China - What are you doing about it?

[ERICOPOLY]

Wow, Eric is posting a bearish article?  :o

 

Today's is even better.

 

Chinese Bets on Rusty Mounds of Ore

http://online.wsj.com/news/articles/SB10001424052702304020104579433011384858006?mod=Markets_newsreel_8

 

Apparently, some companies are having trouble accessing credit, so they are margining their stockpiles of iron ore.  And they can't hedge it very well claims the article because the market for iron ore future are far less liquid than for copper.

 

So of course, as iron ore has fallen another 8% this week, the margin calls are coming in.

[wisdom]

http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20140227000006&cid=1202

 

On housing in Hangzhou. It looks bad.

[wisdom]

Pictures from Guiyang to put things in perspective

 

http://www.ft.com/intl/cms/s/0/8b131a14-0bf2-11e3-8f77-00144feabdc0.html#slide0

 

2012 article on supply coming into the market in Guiyang

 

http://www.weekinchina.com/msingle/?mpage=15726

 

Housing in China by Jcapital

 

http://www.forbes.com/sites/realspin/2013/10/28/in-china-theres-not-one-city-sans-terrifying-stretches-of-empty-houses/

 

 

 

[bz1516]

I think issues of market saturation work similar to the way they do in the US.  To say there are 3 million square feet of empty office space in a city or 100,000 empty homes makes for exciting journalism, but in analyzing the situation that is just having the numerator when you also need the denominator.

 

Hangzhou for instance is a city larger than Philadelphia, so once you get beyond the sensationalist headlines, 100,000 empty apartments may be a perfectly reasonable percentage to have vacant.  Since the stock market is considered risky by most Chinese they put their money in residential real estate and keep them empty for investment reasons, as was mentioned by one of the articles.  So there are going to be a lot more empty apartments in that culture in a stable residential market than in ours.

 

The last vestige of the Hukou system is that urban immigrants are not permitted to own property.  As an example if that were to change many of these apartments would experience increased demand.

 

I'm not saying China's economy is not under significant pressure right now.  Its just that journalism has different goals than macro analysis and to make readable news things tend to get dramatic, as in this case.

[BG2008]

Back in 2004-2005, I was working out at a gym and a meat head was telling his friend how he made $40,000 flipping houses in three days.  His friends kept badgering him how this is even possible.  He just said "I don't know, but that's how it is"

 

In the last 3 years, I have heard from a slew of NYC based RE developers how they are not making money fast enough in the US.  Their project is too small in the US.  They want to work on a mega project in China.  There are all sorts of ways to finance the purchase of the land without putting up real equity.  People wait in line to buy RE by taking tickets just like they do at the deli counter.  When asked if they think the RE market in China is overheated and what happens if it crashes, they give you reasons like the government will bail it out, it can't (which are very scary words), urbanization, it has never happened before (another scary thought), etc. 

 

There is very little institutional memory of bad times investing in Chinese RE.  There certainly exist a sense of genius a la the tech bubble.  I've purposely stayed out of commodities for this very reason. 

[HJ]

The last real estate bear market in China was 1993-1995.  Prior to that, was 1949-1955 where most private ownership were slowly confiscated. 

 

From 1993 to 1995, in USD terms, Shanghai real estate went down probably 60%-70% for domestic buyers and significantly more for foreign buyers.  For domestic buyer, though, most of that depreciation was not visible, because it occurred in the form of RMB exchange rate going from 3.5 to 8.2. 

 

On a previous exchange on Macau gambling revenue, this reuter's article estimates transactions running through Macau to avoid capital control at $202 billion a year.

 

http://www.reuters.com/article/2014/03/12/us-china-unionpay-special-report-idUSBREA2B00520140312

 

 

 

 

[bz1516]

China released their Jan-Feb monthly macro numbers early this am.  They were pretty awful and suggest that China has shown no sequential growth since the end of December.

 

UFAI, Urban Fixed Asset Investment, dropped from 19.6% increase to 17.9%.  This includes all infrastructure spending as well as commercial and residential construction.  Because of the infrastructure spending it is a good proxy for government spending.  These numbers imply a drop to about half the previous growth rate or about 9%.

 

Industrial Production dropped from a growth rte of 9.7% to to 8.6%.  these numbers imply an actual drop in industrial production.

 

Perhaps most shocking, the drop in retail consumption went from 13.6% to 11.8%.  These numbers imply a drop in sequential growth of about 6% annualized.

 

Retail consumption looks like its contradicting the 10% growth in imports recently announced.  At the same time, Industrial Production tends to confirm the sharp decrease in exports recently reported. 

 

UFAI suggests the government is indeed tightening the reins on national and provincial infrastructure spending.

 

Overall a pretty nasty story.  Hard to justify any investments in basic materials right now nor any investments that relate to East Asia.

