Out of the goodness of their hearts.

Not if, but Wen-

China’s Wen Suggests Euro Funding After Meeting With Merkel

Feb 6 (Bloomberg) — Chinese Premier Wen Jiabao raised the prospect of contributing to the euro-area’s bailout programs, telling Chancellor Angela Merkel that China may be prepared to assist in resolving its debt crisis.

The Chinese government is considering funding options for the temporary European Financial Stability Facility and its permanent successor, the European Stability Mechanism, through the International Monetary Fund to help stabilize the monetary union, Wen said yesterday after meeting Merkel in Beijing. China has previously said that it needs more detail on any plan to contribute funds to the euro area.

China is “investigating and evaluating ways, through the IMF, to be more deeply involved using the ESM and EFSF channels in solving the European debt issue,” Wen said at a briefing alongside Merkel, who arrived in China early yesterday on her fifth visit to the world’s most populous country as chancellor.

Trojan horse
They just want to support their exports.

Premier Wen says China needs to help Europe – report

Feb 5 (Reuters) — Chinese Premier Wen Jiabao said that China needs to help Europe stabilise its markets due to strategic considerations in its relations with the region, the official China Securities Journal reported on Monday.

China also needs to keep its policy on imports and exports stable via more encouragements rather than restrictions, the newspaper quoted Wen as saying during a visit to China’s southern province of Guangdong earlier this month.

“Europe is now in a debt crisis,” Wen was quoted as saying. “We must consider our relations with Europe from strategic needs, maintaining our nation’s own interest.

“On the other hand, Europe is our largest export market. Europe is our biggest source of technological imports. Helping Europe stabilise its markets is thus helping ourselves.”

Reads like inflation fears are still there which should temper growth initiatives:

China economy faces downward risks in 2012

Feb 1 (Reuters) — China’s economy faces downward risks in 2012, as weakening external demand cuts into growth of the country’s export sector, the Finance Minister Xie Xuren said in remarks published on Wednesday.

He also said inflationary pressures in China remain strong as international markets are awash with cash, which has helped push up global commodity prices.

“There exists some downward pressure for the economic growth. As the external demand is now fading clearly, Chinese exporters are facing increasing difficulties,” Xie said in an article published in the ruling Communist Party’s mouthpiece magazine, Seeking Truth, which was posted on the central government website, www.gov.cn.

China’s economy, which grew at its weakest pace in 21/2 years in the latest quarter, looks to be heading for an even sharper slowdown in coming months, although an official survey of purchasing managers showed a slight upturn in factory production in January.

Xie also emphasized the important role of fiscal policy in maintaining China’s steady and relatively fast economic growth and said Beijing would continue to implement a proactive fiscal policy this year.

China’s fiscal deficit and government debt ratio, both of which remain within a safe and comfortable zone, are expected to give much scope for the government to keep its proactive fiscal policy, Xie added.

China’s nationwide fiscal revenues jumped 25.8 percent to a record high of 10.37 trillion yuan in 2011, leaving the country with a fiscal deficit of 519 billion yuan, lower than the budgeted 900 billion yuan.

“It is necessary and also possible for us to continue to implement a proactive fiscal policy,” he said. Xie also said that his ministry would provide more fiscal support to small to mediumsized enterprises and step up efforts to cut taxes for some selected sectors to restructure the economy away from exports and towards domestic consumption. “We will further improve tax cut policies in some areas to promote the development of enterprises and boost household consumption,” he added. Beijing has unveiled a slew of tax breaks to help cashstrapped small firms cope with rising costs and has also allowed them to issue more bonds and tap other sources of financing to ease the funding squeeze. The finance ministry also vowed to guarantee enough funding for key construction projects in the 12th five year plan period. Chinese Premier Wen Jiabao also said at a state council meeting on Tuesday that the central government would back funding to major projects already under way to ensure steady growth in investments.

China 2012 Budget Deficit May Rise Slightly

Feb 1 (Bloomberg) — China’s budget deficit may rise slightly or be almost unchanged this year from 2011, Gao Peiyong, a researcher with the Chinese Academy of Social Sciences, wrote in a commentary in today’s People’s Daily.

China may control fiscal expansion this year as maintaining consumer prices is a main problem for the country, Gao wrote

China may cut tax, rather than increase spending to continue conducting positive fiscal policies, according to Gao.

