Well this can’t be good.Singapore has one of the highest leverage ratios and the biggest increase.Tweet
Most political press in China or the United States has the predicted blend of pundits calling for a tougher line or more engagement with the other. It is however, both shocking and appalling that the China News Daily, a mouth piece of the Party previously known as Communists, would publish a piece calling the departing US Ambassador Gary Locke a “banana”. (The original in Chinese is here and the New York Times coverage is here). Just yesterday I was told b a senior ranking party member that China has laws that protect “human dignity.” I guess they just don’t apply to departing US ambassadors, members of the press, or people who have dinner. The law protecting human dignity I guess don’t go quite that far. The move to racially attack a departing US ambassador of Chinese ancestry who said such contraversial things like “it’s my view that if the United States and China cooperate there’s almost nothing that we cannot solve” is nothing less than disgusting an appalling. Hopefully this despicable language will be condemned within China and not just outside. That is realistically unlikely because the respect for human dignity doesn’t extend quite as far as some in China like to pretend.Tweet
Interpreting Chinese economic and financial data is difficult in the best of times. What Winston Churchill said of Russia is true of Chinese economic data: it is a riddle, wrapped in a mystery, inside an enigma. This is even more true when attempting to understand the discontinuity around major Chinese holidays like Lunar New Year.
A mass of confusing and often contradictory data has come out around the Chinese New Year. For those who have not spent significant time in China, it is difficult for most people to understand this holiday. Not only is the time period longer than most holiday periods in other countries but there is significantly less business, retail excluded, activity for a sustained period of time.
Most of China has very minimal business activity for 2 weeks with at least one additional week where people are either leaving or coming back so that there is a total of 3-4 weeks of significantly reduced business activity around Chinese New Year. One foreign businessman jokingly told me Chinese New Year ruins 6 months of the year: for three months before, people are making excuses about why things can’t get done because of the upcoming holiday; for three months after, people are making excuses about how they just got back from Chinese New Year so things can’t get done. According to him, this left only 6 months of actual working time in China. He was only half joking.
This pattern skews the data. Companies may stock up or they may have a flurry of final activity. The Chinese New Year however can skew the data. Recently, markets were cheered when China reported higher than expected import and export levels. However, it emerged shortly thereafter that many companies appeared to be stockpiling inventory and rushing to fill orders when inventories of key barometers like iron ore hit a 17 month high. This was followed by a concerning drop in the Chinese PMI which roiled markets, despite the fact that it covered the period of lowest business activity due to Chinese New Year. Much of the recent data appears to be significantly impacted by the Chinese New Year holiday.
This matters because it is important to not get moved by week to week or month to month data discontinuities when looking at China. The fundamental problems facing Chinese markets remain unchanged by the New Year holiday. To take one simple example, the steel industry remains an enormous problem and a financial and political risk. Hebei steel mills are polluting Beijing and posing financial risks. One city in Hebei makes more steel that the entire United States, which even rapid growth in China is unable to use entirely. The glut of supply has driven down prices which has prompted people to use steel as collateral for loans increasing inventory rather than consumption. One analyst notes that rapid iron ore import growth coupled with inventory growth indicates “…non-fundamental factors such as financing demand.”
Chinese economic data is difficult enough in the best of times to properly understand. Adding in lumpiness around Chinese New Year and non-traditional behavior for goods such as steel and exports to collateralize debt, only further complicates matters. Chinese New Year causes many businesses to either move forward or delay, shifting, business behavior towards their needs. Don’t worry about individual data points around Chinese New Year. Worry about the big problems that haven’t been addressed.Tweet
The South China Morning Post has dropped a bombshell, which if you are an economist in China that does anything less that say how great and wonderful the Chinese economy is, comes as absolutely no shock. According to the SCMP:
“Economic researchers and people working for state-owned media told the South China Morning Post that the central government’s propaganda department had instructed senior editors at major official media outlets to be cautious about whom they invite to talk about China’s economy and what they might say about the problems and challenges it faces after its long run of supercharged growth. “There’s no black list or white list, but it’s clear we are now being encouraged to invite economists and analysts with domestic securities firms and banks to talk about China’s economy, especially on live broadcasts,” said one mainland media source who declined to be named given the sensitive nature of the matter.”
