The lagged effect of the Fed’s monetary tightening on global financial markets finally took hold, with a broad-based fall in commodities both at home and abroad in Mid-november. In a high inflation environment in the United States, even if the growth prospects of the United States are weak, the yield on U.S. debt is likely to be higher than during the QE period after the end of Qe, not to mention that continued high inflation may force the Fed to raise interest rates earlier. Therefore, US bond yields to a certain threshold, copper and other assets will be subject to a negative impact. Real estate financing conditions marginal improvement, but build a long-term top, real estate financing conditions marginal improvement

In the third quarter, China’s real estate sector showed a clear trend of de-foaming, but at the same time of de-foaming, tight financing conditions to a certain extent hurt some residents’demand for just-needed and real estate commodity policy financing. Therefore, starting at the end of September, the central government has continuously fine-tuned the real estate financing environment and policies. At the end of September, the People’s Bank of China and the China Banking Regulatory Commission jointly held a seminar on real estate finance work to guide major banks in accurately grasping and implementing the prudent management system for real estate finance, and to keep the steady and orderly release of real estate credit, maintain the steady and healthy development of the real estate market. On October 20, Vice Premier Liu He stressed in his speech at the opening ceremony of the annual meeting of the 2021 that financial risks should be well controlled. At present, there are some problems in the real estate market, but the risks are generally controllable, reasonable capital demand is being met, and the overall situation of healthy development of the real estate market will not change. Pan Gongsheng, deputy governor of the People’s Bank of China, has said that the excessive contraction of risk appetite in the real estate market, financial institutions and financial markets has gradually been rectified. The central government and the financial management department in the recent centralized position, is seen as the real estate financing policy to further clarify, the real estate credit policy environment will have a certain degree of improvement.

Recently, the Commodity Market Colored Plate and the Black Plate, the stock market real estate plate rebound and real estate financing marginal improvement has a great relationship. Some media reports, the real estate bond market in recent days initially ushered in the warmth of long-lost, at the same time, a number of housing enterprises by buying back dollar bonds and other means to deal with market doubts, transfer cash flow abundant signal. For the copper market, there is a medium positive correlation between the growth rate of real estate investment and copper prices, because real estate has a great impact on copper demand, especially indirect demand, such as real estate brought home appliances, automobiles and real estate related to the larger terminal durable goods industry. Mortgage rates have long been seen as a thermometer of the property market. The Shell Institute’s latest report, released in October, showed that the rate it monitored for mainstream first home loans in the 90 cities was 5.73 per cent and for second home loans was 5.99 per cent, both a basis point lower than in September. This is the first time this year, mortgage interest rates across the board, in the loan down payment ratio and interest rates are expected to support first-home buyers.

Real estate has a great impact on copper and other commodities. From the perspective of commodity pricing logic, the relationship between supply and demand is the core. Futures Pricing is based on spot pricing, which derived the theory of holding cost hypothesis and the theory of risk premium. For Copper, its spot pricing depends on supply and demand on the one hand, on the other hand depends on its financial attributes. Statistical results show that copper prices and real estate are closely related. In general, copper prices have risen during the housing boom since 2006 and have fallen in the opposite direction. If you look at the relationship between supply and demand, the price of copper and the growth rate of real estate completed area should be very high, because copper in the real estate industry is mainly used for the completion stage, such as residential distribution, indoor wiring, sanitary and plumbing and so on. However, in fact, the correlation between copper price and real estate development investment growth rate is very high, reaching 0.73, and the correlation with real estate completion area growth rate is low, is-0.38. On the one hand, copper is used less directly in real estate construction and installation projects and indirectly in the building materials, automobile and home appliance industries associated with real estate; on the other hand, real estate has the function of credit creation, real estate can strengthen the financial properties of copper, especially the investment demand for copper. The relationship between real estate and China’s economy: First, real estate involves many industries in the upper, middle and lower reaches of the river, such as building materials (including steel, aluminum and glass) in the upper reaches, cars, household appliances and sanitary ware in the lower reaches, etc. , as well as supporting the power, gas, greening and decoration industries, on China’s economy a great impact.

