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dexion10 (27.87)

OMG - It's worse than I thought - China is a "sham"

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July 28, 2009 – Comments (8) | RELATED TICKERS: FXP , SPY

I have long believed that China's growth rates will have to revert to much lower levels at some point in the next few years because the truth about China is that China has a conundrum of a situation. China also has a looking real estate crisis that will likely derail the country at some point in the next few years.

All of this strengthens my belief that the current global stock market rally is a "W" recovery and we are nearing the "WIDOW'S PEAK" at some point in the next 6-9 months.

 

China may be much more reseilent than anyone suspected - but it is not a risk free investment environment as many have proclaimed it to be of late (supposedly it is a long-term buy and a near term hold right now... geez I've heard that a few times too many about a few too many investing disasters).

 

The China Conumdrum:

They are losing U.S. and European customers and need  to replace those customers with domestic demand. However China doesn't pay its people very much money and they can't afford to because if China does not remain the low-cost producer of manufactured goods they will lose manufacturing jobs to neighboring countires - this started to happen in 2007 when China had wage inflation.

In the short-term china has solved this problem by providing subsidies to its own consumers - but that is not a sustainable strategy for growth - the growth in consumption funded by the government is a zero sum game and has diminishing returns going forward.

I'd also add that for much of the 2004-2007 period China grew at near 16-20% while publically saying it grew at 8-14%... in the history of the world no economy that has grown at 20% has averted a large crash... so it is not prudent to expect a different result in China.

 

 China Real Estate Bubble - is Scary:

 

Rather than recap the growing issue of China Real Estate development and 0-30% occupancy rates - read the Daily Kos blog - this is scary stuff.

The sustained need for Chinese government stimulus and the eventual slow down in construction will mean much slower Chinese growth at some point in the next few years.

 

HERE IS A BLOG FROM THE BLOG DAILY KOS

Many have been looking for China to be the engine that pulls the world economy out of its doldrums. And, economic data of late seems to be pointing in that direction. We have had China pulling ahead of the US as the world's largest market for new cars, the Shanghai stock market is up over 75% this year and most remarkably China has shown economic growth of 8% despite reports of 30 million left unemployed by the drop in foreign orders to local factories.

So what is wrong with this picture? Plenty.

I have found the most interesting source of information on China to be the blog of Michael Pettis. He works in China, and seems to have very good connections there (and in China connections are a BIG thing).

So it was with interest that I read his latest post, especially the part I will reproduce below which comes from a friend of his that has just visited the city of Guiyang (a city of 1.65 million, with close to another 2 million in the surrounding countryside). It is one of the scariest economic observations that I have read for some time.(In the excerpt below, NPL stands for non-performing loans).

I don’t know how much you travel around China.  Tom and I do a fair bit, and most recently we were in Guiyang.  I thought I’d seen insane excess in the past – 200 thousand square meter malls completely empty next to apartment complexes with 40 thousand units and 30% occupancy rates, etc. etc.  But what we saw over there is rather hard to fathom.  It seems the Guiyang city mayor had the same idea as the Shenzhen mayor – to move the old downtown to a piece of undeveloped land.

Of course Guiyang has a quarter the population and probably a quarter the per capita income of Shenzhen.  They built sprawling new government buildings about a 20-minute drive north of town.  And then the residential high rise projects started going up.  From driving around the area, Tom and I figured well over 100 20+ storey buildings.  

What was most distressing was that the development has been totally uncoordinated – a project with 15 buildings here, in another field two miles away a project with one building, another mile in another direction three buildings, sprawled over what was easily over 30 square kms. of farmland well north of town.  Every building we got close enough to see was either incomplete/under construction, or empty.  Our tone gradually went from "Haha, another one!" to "Oh my God, another one."  We conservatively guesstimated that we saw US$10bn of NPLs in one afternoon.  The only buildings that were occupied were six-storey towers built to accommodate the peasants who had been displaced by the construction.

So you have, in just one city, well over 100, 20 story buildings, unoccupied! Yikes.

Why does this matter? Because understanding this helps answer the China growth riddle.