If you are shocked by this, you would probably be just as shocked to learn they speak Chinese in China or that there is gambling in Casablanca. As an economist who has pointed out discrepancies in official data and problems in the banking industry, among other official sins, I can unequivocally state that all this is true and more. Within the past year my office has been broken into, I strongly believe my home has been broken into, there is every indication my phone calls are all listened to, and my computer has been hacked or at the very least targeted.
It began when I wrote a blog post, which has since been taken down due to threats against my personal safety, in which I mentioned some of the activities of a large, powerful, and very influential Chinese company. The information I linked to and wrote about this company was nothing more than public domain information that had already been published by global news organizations. Though embarrassing, I wrote nothing new about this company that was not already in the public domain.
Shortly thereafter, I received word from a senior person at my school that three lawyers and a secretary from this company in Beijing had flown to Shenzhen and made numerous civil and criminal legal threats against me also urging that I be fired immediately. School personnel told me they would do nothing to protect me, strongly advised me to take down the offending post, urged me to make a full apology to the company, but said that they did not see the need to fire me. Though these actions may have been taken in solely by the Chinese firm, I was also told that the actions by this Chinese company were likely taken with the prior knowledge of powerful interests in Singapore.
Nearly immediately my computer was attacked, I believe for different reasons my phone was monitored from that day forward, my home internet has been cut off for extended periods of time despite my neighbors being perfectly fine, and my office was broken into among other intimidation tactics. There have been other small incidents but I have every reason to believe that none of the basic tactics have ceased for nearly 1 year.
I have personally made my peace with what has happened and have chosen to continue to write about what I believe the data says and what companies are doing. It is extremely intimidating to receive the threats, intimidation, and daily reminders that my activities are so closely monitored. I personally know others who have left China because their “safety could not be guaranteed”.
For most academics not in China, it is difficult for them to understand the level of scrutiny and monitoring we face on regular basis. Most professors have students assigned to monitor them and security officials approaching many people to report on our behavior. Our email is widely acknowledged, even by students, as being read. While there are some overt obvious forms of intimidation as I have detailed, much of it is also the “deal you can’t refuse” variety. There are no overt threats but the message is clear.
More than being surprised at what the South China Morning Post is reporting, I am surprised that anyone is surprised by this news. Yu Jie in his new book calls Xi Jinping the Godfather and this is a good model for much of the intimidation and threats. While China has changed enormously in recent years and even in my nearly 5 years here, the repression and intimidation has only worsened.
Economists are targeted because some us choose not paint a rosy picture of the Chinese economy. It should come as no surprise that the People’s Bank of China chose Deutsche Bank economist Ma Jun as its chief economist given he has a 2014 Chinese growth projection a full percentage point higher than the official target.
Like the fable of the emperor’s new clothes, economists who tell those in power what they want to hear are lauded while those of us in China who point out the obvious face threats. Who knew being economist would bring such danger?Tweet
The Financial Times has a great piece about the mysterious Chinese trade data which saw imports and exports both rise by more than 10% in the time period leading into Chinese New Year. Given that PMI numbers had been slowing the robust growth of trade figures threw many China watchers for a big surprise. Noted Chinese data skeptic Stephen Green of Standard Chartered joked that “we’re flying blind and nobody knows how to properly adjust this data….we should all just take an extended holiday.”
