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interesting article on chinese looming crisis


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http://m.timesofindia.com/home/opinion/edit-page/Chinas-debt-crisis-suggests-an-India-like-crash-round-the-corner/articleshow/29512055.cms

 

I wonder what all the big macro guys think about this. I got some china exposure, so I wonder if I should be worried and leave some cash to buy lots of cheap asian stocks soon :D .

 

These are powerful precedents. Recent studies have isolated the most reliable signal of a looming financial crisis, and it is the 'credit gap' or the increase in private sector credit as a proportion of economic output over the most recent five-year period. Looking back over the past 50 years and focussing on the most extreme credit booms - the top 0.5% - turns up 33 cases, with a minimum credit gap of 42 percentage points.

 

The unravelling of these cases sends a sobering message to China. Among the 33 nations, 22 suffered a credit crisis in the subsequent five years, and all suffered a major economic slowdown over that period. On average, annual GDP growth rate fell from 5.2% to 1.8%. Not one country got away without facing either a crisis or an economic slowdown.

 

Today, China's credit gap continues to grow and it is now the largest ever recorded in the emerging world, having risen since 2009 by 71 percentage points, taking the total credit burden up to 230% of GDP. Before China, the five worst credit binges had come in Thailand, Malaysia, Chile, Zimbabwe and Latvia, all of which saw the credit gap grow by 60 points or more. All five suffered a severe credit crisis and a major economic slowdown.

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Rumors of the death of China's economy have been greatly exaggerated, for a number of years. People have been calling for a crash for a long time now. Chanos has been calling for one since at least 2009. I'm no expert or anything close to it, but I think the people at the top running things in China are well aware of these potential problems and take actions to try to smoothly manage things. I get the sense that officials lower on the totem pole are corrupt and inefficient, impeding the officials ability at the top to manage things exactly as they like. I think they are a large part of the reason so much debt has been created without as much return to show for it. Allowing things to be more market based, which China is always making measured moves towards, should help with this. China is in need of some "creative destruction", and I believe the people at the top realize that and are trying to slowly work that into the economy, without causing crashes or crisis's.

 

IMO, you simply can't compare a well managed, part market based economy like China's to either a mostly market based economy, or a total shit managed economy like Zimbabwe. Market based economies have booms and busts. If there wasn't such a big potential crisis then China would probably do well to allow a bit of a bust, to clear out inefficiencies and root out some corruption. As it is, they need to do small house cleanings and  take actions to reign in inefficient growth in certain areas without slowing things down to bust status and creating contagion. You generally couldn't do this in a market based economy, but you potentially can in China. In America, the Fed pretty much has free reign within it's sphere of power, but it doesn't necessarily have congress and the president acting in concert with them, and many things congress could do are limited by politics, the constitution, courts, etc. The people at the top in China can control banking, fiscal policy, trade, etc. I am sure they are well aware of these problems, they have probably read this article or one like it.

 

In closing, I don't think we are going to see some huge crash in China, unless outside influences get the ball rolling. I think global macros look good unless a war breaks out or something, and unless demand for China's products temporarily evaporates, the people at the top managing China's economy should be able to smooth things out. Also, the overall debt burden as a percentage of GDP is still small compared to the US, for example.

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Certain segments will suffer, I wouldn't want to be shareholders of Chinese commercial banks, property developers, or construction material manufacturers. Tempting as they are, there are reasons that these stocks sell for single digit P/E while companies with consumer exposures go for double digits in the Chinese domestic stock market. The source of aforementioned article is from India Times and its target audience has certain inherent bias. I wouldn't take it as seriously as something from the IMF or the Economist.

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http://m.timesofindia.com/home/opinion/edit-page/Chinas-debt-crisis-suggests-an-India-like-crash-round-the-corner/articleshow/29512055.cms

 

I wonder what all the big macro guys think about this. I got some china exposure, so I wonder if I should be worried and leave some cash to buy lots of cheap asian stocks soon :D .

 

All these type articles seem to make a good case that the odds of a serious decline are elevated, but not that such a decline is likely.  I think most economists would have to come to that conclusion.

 

As for ghost cities my own personal visits to China indicate they are less of a problem now.  I posted pictures on COBF from my last visit to China of a mall in a "ghost city".  hardly what anyone would expect.

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History is not on China's side.  This speed of debt build up, this magnitude of debt build up, all sots of skewed incentives to misallocate capital, these levels of foreign reserves...we have seen it all before.  That's not to say history repeats exactly, but it rhymes, and incidentally the Soviet Union and Nazi Germany were amongst the historical peer group so command vs. market economy is not necessarily the key difference.  Michael Pettis' recent book is very good on this.  History is pretty clear that China will have a job to keep 7.5% growth going.  Moody's suggests that 23% of GDP is building, outfitting, and selling flats and Prem Watsa says 60m flats were under construction at the start of the year vs. a peak in the US of what, 2m?  What happens when that slows?  Predictions are a mug's game, but protecting yourself from this wouldn't be stupid.