2012 Economic Fundamentals Remain Sound

Feb 1 (Bloomberg) — China’s economic fundamentals remain sound and the country has some advantages that will promote development this year, Finance Minister Xie Xuren wrote in Qiushi article posted on the central government’s website today.

China has “huge” domestic demand potential, Xie writes

China still faces downward pressure on economic growth, “relatively large” inflationary pressure and potential economic and financial risks, Xie writes

China’s deficit rate and debt rate are in a “safe range,” Xie writes

China Says it Will Implement Proactive Fiscal Policy This Year

Feb 1 (Yonhap) — China said Wednesday it will implement a proactive fiscal policy this year in a bid to drive up growth amid growing signs of a global economic slump.

Chinese Minister of Finance Xie Xuren, said in a statement that the government will use financial functions to maintain stable and rapid economic development in China.

China’s economic growth slowed last year, with its gross domestic product growing 8.9 percent on-year in the fourth quarter, slowing from 9.1 percent in the third quarter and 9.5 percent in the second quarter.

Over the course of the year, China’s economy expanded 9.2 percent in 2011 from a year earlier, down from 10.3 percent on-year growth in 2010.

Xie noted that China’s economy is facing downward pressure stemming from external shocks.

“The country’s exports are facing increasing difficulties, affected by significantly weakening external demand,” he said. “New drivers for economic growth need to be developed.”

The country’s export growth has begun slowing on falling global trade.

With global economic uncertainty lingering, including the European fiscal crisis, China has been looking to transform itself into a consumption-oriented economy by raising domestic demand.

I’ve been watching the fundamentals for the exchange rate to deteriorate for the last couple of years. Could be the timing is now right with FDI flows as well as trade flows looking like they may have turned.

China Forex Reserves Dip for 2nd Month in Dec

May 25 (PTI) — From K J M Varma China’s foreign exchange reserves amounting to over USD 3 trillion declined for the second straight month in December, snapping the trend of years of accumulation.

Chinese lenders bought USD 142.5 billion on behalf of their clients in December, while they sold USD 157.8 billion, marking the second monthly deficit, China’s State Administration of Foreign Exchange (SAFE) said in a statement.

The December deficit stood at USD 15.3 billion, up from USD 800 million in November.

China sits on the world’s largest forex reserves.

The SAFE data came after the central bank had said earlier this month that the country’s yuan funds outstanding for foreign exchanges fell to 25. 36 trillion yuan in December.

Analysts said the deficit, like falling yuan funds, is a result of a narrowing trade surplus, a slowdown in the growth of foreign direct investment and weakened expectation for yuan’s appreciation.

Last year, Chinese banks bought USD 1.6 trillion in foreign currency, and sold USD 1. 23 trillion, leading to a surplus of USD 367.8 billion, the SAFE statement said.

Reports of the decline came as China starts celebrating the lunar New Year, or the Spring Festival from January 23. This will mark the beginning of the ‘Year of the Dragon’, according to the Chinese Zodiac that assigns one animal, real or fabricated, to each year, repeating every 12 years.

However, experts say that this year is expected to be a tough one for China as it is seeing a declining trend in exports which is narrowing the decades of trade surplus.

Besides the dip in the forex reserves, China also saw a decline in the double digit growth rate in its economy, which grew by 9.2 per cent in 2011, with official projections that it will decline to 8.5 per cent this year in the face of falling exports and global financial crisis.

China’s trade surplus fell to 6-year low at USD 155 billion in 2011 amid shrinking exports market, even as its foreign trade surged by 22.5 per cent to hit an all-time high of USD 3.64 trillion.

The annual trade surplus narrowed to 14.5 per cent year-on-year to USD 155.14 billion in 2011, according to the General Administration of Customs (GAC).

China is the world’s second-largest importer and is expected to become the top importer in 2-3 years and contribute to global economic recovery, a senior research fellow from the Center for US-China Relations, Tsinghua University, Zhou Shijian, was quoted by the official media here as saying.

More signs the western educated kids are taking charge.
Instead of the public sector spending more than it’s ‘income’
seems they are working on expanding private sector debt?
And tax cuts for institutional investors to buy equities?