The problem as has been repeatedly stressed on this blog is that Chinese data does not actually mean anything. It is manipulated and fraudulent. This creates three specific problems. First, people expect and treat Chinese data as if it is an accurate or good faith estimate of reality when in fact it is not. If people begin to treat Chinese as an exercise in futility and adjust accordingly, the data will be more understandable. In other words, adjust for the systematic bias in the data and it will become understandable. Is there anyone that really believes that price inflation in Chinese housing is only 8% since 2000? However, if you treat it as an accurate portrayal of reality, it will always puzzle you.
Second, even when data is reasonably accurate there is an underlying manipulation. For instance, in the middle of 2013 it came to light that fake invoices where Chinese exporters put reminbi accounts in Hong Kong was significantly inflating trade data. In other words, even though official data might have been reporting reasonably accurate data, there was an underlying manipulation that caused the overall picture to be false. Chinese exporters were not healthy but instead making up the data.
Third, the confusion begins when people try to place the discontinuous data trends into a coherent story that explains the Chinese economy. Economic analysis should focus on directions and trends rather than focusing on one data point. However, every Chinese economic variable has a different bias and set of underlying manipulation. Let’s take a simple example. GDP is going to be manipulated upwards, we know that. Most pollution levels should be strongly correlated with GDP but there is a bias to manipulate the pollution data downwards because China wants everyone to believe it is making progress on its environmental record. Not only are GDP and pollution negatively biased (biased in different directions) but the magnitude of the bias is likely to be different. GDP might be biased upwards by 25% but air pollution levels are likely to be biased by a minimum of 50% and probably even more. The underlying result is that making sense of Chinese data is a riddle wrapped within an enigma surrounded by a question.
For the geeks out there, probably the best suggestion for making sense of biased data is to use the geometric mean. Additionally, other research institutions have begun publishing third party data correcting for official Chinese data which has embarrassed Chinese bean counters with some data being incredibly far off.
The basic point being is that if you are an investor trying to make sense of Chinese economic data: take some good advice and take the rest of the week off.Tweet
Since global markets are breathing a bit easier since the China Credit Trust bailout of its ill fated wealth management product sold through ICBC, it seems appropriate to conduct a post mortem about what happened and the implications.
- The original loan was a mega-gamble from the outset. The 3 billion reminbi loan was made to a group seeking to buy a Shanxi coal mine with 50 million reminbi in equity. There were additional loans totaling another 4 billion raising their debt to 7 billion rmb using 50 million in equity capital. For those of you keeping score at home that is a debt to equity ratio of 140. To provide some perspective, China Credit Trust and ICBC made a combined 180 million rmb for creating and distributing the product. In other words, they made nearly 4 times what the receivers of the loan put up to fund the deal! Not only was the debt level absolutely astronomical, but once fees were included, the annualized percentage rate topped 14%!(Google translate). I don’t care what country, industry, or economic climate you live in: a company with a debt to equity ratio of 140 paying 14% annually trying to buy another company is extremely high risk.
- The collapse of Shanxi Zhenfu Energy in many ways appears to be a standard case of corporate fraud. While much has been made of coal mine consolidation and drops in commodity prices, the collapse of Zhenfu appears much more straightforward. There are reportedly numerous instances of “related party transactions (Google translate)”. The commonly reported charge of Zhenfu “taking deposits” is really better understood as off balance sheet transactions designed to hide debt. In another instance, one mining asset valued at 445 million rmb ($75 million USD) had 415 million rmb of “intangible assets”. In one deal, Zhenfu transferred one mine to an investment company valued at 754 million rmb or approximately $126 million USD while the origin of the investment company that received the mine remains unknown with one paper speculating it is “loan sharks”. There are also reports of large numbers of missing assets. Many Shanxi based coal companies survived the past few years in fine shape without collapsing in spectacular fashion. While weakness or the consolidation did not help, they did not cause or precipitate the downfall of Zhenfu Energy.
