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JakilaTheHun (99.94)

Byron Wien is Bullish on China; I'm Not

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November 30, 2010 – Comments (4) | RELATED TICKERS: FXI , SLW

Byron Wien of Blackstone Advisory Services is bullish on China.  I am not, but I do believe his arguments are worth exploring and there might even be merit to some.  See below for Wien's analysis:

Byron Wien on China

Wien believes that the Chinese government can react much more quickly than Western nations and has thus been able to fix its economic issues more easily.  He suggests that this will allow China to recover from any impending downturn fairly quickly.  I find myself in disagreement with most of his thesis. 

 

Major economic movements generally take some time to develop and nations can be on the wrong course for decades, before realizing that it was actually the "wrong course." Case in point --- the US housing bubble was about two decades in the making and involved a confluence of factors, such as governmental subsidies, deregulation of the banking industry, structured finance run amok, a continual low interest rate environment, and most importantly, a naive belief amongst the American masses that real estate prices would never fall.

There are some areas where China is better than the US and Wien hits upon it when he says 'China is able to do things much more quickly than the US.' This particular holds for infrastructure, where the US is somewhat paralyzed by the political process. Yet, there's not really a "free market" in US transportation for all practical purposes; it's a heavily subsidized sector that is very dependent upon political favor. So China's less politicized model might arguably be more efficient.

However, where China has major issues has been its attempts to manipulate basic supply and demand for their exporters. This has been particularly evident in their currency policies, which have been designed to weaken the Yuan and strengthen the Dollar; which acts as a subsidy to its exporting companies and a tariff against American companies.

The basic problem with this is that it ignores the actual needs of the Chinese market. Chinese consumers may need to purchase more, but are unable to do so, because the policy increases prices in China. It does this not only by weakening the currency, but also by placing restrictions on outside companies that can lower the cost of goods inside China through various operating efficiencies.

This policy also increases the likelihood of oversupply in certain economic sectors and undersupply in others.  There is likely an oversupply of commonly exported manufactured goods.  If the demand for these goods was to drop off suddenly, China could find itself in major trouble.

There's also some convoluted dynamics involved with market distortions, particularly with real estate.  Real estate prices are artificially high due to the currency distortions, yet, people continue to buy real estate and other hard assets because they believe these assets will retain value, while the purchasing power of their currency is weakened.  Consumers are right, but unfortunately, do not understand the bigger macro picture.  As the cost of living rises and consumers start to get squeezed, the market puts heavy pressures on prices, which can cause a major real estate collapse. 

 

The currency problem will eventually come back to bite China, and might be manifesting itself already with very high inflation looming. This will force the China government to take aggressive measures to cool off the market; which will then cause the economy to fall into recession.

So, I don't think Wien's argument is total bulls@#$. I think he's right about China's infrastructure development being more efficient in some ways than the US. But he ignores the larger distortions that have been unsustainably driving China's GDP.

 

Due to the volatility surrounding China's economy, I would be very relunctant to buy into some industrial metals like silver and copper.  Even gold might be very suspectible to a China crash.

Silver miners (and related companies), in particular, look pricey to me.  I have started some small shorts on a few metal related companies in order to hedge my portfolio.

4 Comments – Post Your Own

#1) On November 30, 2010 at 12:17 PM, EnigmaDude (97.98) wrote:

Wow - interesting conclusion!  I have to admit that I did not see that coming.  I was reading in Barrons how the demand for Titanium has slowed.  Perhaps this is an indicator of what you are describing?

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#2) On November 30, 2010 at 12:35 PM, JakilaTheHun (99.94) wrote:

Titanium, if I'm not mistaken, might be more tied to military hardware purchases.  Since most of those sorts of purchases are coming from the public sector, it makes sense that it could get hit right now. Not sure how correlated it is with the other metals.

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#3) On November 30, 2010 at 1:20 PM, lemoneater (85.05) wrote:

A dictatorship may benefit from the flexibility of rapid decision making, but only if its information is accurate. We have seen how central planning didn't always work well in the former U.S.S.R. In any bureacracy proper information flow is a crucial and elusive goal.

Unfortunately too many politicians (in any country you care to name) care more about saving face temporarily than what is good for their country long term. 

Interesting perspective. Thanks for sharing, Jakila.

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#4) On November 30, 2010 at 11:33 PM, Option1307 (29.90) wrote:

You lay out a prety decent case in contrast to the "main stream" view that China is the next big thing. While my mind is not made up on this issue yet, there is just to much we don't know/can't predict, I have been steering clear of Chinese stocks and plan on doing so in the near future.

IMO the future direction of China is somewhat irrelevant at this point, their are just too many reg flags (and outright fraud) in too many Chinese companies to warrent my investment. What started out as a few companies here and there has quickly grown into a relatively common phenomenon.

So for me, not only do you need to deicde the future of China, but also to sort through the "too good to be true" numbers and fraud that make up an increasingly larger part of Chinese stocks.

The rewards may very well be huge, but the risk just seems like too much at this point in time. Besides, there are still other deals to be found in other areas.

Good thoughts, +1.

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