PBoC news

Here is collection of various reports  concerning PBoC....

M2

M2 statistical coverage has been changed.

It now includes 2 new items...
1) Deposits of non-deposit-taking financial institutions (Investment Banking, Wholesale Banking)  in deposit-taking financial institutions
2) Deposits of housing provident fund
The change is to reflect and take into account the development  and use of  newer financial instruments. Both are already in substantial volume and have relatively large impact on money supply.


Based on the expanded coverage,
M2 posted 81.68t RMB (in Oct 2011)  and 72.35t RMB (in Oct 2010),
OR 12.9% yoy UP.
That is, (81.68-72.35)/72.35*100%=12.9%.

Note that this is  already reflected in the Oct 2011 statistics




FOREX Reserves

Officially stands at  USD 3.2t





 Home Prices

A Reuters report dated December 2, 2011, says that the PBoC think that Home Prices are at a turning point.

Reuters Excerpts...           BEIJING - Chinese home prices are at a turning point and banks are concerned about a possible 'chain reaction' if they were to fall by 20 per cent, the central bank said on Friday. 'Real estate investment growth eased, developers' cash flows tightened, land transactions and prices fell, property loan growth moderated and there are early signs that property prices are at a turning point,' the People's Bank of China said in a statement published on its website. Chinese home prices fell in October from September for the first time this year, official data showed, but a private survey has indicated that November could mark a third consecutive monthly fall

What does this means, in policy terms?
Likely, there will be a turning point in the monetary policies.
The polcymakers wants to see a gradual incremental trend in housing prices.
NOT a precipitous 20% drop that will have drastic consequences on banks and their NPLs.

PMI News

US

US ISM Manufacturing PMI was the surprise this round.

PMI	52.7	50.8	+1.9	Growing
New Orders	56.7	52.4	+4.3	Growing
Production	56.6	50.1	+6.5	Growing

If seen together with the ADP Employment data, the US Private Sector, in particular the Manufacturing sector seems to be on the mend.



China

 China's CFLP PMI (at 49.0%) and HSBC PMI ( at 47.7%)  both correlates and tells the story that policymakers have over tightened and that the Manufacturing Sector is in contraction.
These two sets of data is likely the key reason for the announced cutting by the PBoC, of the RRR by 50 basis on 5th Dec. This can be seen as an inflexion point where the policies could be reversed (i.e. loosened) from now on.




Eurozone

Eurozone PMI data is rather bleak.

Countries ranked by Manufacturing PMI® (Nov.)
Ireland 48.5 2-month low
Germany 47.9 28-month low
Austria 47.6 28-month low
France 47.3 29-month low
Netherlands 46.0 29-month low
Italy 44.0 2-month high
Spain 43.8 2-month low
Greece 40.9 2-month high

Both the Core and the periphery are in contraction .

MAS must clarify threshold levels for demanding a Poll

The following BT article by Jamie Lee, dated 1/12/2011  and titled "Sale of KepLand's Ocean Financial Centre stake to K-Reit surprises analysts. They say it may have been disadvantageous to the Reit's unitholders" have higlighted some points that MAS must clarify...