- ICBC’s role was not simply as a distributor of the wealth management product. Though it has been widely reported that ICBC acted only as a distributor of the product originated by CCT, limiting both their financial and legal liability, what has been unreported is that according to the 21st Century Business Herald, they also acted as the trust bank and custodian of funds raised. Furthermore, CCT has stated that the ICBC Shanxi branch actually recommended the client to them and then agreed to distribute the product. Furthermore, given that some estimates for Zhenfu Energy have assets pegged at 500 million rmb and total debt at 5.9 billion rmb, the discrepancies invite questions about third party culpability. If ICBC acted as the custodian bank dispersing funds for bogus assets and related party transactions while also recommending the client to CCT, this invites a wealth of questions about the role ICBC played and whether they bear both ethical and legal liability for the Zhenfu Energy collapse.
- China Credit Trust is not a shadow bank but a state owned company covered with conflicts of interest. Despite the frequent perception that Chinese shadow banking is run by underworld corrupt gangsters (which might still be an appropriate term), China Credit Trust (CCT) is owned by some of the largest and most well connected state owned firms in China. CCT is owned by a consortium of other Chinese state owned enterprises (SOEs). CCT’s largest shareholder is the large state owned insurance company China Peoples Insurance which among other distinctions holds nearly 20% of American International Group (AIG) and is the largest casualty insurer in China. The second largest shareholder Guohua Energy Investment is a subsidiary of the Shenhua Group the “largest coal producing company” in the world. The third, fourth, and sixth largest shareholders are the Yanzhou Coal Mining Group, Yongcheng Coal Holdings, and China National Coal Group which is the third largest coal company in the world. Its remaining shareholders are mostly other coal companies. In other words, CCT is owned by some of the largest and most powerful companies in China with ICBC distributing its products.
- If you noticed a theme among shareholders…. The wealth management product created by CCT and marketed by ICBC was ultimately loaned to an ambitious coal miner. More than 50% of CCT shares are held by coal miners and related companies. However, not only are coal miners the dominant interests in a company making a failed and enormously risky loan to a Shanxi coal miner but the major Shanxi coal miners are shareholders in the company making loans to a Shanxi coal miner. The Shanxi Coking Coal Group and the Shanxi Lu’an Mining Group which also has interests in finance and solar power, are minority owners in CCT. Furthermore, most of the large national coal companies have significant interest in the Shanxi region given its importance to Chinese coal mining. To put this another way: CCT was owned by coal miners and Shanxi coal miners originated a scandalously bad loan to an unknown Shanxi coal miner at 14% apr with a total leverage ratio of 140 while putting the risk on unwitting consumers.
- The clear implication being: this deal just doesn’t pass the smell test.
- Even in the heady days of Chinese financial lending, an unknown company does not walk into a bank and raise $1 billion USD with a leverage ratio of 140 to 1. There had to be a very powerful person or entity behind this deal.
- There are obvious conflicts of interests between the originating institution, its shareholders, and the borrowers. A trust company owned by coal miners making a bad loan to a coal miner where others bear the risk is simply too problematic.
- ICBC clearly needs to answer more questions about its role as the custodian bank for dispersing funds for non-existent assets and related party transactions and whether they recommended the client to CCT. There very well might be a reason that they have reportedly agreed to fund some of the bailout.
- To date, I have been unable to link any of the shareholders of CCT or other vested interests to any of the transactions or assets in question. However, apparently others have had just as much trouble finding people behind the transactions or assets.
There are two final points that needs to be made about this situation. First, while the Chinese government has come under criticism, internally and externally, for deciding to bail out the trust product rather than let market forces and risk prevail, this fails to grasp a basic tenant of the social contract. Having lived in China and talked to people and sat in meetings with senior executives at Chinese and foreign institutions, I have heard the unwavering faith and demands investors and common have in the ability of the Chinese government to manage any situation. The Chinese government clearly understands the ramifications of breaking the social contract with people who expect nothing less that continued economic prosperity promised by state owned banks like ICBC.