Good luck to them…

Chinese Agencies Working on Fiscal Steps to Boost Consumption

Jan 18 (Bloomberg) — Commerce Ministry spokesman Shen Danyang says his agency, central bank and finance ministry are working on such steps

* China will support wider use of credit, bank cards

* Agencies will submit plan to State Council

* NOTE: State-run China Securities Journal today reported govt may introduce tax cuts, other preferential policies for institutional investors to encourage long-term stockholding

China PBOC Asks Banks to Refrain From Lending Too Much

Jan. 13 (Bloomberg) — The People’s Bank of China’s regional branches asked banks to refrain from lending “too much” in early part of the year, Reuters reports today, citing unidentified people in the banking industry.

Shanghai PBOC branch told banks that 1Q new loans shouldn’t exceed 40% of total new loans last year, according to Reuters

My proposals remain:

1. A full FICA suspension:

The suspension of FICA paid by employees restores spending which supports output and employment.
The suspension of FICA paid by business helps keep costs down which in a competitive environment lowers prices for consumers.

2. $150 billion one time distribution by the federal govt to the states on a per capita basis to get them over the hump.

3. An $8/hr federally funded transition job for anyone willing and able to work to assist in the transition from unemployment to private sector employment.

Call me an inflation hawk if you want. But when the fiscal drag is removed with the FICA suspension and funds for the states I see risk of what will be seen as ‘unwelcome inflation’ causing Congress to put on the brakes long before unemployment gets below 5% without the $8/hr transition job in place, even with the help of the FICA suspension in lowering costs for business.

It’s my take that in an expansion the ‘employed labor buffer stock’ created by the $8/hr job offer will prove a superior price anchor to the current practice of using the current unemployment based buffer stock as our price anchor.

The federal government caused this mess for allowing changing credit conditions to cause its resulting over taxation to unemploy a lot more people than the government wanted to employ. So now the corrective policy is to suspend the FICA taxes, give the states the one time assistance they need to get over the hump the federal government policy created, and provide the transition job to help get those people that federal policy is causing to be unemployed back into private sector employment in a more orderly, more ‘non inflationary’ manner.

I’ve noticed the criticism the $8/hr proposal- aka the ‘Job Guarantee’- has been getting in the blogosphere, and it continues to be the case that none of it seems logically consistent to me, as seen from an MMT perspective. It seems the critics haven’t fully grasped the ramifications of the recognition of the currency as a (simple) public monopoly as outlined in Full Employment AND Price Stability and the other mandatory readings.

So yes, we can simply restore aggregate demand with the FICA suspension and funds for the states, but if I were running things I’d include the $8 transition job to improve the odds of both higher levels of real output and lower ‘inflation pressures’.

Also, this is not to say that I don’t support the funding of public infrastructure (broadly defined) for public purpose. In fact, I see that as THE reason for government in the first place, and it should be determined and fully funded as needed. I call that the ‘right size’ government, and, in general, it’s not the place for cyclical adjustments.

4. An energy policy to help keep energy consumption down as we expand GDP, particularly with regard to crude oil products.

Here my presumption is there’s more to life than burning our way to prosperity, with ‘whoever burns the most fuel wins.’

Perhaps more important than what happens if these proposals are followed is what happens if they are not, which is more likely going to be the case.

First, given current credit conditions, world demand, and the 0 rate policy and QE, it looks to me like the current federal deficit isn’t going to be large enough to allow anything better than muddling through we’ve seen over the last few years.

Second, potential volatility is as high as it’s ever been. Europe could muddle through with the ECB doing what it takes at the last minute to prevent a collapse, or doing what it takes proactively, or it could miss a beat and let it all unravel. Oil prices could double near term if Iran cuts production faster than the Saudis can replace it, or prices could collapse in time as production comes online from Iraq, the US, and other places forcing the Saudis to cut to levels where they can’t cut any more, and lose control of prices on the downside.

In other words, the risk of disruption and the range of outcomes remains elevated.

China Should Seek ‘Relatively High’ Deficit

Jan 5 (Bloomberg) — China should seek a “relatively high” fiscal deficit this year to stabilize the economy, Jia Kang, a researcher at the Ministry of Finance, wrote in an article in China Finance magazine.

A growth rate of at least 8% this year is acceptable, Jia says.

This is peculiar.
This supports the yuan vs the yen,
supporting Japan’s exports to China.

Could be more evidence of China’s inflation concern?

Japan To Buy Chinese Govt Bonds Under Bilateral Pact

TOKYO (Nikkei) — Japan will likely purchase yuan-denominated bonds issued by the Chinese government under a proposed bilateral currency and financial agreement, The Nikkei learned Monday.

