Bird Flu From Chinese Poultry Infects Humans For The First Time: Dangerous Human/Bird Flu Virus Hybrids Possible

The flu virus is evolving in unpredictable ways in Chinese poultry. For the first time, the avian flu has mutated and infected a human being.

According to New Scientist, the World Health Organization says no similar bird flu strains have ever crossed over to people before and this unexpected jump from chickens to humans was a surprise. The Chinese government has confirmed the first human case of H7N4 bird flu in the country. The patient, a 68-year-old woman in the Jiangsu province, is in stable condition and health authorities believe she will make a full recovery.

According to The Guardian, the patient contracted the virus in December and began to develop symptoms on Christmas Day. Bird flu symptoms in humans include mild to a severe pink eye, fever, cough, sore throat, and muscle aches. The patient was admitted to a hospital on January 1 and stayed until January 22. Although her identity has not been disclosed, media outlets confirmed she likely contracted the virus from close contact with live birds. Although the virus does not appear to be particularly harmful to humans, it sets an interesting precedent since this is the first instance of such transmission to a person from a chicken.

“She had contact with live poultry before the onset of symptoms,” Hong Kong’s Center for Health Protection (CHP) said in a statement of the woman infected. “According to a report from the Chinese center for disease control and prevention, upon analysis, the genes of the virus were determined to be of avian origin.”

Dr. Bettina Fries, chief of Stony Brook Medicine Division of Infectious Diseases, told Newsweek it’s cause for great concern any time a bird flu virus causes disease in humans. “There would not be any preexisting immunity since the virus is new for humans,” Fries said. She also explained that the bird flu could form a dangerous combination with a human flu virus. “The viruses recombine/mix their genomes and you have a new flu virus half human, half bird flu virus,” said Fries. “The swine flu outbreak was a strain with some swine and some human flu. What keeps us safe at the moment from bird flu is that they rarely infect humans,” she said. “A recombination of virus (human and bird flu) could change that and we could find ourselves in a pandemic with a rapidly spreading virus and no preexisting herd immunity, no vaccine.”

The virus was identified through genetic testing, and results were only just released, the South China Morning Post reported. The patient’s close contacts are also under surveillance for signs of the illness, but so far no one has developed any symptoms, CNN reported.

According to the Center for Disease Control and Prevention, the avian flu H7N4 is a subtype of influenza A viruses that infect birds. All influenza A viruses are divided based on their proteins (the HA subtype) and the surface of the virus (NA subtype). Therefore, H7N4 has an H7 protein and an N4 protein.

The Hong Kong CHP statement urged the public to practice strict hygiene both in Hong Kong, an autonomous region south of mainland China and while traveling in China. This includes avoiding living or freshly slaughtered poultry, which is described as any domesticated fowl such as a chicken, turkey, duck, or goose.

Visualizing The Global Rush To Build Skyscrapers

As the creator of today’s visualization, Alberto Lucas López, points out, “the world’s tallest buildings have acted as barometers”.

Another way of putting it? Our biggest architectural accomplishments are highly visible symbols of what society values most, and those values have changed over time.

Today, the paramount belief system in many parts of the world is in capitalism, and there is no more potent marker of the economic might than fantastically tall commercial skyscrapers.

Today’s visualization is an effective way to take in the mind-bending scale of the newest generation of megatall buildings. It’s headlined by Jeddah Tower, a skyscraper currently under construction in Saudi Arabia that will smash the one kilometer mark when it’s completed in 2019.

Courtesy of: Visual Capitalist

CITIES ARE GROWING UP

In general, only very large cities have the resources to build and support extremely tall buildings.

With the explosion of urbanization around the world and developing economies asserting themselves in high profile ways, the stage is set for a global skyscraper boom.

In the last two years, 39 skyscrapers taller than 300m have been constructed, with five of the them eclipsing the height of the Empire State Building.

Global skyscraper construction has increased a whopping 402% since 2000.

HIGH-RISE HOT SPOTS

China

Nearly every sizeable Chinese city has skyscrapers under construction, and the numbers are staggering. Since 2012, China has added 38 skyscrapers over 300m (~1,000 ft) in height, and there are another 16 skyscrapers on the way in 2018.

In particular, the Pearl River Delta megaregion, which is anchored by Hong Kong, Shenzhen, and Guangzhou, has seen an astonishing commercial construction boom. Today, 20 of the 100 tallest buildings on earth are located in just this one urban megaregion of China.

China’s Top 10 Tallest Buildings

In total, 46 of the world’s 100 tallest skyscrapers are now located in China, and that number is sure to increase in coming years.

United Arab Emirates

Construction has been relentless in UAE for decades, and much of that development has been vertically-oriented. Today, Dubai is home to nearly 1,000 high-rise buildings, and there are 13 projects currently under construction that will hit or exceed the 300m mark.

UAE’s Top 10 Tallest Buildings

Russia

While the skylines of many European cities are conspicuously low-rise, an exception to that rule is in Moscow’s International Business Centre, where four 300m+ towers have been completed since 2012.

Russia’s Top 10 Tallest Buildings

WHAT ABOUT THE UNITED STATES?

In the early 20th century, the United States was the undisputed champion of skyscraper construction, but that has tapered off dramatically. In fact, only six commercial towers over 300m have been constructed in the last 20 years.

The exception may be the city that started it all: New York. There are currently 30 skyscrapers under construction in NYC, fueled in part by a red-hot luxury real estate market.