Second, the decision to bail out CCT is obviously political, but not for the reasons most people believe. The Chinese government has to bail out as many of these products as possible because there is no greater flash point for the Chinese population that continued and expanding prosperity. An economic downturn or financial crisis has the very real potential to prompt a political crisis which Beijing will not tolerate under any circumstances. They have to bail these products out.
Zhenfu Energy, CCT, and ICBC may have brought a fright to global financial markets, but given the uniqueness of the collapse, it may not be the harbinger of events that many believe. The systematic fraud and misrepresentation on multiple levels by many parties separates it from more standard forms of credit risks that concerns most pundits. While the potential for default was real, it is important to understand the details driving these potential events and their potential spillover.Tweet
Lost amid the Anton Casey mess was the announcement that SMRT would raise fares by more than 3% in 2014 and additional 3% in 2015. With yesterdays announcement that SMRT profit had fallen by more than 40%, SMRT appears destined to take increasingly stronger steps to maintain profitability. While people have understandably been upset by the fare increase, there appears to be a poor understanding of how this fits into the larger picture of Singaporean public finances and the Temasek portfolio.
- Transportation companies and especially public transport companies are notoriously unprofitable. There is a reason there are virtually no listed public transportation companies and that is because they are unprofitable. Throughout the world, whether it is North America, Europe, or even Asia (Singapore and Hong Kong excluded) public transportation companies like bus and rail companies do not make money. Public transport train, subway, and bus companies from Japan to Germany are rarely profitable enterprises.
- SMRT is an immensely profitable firm. Despite being in a difficult industry, SMRT has posted net profit margins of nearly 20% as recently as 2010 and even in its most difficult recent year still managed to post a net profit margin of 7.3% equaling $83 million SGD. In other words, despite declaring a healthy net profit, SMRT has also declared its business model “unsustainable”. This begs the question: what is driving the unreliability and financial problems at SMRT?
- SMRT is receiving subsidized profits via government funds. Though most people are aware of the subsidized fares available to seniors and students, there are two much larger and less obvious ways the government subsidizes SMRT. First, the Singapore government has been gifting buses to the SMRT most recently to the tune of $1.1 billion SGD resulting in an annual implied subsidy. If we take a simple scenario assuming this money was loaned to SMRT over 10 years at 5% annual interest, this would necessitate annual payments of $142 million SGD. Consider, that SMRT only recorded net income of $161 million in 2011 declining to $83 million for the year ending March 31, 2013. It becomes obvious how important this implicit subsidy become to SMRT reporting yearly net profits around 10%.
Second, though there is no public statement about the agreement between SMRT and the government on the rail, subway, and light rail assets, given the generosity of the government to SMRT with regards to buses, it stands to reason that they are displaying a similar level of generosity with regards to rail assets. The government of Singapore paid for out of public funds and built rail and subway lines and then reach an agreement for SMRT to pay the government for the use of these assets. If the government is not charging SMRT a cost plus rate for the use of those rail assets, as is the most likely scenario, this represents an additional significant subsidy. Given the large amount of money invested by the Singaporean government over time but the longer expected of life span of rail assets when coupled with the bus subsidy, it would be conservative to estimate an implied subsidy of greater than $200 million SGD annually to SMRT. Given their recent net profit of $83 million and their $163 million in 2010, this implied subsidy represents between 125-250% of net profits.
- This matters because SMRT is a publicly traded firm and a portfolio company of Temasek. SMRT is publicly traded and counts Temasek as its dominant shareholder. Temasek repeatedly boasts its superior asset management in producing 16% annualized returns since 1974 and SMRT has produced consistently high rates of return producing an 18% net profit in 2010. Given the close links between the government and Temasek, each has an incentive to ensure continued profitability even if that means the government gives money to Temasek managed firms so they can declare a profit. SMRT is only making a profit because of government subsidies not due to superior management. If the government wants to give money to SMRT for the purpose of maintaining service, this would be a reasonable use of public funds. However, the government giving money to SMRT so it can declare a profit and increase the rate of return for government linked shareholders is nothing less than cronyism.
