China property bubble and Barclays’woes


  • Business
  • Monday, 12 May 2014

A picture shows the Barclays Bank headquarters in Canary Wharf, east London, on May 8, 2014. Scandal-hit Barclays said it will shrink its investment bank unit as part of plans to axe 19,000 jobs across the entire group over the next two years. AFP PHOTO / CARL COURT

CHINA’S property boom is said to be on its last leg and possibly reaching systemic proportions.

“In 1990, Tokyo’s total land value accounted for 63.3% of US GDP (gross domestic product), while Hong Kong reached 66.3% in 1997.

“Now, the total land value in Beijing is 61.6% of US GDP, a dangerous level,” said Vanke Group vice-chairman Mao Daqing.

According to The Telegraph, a leaked recording of Mao’s dinner speech more or less confirms what the bears have been saying for months.

It is a dangerous bubble, and already deflating, says Ambrose Pritchard-Evans in his column in The Telegraph.

China’s anti-corruption campaign has resulted in a flurry of home sales as many people try to get rid of high priced units.

Transaction volume has slowed down in the 27 cities surveyed, of which 21 cities have inventory exceeding 12 months, said The Telegraph, quoting Mao.

“We believe that a sharp property market correction could lead to a systemic crisis in China, and is the biggest risk China faces in 2014,” said Nomura’s Zhiwei Zhang.

The risk is particularly high in third and fourth-tier cities, which accounted for 67% of housing under construction in 2013, said Zhang, as quoted by The Telegraph.

China can leave the situation to correct itself or prick the bubble.

“Whatever measure is taken, when China sneezes, you will catch a cold, wherever you are,” said Pritchard-Evans in his column.

Citing the decision by the US Federal Reserve to pop the bubble in 1928, he said it caused a lot of adverse effects which the world should be aware of.

The United States was then the world’s rising creditor power, with foreign reserves above 6% of global GDP, almost exactly the same as China’s holdings today.

The other major announcement last week was Barclays’ plan to trim staff.

Hot on the heels of shareholders’ rejection of its bonus plan, Barclays is cutting 19,000 jobs over the next three years.

Barclays increased its expected job cuts this year to 14,000, from 12,000 announced in February, with the extra 2,000 jobs going in the investment bank, according to Reuters.

It said it woukld cut a further 5,000 jobs in the investment bank by the end of 2016.

Under its revival plan, the 320-year-old bank will set up a bad bank which will carry £115bil of risk-weighted assets.

This includes £90bil of investment bank assets and all of its European retail banking operations, amounting to £16bi of assets.

Barclays is raising £5.8bil (US$8.9bil) from its shareholders to help plug a larger-than-expected capital shortfall.

Barclays certainly has a lot to deal with before it can comfortably start thinking of rewarding its staff with big bonuses.

New, potentially risky practices among asset managers and mortgage servicers have been identified by the US Financial Oversight Council in its latest report.

At issue were indemnifications that asset managers offer some clients involved in securities lending activities to guard against the risk of borrower defaults, said the South China Morning Post (SCMP).

Although asset managers did receive collateral in exchange for the securities they lend, the report raises concerns that indemnifications could still leave asset managers at risk because they were not required to set aside capital, SCMP said.

Mortgage servicers handle borrowers’ accounts, processing payments and handling foreclosure proceedings.

The report says non-bank servicers do not have the same capital, liquidity or risk oversight as banks. As a result, it said the failure of a non-bank servicer could hurt investors in mortgage-backed securities.

The regulators have taken the initiative to identify risks posed by the non-bank sector.

It will be interesting to see what measures they will take to contain these risks after flagging the red flags in the sector.

From east to west, columnist Yap Leng Kuen sees worrying trends in the global arena.


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