America’s Top 10 Tallest Buildings (Under Construction)

Philadelphia and San Francisco will soon have new additions to their skylines as Comcast and Saleforce complete their flagship construction projects. If current construction numbers are any indication, America’s love affair with the skyscraper may be reignited in urban centers across the country.

Mystery Buyer Of "Most Expensive Apartment In Asia" Revealed

A month ago, we highlighted a disturbing new record in the Hong Kong real-estate market – a market that received a ranking of “high” from Algebris Investment’s Alberto Gallo in his annual ranking of the world’s biggest asset bubbles.

According to a report in the South China Morning Post, the record price per square foot for a residence in Hong Kong was obliterated when a mystery buyer purchased two apartments in “The Peak” – an exclusive district.

At 132,000 Hong Kong dollars per square foot, the purchases made them the two most expensive apartments in Asia in terms of square footage. In total, the mystery buyer spent an astonishing 1.16 billion Hong Kong dollars (nearly $200 million) on the two apartments.

Today, the name of the mystery buyer has been revealed, courtesy of the South China Morning Post:

The Land Registry on Saturday identified the buyer as Lin Zhongmin, sparking frenzied media speculation about where the person comes from.

 

The two flats on the 12th floor of the exclusive residential development, with a combined area of 8,821 square feet, were sold last month.

 

One flat, measuring 4,242 square feet, fetched HK$560.2 million, or HK$132,060 per square foot, making it Asia’s most expensive residence by floor area. The adjoining flat, measuring 4,579 sq ft, sold for HK$604.2 million, or HK$132,059 per square foot.

According to the SCMP, the name of the buyer is not widely known in Hong Kong. The paper ventured to guess that he is from the main land, meaning the buyer would have to pay a double stamp duty of 15% on one flat plus the basic stamp duty of 4.25% on the other. The total would come to about $110 million Hong Kong dollars.

Whoever Lin is, it’s safe to assume he has a personal wealth in the billions.

“It would be logical to assume that anyone who can afford to spend more than HK$1 billion on two flats would have a personal wealth of at least HK$10 billion,” Vincent Cheung, deputy managing director for Asia valuation and advisory services at Colliers International, said.

"They may not even have bought the flats to live in as they most probably have other homes."

With the purchase of these two apartments, Mount Nicholson now has Asia’s three most expensive homes. In addition to the two bought by Lin, another flat – measuring 4,266 square feet - was sold in November for 500 million Hong Kong dollars ($60 million).

The buyer of that flat was mainland businessman Zhu Xingliang, the founder of Suzhou Gold Mantis Construction Decoration, which is engaged in the interior design, construction and landscaping sectors.

In the global league table, Hong Kong held on to the dubious accolade of being the world’s most expensive place to live for the seventh straight year in 2017, according to Oxford Economics. The median home price was 18.1 times the median annual pretax household income last year.
 

After $150 Billion Buying Binge, "Tokyo Whale" Seen Paring Back ETF Purchases In 2018

A few months ago, we noted that the Bank of Japan had decided to throw every textbook out of the window and crank their plunge-protection to "11"after reports surfaced that they owned a staggering 75% of Japan"s ETFs.

The BOJ first started their buying spree in December 2010 - when they held no ETFs at all - and have since accumulated some $150 billion in aggregate holdings.  The buying was all as part of unprecedented "economic stimulus" which has undoubtedly contributed to the Nikkei 225 Stock Average surging roughly 125% since December 2010.

Here"s a quick graphical recap of the program courtesy of Bloomberg...

...and another look which shows the central bank owns three quarters of ETFs by market value...

 

...all of which has resulted in the following bubble stock market appreciation...

Not surprisingly, since the program started, everyone from the head of the country’s stock exchange to the chairman of the Japanese Bankers Association has questioned the ETF program’s size and whether it artificially depresses volatility.

Now, with the Nikkei surging to 25 year highs, analysts are increasingly saying it"s time for the BOJ to put this specific component of their many controversial bubble-blowing policies to rest.  Per Bloomberg:

Sometime next year, the BOJ will cut its annual buying target for domestic exchange-traded funds by as much as a third from the current 6 trillion yen ($53 billion), says Toru Ibayashi, head of Japanese equities at UBS Wealth Management in Tokyo. Soichiro Monji of Daiwa SB Investments Ltd. expects a similar reduction, but by the end of March.

 

“Four trillion yen,” UBS’s Ibayashi predicted. “And everybody will understand.”

 

"Fear of deflation was behind the 6 trillion yen target,” Daiwa SB’s Monji said in an interview. “We’re no longer in that kind of environment. Risks are now skewed toward the upside, rather than the downside. It’s hard for the central bank to justify its buying spree.”

 

“Given the circumstances at this point in time, it is difficult for the BOJ to keep buying ETFs at six trillion yen per year,” Ibayashi said.

Jonathan Garner, chief Asia and emerging markets equity strategist at Morgan Stanley in Hong Kong, described the ETF purchases as “perhaps the most controversial part” of the bank’s stimulus program which includes everything from negative interest rates and yield-curve control to buying tens of trillions of yen of bonds each year, on top of its stock purchases. 

Of course, not everyone agrees as Naoki Kamiyama, chief strategist for Nikko Asset Management Co. in Tokyo, and Hisao Matsuura, a strategist at Nomura Holdings Inc., both saying the BOJ won’t cut its ETF target anytime soon as "it would hurt investor confidence and make a pickup in inflation much less likely..."

