Economy – Page 3 – shiqiv.com

US car vs. home loans

Read the q3 quarterly report on US household debt and credit (here). One interest takeaway is how divergently different loans perform, vs. the GFC era.

When the GFC hit, both all loans perform badly. Transition into delinquency (30+ days) for credit cards, mortgages, and auto loans reached over 10%. Mortgages delinquency were picking up faster and looks worse than auto loans.

This time around, mortgages looks fine (as of 23q3), and delinquency is going up not only slowly but at the level even lower than 2005-06, while auto and credit cards are deteriorating at a faster rate.

By age groups, for 18-29 and 30-39, the percentage of auto loan balance falling 3-month behind is reaching about the similar level of GFC era. (Another theme: younger generation is under more pressure than the older for the past 2 years)

To reflect back, there was a shortage of cars during the pandemic and used car prices were shooting up. It could cost some money if someone bought a car back then and sold it this year, as 2nd-hand car price has been on a downward path.

The selling and downward pricing trend could be a self-reenforcing process.

Meanwhile, house is a more resilient asset class and current macro is still ok. After 10 years, houses are very likely to worth more but cars very likely won’t.

As shown with the FHFA house price index, which is keeping up.

…which is very different from the GFC era when HPI declined and under pressure for years.

China new home sales 2023 Sep vs. 2020 Sep

Facts for China new home sales

		2020	2023
		Sep	Sep
‘0000 sqm	万，平方米
Supply	供应面积	7,529	2,990
Demand	成交面积	5,228	2,262


Inventory	库存	50,739	51,221

Sales pace (month)		9.71	22.64

Inventory actually didn’t increase much, flat after 3 three years.

But the willingness to purchase (new homes) has decreased, area sold in Sep 2023 is less than half (43%) of 2020 Sep level.

Therefore, the resulting month-to-clear-for-sale-homes is more than doubled from ~10 month to almost 23 month – it will need almost 2 years to clear new house inventory at current sales pace.

The above figure is for 100 cities in China.

To look at the bottom 10 cities: back in Sep 2020, the worst 10 cities needed 21.5 – 35.3 month to clear inventory whereas in Sep 2023, the worst 10 cities will need 57.6 – 93.9 month to clear inventory.

Source:

http://m.fangchan.com/news/320/2023-10-25/7122778841134993672.html

http://news.dichan.sina.com.cn/2020/10/27/1274844.html

China’s housing market (2) [WIP]

Asset allocation in China

Very different from the US, where financial assets represent a large portion of families’ wealth, for most Chinese families, real estate assets (residential) are the top choice and the most important part for asset allocation. According to a survey conducted in 2019, among urban families’ total assets, 59.1% is residential homes while only 20.4% is in financial assets[1],[2]. In a previous analysis on another series of data, housing asset represents 74.1%, 73.8%, and 72.7% of urban households’ total assets in 2010, 2012 and 2014 respectively[3]. Comparatively, in 2016, US households’ mean value of primary residence is only 24.4% of their mean value of total assets, while financial assets are around 42.5%[4].

For one thing, China’s A-share market doesn’t provide meaningful return over the last decade, compared with S&P 500. The chart below is from 2010 to 2019: the black line is CSI 300 Index, which consists of the 300 largest and most liquid A-share stocks, while the blue line is S&P 500.

Exhibit 2. CSI 300 and S&P 500 performance over from 2010 to 2019

In fact, among the 20.4% financial assets, the report said only around 10% (or 2% of total asset) is equity exposure, including stocks and mutual funds.

Meanwhile, housing prices in China is climbing steadily. Buying a home in top tier cities in China is like a leveraged long position in S&P 500 in the US, with lower risks and higher returns. Indeed, it would be comparable to a leveraged buyout deal – and millions of people are actively participating. According to some 2010 info, prices under RMB 30k per sqm[5] were common in Nanshan, Shenzhen; after 10 years, in the same district, new homes are priced at least at RMB 70k per sqm. Indeed, for the same community, prices can easily triple up.

The last decade’s rise is already on the back of a steady growth in the previous decade. In another study, Shenzhen’s housing price index rose from 1 to 3.65 between 2003 and 2013[6]. The same is true for other first tier cities – index increased from 1 to 4.43 for Shanghai, from 1 to 5 for Guangzhou, and from 1 to 7.6 for Beijing. Tier two and Tier three cities generally experience the same trajectory, with average growth rate a few points lower.

With a common 10x return and the ability to take leverage, residential real estate has become the most obvious, safest asset allocation choice with the best return profile for most people in China.

It is also worth noting that many high-quality companies in China, mostly in the internet industry, are not listed on the A-share market. Thus, they remain inaccessible to many people, further limiting their asset allocation choices.