Excerpt..... (SINGAPORE) The sale of Keppel Land's entire 87.5 per cent stake in Ocean Financial Centre to K-Reit Asia for $1.57 billion has raised eyebrows. Several analysts who spoke to BT on condition of anonymity argued that the deal may have been disadvantageous to K-Reit unitholders. For one thing, while the prime Grade A office building in Raffles Place has a tenure of 999 years, K-Reit will get the stake with only a 99-year lease for now, though it can exercise a call option to re-gain the property after 99 years. Without the income support from Keppel Land of up to $170 million, the sale price of the office building translates to about $2,400 per square foot (psf), which K-Reit unitholders deem high at a time when the economic prognosis is grim. In a third-quarter report, Colliers International noted that the office market has cooled further, with many companies taking a longer time to commit to new space amid caution over expansion plans. The office market remains highly correlated to the country's economic performance and employment in business and financial services, CBRE said in a recent report. 'They should have left some meat on the table for both parties. Otherwise, what is the point of a Reit if the trusts are stuffed with assets at high prices,' said one analyst. A second analyst said: 'Given the economic uncertainty, the deal is overpriced. The crux of the matter is that the deal was done when the office market is at an inflexion point.' Another analyst noted that after stripping out the income support, the yield of about 3 per cent is not attractive. 'The price is at the top of the market. Granted that it's a Grade A office building but why now? Why acquire at a time when the macro-economic situation is deteriorating?' he said. 'The deal is skewed towards the parent.' He also criticised the 17-for-20 rights issue that would raise about $976 million used to foot the bill, arguing that it is dilutive to existing shareholders. 'It's a good idea if it is being used to purchase depressed assets,' he said. Still other analysts, while cautious, were more optimistic over the deal. 'It is too premature to pan the deal, especially when unit prices of office S-Reits have probably over-discounted the severity of the forthcoming downturn,' said a Daiwa report. The big concern is whether the income support is sustainable, it added. Ocean Financial Centre has a committed occupancy rate of 80 per cent, with existing leases at about $9 psf. The income support, by Daiwa's estimates, should raise the overall current rent to $14 psf and be 'just enough' to last until 2016. If in 2015 and 2016 - when nearly 30 per cent of the leases are up for renewal - spot rents hit $10.60 and $11.70 respectively, there would be 'significant decline' in Ocean Financial Centre's contribution in 2017, it said. 'However, if spot rents reach the mid-teens when the renewals take place, there might not be much drop-off, if any.' In a client note, Credit Suisse said 'admittedly, market conditions are a little uncertain, and perhaps timing may not be perfect'. But comparing with the Marina Bay Financial Centre transaction that involved K-Reit and Suntec last year, the acquisition price is fair from a long-term view, it added. The approval from unitholders also came via a show of hands at the extraordinary general meeting - a practice that the Code of Corporate Governance no longer accepts as sound governance - and amid criticisms from minority unitholders over the price and timing. 'Given the size of the deal and the fact it was a related-party transaction, the vote should have been carried out by poll, with the results tabulated to include the percentages of voting for and against the acquisition,' said Lee Kha Loon, head of the Standards and Financial Market Integrity division of CFA Institute for the Asia-Pacific region, in a blog post for the institute. A K-Reit spokeswoman said minority unitholders can call for a voting by poll so long as this request is supported by unitholders representing at least 10 per cent of the units held by those present. But the poll request, led by one institutional unitholder and supported by a few retail unitholders, fell short of this number. All interested parties that included Keppel Land were not allowed to vote. BT also understands that a proxy voter holding a significant block of 46 million units had already been instructed to vote in favour of the deal. Keppel Land said the sale would 'unlock part of its investment holding especially given the strategic commercial reasons and the volatile economic climate'. As for K-Reit, the acquired Ocean Financial Centre will also provide strong branding, making it a key office landlord in the Marina Bay and Raffles Place areas, with the transaction boosting the size of its assets under management from some $3.9 billion to about $5.9 billion. The deal is also expected to be accretive to the Reit's distribution per unit from the cash flows generated, and should improve K-Reit's lease expiry profile such that no more than 11 per cent of its portfolio by net lettable area will expire in any one year over the next five years. BT

________________

My Thots....

Much of the issues raised in this article has been discussed.

The section highlighted in blue, however raises issues that MAS/MoF must clarify....

In June 2011, there was actually a Rule Change Proposal by SGX to mandate compulsory polling at all shareholder meetings; see proposal.

Unfortunately, after public consultations, the recommendations was that a poll was deemed NOT a necessity altho if U attend any CMA or Capitaland-related AGMs or SGX AGMs or SingTel AGMs (i.e. the more progressive and transparent listcos) , U will have been given a electronic polling device and polling would be conducted; irrespective. Remember all dual listed listcos (i.e HKEX and SGX) must comply with HKEX rules.

What happened, was that at the KReit Asia EGM, the electronic polling device was distributed and the expectation was that polling will be done. So at one stage there was confusion, when the Chairman said polling will not be done becos there was no requirement.
No explanation was given!!