You know, because every central bank"s primary objective is to boost "investor confidence" by creating massive asset bubbles that make the masses feel richer...at least until the marginal stimulus fails and the whole ponzi comes crashing down...

WeWork: London"s Soon-To-Be Biggest Property Renter Makes Massive Bet On Office Market Despite Brexit

The rationale for creating WeWork, the eco-friendly serviced workspace provider, was simple as co-founder Adam Neumann explained to the New York Daily News.

“During the economic crises, there were these empty buildings and these people freelancing or starting companies. I knew there was a way to match the two. What separates us, though, is community.”

It wasn’t a bad idea since the company was recently valued at $20 billion. The first WeWork location was established in New York’s fashionable SoHo district (above) in 2010. Only four years later, Wikipedia notes that WeWork was the “fastest growing lessee of new office space in New York”. The company currently manages office space in 23 cities across the United States and in 21 other countries including China, Hong Kong, India, Japan, France, Germany and the UK.

WeWork’s growth has been little short of stratospheric, and investors have included heavyweight financial names such as JP Morgan. T. Rowe Price, Goldman, Wellington Management and Softbank. As Bloomberg reports, WeWork is about to repeat its success in New York and other cities by becoming the largest private lessee of office space in London. However, some old-school property developers are predicting that WeWork’s break-neck expansion is ill-timed.

A seven-year-old U.S. startup is set to become the biggest private tenant in London just as the U.K.’s economic outlook worsens. Three years after entering the British capital, WeWork Cos. has signed leases that will make it the city’s No. 1 private-sector user of office space, according to data compiled by CoStar Group Inc. for Bloomberg. The rapid growth makes WeWork, valued at $20 billion, increasingly important to the health of the city’s property market as well as more vulnerable to any future decline in rents.

“A downturn of some description has to happen at some point, and when it does the serviced office business will suffer very quickly,” said Michael Marx, the veteran developer who ran Development Securities Plc for 21 years through 2015. “In the present uncertain market many people are hoping that the WeWork model works -- but we have no idea whether it does on a sustainable basis or for how long. It appears to be a well-capitalized business, but if the cycle turns down, then the model looks vulnerable.”

As the chart below shows, WeWork’s expansion is occurring after the bull market in London office space is more than two decades into an upturn.

The company currently has 17 locations in London, with two more about to be opened, as shown on this map of the city. The majority of the office space is in the eastern part of the city, in and around the City of London.

The addition of the two about-to-open properties and another ten in the planning stage - one of which is the 620,000 square foot 12-building campus of Devonshire Square which the company is negotiating to buy outright from Blackstone Group (for $785 million) - will catapult WeWork into the number one position in London.

In short, WeWork is making a massive bet on the office market in London in spite of the risks posed by Brexit. From accounts filed by WeWork’s UK business, Bloomberg learned that the company has committed to £815 million ($1.09 billion) of rent payments in the future, of which £231 million ($309 million) is due over the next five years. Income in 2016 was £61 million ($81.7 million) and the company posted a loss of £11.1 million. Some anecdotal evidence unearthed by Bloomberg raises concern.

WeWork’s most basic membership plan, which allows access to the company’s offices two days a month and use of the firm’s app, starts at $45 a month, according to its website. The company ran a promotion this summer offering tenants half of their lease for free in an attempt to fill that space. In some cases, it has also paid brokers fees of as much as 20 percent for bringing in tenants, double the industry norm, people with knowledge of the matter said. WeWork’s standard broker payment is 10 percent, another person said.

WeWork is exposing itself to a classic case of liquidity mismatch. This is normally associated with the banking sector and banks being caught out in a crisis from borrowing short to lend long. In the property sector, the equivalent is borrowing long to rent short. Bloomberg reports the contrasting view of one of WeWork’s competitors, which shuns this strategy.

Jamie Hopkins, CEO of WeWork competitor Workspace Group Plc, said he prefers a business based on purchasing the properties the company rents out as short-term offices. “Buying long-term leases and selling short ones at a profit is not a model we are comfortable with at all,” Hopkins said in an interview. Owning its buildings gives Workspace “much more flexibility in terms of pricing if we need it,” he said.

Not surprisingly, WeWork sees things differently and Bloomberg relays its take.

While the company has acknowledged that Brexit poses economic risks, it also said that uncertainty surrounding the move will support its business as companies remain wary of long-term commitments. WeWork has secured deals with firms including International Business Machines Corp. and Amazon.com Inc. in its U.S. business and is seeking similar deals with blue-chip tenants in London.

Some companies have as many as 600 people in WeWork sites, McKelvey, the chief creative officer, told Bloomberg in an interview in July. “Our approach appeals to companies of all shapes and sizes,” he said, discussing a plan to expand rapidly in Latin America. The chief creative officer also described WeWork’s approach to growing quickly.

“To build out locations is a challenge,” he said. “But we came out with a very sophisticated platform of how we manage that whole process and it allows us to run it like a software development process, and it gives us a lot of confidence in our ability to execute.”

In WeWork’s defence, Softbank invested $4.4 billion in the company, which is what established the $20 billion valuation. While that is reassuring, the story behind Softbank’s investment is bizarre and doesn’t inspire confidence in WeWork’s prospects.