The real estate industry is a comprehensive industry with high added value, which is engaged in various economic activities such as real estate development, operation, management and maintenance, decoration, service, etc. . It belongs to the tertiary sector of the economy. It has both connections and differences with the construction industry. The construction industry is engaged in the survey, the design, the construction, the installment, the maintenance and so on production process, its production result is the building or the structure. The construction industry is the material production sector of the national economy engaged in the investigation, design, construction and maintenance of the original buildings. It belongs to the secondary sector of the economy and the material production sector. In terms of output as a share of GDP, the current value of real estate is about 7.5 trillion yuan in 2020, rising to 7.34 percent of GDP, which is higher than that of the construction industry, which accounted for only about 4 percent of GDP before the housing reform in 1994. If the price factor is taken out, the value of real estate at constant prices is about 5.4 trillion yuan, accounting for about 5.9 percent of real GDP.

In terms of its contribution to GDP, the contribution of real estate to GDP reached 9.38% year on year in 2020, far exceeding its output as a share of GDP, and exceeding the contribution of the transportation, warehousing and postal industries, wholesale and retail industries, accommodation and catering industries to GDP, it’s basically the same as the construction industry in secondary sector of the economy. This is unusual given the impact on the transport, warehousing and postal services, wholesale and retail, accommodation and catering sectors in 2020 as a result of the outbreak. During the 2016-2017 property boom, for example, real estate contributed 7.9% to GDP and 6.7% to GDP in those two years, also outpacing the contribution of construction, transportation, warehousing and postal services, accommodation and catering to GDP. In addition, the impact of real estate on GDP may be underestimated due to the immature rental system and unclear property rights of some houses in China. From the proportion of investment, the proportion of real estate investment to fixed assets investment is rising, and the real estate bubble is becoming more and more serious. By 2020, that share had risen to 27.3 per cent, the highest since 1999. In addition, the proportion of real estate investment, nearly 10 years of real estate investment in nominal GDP accounted for more than 10% , China’s economic growth is one of the core engine. Real Estate Investment as a share of nominal GDP reached 13.9% in 2020 and 14.5% and 14.8% in 2013-2014.

Because real estate has an indirect pull on related industries, the input output table for 2018 published by the National Bureau of Statistics of the People’s Republic of China can be used to measure the pull of real estate on related industries, it can be found that money and financial and other financial services, business services, architectural decoration, decoration and other construction services, gas production and supply, cultural and office machinery, railway passenger transport, urban public transport and road passenger transport all exceed 1% , monetary, financial and other financial services topped 12.2 percent. In addition, electricity and heat production and supply, furniture, metal products, metal products, machinery and equipment repair services, wires, cables, optical cables and electrical equipment, also have indirect pull. Second, the real estate is nearly 10 years since the credit creation of the most important way. In the process of first-class land development, 30% of the total project investment is financed by the government or the entrusted enterprise’s own funds, and the remaining 70% is financed by loans from financial institutions, which are finally represented by local or enterprise debts. In the course of secondary development of real estate, the actual capital contribution of real estate development enterprises is 30% of the peak value of the project investment funds, and the remaining 70% of the funds are borrowed by real estate companies from financial institutions, which is finally reflected as the liabilities of enterprises. In the final link of real estate -- sales, customers need to pay at least 20%-30% of the total price of the house as a down payment for the purchase of the house, the rest of the money customers can apply to financial institutions for housing mortgage loans, the final embodiment is personal housing mortgage loan.

In terms of the credit creation process, in recent years there has been a pattern in which commercial banks obtain reserves from the central bank, then lend, and automatically create the same amount of deposits (for the entire banking system) at the same time as they make each loan, in order to promote credit creation. In more colloquial terms, it is “Loans create deposits, first with loans, then with deposits”. In terms of the total real estate credit balance, the total real estate credit balance including real estate development loans and personal mortgage loans rose to 8.88 billion yuan in the 2021, although year-on-year growth peaked in the fourth quarter of 2016, it fell less as a percentage of financial institutions’loan balances. In the three months to 2021, the full measure of credit for real estate accounted for 46.9 percent of all loans made by financial institutions, the highest since records began, at 48.7 percent in the third quarter of last year.