So those who were more knowledgeable, guessed that they were invoking the 10% rule.
See Recommendation 2.2 and a few of us went to the back of the room to register our shareholdings with the scrutineers to see if we had 10% shareholdings.

It was later announced that we did not satisfy the "requisite" holdings requirement and a show of hand voting commenced, immediately, to which those opposing were Out-Voted. But it was never clearly stated what was that % requirement, that we did not meet, during the EGM.

Later, I checked and found that the required % shareholdings threshold have been reduced from 10% to 5%!!!
After the EGM,  I went to read Recommendation 2.2, again and it appears that there is  a 5-members request rule---there are in effect two thresholds in section 178(1)(b)----- the 5 member rule in i) and the now effective 5% rule in ii) !!

In effect, a polling had to be carried out as there were more than 5 of us demanding a poll. We have been "robbed" of a fair poll which Kepcorp and Kepland as IPTs and together own 76.3% of votes, had to abstain.
Yet, we were denied!!!
A poll would be more favourable to dissenting unitholders, since we have some IIs (Institutional Investors) and some big unitholders amongst us!!

 This BT article appears to imply that a 10% threshold was used; which does NOT conform to the Companies Act.

Will MAS or MoF, please clarify!!!

4 Positives

Positive One
ADP Employment  report

The ADP Employment Report  for Nov 2011 has continued to trend up.

U.S. Nonfarm Private Employment Highlights – November 2011 Report: Total employment: +206,000 
 Small businesses:* +110,000
 Medium businesses:** + 84,000
 Large businesses:*** + 12,000
 Goods-producing sector: + 28,000
 Service-providing sector: +178,000
Addendum:
 Manufacturing industry: + 7,000

As with previous mths, the Service Producing Sector  and Small and Medium Bizs continues to be the star performers.
The surprise is that manufaturing carved out a 7K gain; giving the previously moribund Goods-producing sector aboost to 28K jobs added.

This set of data which correlates well with BLS data bodes well for the Friday release.


Postive Two
CBs Act

See CNBC

Central Banks (CBs) take co-ordinated actions by providing liquidity swaps.
Mainly, involves ECB and the FED; to ease the credit crunch in Europe.
There is apparently a  credit crunch in the USD wholesale market and the FED is opening swap lines for the ECB to ease that crunch.
The participation of the CBs from Canada, England, Japan and Switzerland helps to boost the Bazooka effect  and shows that the CBs are united in helping the ECB , if  indeed it needs the help.
It shows  that ECB's head Mario Draghi, may be stepping up--- now  that it is clear that the politicos (Merkel & Sarkozy)  have agreed that the path to fiscal union is the way to go.


Positive Three
US NAR Pending Home Sales

Pending Home Sales Index for Oct 2011; which is a leading indicator of EHS ( Existing Home Sales) jumped 10.4%


Positive Four
China cuts RRR

In my last post on this topic, Reuters suggest that the cuts in RRR will happen, only next year .
As in the past, the PBoC wrong footed them again.
The RRR will be  cut by 50 basis pts from Dec 5.
This suggests that the policymakers are ready to ease the tightening measures that have made credit difficult to get for many SMEs .

Return on Capital for Reits

Return on Capital
Given the propensity for cashcalls (i.e. Capital Outlays) in SG Reits, the correct metric for a Value Investor, should not be the dividend yield but the ROC ( return on capital).
Teh Hooi Ling of BT's, "Show Me the Money" series, did a calculation for the ROCs of 22 Reits listed on the SGX .

On that metric, of the 22 that she studied, only 17 made it to positive territory.
She did not state the date for the prices she used. But if we take her "prices today" (as at 25/11/2011), then we are taking prices at quite a trough, given current bear market conditions.

KReit Asia Positive ?
For the emblematic KReitAsia, which has been the most prolific in issuing rights, the surprising outcome is that it still managed to eke out a positive return on ROC, even tho the rights issue (at 85c) has pushed prices on that day to 86.5c.
So Reit, has a place in a value investor portfolio, just as Ben Graham, advocated in his book "The Intelligent Investor". Better still if they are trading below intrinsic book value.