Before the deal was announced SoftBank Vice Chairman Ron Fisher -- who led the investment -- met with executives at IWG Plc, a competitor with a much lower valuation and more than 10 times as many sites, people with direct knowledge of the matter said. The meeting was held to better understand the temporary office business model and address the investor’s concerns over WeWork’s valuation, they said.

IWG, in its former incarnation as Regus, filed for bankruptcy protection for its U.S. business in 2003 after it expanded too rapidly in the dot-com boom. IWG has a market value of just 1.8 billion pounds despite having nearly 3,000 locations worldwide compared to WeWork’s 235. More recently, the Swiss company has seen the value of its shares drop almost 40 percent since Oct. 19 when it issued a profit warning, citing in part weakness in the London market.

IWG is “the same business, the returns are the same and there is no difference -- there’s no alchemy in it,” CEO Mark Dixon said in an interview about half-year earnings, comparing his company to WeWork.

Some old hands in UK real estate are pointing out how WeWork’s expansion across London is merely transferring risk, not reducing it. Indeed, by bidding up for office space, WeWork is taking on the risk previously in the hands of landlords, since it needs to rent out the office space. The CEO of the UK’s largest REIT, Land Securities, noted “You are effectively transferring risk from a landlord to an intermediary, that space still needs to be let out.”

Meanwhile, the jury on WeWork’s rapid late-cycle expansion is still out and we sympathise with the tone of the feedback reported by Bloomberg. Either WeWork is going to blow-up, or it’s the work of genius. If  pushed, we’d probably side with the former.

Despite the risks, WeWork has its backers in the London property market. “I hear people say it is going to blow up any minute now, but they have got major investors,” Tony Gibbon, founder of broker GM Real Estate said at the Bisnow event. “People question the valuation but so what, it is a considerable scale and it is a trend that isn’t going to disappear.”

“There are clearly risks associated with the speed of expansion of WeWork,” Toby Courtauld, CEO of London office landlord Great Portland Estates Plc, said in an interview. “It is probably too early to call whether that’s a systemic problem or in fact is a fantastic call by them.”

China"s Infrastructure Boom Heading For Rapid Slowdown In 2018

There have been signs since October’s Party Congress that China’s infrastructure boom was about to cool off as the leadership seeks to contain debt levels and focus on the quality not the quantity of growth. Subway building is one sector which has seen some high-profile project cancellations. In mid-November 2017, Caixin reported that China’s top economic planning authority, the National Development and Reform Commission, was “raising the bar for subway proposals” – increasing scrutiny in terms of fiscal conditions, population and GDP. In recent weeks, we’ve seen two large subway projects shelved, one in Hohhot, the capital city of Inner Mongolia (worth 27 billion Yuan) and another in Baotou, another Inner Mongolian city (worth 30 billion Yuan). As Caixin noted.

The cancellation of the Inner Mongolia subway projects is having a ripple effect in other cities. Several city governments, including those of Xianyang in Shaanxi province and Wuhan in Hubei province, said in statements that their subway plan are unlikely to win immediate approval under the central government’s crackdown on financial risks related to borrowing for such projects.

The crackdown on local government debt, a key source of infrastructure financing, will have a knock-on effect on Chinese GDP growth. A difficulty for China’s central planners is that the infrastructure share of Chinese fixed asset investment has been on a rising trend, surpassing 20% during 2017 versus just over 15% in early 2014. While we’ve been expecting China’s infrastructure spend to slow next year, we are surprised by the rate of slowdown estimated by Bloomberg, which surveyed a large number of forecasters.

China’s frenzied construction of roads, bridges and subways is set for a major slowdown, adding a headwind to economic growth in 2018. The nation’s fixed-asset investment in infrastructure will grow 12 percent next year, according to the median estimate in a Bloomberg survey, down from almost 20 percent in the first ten months this year. All 18 economists in the survey anticipated a moderation, adding to reports by Morgan Stanley, Goldman Sachs Group Inc. and UBS Group AG predicting a similar trend.

The cooling construction fever is taking shape as authorities renew a pledge to focus on debt management following the Communist Party Congress in October. In a rare move, China has suspended subway projects in some cities, and scrutiny has also toughened on public-private partnerships -- until now a widespread way to fund projects. The easing could even threaten global capital expenditure growth, as China represents one-fifth of the world’s total investment, according to estimates by Oxford Economics.

Infrastructure investment "grew much faster than other investments in the past five years," Larry Hu, chief China economist at Macquarie Securities Ltd. in Hong Kong, wrote in a note. "Policy makers might be able to accept slower growth for infrastructure spending from next year, as the growth in the past five years is unsustainable."

Slowdown or not, the scale of spending on Chinese infrastructure remains vast, about $1.7 trillion during January-October 2017. The pick-up in spending during the last two years followed efforts by the authorities to promote PPP (public-private partnerships) to finance infrastructure projects as one way to limit the growth in local government debt. As is the case with many things related to investment in China, the policy was quickly subject to abuse. In the majority of cases, the “private” partner in PPP projects turned out to be a state-owned firm, which merely added to the state’s debt burden via a different route. Eight local governments have been reprimanded by the finance ministry and the National Audit Office for “disguised borrowing”. We can only imagine the degree of abuse when local governments guaranteed returns on PPP-funded projects. According to Bloomberg.