Here is a brief recap of what looks to have happened in China. Faced with a sharp drop in factory demand (and lots of unemployed) the government started a massive stimulus program that consisted of public works and a flood of new loans at low interest rates. With no need for loans to build more factories the newly loaned money had to go somewhere. It looks to have gone into the stock market, real estate, and likely new cars as well.

Chinese consumers, traditionally big savers, have been hit with very low deposit rates, and so have looked for alternative places to put their money. A major destination has been real estate (something solid that they can own).

So you have developers receiving a flood of new loans (from government banks), consumers looking to make money on their savings, and a government hell bent on generating economic growth. Result - PROPERTY BOOM.

READ MORE HERE:  BLOG DAILY KOS

8 Comments – Post Your Own

#1) On July 28, 2009 at 11:27 AM, IBDvalueinvestin (99.66) wrote:

Initial bull market climbs a wall of worry. Then the stocks go into a climatic buying period crushing all shorts on heavy volume. Once the heavy volume subsides thats the time to short.

We are in the first stage right now, the climb up a wall of worry.

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#2) On July 28, 2009 at 12:15 PM, kaskoosek (37.09) wrote:

It is a bubble, but the question is when will it pop?

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#3) On July 28, 2009 at 12:24 PM, MattH42004 (29.55) wrote:

Nice find. You might be interested in THIS. It's one of the better articles on China I've come across.

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#4) On July 28, 2009 at 2:19 PM, dexion10 (27.87) wrote:

FYI - while I think the stock market will trade in a "W" I think the economy is recovering in an "L"... in other words the bounce for the stock market is much larger than the bounce we'll seen in the economy IMO.

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#5) On July 28, 2009 at 7:31 PM, UltraContrarian (31.77) wrote:

"In the short-term china has solved this problem by providing subsidies to its own consumers - but that is not a sustainable strategy for growth - the growth in consumption funded by the government is a zero sum game and has diminishing returns going forward."

Um.  If a government with a large surplus (China) giving money to consumers is a zero-sum game, that would be a crippling blow to capitalist theory.  I.e., consumers direct the allocation of production more efficiently than a government is able to.

Sometimes we get so used to high debt government (in which Keynesian economics is stretched to or past its breaking point) that we forget that is not the only condition.

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#6) On July 28, 2009 at 10:51 PM, DaretothREdux (36.76) wrote:

Dex,

Thanks as always very informative.

Dare

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#7) On July 28, 2009 at 11:06 PM, Tastylunch (29.40) wrote:

Aligned with you Dex

People are confusing massive Chinese M2 growth for increased productivity...

of interest to you possibly dex(just from today)

http://www.fundmymutualfund.com/2009/07/ftcom-china-warns-banks-over-asset.html

http://www.nakedcapitalism.com/2009/07/china-buildings-to-nowhere-looking.html

http://www.businessinsider.com/henry-blodget-grantham-china-will-collapse-2009-7

http://www.ritholtz.com/blog/2009/07/chinas-new-great-wall-built-on-easy-money-speculation-and-toxic-debt/

Still they say a watched pot never boils so this could go on much longre than any of us think.

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#8) On July 29, 2009 at 12:12 AM, dexion10 (27.87) wrote:

UltraContrarian - 

 

"Um.  If a government with a large surplus (China) giving money to consumers is a zero-sum game, that would be a crippling blow to capitalist theory.  I.e., consumers direct the allocation of production more efficiently than a government is able to.

Sometimes we get so used to high debt government (in which Keynesian economics is stretched to or past its breaking point) that we forget that is not the only condition."

 

Ultracontrarian - I think you actually see where I'm coming from... if the country that has huge surpluses is getting those surpluses from a highly indebted nation like the US that is unable to provide such large surpluses going forward and at the same time the creditor country (China) is using the surplus to drive consumption and infrastructure of dubious neccesity then we have a disaster waiting to happen - do we not?

 

there are several things wrong here - while I agree that China's balance sheet is far superior to the US balance sheet that is like finding out that a convicted criminal has nice breath - it doesn't absolve the crime.

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