Issue
But, the issue as highlighted in the EGM is the timing and frequency, with which the cash calls are made. In effect, the sponsors have abused the Reits vehicle, so that their interests (to monetise the assets at their  timing to recycle cash for sponsor use)  have been done at the expense of unitholders who are subjected to nasty surprises of cash calls, at a time when the markets are on the precipice  of falling and huge opportunities for purchases of  contending "stocks' could be on the horizon.

Against Sponsor's own interests
As pointed out in the EGM, these nasty surprises, if repeated often, work against the long term interests of the sponsors. Such frequent calls necessitate sponsors having to underwrite to take up any excess rights, reducing trading liquidity as the shares are concentrated in the hands of the sponsors. Loyal unitholders and IIs (institutional holders) with high stakes have to rejig and make sudden changes to their "Portfolios"; including selling in a distressed market to cough out the cash. Worst still, retirees and Mom N Pop investors who buy the Reits for dividends only (i.e. defensive plays) may not be able to cough up the extra cash at such short notice, leading to dilution or a need to sell their rights/shares at  "rights"-depressed prices. Other Unitholders, tired and fed up with the frequent and hasty cash calls, will sell.
In the end, the Reit vehicle which is the last piece in the food chain for the "asset recycling model" may fail, much to the detriment of the sponsors own interests.

MAS must act
Growth should never be the over-riding aim of a Reit; and growth for the sake of growth must never be the excuse for any acquisition.
As I have highlighted many times, accretive  property acquisitions ( to DPU) should only be made when it is certain that the property market has more or less bottomed (test is that valuations  are less than NPV for DCFs) or when the property market is stable; not anticipating a fall. The Reits biz model have that luxury to wait  and the regulators (MAS) should see to it that the sponsors stop ramming their cash calls down unitholders throats as and when they fancy!!
The Reits must be  a vehicle where the recurrent incomes have stabilised; those that have not stabilised must be incubated at the Sponsor level, NOT Reit level. Rental support is a gimmick and must be stopped.
Incentives for Reit Managers must be aligned with unitholders, NOT sponsor's interests!!

Reits, A Mystery?

The KReitAsia case has been discussed at length in BT by Wong Wei Kwong. The 3 main issues of Corporate Governance, viz the voting vs the polling process during the EGM, the incentive scheme for Reit managers, the independence of the IDs, were all correctly identified.

But, I guess  the KReitAsia issue has turned out to be a hot topic, so that some in the media wants their one-minute of fame. and  in TodayOnline , there is an article on Reits by Colin Tan  dated 25/11/2011 entitled  "A decade on, REITs remain a mystery".

Wow, what a eye-balls grabbing title; and coming from a property professional, I am quite baffled that he find Reits, a property "staple", a mystery!!

Contrary to the spirit of the BT article, which was to seek clarity and had a a value-add  in pointing to ways to improve Reits, as an asset class on SGX, Colin's article sought to mystify and muddy the Reit vehicle; in fact, the entire fleet of 23 listed Reit vehicles, at that.

First, lets start with the positives, what Colin got right.....

This may have to do with the existing reward structure - the payoff is better with acquisitions than getting the existing assets to perform better. Is this what the Monetary Authority of Singapore (MAS) intended when it drew up the regulatory framework for REITs?

There may be better justification for a hands-off approach in the early days when the industry was in its fledging stages and when the MAS needed to build up the industry.

However, as the recent K-REIT Asia controversy has highlighted, it may be time for further regulation, especially in the areas of independence and avoidance of conflict of interests.

Many times in the past, I had prodded journalists to look further into certain REIT issues but all have declined, citing a lack of understanding of the subject matter.

Also, as pointed out by one reader, most REIT unitholders are not sophisticated enough to look after their own interests because of their lack of understanding. Even a representative of an institutional fund I spoke to immediately after the K-REIT controversy erupted showed a lack of understanding of the issues. They simply trust the management to do the right thing.