In general, real estate credit is created through land or real estate as collateral to financial institutions to finance, so the market value of real estate can be roughly estimated how much credit created by real estate. In the first stage of land development, 70 per cent of the incremental cost of land acquisition is used to measure the amount of credit created. In the real estate secondary development process, with the real estate development funding source of 70% to measure the credit creation. In the sales phase of commercial housing, the total market value of the commercial housing sold in that year is calculated by the area of the commercial housing sold in that year and the average price of the sample housing sold in 100 cities, and the credit created by the sales link is calculated by 70% of the total market value. Although there are many flaws in this calculation, the approximate amount of credit created for real estate from land auctions to the sale of commercial housing is not too far off. Here also ignored the residential commercial housing mortgage to finance, engaged in other industrial and commercial activities brought credit creation. The results show that the total credit created by real estate was about 12.6 trillion yuan (incremental) in 2010, rising to 36.1 trillion yuan (incremental) by 2020, accounting for 35.5 percent of nominal GDP in that year.

The real estate downward cycle has just begun. At the end of September, the central government began to fine-tune its real estate financing policies one after another, mainly to prevent a “Hard landing”of real estate. However, the problem of the real estate bubble has not yet been solved, at present, it is mainly through “Time for space”, the implementation of precise control measures to guide the real estate bubble, deleveraging, economic growth from the over-dependence on real estate. From the perspective of addressing the risks of a real estate bubble or the need to transform China’s economy away from its reliance on debt growth, the central government has made it clear that it will no longer use real estate as a means of underpinning the economy. In 2019, the central government proposed that “Housing should not be speculation”, and established and improved a long-term mechanism for real estate. In the second half of 2020, the central government put forward the “Three red lines”for financial institutions, as well as the passive contraction of real estate financing channels and the slowing trend of real estate bubbles. The author believes that the real estate is building nearly 20 years top, real estate policy adjustment is very strong and there will be no fundamental slowdown in the future, the policy is only fine-tuning.

First of all, from the policy perspective, the future prevention of real estate bubble or a long-term work. On November 12, Chairman Guo Shuqing, secretary of the Party Committee of the CBRC, chaired a meeting of the Party Committee (enlarged) to convey the spirit of studying and implementing the important speeches of the Sixth Plenary Session of the 19th CPC Central Committee and General Secretary Xi Jinping, and to integrate the actual situation of the CBRC, research, deploy, learn, implement. The meeting called for unrelenting efforts to guard against and defuse financial risks, to balance the relationship between steady growth and risk prevention, and to firmly guard against systemic financial risks. We will stabilize land prices, house prices and expectations, curb the tendency of real estate to become a financial bubble, improve the long-term mechanism of real estate regulation and control, and promote the steady and healthy development of the real estate industry. In the future, there are not only “Four red lines”, price control, real estate tax, but also a series of problems in the real estate system represented by Evergrande event. Secondly, from the cycle of real estate itself, the ratio of housing loan income is high, but because of the financing policy and land policy, this situation has lasted for a long time. With the tightening of financing policies, the per capita living space has exceeded 35 square meters in 2017. According to common sense, the basic living needs have been met. However, due to the great difference in the Real Estate Holdings of Chinese residents, a large number of residents hold two or more real estate units, but there are also a large number of residents who do not yet own real estate in cities. Therefore, the distribution efficiency needs to be strengthened when the average per capita area reaches the standard, the future real estate consumption is likely to be a stock adjustment.

Since early October, the three-month premium on LME copper has continued to climb, as has the three-month premium on 15-month copper, also observed LME copper stocks continued to decline, it is clear that there are large speculators in copper “Squeeze warehouse”speculation, this time according to foreign media reports is Trafigura large LME delivery. Historically, the speculation of LME copper market “Squeeze”generally needs to meet three conditions: first, the supply of copper is shrinking, or there is a large reduction in mine production, or there is an unexpected interruption; The second is low LME copper inventory, which allows speculation in the spot market control copper warehouse orders, and Copper Futures Squeeze Long Positions; third is the United States dollar low interest rates, which allows speculators to manipulate LME copper futures and spot costs lower.

