Hong Kong Property Market Defies Tame Inflation

The Hong Kong Monetary Authority just published its Quarterly Bulletin on economic conditions in Hong Kong and around the planet. The HKMA concludes that inflation is tame overall:

“Inflationary pressure eased further, as the underlying inflation rate tapered to a year-on-year 3.8% in October from 4.5% in June. The sequential pressure moderated slightly to an annualised 3.1% on a three-month-on-three-month comparison. This reflected waning food price inflation and moderation in price increases for other major CPI components.”

The slowly growing economy is expected to continue to keep inflation at bay. However, this calm surface masks a still roiling property market. Indeed, the HKMA believes the property market is well ahead of the economy given meager gains in income:

“In the property market, the disconnect between housing prices and economic fundamentals appeared to have become more acute. In contrast to tepid income growth, housing prices surged by a cumulative 23.2% in the year to October. Housing affordability deteriorated as a result, with both the price-to-income ratio and the mortgage payment-to-income ratio rising to their post-1997 highs.”

This is likely a matter of cheap money finding a home somewhere. In this case it is the property market. The government has responded to the growing problem with a series of taxes that seem to be moderating demand.

The HKMA places partial blame for inflationary pressures in the property market on the the Federal Reserve’s recent rounds of quantitative easing:

“Risks to inflation have also increased with additional quantitative easing in the US, through its potential impact on global commodity prices and local property prices.”

Note that the HKMA recognizes that QE in the U.S. will drive commodity prices higher. This dynamic is something Ben Bernanke has refused to acknowledge. With the Federal Reserve adding a “stealth” QE4 in the December statement, I will look to commodity prices to catch bids in 2013…and for central banks to work to try to counter-act the moves of the Federal Reserve.


Wages on the rise in China

Several reports have been published this year documenting rising wages in China. In “Wage Rises in China May Ease Slowdown“, the WSJ notes that these increases may help lower the impact of a slowdown in China as workers have more money to purchase goods (although it is not clear to me how much this helps if a lot of the money goes into buying foreign goods as the article suggests could happen).

The current and projected jumps in labor costs are dramatic:

“…wage income for urban households rose 13% year-on-year in the first half, and average monthly income for migrant workers rose 14.9%, according to data from China’s National Bureau of Statistics. A labor ministry survey of 91 cities in the first quarter showed demand for workers outstripping supply by a record amount, pointing to low unemployment…

…At current rates, China’s private-sector manufacturing wages will double from their 2011 levels by 2015, and triple by 2017, eroding competitiveness and denting the exports that have played a key part in China’s early growth.”

These wage hikes are coming off low levels. For example, as of February of this year, Hon Hai Precision Industry Co, the company that manufactures Apple (AAPL) iPads, reported a 10% increase in base salary for its factory workers to 2,200 yuan ($345) per month.

Moreover, the supply of new, young workers will decrease thanks to China’s one-child policy:

“In 2005, there were 120.7 million Chinese people aged 15-19, according to United Nations estimates. By 2010, that had fallen to 105.3 million, and by 2015 it is expected to dip to 94.9 million.”

Finally the government is forcing the minimum wage and benefits higher:

“China is committed to sharply raising minimum wages, which puts pressure on employers to raise salaries for higher skilled workers. Beijing also has increased requirements for severance payments, which discourages layoffs unless business drops severely.”

It will be interesting to watch what happens to China’s economy as its manufacturing competitiveness declines slowly but surely with the increase in wages.


U.S. workers missing out on the “reflation celebration”

Several times on these pages, I have “celebrated” various confirmations of reflation as indicated by the soaring salaries of CEOs, largely through stock-based compensation. On October 10th, the New York Times printed the results of a study that confirmed what many of us already knew from informal observation: the wages of U.S. workers have fallen at a faster rate than they did during the recession. This “deflation” is working in the exact reverse of the trend for those who who hire these workers and run their companies! From “Recession Officially Over, U.S. Incomes Kept Falling” (NY Times via CNBC):

“Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.”