Colin thinks that Reit holders, even IIs are not sophisticated enuff to understand the issues.
He probably pushed it too far....
The rest of the article is peppered with  serious assertions that are highly contentious and unsubstantiated.

Colin might be an expert. But he needs to back up his assertions which must be challenged!!

Excerpts...

.....it must be said that REIT managers have mostly had to acquire their properties on the higher side of valuations if only because it is the only way they can get the owners to sell it to them

This is a gross generalisation.
The property market is cyclical.
Reit managers acquire most properties at close to valuations.
Property prices rise and fall; subject to demand and supply, so do valuations.
Remember, property prices and rents are cyclical,  at any time there will always be valuation "gaps" and differing opinions creating opportunities for buy or sell.
Reit managers actually have the luxury to choose their timing so that they buy (only) in a down cycle, when assets are fairly priced or under-priced (hence, my objection to KReit timing for OFC's purchase), so long as the properties are reitable (able to be let out to good tenants and generate NPI  after Op Expenses and Interest charges) and that the Net Present Value of the DCF  exceeds valuations.

Excerpts.....

A REIT can get a property on the cheap only when the owner is ignorant of its true market value or if it is a forced sale - many investors still do not realise this.

Wow, unless the property is miniscule in size terms , which then means that it is not reitable, most  properties will be properly valued before sale. Many investors know this!!  Try taking a  property loan or a Refi, the banks will make U pay for a valuation, not to mention a SPA for a property.

At the same time, the REIT manager can only justify the acquisition to shareholders if it is yield-accretive. Otherwise, the REIT is better off not doing anything.

So, a spot of financial engineering is required to get it to be so. This will buy the REIT manager some time to get the asset to perform to expectations or for the market to turn around and justify the values. In a rising market, this is not a problem.

Otherwise, for the acquisition to be yield-accretive, the REIT will have to buy a property of lower quality or one with higher risk because such properties have higher yields.

Serious accusations!!
If the Reit manager do any of the 3 mentioned above:
1) A spot of financial engineering
2) Buy an asset of lower quality
3) Buy an asset  with higher risk,
 then that Reit is surely headed for disaster.
Of the 23 surviving Reits on the SGX, will Colin care to substantiate with just 1 example, which Reit Manager, do any of the above to get accretive yield?

As more properties in Singapore are acquired by the REITs, there will be fewer available on the market. As such, the asking price by the remaining landlords can only get higher. Given more time, it will become clear, if it is not so now, that the current model is not sustainable in the long run.

Sounds prophetic and self congratulatory.

Contradicts the point he, himself made earlier----- that Reits can only justify their acquisitions, if the DPU are accretive. Reits, can simply say "NO", if prices are too high.
I can cite many cases Katong Mall, Chinatown Mall, Yew Tee Point, Parc or Bugis Junction---- the landlords chose to sell becos of certain internal issues such as a change of strategy or biz direction. For 77 King Street that was acquired by KReit, the owner was a Greek, who had personality issues with the tenants and hence could not get the occupancy higher.

Reits is an asset class that has worked in many jurisdictions eg US, UK and Australia.
The model is sustainable and has worked;  the biz model can evolve as the size grows----- with AEI (Asset Enhancements), Development ( up to 10% of asset value), sale of Old Properties. There is also less need for cash calls as size evolves, since placements will be  smaller  and bite- sized, relative to the size of the evolved Reit (Kreit will become No 2 in size in SG)  and easier to find subscribers; after the growing pains.

REITs are often presented as defensive plays as it relies on revenues generated from income-producing properties held in its portfolio. While it may be so in more mature economies, the situation is different in Singapore.

In mature economies, a typical portfolio of properties in a REIT is a lot more stable. The leases are longer, which means the payout is much more consistent. In Singapore, most REITs are on the acquisition trail and their portfolios are always expanding.

Is SG, not a maturing economy?
Colin should check out the WALE, before and after the acquisition  for most of the acquisitions by Temasek-linked Reits,  before he makes all the bold statements, above.
Almost all the Reits, I am vested in or know of ( i.e. with good sponsors), have no issues with consistent divd payouts.With the exception of some Reits hit by the Japanese triple whammy, most Reits have a stable portfolio of properties.