The Ministry of Finance last month banned local governments from guaranteeing returns for private investors in PPP projects or backing a project’s debt. The national watchdog for state-owned enterprises also published rules to regulate state companies’ participation -- a potential blow to a major source of funding.

"A change in central government’s attitude towards PPP does not bode well for infrastructure in 2018," according to Yao Wei, chief China economist at Societe Generale SA in Paris. "A slowdown from the rapid pace this year looks inevitable."

The challenges for Xi Jinping and his top bureaucrats are mounting, as 2018 looks like it will see the convergence of a host of major reforms of which slower infrastructure spending and altering PPP funding arrangements are a small part. Other major ones include cooling the property market, reducing overcapacity in heavy industry, pollution control, continuing the crackdown on corruption, deleveraging and reforming the out-of-control shadow banking sector.

The China bulls will undoubtedly downplay the scale of these challenges, expecting little deceleration in Chinese growth, helped by a near seamless transition from investment to consumer-led growth. We will be amazed very impressed if Xi can pull it off.
 

How "Ghost Collateral" And "Yin-Yang" Property Deals Will Collapse China"s Credit Bubble

One lesson from the 2007-08 crisis was that the vast majority of financial market participants, never mind the general public, were unfamiliar with subprime mortgages until the crisis was underway. Even now, we doubt many have much understanding of repo, the divergence between LIBOR and Fed Funds from 9 August 2007 and Eurodollar liquidity. In a similar way, when China’s bubble bursts, we doubt the majority will be that familiar with “ghost collateral” and “yin-yang” property contracts either.
 
A second lesson from the 2007-08 crisis was that as the value of the collateral underpinning the vast amount of leverage declined, the surge in margin calls led to cascading waves of selling in a downward spiral.

A third lesson was that the practice of re-hypothecating the same subprime mortgage bonds more than once, meant collateral supporting the most vulnerable part of the credit bubble was non-existent. It only became apparent with the falling prices and margin calls. Few people realised the bull market was built on such flimsy foundations, as long as prices kept rising.

A fourth lesson was that in order for the bubble to reach truly epic proportions, key financial institutions, especially banks, needed to conduct themselves in a negligent fashion and totally ignore increasing risks.

Each of these warning signs from the 2007-08 crisis exists in China’s property market now – and other parts of its financial system - bar one…falling prices leading to cascading waves of selling. However, as we’ll explain, we think it’s only a matter of months away now.

We should note that our thesis that China’s bubble would eventually be undermined by a “black hole” of insufficient collateral is one that we have been developing for several years. What we came to realise is that insufficient collateral is nothing more than normal business practice in the Chinese economy. It doesn’t matter whether it’s related to commodity-backed loans, property speculation or managing redemptions in the Wealth Management Products (WMPs) sector.

The first sign of this practice to received worldwide attention came to light in 2014 with the collateral fraud at China’s third largest port, Qingdao, which spreading to another port, Penglai, before it suddenly got covered up stopped. Numerous borrowers were found to have pledged the same copper and steel inventory as collateral to obtain funding from various banks, including state-owned Citic Resources, as well as Citi, Standard Chartered and others.

Not long after the scandal emerged, media attention began to wane, as commentators either assumed it was fixed or were distracted by other issues. However, it wasn’t fixed and we had a shocking reminder last month with the first major publicly announced loss. ED&F Man took an $80m hit after acting as a broker between Australia’s ANZ Bank and two Hong Kong-based trading companies in a sale-and-repurchase financing deal. The trade was backed by storage receipts for about $300 million of nickel stored in Glencore-owned warehouses in Asia. The problem was that the warehouse receipts were forged. As we said.

What is surprising is that it has taken over three years for the first serious hit from China"s "ghost collateral" to emerge. Or perhaps not: in a time of generally rising prices, few if any traders actually bother to check if their pledged collateral ever exists. The problem emerges when prices decline, which courtesy of China"s bubble machine, has so far not been an issue.

In June 2017, we discussed an article, “Ghost collateral’ haunts loans across China’s debt-laden banking system”, by our favourite Reuters reporter and forensic investigator of China’s collateral black hole, Engen Tham. Here are a few soundbites from Tham’s impressive piece.

One lawyer said he discovered that the same pile of steel was used to secure loans from 10 different lenders.

Most of the bankers said that kickbacks were prevalent, with loan officers turning a blind eye to the quality of collateral and knowingly accepting dubious and even fraudulent documents. Two of the bankers said they themselves had taken bribes to smooth the approval of loans.

Overall, 23 of the 30 bankers described the existence of ghost collateral as a serious problem and expected more instances to emerge as the Chinese economy slows. The bankers interviewed come from 13 banks in China, including some of the nation’s biggest lenders.

…fraudulent collateral is “a huge issue,” said Violet Ho, senior managing director and co-head of Greater China Investigations and Disputes Practice at Kroll, which conducts corporate investigations on the mainland. “Often you also see that the paperwork around collateral may be dodgy, and the bank loan officer knows, the intermediary knows, and the goods owner knows – so it’s essentially a Ponzi scheme.”

More than six months later and Egen Tham is back with a “special report” on loan fraud and missing collateral in China’s property market, “Hidden peril awaits China"s banks as property binge fuels mortgage fraud frenzy”. We strongly recommend the article as Tham goes into forensic detail as he examines specific legal disputes which act as a window on the broader Chinese property market.

Here is our summary.

