 

Passing the legislation is a success for Gillard, whose predecessor Kevin Rudd was ousted amid a campaign by mining companies against a broader 40-percent levy that he initially proposed. Gillard, the country’s first female prime minister, is trying to hold together a minority government that relies on the support of independent and Green party lawmakers.

“It’s a victory for Labor and will help the nation’s bottom line,” said Norman Abjorensen, a political analyst at Australian National University in Canberra. “Most Australians probably believe the big miners can afford to pay more tax.”

The levy will aid the prime minister’s bid to return the budget, to be announced May 8, to surplus.

“We’ve got a spectacular resources boom,” Gillard said in an interview with Channel Nine television today. “It makes sense to take some money from the turbo-charged section of the economy and share it more broadly around the nation and that is what the mining tax does.”

 

(emphasis added)

None of these projections will come to pass, you heard it here first. What 'Australians probably believe' about how much tax the mining firms can afford to pay is largely irrelevant in this context. Naturally the idea that Peter will get more if Paul is squeezed is often popular, but that doesn't make it a good basis for sensible economic policy. The irony becomes evident further below in the Bloomberg article:

 

“Australia posted its first trade deficit in 11 months in January, as weaker shipments of iron ore and coal contributed to the biggest drop in total exports in almost three years. The nation’s economic growth slowed to 0.4 percent in the fourth quarter from the previous three-month period, according to figures released on March 7.

The mining tax will raise A$10.6 billion in the three years after being implemented from July 1, according to government estimates. [no, it won't, ed.]

Parliament goes on hiatus from March 22 and resumes May 8, when the government will announce its annual budget that it says will return to surplus. Under laws already passed, the government will put a tax on carbon emissions from July 1 by charging about 500 polluters A$23 a ton for discharges until the set price gives way to a cap-and-trade system in 2015.”

 

(emphasis added)

Conclusion: sell the Australian dollar as quickly as you can. Seeing that Australia is also enacting a carbon tax and a 'cap and trade' scheme, we recommend prayer to our Australian readers as an initial ad hoc measure.

As an aside: these 'climate change' related extortions of tax payer funds are probably closely related to the state of the economy. They often are quietly dropped when economic conditions get bad enough, as they are really a luxury associated with a positive social mood ('let's all pull together to save the planet!' is a positive social mood inspired slogan). 

The climate changes all the time, regardless of what governments think they can do about it. In fact, if there is indeed a problem associated with changes in the climate (consider us extremely doubtful on that score, especially as global temperatures have completely failed to rise for 13 years running now), the last organization we want to 'deal' with it are the world's governments. They demonstrably make a hash of everything, and it won't be any different in this  case.

 

Addendum: US Housing Starts – Worse than Thought

Much ado has been made about the recently reported improvement in US housing starts. However, as the disaggregated numbers show, the bulk of the improvement was in multi-family units, not single family dwellings, which represent the bulk of the extant housing stock.

The chart below depicts the situation (via Calculated Risk):

 


 

Disaggregated US housing starts – single family dwelling starts have actually declined again.

 


 

Single family structures in isolation, long term. There's evidently nothing to get excited about. The housing slump is still not over. 

 


 

 

 

Charts by: SocGen, AlsoSprachAnalyst, Calculated Risk


 
 

 
 

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5 Responses to “A Slowdown in China, and Ill-timed Socialist Interventions in Australia”

  • zerobs, if your comments are in my direction, in no way have I called a bottom in the market. I surely haven’t seen Pater call one, so you must have misread what I wrote. DFW was and is a growing population area, yet we had a multiple year bust after a couple of years of overbuilding. Prime suburban locations today don’t sell for any more per foot than they did in 1984, a year 113,000 housing units were constructed in the metro area. Foreclosures here were running 4000 postings a month prior to the bust, while SFR construction was running around 12,000 a quarter. So, in essense, the supply was being put back on the market as fast as it was built. I’m in the housing business here with my mother. She wants to buy. I’m waiting for the next shoe to drop. I have sensed speculation has never ceased here. If the rental market soaks up the excess, new construction will merely steal from the rental market. There isn’t enough credit to run another price run and I suspect that declining needs of an aging population will provide an overhang of supply in the mid range market.

    APM, I have marveled for years over the seeming skys the limit of the Hong Kong market. What I have never been able to rectify is the income needed to occupy such an expensive market. Having a massive amount of GDP tied up in housing can’t be productive, save for it providing a source for credit to float the rest of the economy. Of course, the bill eventually comes due.