As a vested Property Professional, Colin should clarify
NOT sensationalise and mystify.

Li DaoKui on China

This article by Grace Segran appeared on Today , on 25/11/2011.
Those who follow me on the CNA Forum will know that he is one of my fave commentators on China.

By all accounts, the Chinese economy is thriving. While America and Europe continue to struggle with debt and unemployment, China is moving from strength to strength. Still, Chinese economists and policymakers are looking ahead to see what problems China may be facing in the not-too-distant future and, more importantly, how to prevent or mitigate them.

For a start, Professor David Li Daokui (picture), a     member of the Monetary Policy Committee of the People's Bank of China and the director of the Center for China in the World Economy at Tsinghua University, believes that China is heading into a major grain shortage.

China already has a very limited amount of per capita arable land, he told INSEAD Knowledge. However, as China industrialises and urbanises, labour costs are rising quickly. These costs will be capitalised into the price of agricultural products such as grain. The Chinese consume grain in very large quantities - not just whole grains but also as raw materials for the production of other food items. Together, these factors are leading to a perfect storm that will result in an increased demand for grain.

The increase in demand for grain is a global problem, according to Prof Li. It would only take one bad crop to throw the world into a major food shortage. "We can imagine that, with the frequency and severity of natural disasters in China as well as in other parts of the world, the overall global grain output will be decreased, which will pose a potentially grave threat to grain security, leading to worldwide food shortages and resulting in global inflation in food prices," he says.

It is important for China to think carefully about its agricultural strategy. Prof Li recommends that the Chinese government takes measures to increase the scale of grain production by investing in agricultural technology. He also suggests that China invests in grain production overseas.

He opines: "This will not only work towards China's self-interest but will also contribute to helping to solve the wider global grain supply problem."

OIL MARKET FLUCTUATIONS
Prof Li predicts that, like grain, there could be a global shortage of oil that could adversely affect China's development. However, he points out that oil and grain are different kinds of resources.

"The risks associated with oil and grain are different, as the geographical supply of oil is relatively concentrated," he says. "Oil responds much more dramatically to changes in the global economy. The downturn in the European and American economies has depressed the price of oil. However, even a small economic recovery could cause an upward surge in oil prices."

Since China is dependent on external oil supplies, a dramatic increase in oil prices could be devastating to the Chinese economy. In Prof Li's view, China must be prepared for these possible fluctuations by building a domestic supply of crude oil equivalent to three to six months of domestic consumption. China should also diversify risk factors by establishing long-term contracts with countries that supply oil and begin to rely on other energy sources.

EXCESS CASH SUPPLY
Over the past three decades, China has experienced a steady increase in its supply of money. It now has an overall money supply of US$10.5 trillion (S$13.7 trillion), which is higher than that of the United States and is equivalent to nearly double its gross domestic product.

Prof Li explains that this excessive circulation of cash presents many risks for the Chinese economy. Without viable options to invest this money, asset price bubbles could develop and the prices of certain assets could climb. "We saw this in the housing market bubble in the US ... When asset prices reached unsustainable levels, the bubble burst, causing a nationwide economic meltdown."

Prof Li suggests that China shifts its monetary policy to reduce the amount of money circulating in the economy. He says: "China should tighten its supervision on financial institutions to control systemic financial risks in this sector and prevent excessive price increases."

China could also let excess capital flow out of the country, by allowing companies and individuals to convert their yuan into other currencies. Eventually, these measures should facilitate a two-way flow of capital, allowing China to regulate the flow of money into and out of the country.

On the whole, the Chinese economy is in good health, Prof Li asserts. Still, it is vitally important not to underestimate the risks that, if left unchecked, could devastate China and undo years of economic progress.

This article first appeared in the latest issue of INSEAD Knowledge. David Li Daokui, who received his doctorate in economics from Harvard University, is Mansfield Freeman Professor of Economics and part of a trio to replace Fan Gang as academic members to the Chinese central bank's monetary policy committee.