Japanese and Chinese officials are working out plans to have the pact signed when their leaders meet for a summit this coming Sunday. The agreement will be pillared on the purchase of Chinese government bonds using Japan’s foreign exchange fund special account, along with the joint establishment of a green investment fund.

Japan seeks to diversify its forex fund special account, which now focuses on dollar investments. It also aims to strengthen economic cooperation with China by supporting that nation’s efforts to turn the yuan into a more international currency.

The bond purchases may total up to 10 billion dollars’ worth, or roughly 780 billion yen, with buying carried out in stages through the special account.

The Chinese government counts Japanese government bonds among its foreign-currency reserves. Through cross-holding of bonds, Japan and China will be better poised to exchange information on financial developments in the bond market and elsewhere.

The Japanese government also plans to aid Chinese efforts to nurture an offshore market for yuan-denominated transactions.

The proposed joint fund for environmental investment would feature the participation of the Japan Bank for International Cooperation and private-sector companies from the Japanese side. Details of the fund’s size and investment percentages are to be fleshed out in the near future.

Thailand and Nigeria are among the countries that hold yuan-denominated government bonds through their central banks. Tokyo and Beijing believe that having a developed nation like Japan maintain a certain amount of yuan-denominated holdings may help lift the Chinese currency’s standing on the international stage.

China’s government bond offerings totaled 1.4 trillion yuan in 2009, up 55% on the year.

Such issuances have recently increased in Hong Kong. Overseas investors can acquire government bonds issued on the mainland, but regulations — including a ceiling on purchase amounts — remain strict. top

China Bond Purchases Could Help Ties: Finance Minister

Japan To Buy Chinese Govt Bonds Under Bilateral Pact

TOKYO (NQN) — Finance Minister Jun Azumi on Tuesday confirmed a report that Japan is considering buying Chinese government bonds, arguing that such purchases will offer the two countries significant advantages while strengthening bilateral economic ties.

At a news conference after a Cabinet meeting, Azumi said Japan should hold yuan-denominated bonds as a means of strengthening diplomatic relations.

Azumi said no official decisions have been made on the matter, and that Tokyo will discuss the issue at a future Japan-China summit. He also suggested that the two nations may be able to strike an agreement when Prime Minister Yoshihiko Noda visits China.

Best I can tell the jury is still out as to whether China is going through
the ‘hard landing’ scenario that began when modest first half state lending was
followed by lower second half state lending, all to control inflation.

Note the recent social unrest that could be inflation linked.
All we know is the regime change risk was sufficient for them to cut back on growth.
And so far not much sign of anything of consequence in the pro growth direction,
which means the political concerns over inflation are still there.

The currency could also be heading south fundamentally due to inflation.
Net fx reserves may be down to minimum levels
after factoring in their dollar debt that has been indirectly supporting the yuan.
And with foreign direct investment tapering off,
that source of currency support seems to have subsided.

While slower growth in China hurts some US companies,
lower resource costs for the US are consumer friendly.

If gold has lost enough of it’s bid from central bankers,
it could be headed back to it’s marginal cost of production, 1980′s style,
which is where it goes without global central bank accumulation.
I recall the buyers earlier this year included the Greek and Mexican central banks,
as well as the central bank of Bangladesh.
I suppose with high unemployment,
govt figures it might as well put people to work in the gold mines? Whatever!
Anyway, the final leg up for this cycle may have been the spike after Chavez
opted to take delivery of his gold, which he now has,
debunking the speculation that it wasn’t there to be delivered.

Next is whether Congress lets the FICA cuts expire and take maybe 1% off of Q1 GDP.
The President just said he wouldn’t veto the Republican plan, so they may work something out.
But with their bent on ‘paying for it’ no telling what the final result will be.

China headlines:

China’s Manufacturing May Contract a Second Month
Foreign Direct Investment in China Falls as Factories Slow
China Money Rate Rises Most in 2 Weeks
Yuan Forwards Fall for an Eighth Day as Manufacturing May Shrink
Chinese Cut Back on London Luxury Homes as Stock Losses Bite
China Money Supply Growth Slows to Weakest Pace in Decade
China Affirms Property Curbs Amid ‘Grim’ Outlook
China’s Stocks Fall to Lowest in 33 Months on Economic Concerns

Reads to me like policy is moving back towards growth and ‘inflation?’

I don’t expect runaway inflation but enough to continue to fundamentally continue to weaken the currency.