    • APM:

      mannfm11, of course a lot of money in HK is flowing in from the outside i.e. from China, India, Australia and so forth, and real estate speculation (price appreciation) is only one of the driving factor. More important driving factors are diversification (especially for the Chinese), a low-taxation jurisdiction and in general a good place from which to run a business in Asia (rule of law, good infrastructure, developed financial system). Thus prices can stay elevated as long as the other regional economies in Asia are performing and still inflating. Corrections do occur though: between 1997 and 2003, residential real estate prices collapsed by 60% and did not reach again the 1997 level until last year (2011).

  • zerobs:

    I actually think you are understating the problem in the US.

    Statistically, the big local or national housing bubbles have taken 6-8 years to hit bottom and we are only entering year 6. We may be near the bottom, but we aren’t quite there yet. I’m not one for market timing, so I would not discourage some souls with the time and money to look at buying but when I say people with money, I mean people with cash not creditworthiness.

    Having said all that, I would probably still caution that group to think a little more. I would venture to say that nearly all US economic statistics since WWII have been tainted by a demographic bias that is almost always ignored – baby boomers (more aptly named the “ME” generation in the 70’s). To make a long post short, we may be near the “bottom” in housing, except that we are just beginning the retirement sell-off of houses which may mean we will be bouncing along the housing bottom for another 12-15 years until the number of living baby boomers no longer skews the statistics. If you consider a 67-year old’s house to be shadow inventory of 2017 (will they want to sell and move to a retirement community at age 72? will they die?), supply is probably still increasing for the next decade.

  • 30% huh? I guess China is going to have to pay it or the mines won’t run. That CDS on the Australian banks might be a good play.

    In the meantime, they have all their BS artists, beginning with Stephen Roach, on CNBS today. Makes me want to kill my TV every time they put these groups together. China has blown the mother of all housing and capacity bubbles. These bubbles feed themselves until they pop. Humpty Dumpty is broken and there is this delusion he will fit right back together again. China has been building around 20 million units a year and I have read estimates of 60 million empty units. The bubble is 3 years too large. 20 billion square feet at $100 a foot is $2 trillion. They don’t have a pipe big enough to smoke this one. If you figure the average US home was twice the size of the Chinese home, the US bubble was only about 1/5th the Chinese bubble. Empty property is near worthless.

    My personal experience and my posted analysis on the US bubble, from afar, I would consider myself an expert on this subject. When the media was calling bottoms, I was calling record low construction rates before our mess was done. Note the chart. We had the lowest birth rate since the Great Depression in 1976. Why would a dwindling number of people coming of age produce an interrupted boom in home construction and price? The levels on this chart exceed what I have added up from government data, but it is possible I added up home sales and not homes built. I assume the difference is some people build their own homes, thus they don’t count as a sale. In any case, instead of coming off the peak in the mid 1990’s, we had an accelleration. The declines are what worked off the excess of the prior few years and there wasn’t one, for 10 years after one was naturally due. My research indicated that about 750K in new home sales should have been more than enough to supply the market. From the figures I recall, sales will be about 15% less than the numbers indicated on the chart. There were years they built and sold 2 times prior peak year demand. At current construction rates, it will be absorbed at about 500K units a year. In most areas of the US, we still have a few years to go and if speculators continue to soak up the excess, the improvement in construction will merely be added to such excess. The same principals apply to China.

    • APM:

      Yes, the property bubble in China is unprecedented in terms of size and also of sheer greed. I currently live in Hong Kong and in a 7.7 million people city there are apparently between 200,000 and 300,000 empty apartments bought as “investment”. It is a peculiarity of the Chinese culture that an apartment can be resold (flipped) for a higher price if it is still “new” i.e. unused. So property gets bought, stays empty for a few years and gets resold to the next speculator in the chain. It does not take much business acumen to know where this thing is headed. The picture in Mainland China is possibly even worse. One thing that strikes me when talking to business owners and managers in China, is the amount of energy they devote to property speculation, not only on the private side with their family money but also on the business side with their firm’s funds even if real estate does not happen to be one of their (declared) areas of business. I have done business with and reviewed the balance sheet of several companies whose core business (industrial, distribution, retail) was money losing or breaking even and whose source of (paper) profit was property speculation by buying offices, stores and even residential real estate. Those companies are basically consuming their capital chasing paper profits in the real estate market. Look out below! Most likely, this will end up in a huge bust coupled with even more money printing to soften the blow.

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