Tag: Economy

March CPI 3.5%

March CPI is 3.5% for the past year and increased 0.4% MoM in March.

Higher than expected, but again, like the post last month, Truflation indicates <2% inflation.

Here is another discussion of “lagging” in shelter CPI, which was 0.4% in March

This lag occurs for a few reasons. First, the market indices capture rents of units currently on the market, not rents for units occupied by continuing renters, like the CPI does. Rents change when leases expire, which typically happens annually. In addition, landlords may be less likely to raise rents to market prices for continuing tenants, and so it might take even longer for rents on all units to catch up with rents charged to new tenants.

A new index was introduced to more closely track market prices of renting.

 

PingAn Trust?

A coin has two sides.

A balance sheet has two side.

If there is a hit on the asset side, there must be a hit somewhere else.

When properties are not selling, the property linked trust products would take a hit.

PingAn Trust is not responsible for those products’ underlying assets, which are troubled developers; it’s like an investment bank that packages products and sells those to “retail investors”.

Maybe many of those “retail investors” are not sophisticated enough.

In China, anyone with 500k rmb annual income can become a “qualified investor”, vs. $200k in the US, only ~1/3.

In China, if you have 5mn rmb financial assets (not net assets), or 3mn rmb net financial assets, you could become a “qualified investor”, vs. $1mn net worth (not counting primary residence) in the US.

Someone can borrow against the house and buys financial assets? Sure. He/she may get a >5mn loan from a tier-one city home (a 100+sqm home can be easily over 10mn rmb during good times).

It’s such a perfect designed chain of problems when property prices are coming down.

  • Underlying assets of trusts are worsening.
  • Trust investors can’t pay mortgages or home equity loans (or banks lower the est. value so can only take out less loan).
  • Fire sale from developers (trust products) & home owners (trust investors) shall further put pressure on the property market.

Is it possible that US inflation data is “tweaked”?

US reported Feb CPI (inflation) data: +0.4% mom and +3.2% yoy

Core CPI: +0.4% mom and +3.8% yoy

Slightly ahead, which makes it more difficult for Fed to cut rates.

However, is the data a bit inflated? I say possible.

Here is another inflation gauge by Truflation: only +1.64% yoy in March; below 2% in Feb

It’s true that US economy is stronger than most other places around the world.

However, it’s hard not to think that maybe there are some political reasons to “influence” CPI, which can influence Fed decision. After all, Fed is “data dependent”. See this post (Fed is bullied by the market – why?) as well.

Some elements from official CPI data can be more easily to “influence” e.g. used cars.

I will just stop there.

Why property price to income ratio this high?

China doesn’t have a nationwide recurrent property tax that applies to all residential.

  • in some cities with property tax experiment, usually certain area is exempted from taxation, e.g. Chongqing is 180 sqm

Hukou policy means residential property comes with other value. Not owning one will cause inconveniences: e.g. renting is not similar to ownership in education etc.

Renter’s right vs landlord is not like what usually seen in mature markets.

Most people don’t pay tax on rental income.

One-child policy plus decades of economic growth created massive buying power for this one-child generation. When you have 4 parents supporting the new couple to buy 1 home, that purchasing power is hugely inflated.

Local gov’s budget is partially financed by selling lands (use rights) for residential property development. High price -> higher budget.

 

How China exported deflation & what data to watch

1/ China PPI

China’ PPI (12-month) started to decline from Nov 2021 (Dec 2020 – Nov 2021 when global demand running high and supply running low), and entered the negative territory in Oct 2022 (global demand shock after Fed hiked rates & war in Ukraine)

China’ PPI (12-month) has remained in negative territory for 16 month as of Jan 2024 data. Looks to remain negative for next 6 month at least.

 

2/ RMB depreciation

Average exchange rate for RMB has depreciated ~9% in 2 years against USD, which caused additional price deflation.

Average exchange rate in 2023: 0.1415 USD.

Average exchange rate in 2021: 0.155 USD.

 

3/ Domestic demand

Hard to quantify, but weak China domestic demand is partially causing weakness in global demand in commodities etc., especially from the real estate sector., thus reducing inflation pressure.

The sharp dropped happened in August 2021, when Evergrande’s debt problem was catching world’s attention.

What did Japan’s housing price look like during 1990s housing bubble?

Price-to-income ratio

The average price of a new 70 sqm apartment in 1990 in Tokyo was 107,660,000 Yen, or 1,538,000 Yen/sqm, while the average annual income was 5,940,000 Yen. Before the bubble, the average price-to-income ratio in 1985 was 8.08.

Financial Times article (https://www.ft.com/content/2ba1cb74-f598-3a4e-9edd-4e55a48d3480)

So in 1990, new home price is ~18x annual income and before bubble is ~8x.

Relative performance

Price rose ~4x in 15 years

Peak to bottom took 5 years; declined ~40% (1990-1995)

From 1975 – 1995, price still rose ~2.5x in 20 years.

Source: Home Ownership and Economic Change in Japan

Relative to global (before bubble)

Price-to-income ratio is actually more than doubling US-level and is the highest among developed countries.

Source: Introduction to “Housing Markets in the U.S. and Japan”

However, Japan’s women work participation rate is lower than the US back then, which can impact household income.

Source: Lessons from the rise of women’s labor force participation in Japan

Income level

Peak income is actually lower for later generations.

Source: The Impact of the Rise and Collapse of Japan’s Housing Price Bubble on Households’ Lifetime Utility

Due to other reasons, e.g. Asia Financial Crisis, the property market didn’t seem to recover until later years.

Source: New apartment prices in Japan since 1956,
Tokyo Kantei via JAPAN PROPERTY CENTRAL

Fed is bullied by the market – why?

Market news nowadays are saying that Fed is bullied by the market.

e.g. FT article: The Fed should resist market bullying

What’s “bullying”? Seems to me that market is leading and Fed is just following the market.

Why is this the case? I got three reasons:

1/ 2024 is election year. Market knows Fed needs to help the economy.

2/ Market understands data better, and Fed has been saying it’s “data-dependent”; no wonder why market (e.g. hedge funds) is leading with all those high-frequency data. Hedge funds can simply simulate what data Fed is receiving and even have better real-time data than the Fed.

3/ Some market players can “influence” or “control” the data. Sounds absurd. Just an example – what if hedge funds can buy up goods which would cause inflation when needed, or sell them at low prices to cause deflation when needed. As long as they can make huge profits in the market, it can be worth the cost.