Let me strongly emphasize that given the difficult nature of the public transportation industry, I am not philosophically opposed to public private partnerships in this area. However, it seems to be a clear conflict of interest and inappropriate for the government to be subsidizing the profits of a publicly listed firm that is owned by a government owned investment firm. SMRT clearly has no profits without government subsidies and the subsidies should not be used to allow Temasek or other executives to meet profit or return targets for bonuses.Tweet
Apparently, I am not the only one coming up with better estimates for the reality of Chinese data. One Chinese academic says that if a more representative methodology is used to record home prices in China it may increase “housing market appreciation by more than 100%!” It is also worth noting this is from the China Daily not a foreign publication. These data discrepancies have caused one research firm to estimate Chinese GDP at 6.1% in the 4th quarter rather than the officially report 7.7%. More some other time on why China needs to maintain such rapid growth but it is interesting just how many people are pointing out the Dragon Emperor has no clothes.
From departing Fitch Chinese shadow banking expert Charlene Chu comes this beautiful tidbit regarding asset management and bad loans:
The fundamental question with these asset-management companies is where are they getting the money to do their business. We can see on the asset-management-company balance sheets that much of their funding is coming from banks, so they are borrowing from banks to buy bad debt from banks. In that scenario, there isn’t any true risk transfer the way there was in the previous bank bailout when the financing for the nonperforming loan carve-outs came from the government. Instead, what we have is bad loans moving from banks’ loan portfolios into their interbank portfolios as a claim on an asset-management company. Over the short term, this disguises the bad debt situation. But over the longer term, if asset-management companies can’t repay their borrowing from banks, then bank capital is still at risk of loss….Fundamentally there needs to be a deeper recognition that most of the challenges facing the financial sector, including the liquidity issues we see at the moment, are related to asset quality problems. That’s regardless of what the nonperforming loan data say. The market recognizes that; that’s why the banks are trading at such low valuations.”
While credit problems loom in China, there are also larger underlying pressures to the real economy. One of the biggest is wage pressures. According to this Financial Times article Chinese “factories made clothes at half the cost of its facilities in Malaysia and Thailand but that gap has since disappeared.”
China wants to start policy think tanks which invites the obvious question: don’t you need to be able to think to have a think tank? Jailing professors for pushing the government to require officials to disclose their personal wealth isn’t radical stuff, unless you have something to hide.
Update: According to Goldman Sachs the Chinese banking regulator has issued a warning on all loans made to coal miners. Remember, it is a Shaanxi coal miner that triggered the first wealth management product that defaulted which is currently under negotiations with investors.
In Part I of this series, I provided an economic philosophy for the prediction of financial crises or bubbles where I point out that it is incredibly problematic to try and predict them. We can see risks but predicting a financial crisis is something very different. There is an old joke that says God invented economists to make astrologers respectable. The point being that it is important to have an enormous amount of humility when prophesying about what is to come.
I believe words matter in writing as they state our intended meaning. Jesse Colombo when writing about Singapore did not write that Singapore real estate is overvalued; he did not write that credit has expanded rapidly in recent history; he did not write that Singapore is a major investor in the region holding potentially overvalued assets. Jesse Colombo asked whether Singapore is going to suffer from an Icelandic style meltdown. Therefore, the question before us is whether Singapore will suffer a financial crisis similar to Iceland. To answer this question, it is important that we have small understanding of the Icelandic financial crisis.