 

 

 

[shalab]

Some data on January U.S Trade:

 

Exports to China:

      Up by 10%    -> from a relatively smaller base

 

Imports from China:

      Up by 2.6%

 

Exports to Japan:

      Up

 

Imports from Japan:

    Down

 

Exports to India:

      Down

 

Imports from India:

      Up some 15%

 

Exports to Korea:

Up

 

Imports from Korea:

Up

 

So - nothing alarming yet - though things may change moving forward.

[goldfinger]

another perspective on China: http://www.financialsense.com/contributors/ryan-puplava/majors-versus-minors

[dpetrescu]

China, construction industry specifically, has been troubling me. A little while ago I bought 2 year OTM puts on CAT and RIO for protection on falling iron ore prices. Both of these companies have recently doubled down and have increased cap ex greatly above current depreciation. I find it amazing, the puts were available for 19% and low 20% implied volatility so the puts were and still are very very cheap. I was hoping to pick up Fortescue but it is only short term with very high volatility. I really hope I lose 100% of this position. I just got it so I can sleep at night for the next two years. I'm covered on this known unknown, I wish there was a way to buy puts against what really matters: unknown unknowns.

 

Otherwise related to China, I also sold SORL even though it's unreal how cheap it is but still holding on to IMOS which is almost 10% of my portfolio.

[ERICOPOLY]

another perspective on China: http://www.financialsense.com/contributors/ryan-puplava/majors-versus-minors

 

quoting:

China is restructuring from an investment-driven economy to a consumption-driven economy

 

It's a debt driven economy, isn't it?  $14T expansion in private debt since 2008.

 

How are they going to restructure from a $14T expansion in debt driven economy to one that isn't driven by expanding debt?  Merely slowing the velocity of credit expansion ought to hurt the growth rate -- right?

 

 

quoting:

A China “hard landing” has been predicted by notable analysts for three years, but we have not seen the signs of a disruptive undertaking here. Nevertheless, let’s look at the facts and let the facts speak for themselves.

 

Again, it's the massive expansion of debt which has so far held up the growth rate.

 

You know, that article doesn't even address the topic of the debt expansion.  Not even mentioned.

 

[gary17]

 

a bit more perspective

http://www.forbes.com/sites/jackperkowski/2014/01/21/chinas-debt-how-serious-is-it/

 

 

 

When looking at China’s total debt, Ruchir Sharma, Head of Emerging Markets at Morgan Stanley Investment Management, wrote last year that: “Since 2008, China’s total public and private debt has exploded to more than 200 percent of GDP — an unprecedented level for any developing country” in his opinion – and that China’s debt problems are “huge.” Sharma’s conclusions were cited by Fareed Zakaria as one of China’s looming challenges in his recent piece on the country.

 

But how does China’s debt level compare to its assets and the debt levels of other countries? The CASS report showed that China’s net assets exceeded RMB 300 trillion ($49.3 trillion) in 2011, almost three times China’s total indebtedness. According to data supplied by the McKinsey Global Institute, the 10 largest mature economies in the world — Australia, Canada, France, Germany, Italy, Japan, Spain, South Korea, UK and US — had total debt of almost 350 percent of GDP in 2011. If Portugal, Ireland, Italy, Spain and Greece, the countries worst hit by the debt crisis in Europe, are included, total debt was almost 400% of GDP.

 

 

Of these countries, Japan and the UK were over 500 percent, and the United States and Germany were both at about 279 percent. If asset-backed securities, which many analysts include in total debt, are included, US total debt would have been 360 percent. To be fair, Sharma considers China to be a developing country, not a mature economy as those in the survey, and he argues that the “rate of increase” of debt, not necessarily the total amount of debt of a country, is the key measure.

 

That may be, but on all things China, I have found that the glass is either half-empty or half-full based upon your perspective.

[ERICOPOLY]

The CASS report showed that China’s net assets exceeded RMB 300 trillion ($49.3 trillion) in 2011, almost three times China’s total indebtedness.

 

Is pre-crash real estate value included in that net asset figure?

 

And 2011?  Ah, the good ole' days.  If we go back to 2008 the numbers look even better.  Before the debt expansion.

[Mephistopheles]

Wasn't the European debt crisis supposed to cause serious problems for U.S. markets, but didn't? Of course this is only one out of a myriad variables, but I'm just trying to point out, with my limited knowledge, that macro is problems don't necessarily cause trouble for stocks. On the other hand, valuations are significantly higher now than they were a few years ago, so maybe the market will correct regardless of Chinese issues.

[ERICOPOLY]

Wasn't the European debt crisis supposed to cause serious problems for U.S. markets, but didn't? Of course this is only one out of a myriad variables, but I'm just trying to point out, with my limited knowledge, that macro is problems don't necessarily cause trouble for stocks. On the other hand, valuations are significantly higher now than they were a few years ago, so maybe the market will correct regardless of Chinese issues.

