The irresistible terror of market pricing

In the old days, the media could concoct stories, like that of the woman who gave birth to rabbits. Nowadays, we want our sordid and disgusting news to be real. For some folk, it’s the South African nonentity with no legs, who’s accused of shooting his Barbie-lookalike girlfriend. For others, it’s the American exchange student found guilty (or not) in Italy of killing her British roommate. For quite a few more, it’s a blurred bit of cleavage from Kate Whats-her-name, the really-rather-ugly wife of one of bim Princess Diana’s airhead sons. Human interest stories. Other people’s business, sometimes lurid, often just banal, invariably of little consequence to the rest of humanity – but somehow endlessly fascinating to the world.

For avid readers of the Standard, the ultimate nastiness to gawk at is the person who sells an apartment at a loss. The worst of all shocking horrors, happening to a stranger. More nauseatingly gut-wrenching than a mutilated, entrails-erupting corpse at a traffic accident. More obscene and petrifying than the most grotesque goings-on unearthed at a 1970s Catholic orphanage. Nothing else comes close to sparking that combination of sheer terror and prurient buzz.

Today, the paper reveals the terrible but compelling cases of Mainland ‘investors’ Sun Hongfeng and Zhang Zhiyong, whose multiple mortgages and defaults – culminating in eventual, tragic below-cost sales – have readers gripping the pages with sheer naked fear, while transfixed by a pervy thrill. Little details like how they acquired the down-payments, how they got the cash over the border (if they did) or what they will do now are of no concern. Nor do we worry ourselves with minor questions like ‘who are the idiots who lent them this money in the first place?’ (As with Rong Bing, now thinking of suing Canada for not selling him a passport, it’s the denial of what must surely have been his right that we can’t resist, not little things like how a state-owned enterprise employee acquires the means or the desire to flee the motherland.) The very idea of someone buying a property and then selling it for less than they paid is just so unspeakably dreadful – an affront to decency and indeed to nature – we can’t look away.

And what have we here? More investors, possibly ordinary hard-working people merely wanting to save for the future. They saw a chance to make returns of 9% a year from Chaori Solar bonds. They instinctively assumed the local authorities would pay them back if anything went wrong. It didn’t occur to them that while you might be able to have a 9% return or a state-backed guarantee, you can’t have both – or certainly not for ever – any more than it occurred to them to check whether the solar power industry is currently in a near-fatal glut.

A strengthening dollar and the prospect of rising interest rates, and greater future supply, all point to a little more sanity in Hong Kong’s real-estate valuations. And it looks like China is finally moving on to sensible pricing of risk, and thus of debt, which points to efficient allocation of capital. Good things. Also, unutterably gruesome, gory and lascivious.



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12 Responses to The irresistible terror of market pricing

  1. Joe Blow says:

    So farewell then, Holland Tom
    You wrote such a fine column
    I never read it, it’s true
    But I heard good things about it, and you

  2. maugrim says:

    I was going to mention Chaori too. This is worth noting by HK investors:

    “Hong Kong-based analysts at Bank of America are saying the growing risk of default by Shanghai Chaori Solar Energy Science & Technology may become China’s “Bear Stearns moment, “prompting investors to reassess credit risks as they did after the U.S. lender was rescued in 2008.

    “We doubt that the financial system in China will experience a liquidity crunch immediately because of this default but we think the chain reaction will probably start,” the strategists wrote in a note yesterday. During the US financial crisis, it took a year “to reach the Lehman stage” when investors began to panic and shadow banking froze, the strategists added.

    Billionaire investors George Soros and Bill Gross have drawn parallels this year between the situation in China now and that in the US in the run-up to the 2008 financial crisis.”

    Popcorn time?

  3. Famous Last Words says:

    Minnows like Chaori aside, it’s all State-owned banks that have lent money to municipalities or state-owned companies. It’s left pocket to right pocket, and the state calls the shots in terms of price, not the market. There may be some re-pricing of risk on piddly little issues like today’s, but overall the pricing of the majority of credit is ultimately firmly state-directed. Money markets and debt markets just do not play the kind of role in China as they did in the US in 2008. It’s apples and oranges. And don’t give me any of that shadow banking crap, neither. Wishful thinking.

    Something will no doubt give in China one day, but with a closed capital account, it ain’t this.

  4. Ex Tax Payer says:

    FAREWELL Tom Holland

    A voice of financial sanity in an increasingly lunatic financial world.

    Tom : If you do read The Big Lychee (which I’m sure you do covertly – just for the ribald humor, if not for Hemmer’s piercing wit)
    then God speed and wish you all the best for the future.

    Just hoping you stay within commentating distance of us left in HK

  5. Amateur Property Investor says:

    It was not so long ago that I was faced with selling my one and only venture into property for pure investment at a loss@ Robinson Place (lousy building work / leaking water pipes / typical property tycoon cheap shoddy work ) .

    I bought at what I thought was the nadir of the market in about 2003, but then the market went even lower , and I was very relieved when it finally went past my buying price again and I could escape with only minimal loss (rental income never really covers the mortgage costs for amateur property investors, what with vacancies, agents fees, bad tenants etc – same same experience in London) .

    So my heart bleeds for these Mainland investors who may actually LOSE money by dabbling in HK’s notoriously volatile property market.

    Long may such losses continue and be publicized !

    Such horror stories deserve front page news !

  6. gweiloeye says:

    The last line form the standard article:
    “Agents said there are currently about 50 to 60 distressed properties on the market.”

    Should have added – “..but there are many many more that are not YET on the market that we don’t know about!”

    It’s going to fun sitting watching the negative equity grow exponentially over the next 12 months – even though that might include me, but I’m not a “smart property investor” just an owner/occupier – and i can still afford to pay my mortgage

  7. Sir Jimmy Saville says:

    @ Famous Last Words:

    Sounds a lot like the economy of the USSR and that turned out just fine, oh wait …

  8. Famous Last Words says:

    Sir Jim. No it doesn’t, not in pretty much any way that I can think of.

  9. SIR Jimmy Savile says:

    Famous Last Words, Michael Pettis has drawn some parallels between the two for you:

  10. Famous Last Words says:

    Thanks, but I don’t see a single substantive comparison between the two in that article, other than stating “it’s like the USSR”. The dilemma facing Zhongnanhai may be similar (and that’s debatable), but the economies just aren’t. Sorry.

  11. SIR Jimmy Savile says:

    Yes, but the problem is Pettis has an impeccable reputation as a perceptive and unbiased observer of the Chinese economy. Obviously, it doesn’t follow that he’s right on this one but the man’s record on China is impressive.

    A further note on the supposed insignificance of the Chaori Solar default. As you say, the default of that single trust isn’t particularly significant. What is significant, however, is the implication that the CCP will allow these dodgy trusts to fail.

    If you check the links in this article, allow for a certain amount of hyperbole and false conclusions, you’ll find the number of distressed trusts coming to maturity in the next few months to be decidedly NOT insignificant:

    Perhaps not equivalent to the collapse of the USSR but this could very easily escalate into China’s Bear Stearns moment. Which is long overdue, anyways, when you consider the colossal misallocation of capital brought about by state controlled banks being forced to lend to state controlled companies and local governments often on the basis of maintaining the gravy train for the elite and their offspring/politics/guanxi rather than economic imperatives-again, to me, sounds a lot like the USSR.

  12. Famous Last Words says:

    We must be talking about two totally different USSRs.

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