[1] https://www.reuters.com/article/china-household-assets-0424-fri-idCNKCS2260VC (Chinese)

[2] http://pdf.dfcfw.com/pdf/H3_AP202004271378696212_1.pdf (Chinese)

[3] https://www.mdpi.com/2071-1050/12/7/2946/htm

[4] https://www.bostonfed.org/publications/research-department-working-paper/2019/trends-in-household-portfolio-composition.aspx

[5] https://sz.leju.com/news/2020-09-27/06456715630843769180881.shtml (Chinese)

[6] journals.uchicago.edu/doi/full/10.1086/685953

China’s housing market (1) [WIP]

Urbanization and population

According to the World Bank, China’s urban population percentage increased from 36% in 2000 to 60% in 2019, or around 843 million[1]. Two largest cities in China, Shanghai and Beijing, have 24.3 million and 21.5 million residents respectively in 2019 (Exhibit 1).

in millions	2000	2005	2010	2015	2019
Beijing	13.64	15.38	19.62	21.71	21.54
Shanghai	16.09	18.90	23.03	24.15	24.28

Exhibit 1. Beijing and Shanghai residents growth over the past two decades

While the definition for a “resident” is to live for more than 6 month of a given year, two other metrics are “Hukou” and “actual population served / managed” – Hukou, the most conservative one, is a concept dated back to ancient China while the latter is newly disclosed. In 2019, measured by actual population served / managed, Guangzhou has over 22 million, Shenzhen has over 22 million[2], Chengdu has over 21 million[3]. Meanwhile, their official residents in 2019 are 15.3, 13.4 and 16.6 million respectively.

While Hukou population for Shenzhen is only around 5 million, the actual population is 4 times more. The gap seems to be a good proof for Shenzhen’s fast growth over the past few decades, and also implies an outsized demand for future home buying. As further discussed below, Hukou (or certain years of social security tax) has become the prerequisite to buy homes in certain large cities such as Shenzhen. Therefore, fundamentally, the long-term increase in buying pressure is from 1) among the actual population, those who would like to stay in Shenzhen, obtain Shenzhen Hukou and buy homes, 2) the constant increase in actual population managed / served, as Shenzhen continues to attract businesses and provides high-quality jobs.

[1] https://data.worldbank.org/indicator/SP.URB.TOTL?end=2019&locations=CN&start=2000

[2] https://www.thepaper.cn/newsDetail_forward_7843440 (Chinese)

[3] https://m.bjnews.com.cn/detail/159193229415528.html (Chinese)

「News of the Week」The $2 Trillion Stimulus Package

Breakdown – npr.org

Major items: $350 billion in loans to small businesses, $500 billion for loans, loan guarantees or other aid to corporates, unemployment insurance, direct payments, etc.

Full Text

End of Decade Thoughts (1): An Increasingly Divided United States

This is a series about what we have seen in the past decade.

An Increasingly Divided United States

Three aspects:

1. The 2008 financial crisis provided a great opportunity for those who had equity while made many others in debt work years to recover. And the tax reform exacerbated the process.

– When we entered the past decade, prices were cheap for a lot of equities, but only for those who can buy.

– Differences were then created when the economy recovered – those who held equities enjoyed it.

– On the other hand, those who can’t buy didn’t share the growth (in any bull markets like stock, housing, etc.)

– Thus, more wealth inequalities were created. Supporting evidences could be found for a graph

「News of the Week」US China Agreed on Phase I Deal

WSJ – U.S., China Agree to Limited Deal to Halt Trade War

Dots to connect: US Ag growth, China financial services opening & public market reform, Chinese stock moving up, remaining US tariff on Chinese machinery, electronics and furniture, China IP improvements and growth in IP-driven industries, etc.

「News of the Week」Walmart Continues To Grow

If we need one figure this week to tell how the US economy is going – then the Walmart US store comparable sales is the one: 3.2% yoy.

WSJ – Walmart’s Sales Growth Streak Hits Five Years

Dots to connect: inflation, Walmart’s online sales growth, international sales growth, tariff impacts, etc.

「News of the Week」China Q3 GDP Growth Rate: 6.0%

WSJ – China’s economy grew 6% in the third quarter, landing right on the central government’s full-year baseline target for gross domestic product

国家统计局 National Bureau of Statistics of China – 2019年三季度国内生产总值（GDP）初步核算结果

The percentage growth decrease is high anticipated. The expected value was at 6.1%.