 

I just feel like taking away the largest source of stimulus from the world (China's ballooning private debt) is going to have a destimulating effect on the world economy.

 

That won't improve the rate of inflation in Europe.

 

Then we'll see renewed headlines about Europe.

 

Anyways, I sound like a "born again" zero hedge author these days. 

 

The shear magnitude of the stimulus (from China) about to be removed from the world economy is what is impressing me.  There appears to be no other potential source of stimulus on that scale that can replace it.  I can see the "princelings" in China selling their property in Sydney, London, etc...  the 100m Chinese tourists are staying home... etc...

 

Just think of all those economies that have benefitted from China's expansion.  They will have layoffs, their people will stop buying BMWs and other exports...  it is not going to be the kind of "boost" that has been benefitting Europe over the past few years.

[gary17]

Eric

 

I think the stimulus will Be reduced but not eliminated

 

A lot of these folks have cash - just like throughout the euro crisis we have a lot of cash in Europe , just not deployed in the economy.

 

Wealth if destroyed somewhere will be gained somewhere else..mi don't think money that's been created will leave the system...

[wisdom]

Buffett on CNBC - would be surprised to see a 50% drop in the markets or deflation

 

http://video.cnbc.com/gallery/?video=3000257192&__source=yahoo%7cheadline%7cquote%7cvideo%7c&par=yahoo

 

[Ham Hockers]

Short blog entry about China's debt expansion:

 

http://houseofdebt.org/2014/03/13/china-and-the-dangers-of-debt.html

[ERICOPOLY]

Eric

 

I think the stimulus will Be reduced but not eliminated

 

A lot of these folks have cash - just like throughout the euro crisis we have a lot of cash in Europe , just not deployed in the economy.

 

Wealth if destroyed somewhere will be gained somewhere else..mi don't think money that's been created will leave the system...

 

Why do they need $14 Trillion credit expansion if they have so much cash?  Something doesn't make sense.

 

Are they using cash to build their economy, or credit?  Which one is it?

[fenris]

  I can see the "princelings" in China selling their property in Sydney, London, etc...

That I doubt. There may be less or no more buying for a while but if the Chinese economy goes sideways for a while heads will roll and having premium property outside the country is the true "safe haven". I highly doubt the property would be sold for the cash to flow back to China.

[ERICOPOLY]

Short blog entry about China's debt expansion:

 

http://houseofdebt.org/2014/03/13/china-and-the-dangers-of-debt.html

 

That was good. 

 

First, the Western world put them on an unsustainable growth path fueled by our debt bubble in the US and elsewhere that boosted unsustainable consumption of Chinese exports.

 

Second, when that blew up China has tried to maintain that growth trajectory using unsustainable domestic credit growth rate.

 

So what happens next?

[gary17]

there's always the scenario of the US & EU go back to pre-recession level growth and China manages this - and everybody ends up in a better place this time next year.  could happen.

[ERICOPOLY]

Here's what might happen...

 

China property market collapses at a time when they try to transition to a domestic consumption driven economy.

 

But don't worry about that... it's not like the Chinese have their household wealth tied up in the property market  :-\

[goldfinger]

Chinese households have around 7T$ savings in bank accounts (deposits + savings accounts): http://www.thechinamoneyreport.com/2013/09/12/china-has-the-highest-total-savings-in-the-world/

 

[vinod1]

 

That was good. 

 

First, the Western world put them on an unsustainable growth path fueled by our debt bubble in the US and elsewhere that boosted unsustainable consumption of Chinese exports.

 

Second, when that blew up China has tried to maintain that growth trajectory using unsustainable domestic credit growth rate.

 

So what happens next?

 

Michael Pettis is the guy for you. He has been writing about this for quite a while.

 

http://blog.mpettis.com/2013/10/hidden-debt-must-still-be-repayed/

 

We are also not likely to see, however, the advantages of a Lehman-style crisis, and these are a relatively quick adjustment in the process of investment misallocation. I have always said that the resolution of the Chinese banking problems is far more likely to resemble that of Japan than the US, and instead of three of four chaotic years as the system adjusts quickly, and at times violently, we are more likely to see a decade or more of a slow grinding-away of the debt excesses. The net economic cost is likely to be higher in a Japanese-style rebalancing, but American-style rebalancing is risky except in countries with very flexible institutions – financial as well as political.

 

Another good post

 

http://blog.mpettis.com/2014/01/will-the-reforms-speed-growth-in-china/

 

Low interest rates, low wages, an undervalued currency, nearly unlimited access to credit for state-owned enterprises, a relaxed attitude to environmental degradation, and other related conditions were both the source of China’s ferocious growth as well as of China’s unprecedented economic imbalances. Reversing these conditions will rebalance the economy, but will do so while lowering growth in the obverse way that these conditions had accelerated growth.

 

Vinod