China’s currency has been fundamentally weakened for the last couple of years, while being supported vs the dollar by foreign investment, speculation, and what looks to me like the indirect expenditure of dollar reserves. Should the currency starts falling against the dollar it will tell me those factors have run their course.

Hu Pledges More China Imports as IMF’s Zhu Sees ‘Soft Landing’
China’s Stocks Rise Most in 3 Weeks on Bank Loans, CPI Outlook
China’s Hu pushes for larger global role
Obama warns Hu of U.S. frustrations on trade
Major yuan rise no cure for U.S. economic ills-China’s Hu
China’s Imports Rise Sharply, While Export Growth Slows
China New Loans Rise More Than Expected in Loosening Signal
Former China Banking Regulator Says China 2011 Growth Above 9%
China’s economy on right track: IMF
IMF See Little Decrease in Incentives for Saving in China
Former PBOC Adviser: China’s Economy May Grow 8%-8.5% Annually Over Next 10 Years – Report
China’s Property Market Experiencing ‘Soft Landing’, Fan Says

Reads like the inflation problem was worse then most thought, and that a hard landing might still actually be happening. No way to actually tell in real time.

With China a first half/second half story, as previously discussed, January will bring a fresh slug of new govt. lending/spending that should at least moderate any fall that’s in progress.

However, if the anti inflation fiscal policies continue, and spending/lending is materially down from last year, the weakness should persist and potentially get a lot worse.

Property Prices Collapse in China. Is This a Crash?

By Gordon Chang

November 6 (Forbes) — Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market. The country’s largest builders began discounting homes in Shanghai, Beijing, and Shenzhen in recent weeks, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing. In Chongqing, for instance, Hong Kong-based Hutchison Whampoa cut asking prices 32% at its Cape Coral project. “The price war has begun,” said Alan Chiang Sheung-lai of property consultant DTZ to the South China Morning Post.

Makes sense.

I always wondered how that loan demand was accommodated.
Never looked like the kind of lending US regulators would sanction.

Karim writes:

Now it all starts unraveling. It’s all talk- another ‘optical illusion’ with no operational reality I sight. The China participation isn’t a done deal. The 50% haircut isn’t a done deal either as they haven’t yet figured out how to actually do it without a default event. The EFSF contributions aren’t a done deal either.

What they have done is further frightened investors to the point where the ECB will find itself buying a lot more bonds to keep member nation funding in check, while ‘negotiations’ drag on with no resolution, meaning, as previously discussed, this is the resolution.

Hoping i’m wrong…

Euro Bailout Fund Chief Sees No Quick China Deal

By Reuters

October 28 (CNBC) — The head of Europe’s bailout fund said on Friday he does not expect to reach a conclusive deal with Chinese leaders during a visit to Beijing but expects the surplus-rich country to continue buying bonds issued by the fund.

Still seems to me that the idea that WTI appreciates to Brent as the Strategic Petroleum Reserve release winds down over the next few weeks is playing out as previously discussed. The WTI discount depends on a serious glut condition persisting, and the wind down of the approx 3.8 million barrels a week being delivered from the strategic petroleum reserve will work to reduce the glut by that amount.

If so, WTI is marching towards $110/barrel which seems to me could trigger substantial market reactions.

And about the same time the super committee deficit reduction talks will be in full swing, euro financing stresses elevated, exacerbated by confirmation of the 0 gdp growth forecasts hit the headlines, and further slowdown news from China complicating things as well.

The ‘answer’ remains as simple as it is further away from political reality than ever, even though the right policy responses couldn’t be more attractive to both sides:

The US budget deficit is too small.

He’ll be back…The way things are going there is no alternative, a point market forces continue to make.

And no amount of tea from China, at any price, would be sufficient given current institutional structure and policy.

And more discussion on whether Greece should be allowed to default, even as haircut talk rises to 60%, and as the notion of ‘voluntary’ comes under further discussion. After all, if they don’t have to pay their debts, why should any other member nation have to pay its debts? etc.

Sarkozy yields on ECB crisis role, pressure on Italy

By Julien Toyer and Andreas Rinke

October 24 (Reuters) — European Union leaders made some progress towards a strategy to fight the euro zone’s sovereign debt crisis on Sunday, nearing agreement on bank recapitalization and on how to leverage their rescue fund to try to stop bond market contagion.

But final decisions were deferred until a second summit on Wednesday and sharp differences remain over the size of losses private holders of Greek government bonds will have to accept.

