by Jack Crooks
Saturday, December 17, 2011 at 7:30am
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I find it interesting how complacent many investors still are regarding Asia, China in particular. But I guess if one vests so much time and effort to wave a convincing story, it’s difficult to be objective.
However, a slowdown in Asia is certain. In fact, if you look at the chart below, you can see that one has already begun across emerging markets.
And soon it could turn into an all-out run thanks to falling dollar-liquidity, the euro-zone banking crisis, and the Chinese housing bubble.
There are two key points that could help explain why I say Asia is bound to take a gigantic header; both are tightly linked catalysts for hot money running from the region in a big way.
First, Reuters concluded that the European banking crisis has a negative impact on Asian liquidity and funding …
“It’s not known yet how much Western banks are pulling out of the region. As recently as June 30, their credit into Asia — outside Japan — was still rising, to a record $1.45 trillion. But Japan’s troubled banks cut a quarter of their credit to Southeast Asia between mid-1995 and the start of the Asian financial crisis in mid-1997. It has yet to recover. If European banks did pull out in the same proportion, it would carve roughly $390 billion out of the credit landscape.”
European lenders only account for 2.3 percent of loans to non-banks in emerging Asia, according to the BIS. But they are big lenders to Asian banks. Led by Spain’s BBVA BBVA.MC, and France’s BNP Paribas BNPP.PA, Crédit Agricole CAGR.PA and Société Générale SOGN.PA, they account for 32 percent of Asia’s syndicated lending, according to Citigroup, and 40 percent of syndicated trade finance. Europe thus accounts for 61 percent of foreign loans to non-Japanese Asia, most of it in short, one- to two-year loans.
“The reason is that at least two-thirds of global trade and investment is still conducted in dollars. European banks were raising cheap dollars in the U.S. Aside from HSBC and Standard Chartered, most Asian banks don’t. What they lack in dollar deposits they have to borrow from Western banks. So while their total loan-to-deposit ratios may suggest they can take up their slack, their dollar loans exceed dollar deposits many times over, exposing them to currency fluctuations.”
Second, from the EconoMonitor regarding the precarious position of China’s housing market …
“The first signs of a downturn emerged in August, when China’s top 10 property developers reported unsold inventories totaling RMB 318 billion (US$50 billion), up 46 percent from the previous year. Highly leveraged, with debt-to-asset ratios approaching 65 percent, developers were coming under increasing pressure to liquidate those inventories for cash.
“The fire sale began in October, with several Shanghai developers slashing sale prices on new apartments by 25 percent or more. The discounts sparked angry (and sometimes violent) protests from investors who had previously bought the same units at full price, demanding refunds.
” … According to a central government study, local governments in China depend on land sales for approximately 40 percent of their revenues. The all-purpose answer, whenever doubts are raised about the ability of local governments to repay the loans or bonds that funded various stimulus projects, is that they can always sell more land.
“But when developers stop building, because they are too busy desperately trying to liquidate their existing inventories, they stop buying land.”
Can you say: “Risk bid” and “rising demand for good old U.S. dollars?”
The U.S. Dollar Index Weekly — you’ve seen it in my Money and Markets columns before. Now it’s Zoom-zoom!
The dollar bull story is shaping up nicely!
Best wishes,
Jack