The author believes that the US dollar interest rate determines the duration and profits of the LME copper market “Squeeze”speculation. Since the 1990s, there have been five large-scale “Squeeze”speculative activities, the period from November 1994 to July 1997(during which there was a cooling) , July 2003 to June 2005, October 2006 to June 2008, and 2021 to early October to early November was essentially a downward cycle in US interest rates, the end of “Squeeze”speculative activities are in the U. S. dollar interest rates on the stage, and the return of LME copper inventories is not a “Squeeze”end of the necessary conditions. LME physical copper has fallen sharply from its three-month premium after nominal interest rates in the dollar rose after the Fed’s announcement of QE cuts. On November 14th it fell to $14.90 a tonne, after climbing as high as $1,103.50 on October 18th. Domestic copper demand is weak, but the high spot price means that the decline in copper will gradually slow down, from the demand side, in mid-november after the fall in copper prices, downstream procurement did not show a significant recovery. Chinese copper production fell 12.3 per cent year-on-year to 1.700,600 tonnes in October, down 10.3 per cent from September, the data showed. In addition, high-frequency data showed that as of November 18,8mm copper rod processing fee of 590-790 Yuan/ton, compared with high copper prices in early November only recovered 10 Yuan/ton, copper price decline has not stimulated much copper rod consumption rebound.

Terminal Industry, whether the investment in power grid or power investment in September in the year-on-year negative growth. In October, production of power generation equipment fell 5.7 per cent year-on-year. In the case of photovoltaic and wind power, new installed capacity is likely to be weaker than expected as raw material costs rise. More than half of the world’s photovoltaic projects are expected to be delayed or cancelled by 2022 because of soaring raw material and transport costs, according to a new report from industry consultancy Resta Energy. About 50 Gigawatts of the roughly 90 gigawatts of utility scale PV projects planned for installation worldwide in 2022 could be blocked. Photovoltaic modules and their associated transport costs typically account for a quarter to a third of a project’s total capital expenditure. As the cost of components and transportation increases, the benefits of PV projects will be significantly affected. Comparing transportation costs last year with current costs, Resta found that rising costs add 10% to 15% to the cost of photovoltaic power.

For Wind Power, according to Irena, the average cost per kilowatt hour of onshore/offshore wind power in China has fallen by 54%/53% over the past decade from $0.071/0.178 in 2010 to $0.033/0.084 in 2020, obviously lower than the same period of domestic PV electricity cost reduction of 86% . 2021, the global cost of photovoltaic power is expected to rise by 10% to 15% from 2020 as raw material costs climb, and the cost of installing wind turbines is expected to rise by more than 20% . From the material point of view, wind power is mainly alloy steel, carbon steel and stainless steel and other metal materials, raw material costs account for a higher proportion of product costs. In automobiles, while the penetration rate of new energy sources is increasing, it is accompanied by the rising cost of raw materials and power batteries, as well as the substitution of new energy sources for traditional internal gas vehicles, passenger car sales across the board fell in the first two weeks of November from a year earlier. Overall retail sales in the narrow passenger car market averaged 39,000 vehicles a day in the first week of November, down 18 per cent from a year earlier and 6 per cent from the first week of October, according to the Passenger Association. In the second week of November, retail sales in the overall narrow passenger car market averaged 46,000 units a day, down 23 per cent from a year earlier and roughly the same as in the second week of October. On the supply side, visible domestic inventories are still low at the moment, and there is a high price premium on the spot market, which may make the decline of copper prices not smooth in the face of the Federal Reserve’s monetary tightening and the continued weakness of domestic real estate, the fall will be relatively slow. According to the data, on November 18, the spot copper market in Shanghai and Guangdong rose sharply, reaching 1,380-1,580 Yuan/ton and 1,000-1,450 Yuan/ton, respectively. However, it was mostly traders who transacted business. In fact, the lower reaches were in the majority.

 Source: POSǒNG 見 Boseong Futures