French President Nicolas Sarkozy backed down in the face of implacable German opposition to his desire to use unlimited European Central Bank funds to fight the crisis.

Instead, the euro zone may turn to emerging economies such as China and Brazil for help in underpinning its sickly bond market.

This is what I’ve proposed the US do with Canada and Mexico- long term contracts for oil and nat gas at ‘fair’ prices would stabilize prices and reduce price disruptions and inflation possibilities of all three economies.

Russia says close to final stage on China gas deal

By Gleb Bryanski

October 11 (Bloomberg) — Russia said on Tuesday it was close to the final stage of a huge gas supply deal with China, in what would be a landmark trade agreement between the long-wary neighbours.

A deal to supply the world’s second biggest economy with up to 68 billion cubic metres of Russian gas a year over 30 years has long been delayed over pricing disagreements.

“We are nearing the final stage of work on gas supplies,” said Russian Prime Minister Vladimir Putin, on his first overseas trip since announcing he was ready to reclaim the Russian presidency.

Putin is hoping his two-day visit will help broaden trade with China, which he expects to grow to $200 billion in 2020 from $59.3 billion last year.

This doesn’t need to mean hard landing, but it means the state has to be that much more countercyclical to hold it all together, and they are facing what they consider a serious inflation problem.

Shanghai New Home Sales Plunge 77% Y/y to 6-Year Low, Uwin Says

Oct. 10 (Bloomberg) — Transactions fell to 85,400 square meters in the week ended Oct. 9, fall of 40% w/w, property consultant Shanghai Uwin Real Estate Information Services Co. says in e-mail statement today.

* New home sales in week of Oct. 9 28% lower than same period during 2008 financial crisis, Uwin chief analyst Zhijian Huang says
* New home supplies slumped 81% w/w in week of Oct.9
* Traditional “golden” September turns weakest month for home sales this year excl. Feb. and Mar.: Huang
* Situation to be more negative for developers should they continue to resist price cuts, and cuts may shift to plunging from gradually falling: Huang

> *DJ Bernanke:US Can Learn From China’s Succesful Economic Growth Story

Right, like how their annual deficit spending has been over 20% of GDP
if you count state lending.

Wonder how he missed that one?

> *DJ Bernanke:Promoting Technology, Education Behind Emerging Nations’ Success
> *DJ Bernanke:Sound Fiscal Policy, Open Trade, Better Rules Behind Emerging Nations’ Success
> *DJ Bernanke:China, India, Other Emerging Nations Can Keep High Growth Rates For Years
> *DJ Bernanke:Over Time, Emerging Economies Like China Will Gradually Slow Down
> *DJ Bernanke:Trade Imbalances Threaten Emerging Nations’ Economic Stability
> *DJ Bernanke:Emerging Nations Will Be Challenged If They Rely On Trade For Growth
> *DJ Bernanke’s Prepared Remarks From Cleveland Clinic Speech

If China gets by this we should be ok.
If not, could be a serious setback for a few days,
but ultimately the lower commodity prices are a plus for the US.
And even more of a plus if we knew how to sustain aggregate demand at full employment levels.

China’s Squeeze on Property Market Nearing ‘Tipping Point’
By Bloomberg News

Sept. 23 (Bloomberg) — The squeeze on China’s property market may be reaching a “tipping point” that drives growth lower just when exports are under threat from a global slowdown and investor confidence is plunging, said Zhang Zhiwei, Hong Kong-based chief China economist at Nomura Holdings Inc.
 
Land transactions in 133 cities tracked by Soufun Holdings Ltd., the country’s biggest real-estate website, fell 14 percent by area in August from a month earlier. Prices of new homes declined in 16 of 70 cities last month compared with July, according to government data.
 
Property construction is a mainstay of investment that last year drove more than a half of economic growth while land sales contributed 40 percent of revenues earned by local authorities that have amassed 10.7 trillion yuan ($1.67 trillion) of debt. A funding squeeze on developers risks a “domino effect” as companies needing cash cut prices, forcing others to follow, Credit Suisse Group AG said yesterday.
 
“We’re reaching a tipping point where land sales are dropping much faster than before, developers are losing more access to bank financing, and housing prices are showing weakness,” Nomura’s Zhang said in an interview in Beijing yesterday.
 
The People’s Bank of China has raised interest rates five times over the past year, curbed lending to property developers and raised down payments on home loans as part of Premier Wen Jiabao’s campaign to rein in surging consumer and property prices. The government has also limited purchases of housing in cities where gains have been deemed excessive.
 
