China does not buy efficient markets hypothesis

Big Chinese cities have launched a new round of lending curbs and purchase restrictions in an effort to cool overheated property markets, as official media warn that some have veered towards a bubble. Sky-high prices in cities including Beijing, Shanghai and Shenzhen are stoking anger, even among relatively well-off professionals. Meanwhile, controlling financial risk has emerged as the dominant economic policy theme for 2017. At the conclusion of the annual session of China’s rubber-stamp parliament last week, the government pledged to “contain excessive home price rises in hot markets”. On Zhihu, a Chinese crowdsourced question-and-answer platform, a thread about Beijing house prices has attracted 17.8m page views. In the top-ranked post, a graduate of the prestigious Peking University describes the reason for his painful decision to leave the city: despite a promising job at a top-ranked research institute, he could not afford a home for his family. “Before and after leaving Beijing, I cried twice,” he wrote. “The first time was when I sent my resignation letter to my boss. That 80-something academic was always so kind to me. When I told him I was leaving, he was very surprised.” In recent days, authorities in Beijing and four provincial capitals — Guangzhou, Zhengzhou, Changsha, and Shijiazhuang — have all introduced new property tightening measures. They include higher downpayment requirements on second homes and restrictions on purchases of second or third homes. The moves add to restrictions rolled out in other capitals this month, including Nanjing, Qingdao and Sanya in the resort island of Haina
Nationally, home prices were 11.8 per cent higher in February than a year earlier, following 12.2 per cent growth in January, according to Reuters’ calculations based on the government’s 70-city survey. But other indicators suggest the previous round of property tightening measures, which began last autumn, has not had the desired impact. Property investment grew at its fastest pace in two years in January and February at an annual rate of 8.9 per cent, while sales accelerated to 25.1 per cent growth in floor space terms. China’s statistics bureau combines January and February to eliminate seasonal distortions caused by the lunar new year holiday. “There is no doubt that in some cities the property market’s ‘high fever’ hasn’t subsided, and there are even signs of an evolution towards a bubble,” read a Monday analysis in Financial News, a newspaper owned by the People’s Bank of China, the central bank. “The hidden risks and potential damage cannot be ignored.” Beijing policymakers are attempting to strike a balance between curbing financial risk and social anger, and avoiding a sharp slowdown in construction activity and related commodity demand, which would threaten the broader economy. Even as big cities showed signs of overheating, the strong property market in 2016 was crucial in enabling the government’s gross domestic product growth target to be met. Property was especially important in sustaining growth in fixed-asset investment at a time when manufacturers cut back spending on new machinery and buildings. “The sustainability of the property market rebound, which mainly depends on future mortgage policies, is unclear,” Gao Ting, head of China strategy at UBS Securities in Hong Kong, wrote on Monday. “We think the trend of the property market will remain uncertain and may bring downside risks to economic growth in the second half.”

China subprime

Tightening access to finance is driving China’s developers back into the shadow banking sector. Our latest monthly survey of underground lenders suggests increased demand for non-traditional credit sources as the government cuts off their access to mainstream funding channels. Developers became the number-one source of demand for loans from underground lenders for the first time in eight months in February, according to our survey. Since July last year, consumers had been the biggest source of demand for such loans as their borrowing surged on the back of a housing market boom.

The return of real estate as the main source of demand probably reflects government efforts to bring the housing market under control, a broad-based campaign that included cutting developers off from the domestic bond market in October. Borrowing from key shadow finance channels, such as trusts, is once again surging as companies scrabble around for funding. However, funding pressures are only set to build as regulators look to further clamp down on non-bank lending.

Refugee finance

The newly formed Tent Partnership for Refugees, hosted by yoghurt maker Chobani as the successor to President Barack Obama’s private sector call to action last year on the global migrant crisis, organised a working group, together with government and international organisation partners, on banking and capital market access that met in January to consider policy input and pilot projects. Big names including Citigroup, MasterCard and Soros Fund Management are members of the panel, along with smaller specialist companies interested in microcredit and crowdsourcing as well as traditional commercial bank and bond and stock market linkages. The group explored a range of promising business and technology fixes where tens of millions of dollars could be initially deployed, such as a vehicle to invest in major locally listed financial institutions in exchange for their commitments to expand and adapt refugee finance solutions.

Lebanese counterparts, in turn, have a historic reputation for functioning in a high-debt extreme conflict environment and many have continued operating in Syria during the civil war while also serving the fleeing millions at home and abroad. They have created private placement sovereign bonds when external capital markets were relatively closed and, despite fresh access to the World Bank’s concessional borrowing facility, the government announced at last September’s UN Refugee Summit a pressing need for alternative long-term refugee funding sources that its banks could explore under a broad inclusion rationale.


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An MA with political economy background is a good thing to have

“During the financial crisis I found that mugging up on economic history, particularly from emerging markets, was often more helpful than talking to conventional policymakers hooked on their fair-weather economic models. The rise of economic nationalism and the threat to globalisation means I find myself using emerging market parallels again. I cannot help wondering if investing in western markets may become more like investing in emerging markets.

Emerging markets teach us that economic nationalism is often inflationary. In the west, after an excessive reliance on monetary policy, a reflationary regime-change in trade, fiscal and regulatory policies is welcome. But emerging markets’ experience suggests we should watch carefully how this plays out. In the early stages of programmes, the reactivation of the economy is often positive as employment increases. But emerging markets diverge later on. Some succeed strongly. For others, weak investment and poor productivity often follow, and the interaction of a rise in inflation and inequality can feed the politics of anger. Currency volatility is higher under economic nationalists. Emerging markets also show us that populism is infectious. Across Europe, populist parties could have a material impact on elections in the Netherlands, France and Italy. The feedback loop from the US election and UK referendum on European contests is also strong.

Populists typically have put far more political pressure on their country’s institutional fabric. Although we have seen growing challenges, not least to central banks’ independence, we assume the strength of western institutions will win out. But this pathway doesn’t need to be negative. The threat of protectionism may prompt stronger policies to boost domestic growth — which Europe sorely needs.”

Since you asked about Frexit

France has a written constitution that states that “the Republic is part of the European Union”. So a “Frexit” would require a constitutional change. Under Article 89, any constitutional change needs to be proposed by the government, not the president. Then it has to be approved by both the upper and the lower houses and then either by public vote in a referendum or by a majority of 60 per cent of Congress. This means that, if she wanted to call a referendum, a President Le Pen would need a majority in the June legislative elections.