Reuters discovered an epidemic of mortgage fraud in China’s property market from extensive research and interviews with buyers, sellers, real estate agents, loan agents (see below), bankers and lawyers from three major Chinese cities and four smaller ones.

Buyers habitually overvalue the cost of the house or property they are buying so they can borrow more funds which are typically channelled into the property market, e.g. buyers who have insufficient down payment or income. A mortgage banker at Shanghai Pudong Development Bank estimated that 20-30% of his clients borrowed the down payment from a third party.

Small banks and loan companies do not have the resources to monitor if money is borrowed to finance down payments on property deals. Reuters notes that short-term household loans increased by 243% to 1.6 trillion yuan in the first ten months of 2017.

There are up to three contacts for an individual property transaction – the legitimate one, one for the bank providing the loan which overstates the property’s value and one for the tax authorities. These are widely known as “yin-yang” contracts in which real and fake agreements operate side-by-side.

In these re-packaged loan arrangements, all parties, including the bank and the seller, can be complicit in the fraud. Tham provides detailed examples. Since “everybody is doing it”, the crimes go unpunished, even when the guilty admit them in court documents regarding related claims.

Reuters reports that it interviewed twelve estate agents who admitted to helping clients commit mortgage fraud. One salesperson at the E-House China agency said that about 50% of his clients engaged in mortgage fraud. Another real estate agent estimated that about 60% of Shanghai property deals involve “some kind of re-packaging”.

A separate industry of loan agents has evolved which help property buyers to fraudulently secure mortgage loans. Real estate agents, and the banks themselves, introduce borrowers to the loan agents which keeps the criminal activity at “arm’s length”. 

While many western websites are blocked by the Chinese authorities, discussions about securing a fraudulent mortgage, the price of fake documents and adverts from loan agents are prevalent on social media.

The motivation for mortgage fraud is the fear of missing out in the great Chinese property bubble. While official data showed that house prices rose 12.4% in 2016 (fastest since 2011), this understates reality. The state-controlled Chinese Academy of Social Sciences estimates that prices rose by an average of 42% in 33 major cities.

Reuters noted that property market insiders “see little prospects” of an end to mortgage fraud, even though the Chinese regulators have asked banks to stop over-valuations and “yin-yang” contracts. Even when evidence of fraud is specifically shown to a bank, it is likely to be ignored.  

To add some colour to our prose, here are a handful of soundbites from Tham’s article.

Almost all contracts for the sale of existing property in China have some “yin-yang” element, according to Denny Jiang, a former banker and recent home buyer in Beijing.

A Hong Kong property investor surnamed Fu, who declined to give his full name because he was admitting criminal behavior, told Reuters that 20,000 yuan (about $3,000) in a traditional red gift envelope was enough for a valuation company to inflate the price of the apartment he wanted to buy in Shenzhen by 40 percent. That increased the amount the bank was prepared to lend him by 1.26 million yuan.

While property prices in China continue to rise, mortgage fraud remains largely a hidden danger, much as subprime loans in the United States remained mostly out of sight ahead of the 2008 global financial crisis. The fear is that in a property correction, fraudulent mortgages would unravel, accelerating a collapse of housing prices in the world’s second biggest economy. This, in turn, would imperil China’s debt-laden financial system.

“It seems banks don’t consider the issue a serious one.”

We think the last two comments are particularly poignant, harking back to some of the key themes of the 2007-08 crisis. As we noted above, the one thing missing from China’s bubble is falling prices leading to cascading selling which exposes the “ghost collateral” in the financial system. As this chart from Bloomberg shows, the month-on-month growth in Chinese house prices has slowed dramatically from the heady levels of 2016, as Chinese authorities have increasingly tried to cool the bubble.

“Houses are for living in, not for speculation” as Xi Jinping stated at the recent Party Congress. Even though property sales have been slowing, The Standard reported the state’s CCTV said that the property sector’s three regulators, the PBoC, the Ministry of Housing and Urban-Rural Development and the Ministry of Land and Resources, remained committed to stepping up financial regulation and cracking down on speculation after a joint meeting in Wuhan last month.

The regulators said China would prevent funds from being illegally channelled into the property market, and ensure capital allocation between real estate and other industries was balanced. The three central government entities also told provinces to stick to their tightening measures and be consistent in policy, warning against lax regulation that could lead to big fluctuations in the market and a build-up in financial risks.

"(We) must not tolerate any thinking that we can sit back and relax," the regulators said, according to CCTV. China will also improve its management of the land market and prevent cases of high land prices pushing up property prices.

In Deutsche Bank’s latest China macro presentation, “Risks to watch in next six months, part IV”, the bank explained why property prices will cool further and could be declining on a year-on-year basis by the middle of next year (the month-on-month decline would likely be apparent in early 2018). DB’s rationale is as follows. Leverage in the financial sector is slowing rapidly.

Financial deleveraging is a key factor behind rising interest rates…

…which will deflate China’s property bubble during 2018.

DB believes that unless the Chinese authorities rein back their deleveraging policies, H2 2018 could see the market slow rapidly…

…which assumes China’s central planners can fine tune a deflating bubble once it starts. We have our doubts.

