Bernard's Top 10: China's 52.5 mln empty homes; The danger in China's shadow banks; Cups of tea and coat-tails; Australia's compulsory savings rort; John Oliver on climate change; Dilbert

Here's my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz. 

See all previous Top 10s here.

My must-read today is #4 from Jamil Anderlini on China's shadow banking system.

1. Cups of tea and coat-tails - I'm based in the Parliamentary Press Gallery in Wellington these days and find myself constantly shaking my head at the intense focus on who's doing what 'deals' with smaller parties to sneak in the extra MP or two that might make the difference between being in government or out of government.

It's obviously not what the architects of MMP wanted and an Electoral Commission review of MMP in 2012 recommended the removal of the coat-tail rule and a reduction in the party threshold for election to Parliament to 4% from 5%.

That all sounds sensible enough.

But John Key has rejected that idea because it would rule out the three deals he's likely to announce within a few weeks to 'gift' electorate seats to Peter Dunne, ACT's David Seymour and Colin Craig.

Now Hone Harawira and the left are getting in on the act with their own coat-tailing deal designed to squeeze and extra anti-Government MP into Parliament.

The Sharon Murdoch cartoon below captures the mood, although there's a bit too much sympathy for John Key for my liking.

2. The ageing effect - This chart below shows how Australia's ageing population is dragging on the country's workforce participation rate.

We haven't seen the same thing in New Zealand, where the workforce participation rate is at record highs, but it's a factor to watch in the years to come as the baby boomers retire, although surprisingly high numbers are choosing work on (and collect the pension).

3. The problem of tax evasion - There's another young French economist causing a stir in the area of wealth and tax.

The New York Times reports Gabriel Zucman has used recently revealed Swiss banking records to estimate that US$7.6 trillion or 8% of the world's financial wealth, is currently stashed in tax havens.

If all of this illegally hidden money were properly recorded and taxed, global tax revenues would grow by more than $200 billion a year, he believes. And these numbers do not include much larger corporate tax avoidance, which usually follows the letter but hardly the spirit of the law.

According to Mr. Zucman’s calculations, 20 percent of all corporate profits in the United States are shifted offshore, and tax avoidance deprives the government of a third of corporate tax revenues. Corporate tax avoidance has become so widespread that from the late 1980s until now, the effective corporate tax rate in the United States has dropped from 30 percent to 15 percent, Mr. Zucman found, even though the tax rate hasn’t changed.

4. In the shadows - New Zealand journalist Jamil Anderlini reports for the FT in China on its precarious shadow banking system.

Anderlini interviews a salesman for one of the Local Government Financing Vehicles that raises money from investors. The quotes tell the story.

Despite paying a tempting 9.7 per cent annual interest rate, his product, marketed as “Eternal Trust Number 37”, is not catching on with investors. Mr Qiao is worried.

The problem could be that Yuncheng’s property market has hit a rough patch or that a local steel plant has closed. But he blames events outside Yuncheng for his predicament. The near-default of other Chinese financial products recently has set off alarms – inside China and in global markets – that the country is in the midst of a dangerous credit bubble.

Mr Qiao admits the Yuncheng heating project will not provide any re­turns for his company, a­n un­settling fact for any investor. But he is dismissive that this is the problem.

“All of our investments are public works that should actually be paid for by the local government so when the trust product matures the government should take this project off our hands and give us the money to repay investors,” he says. “Don’t worry, it is impossible for there to be any sort of financial crisis here in Yuncheng.”

5. It's always about housing - Anderlini's piece points out the obvious, which is that the underpinning for the shadow bank he investigates is the over-supplied market for housing in China.

Unfortunately for Mr Qiao, Yuncheng’s real estate market has hit a rough patch.

“Prices are falling and sales are really terrible because too many apartments have been built and so many of them are empty,” said a sales manager at a property development on the outskirts of Yuncheng who would only give his surname, Guo.

Mr Guo says in the district where he works the government approved 800,000 square metres of new property construction last year alone, even though the total population of the district is just 300,000 and most people cannot afford the apartments.

6. And in China it's never far away from politics - Anderlini's piece ends with a look at the implications if these shadow banks start to look like falling over (and how the Government won't let that happen).