Prior to the 2008 global financial crisis, Iceland banks and investment firms began to accept deposits and borrow from foreigners to subsequently purchase foreign denominated assets. When money markets seized up in 2008 and short term credit became unavailable to even the most credit worthy firms, Icelandic banks became unable to roll over their borrowings or repay foreign creditors. To provide some perspective, Iceland’s external debts were nearly 7.5 times GDP and total banking assets were 11.1 times GDP. External debt amounted to 160,000 Euros per citizen of Iceland. Due to the collapse of the three major banks, the stock market declined more than 90%. The declining currency cause a surge in inflation above 12% for two years straight and interest rates topped out at 18%. The government budget went from essentially balanced to a deficit of 9% of GDP and the unemployment rate more than quadrupled. The point here is that this was not a small economic correction but one of the most sudden and largest, in relative terms, financial crises in human history. Therefore, what are the risks that Singapore will suffer from a similarly large and wrenching financial crisis?
Before, I begin to answer that question, I want to emphasize three things. First, I recognize many of the same risks cited by Mr. Colombo. The risks due to home value prices and the rapid expansion of credit to cite just a few are legitimate concerns, though I believe that these risks are enormously overstated. However, the question is not whether these risks are elevated but whether Singapore will suffer an Icelandic style financial crisis. Second, given that the analysis in question was filled with lots of well cited data, I will not revisit each point and will also assume everyone has already read the piece in question. Instead, I will show what I believe I more important facts to consider. Third, I will not address many related questions that could and should be asked here about policy responses or whether these things are good or bad for Singapore. I will only focus on whether these factors will lead to an Icelandic style financial crisis.
- Singaporean external debts are elevated but not excessive. One of the most common threads between financial crises are significantly elevated levels of external debt and increasingly short term debt. Now as I noted philosophically previously, just because those two factors exist does not mean a financial crisis is imminent. Singapore currently has an external debt to GDP ratio of 4.1 well below the Icelandic number of 7.5. What is just as important is the composition of that external debt is its composition. Most of that is in banking deposits. As Singapore has become an offshore banking center and many corporations and wealthy have moved to Singapore, they have similarly brought financial assets. The large majority of external debt is in the form of banking currency and deposits. Iceland was never a banking center providing a large range of financial services to a region or wealthy population. With 1 in 10 Singaporean residents having more than $1 million USD in liquid assets to invest, it is little surprise that this number is at this level. Given that small countries will both trade and invest more outside of their own country, the risk here might be considered slightly elevated but not excessive or extreme.
- Singapore real estate prices and debt appear to have a somewhat elevated but not excessive risk. Though there are numerous data and methodological issues associated with obtaining good estimates of the relationship between income and housing prices, Singapore real estate prices and related debt markets do not appear to be excessively stressed. For instance, the population of Singapore demonstrates relatively high inequality and available wealth. These two factors generally push real estate prices higher raising the overall home price to income ratio. Taking a simple, unweighted average of resale prices for apartments in Singapore from official data, the average price is $521,861 (I used this simple calculation as an approximation as better data to make a more precise estimate is not available). Given an average per capita GDP of $66,521 SGD according to the IMF in 2013, this implies a home price to income ratio of 7.85. Again, this is elevated and puts stress on families and business but again this is not excessive and seems not to imply an Icelandic style meltdown. Though the coming surge of home being built by developers may soften prices or push asset prices down, that is very different than causing a precipitous drop that ignites a painful financial crisis.
- The uniquely Singaporean characteristics. Though I am normally reticent to describe a situation as different, I do believe there are some uniquely Singaporean characteristics that are overlooked. Let me give you a couple of examples. First, though there is a very large public debt, it is owed to the citizens of Singapore via the Central Provident Fund holdings and controlled primarily by the Singaporean government. While that does not make the debt and accompanying interest payments any less real, it does eliminate the possibility that investors will dump government bonds. Second, the Monetary Authority of Singapore has large foreign exchange reserves and could defend all but the largest of financial crises against currency runs or bank recapitalization needs. Furthermore, give the managed exchange rate, it is not inconceivable that should a significant risk of financial crisis arise, that MAS would simply impose currency controls keeping bank deposits in Singapore. Third, one of the risk of being a small country is the push to invest and trade abroad. Countries like the United States and China have very small external economic activity numbers, Singapore especially as a true financial center has to engage with the outside world raising many of these numbers.
