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Coal Sentinel

China Focused, Global Context

Volume 1, Issue 4
Week of January 16-23, 2011
Topics covered in this issue:

China:
 Put 10M units of social housing program in perspective
 Exuberance abound in Beijing’s housing market
 Liquidity crunch again?
 Power conservation continues
 Other data
o QHD price declined RMB 5/ton broadly last week and inventory rose 0.09MTs to 7.16MTs
o Intracoastal freight rate weakness persists
o QHD average daily loading thus far in Jan. is 0.674MTs, 0.166MTs higher than the daily average
achieved in December. In other words, China is sending an extra CAPE per day to the South,
which may have eased the need to bid into the global seaborne market
o According to NDRC’s rule on fuel prices, as of Jan. 12, diesel and gasoline prices should have
been raised. But of course they weren’t.

Put 10M Units of Social Housing Program in Perspective


 Coal Sentinel does not believe that this target is achievable on two fundamental issues
o The sheer size of the program is in direct conflict of governments goal to control inflation
o It will be a tall task to resolve funding gaps
o Of course everything is possible in China for real or on paper. The information below if purely
for perspective
 Each 1M units, assuming 55m2 per unit, would consume about 3.5-4MTs of crude steel equivalent.
o Most of the Chinese steel analysts forecast ~6% growth and by Coal Sentinel estimation, half of
that growth is predicated on perfect execution of the social housing projects.
 Table 1 shows the previous targets and the amount of funds central government gave to local
governments in order to implement the projects
 From 2001-2009, China built (i.e., completed) on average 7-8 million units of housing per year
o Hence, 10M units in one year would well exceed previous average without the help from any
commercial real estate development in a period when the government is trying to rein in
inflation
 To complete 10M units of social housing construction, it is estimated that it would cost RMB1300 to
1400 billion
o Coal Sentinel to date has not been able to locate a figure that the central government is willing
to commit to the cause
o Here are some of the funding sources/gaps estimated by some of the Chinese brokerage firms
 From land sales. In 2010, land sales reach RMB 2700 billion. If local governments apply
10% of the mandated funding and assume land sales go up another 10% to RMB 3000
billion, land sales would contribute RMB 300 billion.
 From the central government. Assume that Beijing doubles its spending to RMB 160B.
 From 401k type of public savings that is dedicated to housing. In 2010, this type of
funding source contributed RMB 50B. Again, let’s double it.
 This would still leave a funding gap of RMB 740B (1300-300-160-100)
 Who is responsible for this gap? If local governments are, are they going to borrow
from the banks or rub Peter to pay Paul, i.e., cut spending elsewhere?

Gang Luther Lu 347-727-6884 or (01186) 186 0129 2954 llu@coalsentinel.com


Coal Sentinel
China Focused, Global Context

 What if the estimate of RMB 1300 billion is too high?


o Assume land is free for social housing projects (there goes some revenue for local gov.)
o Assume each unit of social housing project is 55 m2 or 495 ft2.
o Hence, the average cost of construction is about RMB 2350 per m2, which is reasonable
 If not elbowed, how willingly would the banks lend to social housing construction?
o Most of this year’s construction are supposed to be rental units
o In Issue 2, Coal Sentinel highlighted that renting in China is a low cash flow yield proposition
 Rental units for social purpose should be even worse in cash flow generation
o Hence banks in China would face significant maturity matching issues and credit risk
 Typically loans in China are of short duration. However, the payback period for social
housing programs could be decades long? What interest rate would the banks charge
local governments for such long maturity product?
 Typically loans made to the local governments were guaranteed by land sales. With
considerable amount of land that would not be available for sale, what would local
governments put up as collateral?
 To solve the funding gaps, the central government is “encouraging” insurance companies to participate
the financing of social housing programs.
 What about previous targets?
o In 2010, according to government’s own account, construction started for 5.9M units and
finished for 3M units. However, no detail was provided on how many of the 3M units were
carried over from previous years.
o Shenzhen: the city was supposed to build 140,000 units during 2006-2010. However, the city
actually finished construction of 20,000 units. Further, construction of 41% of planned units has
not even started.
 From 2011-2015, the plan is to start construction of 240,000 units and finish
construction on 120,000 units. Realistic? You be the judge.
o Guangzhou: the city started construction on 80,700 units during 2006-2010 and only finished
12,000 units. Only of 80,700 units, 40,700 units got underway just last year.

Figure 1: Local Gov. Income from Land Sales

Source: Chinese Gov.


Note: In 2008, between tighening and global financial crisis, land sales did take a hit

Gang Luther Lu 347-727-6884 or (01186) 186 0129 2954 llu@coalsentinel.com


Coal Sentinel
China Focused, Global Context

Table 1: Easy to Set the Target, Who Pays for It?


Target Fin. Aid
(Million Unit) (RMB Billion)
2008 1 18.4
2009 3.3 50.1
2010 5.8 81.1
2011 10 ?
Source: Various reports, Coal Sentinel

Exuberance Abound in Beijing’s Housing Market


 As of Jan. 20th, transaction has already totaled 21,231 units, up 54.2% from the same 20-day period a
year ago
o Existing home accounted for 14,076 units and is up 88% YoY.
o Fear of interest rate hikes is one of the reasons for the brisk activities.
 As the Chinese stock market continues to struggle, it is a bit amazing to see capital allocation continues
to flow into one single asset class.
o It would be interesting to know how those who sold this month are using the cash

Power Conservation Continues


 Two weeks ago, Coal Sentinel indicated that there are still widespread power conservation in China and
here are some of the latest findings:
 Huazhong Power Pool (consists the following 5 provinces: Sichuan, Hubei, Henan, Hunan, and Jiangxi)
has enhanced power restriction to about 100,000 MWh per day since Jan. 9th. Coal Sentinel estimates
that should the measure continues for 30 days, it would save 1.4MTs of 5500 Kc NAR quality coal
o Currently, the power pool has 10.7MTs of inventory and daily burn averages 0.85MTs (12-days)
o The power pool is receiving about 0.85MTs of coal per day
 Shanxi province is restricting about 40,000 MWh per day

Liquidity Crunch Again


 At the beginning of the year, Coal Sentinel highlighted the liquidity crunch in China in December as the
government tried not to exceed the loan growth target by too much
 Then, as the calendar turns, the lending flood gate re-opened. It was so wide open that the government
had to throw it another RRR hike to cool things down
 As a result of the RRR hike and anticipation of further tightening, the SHIBOR spiked yet again.

Figure 2: 7-day SHIBOR Spiked Again after RRR Raise

Source: SHIBOR

Gang Luther Lu 347-727-6884 or (01186) 186 0129 2954 llu@coalsentinel.com