Mission Impossible

By Derek On October 25, 2011 Under Broker Notes, Post

From: Derek Hillen
Sent: Monday, October 24, 2011 11:53 AM

To: Derek Hillen
Subject: Mission Impossible

The good news is that, according to the Obama administration, the rich will pay for everything. The bad news is that, according to the Obama administration, you’re rich.” – P.J. O’Rourke

And the good news out of Europe is anything but. Here is what you need for when it is formally announced:


We also have the latest news out of China and for property speculators it is not good. Premier Wen over the weekend said that property market controls will continue. Li Keqiang, the current vice premier and likely Wen successor, is the guy responsible for housing policy in China. In the run up to leadership change in China in 2012, Mr. Li is going to want to be seen as having beaten the crap out of and tamed the wild housing market so in the absence of global panic, I wouldn’t expect him to relax his full Nelson until then. Tuesday last week the statistics bureau reported property price increases in 69 out of 70 cities tracked so Mr. Li knows he has a lot more beating to do. Indeed, in our property note today, “Mission Impossible,” Stephanie Lau, looks at the impact of recent mortgage rate increases across 14 major cities in China (up 5-20%). This is happening as major developers slash prices by up to 20% to clear inventory. By restricting the ability of buyers to buy volumes in the market will wither. Falling volumes plus lower prices means an ugly winter ahead for the China property developers and so it is too early to punt the sector. Sell the current bounce until prices in 69 out of 70 cities tracked fall and Mr. Li clears his throat to declare victory. Note attached.


One major reason banks are hiking mortgage rates across China is because deposit growth is falling – fast. As Patrick Pong, our banks analyst, shows:

Q3 domestic deposit is only 20% of H1 deposit growth and annualized growth for 2011 so far is the lowest it has been in 9 years. We know locals aren’t buying property, with the SHCOMP index at multi-year lows, they aren’t buying stocks. Where is the money going? The curb market, of course! On October 13th, I wrote:

China has been buying copper they haven’t been using it Henry Liu, explains copper importers in China can take advantage of the environment by using a letter of credit issued by a bank to buy a shipload of copper. The copper itself is used as collateral for the LC. It takes two weeks to ship the copper to China whereupon the buyer sells it on the open market upon arrival. He then has six months to pay the bank back. Property developers can’t get bank loans, are locked out of the debt market and are facing liquidity constraints. Our friendly copper “trader” lends the money to them for six months earning a nice turn at current rates (30-50%). There have even been reports of property companies buying copper directly, selling it on arrival and financing their operations this way.”

Everyone now is getting in on the game with one year deposit rates of NEGATIVE 2.5%. I would too. Head of Banks Research, John Wadle, estimates the curb market is now about RMB 10 tn in size, vs. RMB 70 tn of deposits in the formal banking system. But it is growing and deposits are not leading to an erosion of power in the financial levers Beijing relies upon to keep the ponzi scheme going. This won’t last and Beijing will crackdown on “usurious” lending rates as Japan and Korea did in the past. Such action would cause immediate liquidation of collateralized assets in the system such as copper. As the only base metal trading above its cost curve, sell copper.


You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA


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