Commodity Trade Mantra

Chinese Real Estate Debt Settled In Silver, SGE Premium 5.7 %

Chinese Real Estate Debt Settled In Silver, SGE Premium 5.7 %

Chinese Real Estate Debt Settled In Silver, SGE Premium 5.7 %

The Chinese real estate market is crumbling, not at all unexpected after Chinese credit expanded from $9 trillion in 2008 to $25 trillion at this moment (May, 2014). From The Telegraph:

New housing starts fell by 15pc in April from a year earlier, with effects rippling through the steel and cement industries. The growth of industrial production slipped yet again to 8.7pc and has been almost flat in recent months. Land sales fell by 20pc, eating into government income. The Chinese state depends on land sales and property taxes to fund 39pc of total revenues.

“We really think this year is a tipping point for the industry,” Wang Yan, from Hong Kong brokers CLSA, told Caixin magazine. “From 2013 to 2020, we expect the sales volume of the country’s property market to shrink by 36pc. They can keep on building but no one will buy.”The Chinese central bank has ordered 15 commercial banks to boost loans to first-time buyers and “expedite the approval and disbursement of mortgage loans”, the latest sign that it is backing away from monetary tightening.

Could it be credit expansion will always overvalue assets, which value irrevocably will be corrected by economic law?

No matter how much drugs (credit) will be added (growth) to a junkie’s habit, which make him feel better for a little while, his problems will get worse and his health will deteriorate from more drugs. The only way to get his life on track is to stop using drugs, take the pain, and truly recover. Substituting one drug (private debt) by another (government debt) is not a solution. From the Sovereign Man:

According to the Chinese financial publication Securities Daily, emergency real estate rescue packages have been launched in large cities such as Wuxi, Nanning, Hangzhou, Tianjin, Tongling and Zhengzhou in the last month alone.

“Zhengzhou created a mortgage guarantee policy to win back banks’ confidence” according to the story.

Further, “if a borrower does not fulfill the loan repayment obligations as agreed in the contract, the guarantee institutions will have to repay the housing loans…”

What a surprise– a government guarantee.

The market is imploding and defaults are going through the roof. Property vacancy rates in Zhengzhou are an astounding 23%. So the government is putting taxpayers on the hook.

In other areas of China debt is settled through bartering. From Want ChinaTimes:

In Ordos, one of the 12 subdivisions of Inner Mongolia, people in the ghost city are bartering to settle their debts.

…At first, the most common debt settler was Chinese liquor or baijiu, a favorite of native Inner Mongolian residents. However, the lack of price transparency with the liquor prompted local law enforcement departments to ban settlement with the product.

…He Jun turned to precious metals because of the ban. “I believe gold and silver, which have high market liquidity, are suitable for settling debts,” he noted, adding that “gold can be exchanged for cars and silver for houses.”

 

…For example, He uses silver objects worth of 500,000 yuan (US$80,000) to pay off at least 1 million yuan (US$160,000) in debt.

This can only mean two things. Or the debt is actually worth less than half it’s value (oops), or silver is actually worth more than double it’s value (oops). For sure the Chinese, at least in this area, are starting to use precious metals to settle debt and as a currency.

Meanwhile, according to the last SGE weekly report, the silver premium over international price hit 5.7 % on May 9. On the Shanghai Futures Exchange, on May 16, nearly all silver contracts were still trading in backwardation (except for the April 2015 contract).

SGE silver premium

Overview Shanghai Gold Exchange data 2014 week 19

– 28 metric tonnes withdrawn in week 18 (5-5-2014/9-5-2014)

– w/w + 17.79  %

– 721 metric tonnes withdrawn year to date.

My research indicates that SGE withdrawals equal Chinese wholesale gold demand. For more information read this.

 Shanghai Gold Exchange withdrawals 2014 week 19

This is a screen shot from the weekly Chinese SGE trade report; the second number from the left (blue – ?????) is weekly gold withdrawn from the vaults in Kg, the second number from the right (green – ?????) is the total YTD.

 Schermafbeelding 2014-05-16 om 16.57.33

This chart shows SGE gold premiums based on data from the SGE weekly reports (it’s the difference between the SGE gold price in yuan and the international gold price in yuan).

Shanghai Gold Exchange gold premiums

Below is a screen shot of the premium section of the SGE weekly report; the first column is the date, the third is the international gold price in yuan, the fourth is the SGE price in yuan, and the last is the difference.

 Schermafbeelding 2014-05-16 om 16.58.07

Courtesy: Koos Jansen via In Gold We trust

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