This is a sobering statistic that has potentially dire implications for the economy in general. Compare this situation to that in China where an on-going study in the New York Times concludes that China’s government has propped up its banks and large corporations at the expense of Chinese workers (see “As Its Economy Sprints Ahead, China’s People Are Left Behind.”):

“Under an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation. At the same time, other factors in which the government plays a role — a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to keep saving anyway, against an uncertain future.

Indeed, economists say this nation’s decade of remarkable economic growth, led by exports and government investment in big projects like China’s high-speed rail network, has to a great extent been underwritten by the household savings — not the spending — of the country’s 1.3 billion people.

This system, which some experts refer to as state capitalism, depends on the transfer of wealth from Chinese households to state-run banks, government-backed corporations and the affluent few who are well enough connected to benefit from the arrangement.”

Neither system, in the U.S. or China, appear stable to me. With China dependent on the income (or rising debt) of U.S. workers to keep its exports alive, these systems of increasing inequity actually start to look increasingly unstable. I will be monitoring these processes even more closely going forward. They are certainly deflationary, not inflationary.


High rare earth prices impact more and more products

In “China Consolidates Control of Rare Earth Industry“, the NY Times builds from a General Electric FAQ on rare earths (covered here) to describe the spreading impact of high rare earth prices. In addition to compact fluorescent bulbs, these prices are driving up the costs of giant wind turbines and hybrid gasoline-electric cars. Even Walmart has been forced to increase the price of the compact fluorescent bulbs it sells.

China’s efforts to consolidate its rare earths industry and to move it more effectively under the government’s watchful eyes promise to increase international pressures for manufacturers to relocate to China to get cheaper prices.

See the article reference above for more details.


Diamond prices up 17% in the first quarter

In “Diamond Prices Set To Sparkle“, CNBC reports that diamond prices increased 17% in the first quarter of this year. While the U.S. remains the biggest market for diamonds at 40% of sales, Indian and Chinese demand is rapidly rising. DeBeers thinks it may have to double output in 15 years at China’s current rate of growth. This will mark quite a turnaround for the diamond company as it turned in a loss in 2009 and required a $1B “injection” of capital to stay afloat.


China hikes electricity rates for the first time in two years

It is pretty amazing that China has experienced rapid growth without rate hikes for electricity, but such has been the case for two years. The resulting power shortages are getting dire according to “China Raises Power Prices as Shortages Loom“:

“China’s electricity demand is running so far ahead of supply that it is expected to be short of 30-40 gigawatts of power capacity this summer, twice the deficit caused in Japan by the earthquake and tsunami on March 11.”

China is hiking rates by 3% for some users in an apparent effort to cool demand and/or encourage the production of more supply. It is feared that increases in supply will only further drive up the price of coal and offset any profits power companies would have otherwise earned.


Vancouver Housing Keeps On Soaring

In “Homes: Chinese Buyers Make Vancouver Pricier Than NYC“, Bloomberg provides a startling and illuminating account of the dynamics in Vancouver’s over-heated real estate market. The statistics are absolutely astounding. Here is a sample:

“Sales of detached homes, townhouses and condominiums in metropolitan Vancouver jumped 70 percent in February from January, to 3,097 units from 1,819, and were up 25 percent from a year earlier, according to the Real Estate Board of Greater Vancouver. In March, sales climbed 32 percent from February, to just shy of a record for the month of 4,371 transactions set in 2004. Sales increased by 80 percent from two years ago.”

“In 2010, Vancouver had the third-highest housing costs among English-speaking cities worldwide, according to Canada’s Frontier Centre for Public Policy. Only Hong Kong and Sydney, another magnet of Asian immigration, were more expensive. Vancouver’s median home price of C$602,000 ($618,000) was 9.5 times the annual median household income of C$63,100, the group said in a study released Jan. 24. Canada had a 4.6 national multiple, making it ‘seriously unaffordable,’ while the U.S. at 3.3 was ‘moderately unaffordable,’ the study showed. To be affordable, the multiple must be 3 or less.”

The rest of the article explains how buyers from China are helping to drive prices in Vancouver as they escape property restrictions back home. Given three waves of Chinese buyers have descended upon Vancouver since 1990, market participants must feel like everything is normal. As an outsider, this market seems to have all the classic markers of a bubble. As long as the money keeps flowing, the market will remain inflated…