Loan Approval Withdrawn
 
Real-estate development accounted for a fifth of China’s urban fixed-asset investment last year, government data show.
 
Shanghai-based Shui On Land Ltd. had a loan approval from a Chinese bank withdrawn after the lender changed its policy, Vincent Lo, the company’s billionaire chairman, said in a Sept. 13 interview. Cancellations by that bank, which he wouldn’t name, are “happening quite frequently” to other developers, he said, adding that the credit squeeze may slow property development.
 
The price of land in Beijing slumped 76 percent in August from a month earlier, while in Guangzhou it plummeted 53 percent, according to Soufun. Land auction failures surged 242 percent in the first seven months of this year because of government curbs on the property market, the Beijing Times reported Aug. 3.
 
Debt Servicing Difficulties
 
The decline may make it more difficult for some of the thousands of companies set up by local governments to service debts taken on to fund infrastructure investment. China Real Estate Information Corp., a Shanghai-based property information and consulting firm, estimates 40 percent of overall local government revenue came from land sales last year.
 
In a sign financing vehicles in some provinces are struggling, the auditor of northeast Liaoning province estimated in July that about 85 percent of such companies in the region had insufficient income last year to cover all their debt servicing payments.
 
Some developers have turned to trust firms for financing, usually in the form of loans that are repackaged into investment products and sold to retail investors. The debt is typically funded by banks or investors themselves, according to Samsung Securities Asia Ltd.
 
Many real-estate companies have received about half of their new financing from trust firms over the past year, according to Jinsong Du, an analyst with Credit Suisse in Hong Kong. New bank lending to property developers in the second quarter of this year sank to 42 billion yuan from 169 billion yuan in the first quarter, he said, citing central bank data.
 
Stocks Drop
 
Shares in China property companies slumped yesterday on concern tightened access to loans will force them to cut prices. Greentown China Holdings Ltd. plunged 16 percent in Hong Kong, the most in almost three years, and was 6.5 percent lower at HK$4.20 at 3:34 p.m. today.
 
Greentown, the largest builder in the eastern province of Zhejiang, yesterday denied media reports the banking regulator ordered trust companies to provide details of their business dealings with the company and its units.
 
The China Banking Regulatory Commission is looking into financing of developers through trust companies as part of a broader evaluation of real-estate lending, a person familiar with the matter said today. The inquiries are part of regular monitoring and aren’t targeting any particular company, said the person, who declined to be identified because the regulator’s queries were meant to be private.
 
The “possibility of developers defaulting on debt has definitely increased and towards the end of the year that’s pretty likely,” Du said in a telephone interview yesterday.
 
‘Tip of the Iceberg’
 
Developer Dalian Rightway Real Estate entered preliminary restructuring talks with lenders after missing a loan repayment, the Hong Kong-based South China Morning Post newspaper reported Sept. 9, citing three unidentified people involved in the situation.
 
Funding problems are just “the tip of the iceberg” and “sharp declines in property sales and prices are likely in the next two to three months,” said Shen Jianguang, an economist at Mizuho Securities Asia Ltd. in Hong Kong.
 
Premier Wen reiterated this month that stabilizing consumer prices remains the government’s top priority and that the direction of government policies won’t change. The slowdown in economic growth is “within expectations,” he said.
 
Too Complacent
 
Consumer-price increases in August slowed to 6.2 percent from a year earlier, down from a three-year high of 6.5 percent the previous month. Economists at Citigroup, Mizuho Securities Asia Ltd. and Macquarie Securities Ltd. say inflation probably peaked in July.
 
Policy makers may be too complacent about the economy’s performance, Mizuho’s Shen said, pointing to the deteriorating outlook for exports as Europe’s debt crisis deepens and the U.S. risks slipping back into recession.
 
The International Monetary Fund this week cut its forecasts for global expansion this year and next and said downside risks to growth are rising.
 
In signs China’s economy is cooling, a preliminary index of purchasing managers released yesterday by HSBC Holdings Plc and Markit Economics showed manufacturing may shrink for a third month in September, the longest contraction since 2009, as measures of export orders and output decline.
 
“The risk of China replaying the hard landing of 2008 is increasing as the property sector cools and exports weaken,” Shen said. “ I fear that once the real economy deteriorates and officials do loosen policies, it will already be too late.”