Most ordinary investors bought the wealth management and trust products assuming they were guaranteed by the government, since they were usually sold by state banks. But many investors are starting to question this assumption. Some are even taking to the streets to protest and demand the government bails them out.

That is bad news for Mr Qiao and his trust product. But it is also a concern for financial regulators in Beijing, who would like to limit the growth of shadow banking but who realise the sector has become so big that it now has the potential to destabilise the entire system.

“Right now there is a lot of concern over the fiscal condition of the system,” a senior financial regulator said. “If we see a very sudden withdrawal of funds from the shadow banking system then it will definitely be a macroeconomic problem.”

7. Here's the problem - I found this startling. A mere 22.4% of China's 'sold residential homes in urban areas' are empty, a survey of 262 counties in 29 provinces in China found.

I had to re-read the figure. No wonder there is a now a problem of over-supply driving down prices. If only New Zealand had this problem.

Here's the WSJ report on the survey, which found there were 52.5 million empty homes.

The survey included homes left vacant by owners of multiple homes as well as those left empty by owners who have left the city to work elsewhere. In addition to the 49 million sold but vacant units, the survey estimated that China has 3.5 million homes that remain unsold.

The survey said that vacant homes are more likely to add to homeowners' burden and cause them to suffer a financial loss. If home prices fall by 30%, 11.2% of the vacant homes would be underwater on their mortgages, compared with just 3.3% of occupied homes, it said.

8. 64% want to leave  - The latest Hurun report on the plans of High Net Worth Individuals (HNWI) in China found 64% either planned to migrate or already had migrated, up from 60% last year.

The survey found real estate was the number one choice of overseas investments and that New Zealand was fifth on the list of preferred destinations for migration and ninth equal as the favoured destination for real estate investment, equal with London.

Here's the other findings:

• Los Angeles, San Francisco and Vancouver are top choices for overseas property investment. Almost half choose an area close to schools and education facilities. Other popular places for the purchase of residential real estate are NY, Seattle, Toronto, Boston, Sydney, Melbourne, Singapore, New Zealand and London.
• One-third confident of investing overseas.
• Asset diversification and children’s education are the main reasons for investing abroad.
• 70% are interested in buying residences abroad for themselves; only one-third buy for pure investment purposes. Average value of residence US$1 million.

9. Not everyone loves the Australian pension system - Labour has just reaffirmed its support for an Australian style compulsory pension scheme.

But there's plenty of Australians who are very grumpy about what the Australian scheme has become -- a massive money pit for fund managers overcharging for management fees and very wealthy people claiming massive tax breaks.

The difference between the Australian scheme is there are tax breaks there worth A$35 billion by 2016/17, whereas New Zealand's scheme is only costing around NZ$50 million a year because there are no major tax breaks. Also, our fees are much more reasonable and controlled by the Government.

Here's Brian Toohey nailing it on the 'Evil Empire':

The money pours in each day, thanks to a combination of government compulsion, massively costly tax concessions and the misguided backing of key Labor and union leaders. The upshot of this assistance — far greater than the car industry enjoyed — is that Australia now has the world's fourth biggest funds management industry, yet only the 12th largest economy.

But the foundations of this empire are coming under a growing attack. Most criticism focuses on how the tax concessions create an expensive form of upper class welfare, while being of little value to most other people. The harmful effect of compulsory super's artificial expansion of the finance sector is also attracting attention.

Compulsion has another bad result. It distorts the flow of resources away from more productive uses. It encourages fund managers to trade existing financial assets rather than help mobilise capital for productive new investment to boost growth in a country with an ageing population.

To its credit, Industry Super Australia, a group of funds run jointly by union and employer representatives, identified this problem in a report, Finance and Capital Formation in Australia, which it submitted to the current Murray inquiry into the financial sector. The report shows the sector overall is now nearly three times less efficient at utilising economic inputs to facilitate capital formation than before compulsorily super began. Likewise, a recent Reserve Bank study shows super funds made no discernable contribution to funding new investment in Australia's mining boom between 2003 and 2012.

10. Totally John Oliver with quite a clever point on the climate change debate. Enough already.