- A few specific rebuttals.
- The chart on the second page of the piece which says that Singapore has high household debt relative to GDP fails to control for wealth and is consequently essentially meaningless when compared to other countries given the level of financial asset wealth in Singapore compared to other countries.
- The chart on the second page of the piece which says that Singapore is experiencing an “epic” housing bubble is again blatantly misleading. While recent increases have been above the long run trend, the long term trend is nothing out of the ordinary and as shown by a simple estimation of the home price to income ratio, is elevated by not remotely close to “epic” or anything triggering a major financial crisis. The long run price increase, given that 1998 is equal to 100 in the figure, produces a long term price increase of 5% annually.
- The numbers cited on page 2 for the home price to income ratio cannot be reconciled with third party data. For instance, according to the methodology used by the website he cites, the average price in Singapore would need to be approximately $2.25 million SGD! Now even if you are skeptical of official Singaporean statistics on apartment resale value or my simple calculation above, I doubt anyone would believe that the average home price in Singapore is $2.25 million SGD. If you take the much more restrictive household median income using official statistics, this would still yield an average housing price of nearly $1.6 million SGD! Additionally, somehow the city center and the outside the city center home price to income ratio for Singapore are both higher than the ratio for the entire country. Given that Singapore is a city state, this seems mathematically impossible.
- On page 4 of his piece where he complains that assets under management in Singapore surged by 9% annually between 2007 and 2012 and 22% in 2012, he should keep in mind that given returns on capital and any new inflows, that is about right. Important to put this all in perspective.
I do want say very clearly that I share many of Mr. Colombo’s concerns about the expansion of credit, low interest rates, and rapidly rising real estate prices. However, and this is very important, he so drastically overstates them to the point that valid concerns about potential financial risks become lost in a haze of hyperbole and hype.
As anyone who has read anything I have written about Singapore knows, I am no defender of the current economic policy in Singapore or the enormous irregularities in public institutions. There are some distinctly valid and reasonable concerns about economic and financial risks in Singapore. However, there is no reason to believe that these risks will result in an Icelandic style financial crisis.
Note 1: Wikipedia has a good summary of the Icelandic financial crisis.
Note 3: The external debt statistics were taken from the IMF and World Bank Quarterly External Debt Statistics database. You can find that database with data for Singapore as well as other economies here.Tweet
According to JP Morgan report on housing in China from late November, “we think homes are still broadly affordable to the general public and policy risk should be contained in 2014.” Wonder if they interviewed anyone in China or looked at any measure of home prices for this piece of crack research?
Credit Suisse has even better crack research, which albeit defies the laws of mathematics, but offers hope for those who failed statistics. According to CS, “all of them (Chinese real estate developers) expect their own company’s growth to be higher than the market’s – even though some of them have been underperforming the overall market in terms of contracted sales growth over the past few years.” Let’s break this down real slow. First, it is mathematically impossible for everyone to “be higher than the market”. If you believe this is possible, no wonder you are optimistic on Chinese developers. Second, if you ignore the fact that sales growth is contracting then yes, you can continue to remain upbeat on Chinese developers. Amazing that you need an MBA to come up with research like that.
Credit Suisse which appears to be able to state the obvious writes of the recently finished government audit
PR campaign of public debt that “Local government debt (LGD) almost quadrupled from Rmb4.5 tn in 2007 to Rmb17.9 tn by 1H13 (or +67% since 2010)…we view fast LGD growth in the past few years as not sustainable.”. That bit of profound financial insight just might be the understatement of the year by the same people that believe all companies will outperform the market.
According to another JP Morgan report from earlier this month on Chinese financials, “we believe that 2014 is going to be a tougher year for banks, compared to 2013, as the liquidity situation is going to be tight and asset quality deterioration will continue.” Just to be clear, the year when at least one Chinese bank has acknowledged being in technical default is going to be the easy year?