Dots to connect:

IMF’s other forecasts
- cut China’s growth forecast to 6.1% from 6.2% for 2019, and 5.8% for 2020
- cut India’s growth forecast to 6.1% from 7% for 2019, and 7% in 2020
- Forecasts for the U.S. were cut by 0.2 percentage point to 2.4% annual growth in 2019; euro-area forecasts were cut 0.1 point to 1.2%
- Global
  - July version: Global growth remains subdued. Global growth is forecast at 3.2 percent in 2019, picking up to 3.5 percent in 2020
  - October version: Global growth is expected to slow to 3 percent this year, picking up to 3.4 percent in 2020 (a 0.2 percentage point downward revision compared with April)
China’s monetary policies and debt levels.
- China’s central bank injects ¥200 billion market liquidity via MLF at 3.3%
- China’s new LPR and interest rate policy
  - the PBoC cut the one-year LPR on August 20, from 4.31% to 4.25%; five-year LPR rate unchanged at 4.85%.
  - cut one-year LRP again on September 20, from 4.25% to 4.2%

Series C-2: Overview of Brazil Electricity System (2)

Organization structure

History

Before the 1990s reforms, Brazil’s electricity can be characterized by 3 phases[1]:

private ownership with minimal regulatory control (until 1930);
private ownership with poor regulation (from the 1930s to the1940s);
state ownership with centralized control (from the 1950s to the first half of the 1990s)

In the early 1990s, the Brazilian electric sector was characterized by: (i) centralization of operation and planning; and (ii) vertically integration of transmission, distribution and generation of the sector[2].

Privatization: 1990s reforms

In 1995, a major transformation of the existing regulatory framework entered into effect to foster competition10:

Private participation in the electricity sector
Creation of a new market model in generation and commercialization. The figure of Independent Power Producer and the concept of Free Consumer, was created.

From 1996 – 1998, a project to restructure the sector defined the new conceptual and institutional framework to be implemented for the Brazilian Electric Sector10:

De-verticalization of the electric power companies.
Competition in the segments of generation and commercialization.
The State will keep under control distribution and transmission of electric power, considered to be natural monopolies.
Creation of a regulating agency, ANEEL (1996).
Creation of an operator for the national electric system, ONS (1998).
Creation of an operator for the commercial market, MAE (1998).

The energy crisis of 2001 – 2002[3]

Whilst the reforms of the late 1990s were a bold attempt to overhaul the failing system which preceded it, serious issues remained in the sector which the initial reforms failed to address. Growth in capacity continued to lag far behind growth in demand, and the country relied heavily on hydroelectric generation for 80 per cent of its electricity. Delays continued in the expansion of the sector due in part to the uncertainty in the definition of pass-through prices which complicated pricing mechanisms. After a few years in which average rainfall had been significantly lower than expected, reservoirs were depleted, and strict demand reduction programs had to be implemented by the Crisis Management Board, established and led by President Cardoso in June 2001. The Board had powers to implement emergency measures such as special tariffs, compulsory rationing and blackouts. Additionally, the government established a quota system based on historical and target consumption levels, and a corresponding bonus and penalty scheme whereby consumers were rewarded or penalized according to whether they fell within or exceeded their quota.

The government’s goal to reduce consumption by 20 per cent was achieved, and the quota system proved so effective that the government paid out over US$200 million in bonuses to residential, industrial and commercial consumers. Additionally, the government succeeded in avoiding blackouts and brownouts during the crisis. The response to the crisis was successful in reducing consumption and conserving resources. The biggest losers in the crisis were generators and distributors who inevitably experienced significantly reduced revenues.

The 2004 model

Following the energy crisis in 2001-2, and the election of the new administration led by Luiz Inàcio Lula de Silva in 2003, there was some speculation that the initial reforms of the late 1990s might be rolled back. As the reforms of the 1990s were so closely followed by the energy crisis, there was widespread criticism and skepticism of the new model, and some expectation that the sector would be fully regulated and effectively returned to government control. However, contrary to these expectations, the new administration continued to seek long-term private investment into the sector, and to introduce more competition into the market to drive efficiency that would protect the interests of captive consumers. The institutions established by the reforms of the 1990s were preserved and in many cases strengthened, and further reforms were implemented, including the introduction of energy auctions, to consolidate and improve the new model11.

In 2004, the Brazilian government implemented a new model for the electricity sector. One of the main components of the new electricity model was the creation of two energy trading markets, as showed in the figure: a Regulated Contracting Environment (RCE) where a pool of distributors buys power from generators in public auctions under set prices and a Free Contracting Environment (FCE) where free consumers and generators can freely negotiate their own bilateral contracts[4].

This hybrid approach to government involvement splits the sector into regulated and unregulated markets for different producers and consumers. This approach allows for both public and private investment in new generation and distribution projects. Under the plan, Eletrobrás was formally excluded from privatization efforts. In August 2017, the Brazilian government announced its intention to divest its controlling stake in Eletrobrás. The sale will not include Eletronuclear (a nuclear power company owned by Eletrobrás) or the Itaipu hydroelectric dam6.

According to a Reuters report in Feburary 2019, Eletrobrás manages power plants that generate about a third of Brazil’s electricity needs. It also controls power transmission lines that account for half the electricity transported throughout the country. The privatization likely will happen through a capitalization plan in which new shares would be offered to investors in a process that would dilute the largest shareholder, the Brazilian government, to such a level that it will no longer hold a controlling stake[5].