"We Witnessed The DPRK Missile Blow Up": Cathay Pacific Flight Crew Observed North Korean ICBM Launch

Officials from Hong Kong"s flagship Cathay Pacific airline confirmed that the crew of a flight from San Francisco to Hong Kong reported seeing North Korea"s recent test of its most powerful ICBM conducted last Wednesday, according to the South China Morning Post. According to flight trackers, flight CX893 was over Japan when the missile was launched on November 29 at approximately 2:18 a.m. Hong Kong time. A spokeswoman from the airline said that the crew made a report of the suspected re-entry of the North Korean missile after the incident.

"Be advised, we witnessed the DPRK missile blow up and fall apart near our current location" said Mark Hoey, GM of operations at Cathay.

“Though the flight was far from the event location, the crew advised Japan ATC [air traffic control] according to procedure,” said the spokeswoman, adding that the sighting did not affect operations, and that while the airline will remain alert and review the situation with North Korea as it evolves, there are no plans to change any routes or operating procedures.

Rerouting affected routes is always an option, says Hong Kong lawmaker and former Cathay pilot Jeremy Tam Man-ho, adding that virtually no passenger planes are equipped with military-grade radar, making them susceptible to missile threats in the event a rogue nation targets them.

As Asia Times notes, a passenger jet has a very “slim” chance of escape if targeted by a missile, as seen in multiple past incidents, including Malaysia Airlines Flight 17, which was shot down by a surface-to-air missile while en route from Amsterdam to Kuala Lumpur in 2014, as well as a Korean Airlines plane that was downed by a Soviet fighter after it deviated from its original route in 1983.

Such incidents fall under the purview of Hong Kong"s Security Bureau and Civil Aviation Department, which Tam Man-ho says should establish a panel to coordinate intelligence sharing efforts with their counterparts in the region, including Russia, Japan and South Korea.

According to a leaked memo by Mark Hoey, Cathay airlines will start providing satellite phones for crews on its flights bound for South Korea, Canada and the United States. More via Asia Times: 

Several Hong Kong newspapers reported this Monday that satellite phones, among others, have been allocated to crews operating flights to and from South Korea in the event that if normal communication is rendered dysfunctional within the Seoul Flight Information Region should there be an attack from the north, Cathay pilots can still contact the airline’s Hong Kong headquarters.

A Cathay Pacific cargo flight from Hong Kong to Anchorage was also over Japan during the launch, and could have been quite a bit closer.

“Looking at the actual plots, CX096 may have been the closest, at a few hundred miles laterally,” Hoey wrote.

"We Fought Hard But Did Not Deliver": $2.2BN Hutchin Hill Is Shutting Down

With several months having passed since the last prominent hedge fund closure, the recent narrative that the 2 and 20 community was doing exceedingly well to close out the year (with long/shorts piling into tech names with record leverage), was starting to gain traction. That may have changed this afternoon, when Reuters reported that well-known hedge fund manager Neil Chriss announced he is liquidating his $2.2 billion firm Hutchin Hill Capital LP after three years of poor performance. The firm lost roughly 5.5% in the January-November period after having been up 4.7% in 2016. At one point, Hutchin Hill managed more than $5 billion in assets.

Chriss, whose firm is, or rather was, made up of various trading pods like Millennium and SAC, sent a letter to clients that the best way forward is to "proactively return capital as expeditiously as possible."

"We fought hard, but did not deliver the performance that you expected from us," Chriss wrote in the letter dated Nov. 30 and seen by Reuters on Thursday.

In the video below, recorded roughly a year and a half ago, Neil Chriss sat down at the Milken Conference to discuss the evolution of hedge funds. Liquidation was not one of the topics covered.

As Reuters summarizes, Hutchin Hill, founded in 2007, is the latest high-profile casualty in the ravaged hedge fund industry, and follows one-time icons Eric Mindich and Richard Perry who likewise made headlines when they shuttered their firms over the past two years.

"This decision is not about one year of performance, which has been disappointing," Chriss wrote. "We have not delivered on our performance goals for three years in a row."

Chriss had for some time tried to salvage the firm by cutting costs and refocusing resources.  Earlier this year, he began shuttering the firm"s credit portfolio and shifted resources to trading stocks. He also focused more on macroeconomic and quantitative investing. A year ago, Chriss shut the firm"s Hong Kong office.

 

Despite the efforts, Chriss wrote that it does not make sense to continue with a smaller team and less money under management. He said he expects all investors to get their money back by the end of the first quarter of 2018.

Chriss, who earned a doctorate in mathematics from the University of Chicago - and who probably should have just run a profitable frontrunning HFT operation or better yet, some smart beta contraption or quant fund - previously worked for Morgan Stanley, Goldman Sachs and SAC Capital, where he headed SAC"s quantitative strategies division.

In the letter he discussed Hutchin Hill"s legacy and said he was "extremely proud" of the 83.2% net cumulative return his firm returned and its 6.6 percent annual returns.

Ironically, as noted above, Hutchin Hill is shutting down just as the hedge fund industry "breathes a cautious sigh of relief as many managers are performing better and taking in new money after years of lagging behind stock market gains and taking criticism for high fees."

It remains to be seen how the industry will be breathing once the handful of tech stocks which every hedge fund is invested in, crash.

The HFRI Fund Weighted Composite Index, which tracks hedge fund performance, has gained 7.2 percent in the first 10 months of 2017, marking its best return since 2013, data from Hedge Fund Research show. Even so, in 2017 hedge funds will underperform not only the average mutual fund, but also the broader market for the 7th straight year.

