Third Macro Panda Huffs and Puffs…

Over the weekend we posted a piece on the three McBears weighing on global markets.  As all eyes continue to focus on Europe the third macro bear — China — is beginning to growl a little louder.   Greece is no longer the word, in our opinion, and the next big story is going to be the increasing probability of a hard landing in China.

The unintended consequences of a massive credit induced stimulus and negative real interest rates (sound familiar?)  are coming home to roost.  The hard landing scenario is not priced, in our opinion,  and could be the origins of next panic, which breaks the S&P500 support at 1101.   Traders in the U.S. are starting to focus on the story and we think it explains the inability of the equity markets to hold their opening gains over the past few days.

Property developers in China are now having to pay 6-10 percent per month in the private lending markets.  How long can that last before the real estate markets collapse or the central government is forced to intervene?

Here’s the report from Market News International,

Interest rates are already at 6% to 10% a month and are driving some smaller property developers into bankruptcy, the official China Securities Journal said, citing unidentified sources and without elaborating.

The reports come amid growing concerns about the financial health of China’s property sector following government efforts this year to tighten onshore liquidity conditions.

Standard & Poor’s warned Tuesday that weakening property sales and tightening credit conditions at home and abroad could increase risks for smaller and niche developers, who could face refinancing risks next year. A 30% drop in sales could mean even large, rated players suffer “severe liquidity strain,” the ratings agency said.

We’ve been worried about China, among other things, for  much of the past year (click here and here and here) and not sure how this all ends, but it does feel the China story is about to come under its first difficult test.

Stay tuned.


This entry was posted in Black Swan Watch, BRICs, China, Credit, Equities and tagged , . Bookmark the permalink.

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