Lisbon"s Red Hot Property Market - Poor Madonna Can"t Even Find A House

We’ve written a lot about property bubbles in recent weeks – how the bubbles in London and Sydney are bursting, Hong Kong’s has just seen the record price paid per square foot (Twice in the same day) and Monaco is building into the Mediterranean Sea to satisfy the huge demand from frustrated millionaires. A bit like Monaco, one of the problems for Lisbon’s house buyers is that central Lisbon is relatively small. According to Bloomberg.

In central Lisbon’s property market, sellers are kings. The Portuguese capital’s real estate boom is entering a new phase as a shortage of prime property in the city center is prompting some buyers to bid above the asking price for the last available units.

“There’s a big gap between supply and demand,” said Luis Tilli, a real estate agent at Lisbon-based HomeLovers, which is selling a three-bedroom, 236 square meter (2,540 square feet) refurbished duplex in the historic quarter of Chiado for 2 million euros ($2.38 million). “It’s reached a point where some investors offer to pay above the asking price just so they can close a deal.”

“There are a very limited number of buildings located in the center of Lisbon to purchase,” said Jose Cardoso Botelho, head of Vanguard Properties, a real estate firm controlled by French-Swiss investor Claude Berda that’s bought 10 buildings in Lisbon since it began investing in the city last year. “We’ve started looking for building plots on the outskirts of the city now, but it hasn’t been easy.”

For most people are concerned, Lisbon has probably slipped under the housing bubble radar. As Bloomberg explains, however, the foundations for the current bubble date back to 2012.

Lisbon’s property market revival began after the previous government eased long-held rent controls and started offering residence permits in 2012 to non-European property buyers, mostly from China. Portugal’s tax-friendly regime for foreign residents and a tourism boom that led to the conversion of hundreds of buildings into short-term rental apartments and hotels have also helped fuel demand.

The last time we wrote about Lisbon property was in November 2014 in “Dear Portugal, Meet Your New Landlord – China". As we noted back then.

…at a property auction in Lisbon, Portugal last month, about 90% of the bidders for the government-owned apartments and stores on offer were Chinese. They ended up acquiring more than two-thirds of the 45 properties, with one money-launderer investor noting "Lisbon is cheap if you compare it with other cities”.

 

1-in-4 homes bought by foreigners in America in 2014 were by Chinese and Portugal is already at 1-in-5.

While prices have risen by more than a third during the last five years, there is a classic squeeze taking place in Lisbon’s historic centre.

Home prices in the city rose 35 percent from 2012 to 2016, when they reached the highest since at least 2007, according to Confidencial Imobiliario, which collects data on the real estate sector. In Lisbon’s historic center, property prices increased 26 percent in the first half of 2017 while the number of deals fell 34 percent from the same period a year earlier, a sign of a shortage of housing stock.

“It’s the first time that Lisbon has a shortage of homes to satisfy investor demand,” said Lima. “Home buyers need to realize it’s impossible for everyone to live in Avenida da Liberdade,” he said, referring to a boulevard in Lisbon lined with gardens, ornately tiled sidewalks and luxury shops that’s considered the local Champs-Elysees.

Average home prices in the central historic neighborhoods of Baixa, Chiado and Avenida da Liberdade were at 6,367 euros per square meter in the first quarter, according to a study by property appraiser and consulting company Prime Yield.

The country is expected to attract a record 3 billion euros in property investment this year, mostly from foreigners. That’s up from 1.3 billion euros in 2016, according to broker CBRE Group Inc.

The shortage of prime Lisbon property is so acute that Madonna struggled to find a property when she decided to move to the Portuguese capital to support her son’s adopted son’s career ambitions. David Banda has been picked to play in the junior squad of Portugal’s most famous club, Benfica. Bloomberg continues.

Fueling the demand are the likes of rock star Madonna, the latest of a handful of celebrities to show an interest in a city that’s often compared to San Francisco because of its steep hills, trams and red suspension bridge. But central Lisbon’s housing stock is much smaller than in other European cities such as Madrid, London and Paris, and it’s quickly running out, according to Luis Lima, head of Portugal’s Real Estate Professionals and Brokers Association.

Even the “queen of pop” has showed some frustration in her quest to find a home in the southern European city. In June, the 59-year-old Madonna visited a hilltop palace in Lisbon as part of her search for a home in the city, according to Sotheby’s International Realty. Four months later she shared a picture of herself riding a horse on a beach with a caption on her Instagram account that read: “Can’t find a house in Lisbon but damn… sure can find a horse!”

It’s the same story we hear in London, Sydney, Auckland, Vancouver and many more. Local people are priced out of the market and efforts by politicians to reverse the trend have generally been futile, as the Bloomberg piece makes clear.

As housing stocks dwindle and prices rise, Lisbon residents are finding themselves being priced out of the real estate market in the city center…The Lisbon City Council plans to offer affordable housing to low- and middle-income residents in the city center, where a growing number of units have been snapped up by foreign investors. Under the plan, as many as 7,000 new homes with monthly rents between 250 euros and 450 euros will be made available. “We must stop the exodus from the city center of residents who can’t afford the rising real estate and rental prices,” said Romao Lavadinho, president of the Association for Lisbon Tenants. “There are parents moving in with their children and children moving back into their parents’ home.”

Even stringent Chinese capital controls haven’t slowed down Lisbon property prices…perhaps only the bursting of the central bankers bubble can achieve that?