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I think the people at the top running things in China are well aware of these potential problems and take actions to try to smoothly manage things

 

I think you vastly overestimate the expertise of the people at the top. China will crash and the crash will be really really bad. The sexual dynamics are also important because they will cause big problems. Too many men, too few women, men's families investing hundreds of thousands of dollar in overpriced houses for extremely materialistic brides. I don't really know how something like that plays out but I can predict it will be unpredictable and very messy.

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Certain segments will suffer, I wouldn't want to be shareholders of Chinese commercial banks, property developers, or construction material manufacturers. Tempting as they are, there are reasons that these stocks sell for single digit P/E while companies with consumer exposures go for double digits in the Chinese domestic stock market. The source of aforementioned article is from India Times and its target audience has certain inherent bias. I wouldn't take it as seriously as something from the IMF or the Economist.

 

I am a happy shareholder of a chinese bank, because i think these risks are already discounted in the stock prices. But i am pretty sure that the US stocks or german stocks have these risks not in their stock prices and will suffer the most when the crisis hits. So i hedge the cheap chinese banks with expensive german and us stocks. Thats a risk on its own, but i think its worth it in the end.

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IMO, you simply can't compare a well managed, part market based economy like China's to either a mostly market based economy, or a total shit managed economy like Zimbabwe

 

I think it's debatable that the Chinese economy is "well managed", some would say it's manipulated.

 

Brookfield Asset Management has begun to make sizable investments in China and had some interesting comments on the Chinese economy in their annual letter:

 

http://brookfield.com/_Global/42/documents/relatedlinks/6190.pdf

 

The Chinese economy is incredibly large and diverse, and contains some economic regions that at best would be described as “pioneer,” has regions that are classically “emerging,” but most importantly has regions that are fully competitive on a global stage. Our view is that the Chinese economy will experience peaks and valleys along a rapid growth path. But by being careful with how we invest and by being integrated into the economy, these transitions will provide many opportunities for us, as they do in other countries around the world.

 

The misunderstanding by many Western observers lies in the premise that once China stumbles, it will fall behind, and never come back. To put this into context, one can compare China to the United States. In 1820, agriculture represented 80% of the U.S. economy. By 1920, agriculture had declined to 25%, and during this century of transition and growth there were both good and not so good economic periods.  Contrast that to China, where in 1975 agriculture represented 80% of the Chinese economy and by 2030 it will represent 25%. In these 55 years of transition there were, and will be, many economic cycles. But like the U.S., we believe China will be a good place to invest over the long term.

 

The most commented on economic item is the impact of a Chinese slowdown on China, and the global economy. Our take is that many forget that this is largely the law of big numbers at work as the Chinese economy is now the second largest in the world. One must remember that at $8 trillion, even 6% growth creates a GDP increase which in itself is larger than most countries’ GDP, and in aggregate as large as the growth being added by the United States to the world’s economy annually.

 

In closing, I don't think we are going to see some huge crash in China, unless outside influences get the ball rolling

 

I look at the reports of Chinese "ghost cities" and can't imagine how this could possibly end well.  Someone, somewhere is taking hundreds of billions of losses.  Enormous resources were employed to build these cities and those people are either no longer working or building more empty cities. What's the possible end game?

 

Perhaps the government is quietly moving in and buying up all of this surplus property or something but this is a property bubble orders of magnitude larger than what happened in the States.  As commented above, the Chinese economy is huge and so can theoretically absorb larger air pockets than others, but how can you have multiple cities built for more than a million people populated by 20-50 thousand people? It's mind boggling.  This is like intentionally building dozens of Detroits and assuming that people will move into them.

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Its because there are 250 million migrant workers that come into the cities every year for some month and then move back to their farms to support their families. When they stay someday they can fill a lot of these ghost cities. If that ever happens is on a different paper, but i am pretty sure that the government can make some moves to get more families from the hinterland into the cities. Its not set in stone that china has to crash. But its probably wise to be prepared in case it does.

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yeah but how large are these ghost cities compared to the rest? Im curious about that. If its only a couple %, then it wont cause a huge crisis.. Also how entangled are the people loaning money for this in the rest of the system? If I can see that building these ghost cities is stupid, maybe other people within that system can too?

 

Also shadowbanking is suposed to shelter the risks a bit from the system right? If they are mostly seperate entities making these stupid loans, then you wont see a huge slowdown.

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I have no idea on the timing but I believe China has perhaps the largest housing bubble in all of history.

The prices are sky high with ~2% net rental yields in many places and extreme overbuilding.  5-10% net rental yield is probably a better fair value.  So prices could easily drop >50%. 

 

The age old real estate bubble with an enormous credit cycle I think will still apply here.  I think the bust will be bigger than almost anyone expects.  Interesting to think of the secondary and tertiary effects.

 

And it is not just China - I think it is a big emerging markets and related bubble that will go into a bust.

Other real estate bubbles that are related to the commodity boom may include Australia, Brazil, parts of Canada, and others.

 

Of course almost noone will believe it until after it happens.  It has gone on for so long and the skeptics have all been wrong.

But that breeds complacency, overconfidence and optimism. 

 

 

 

 

 

 

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I have no idea on the timing but I believe China has perhaps the largest housing bubble in all of history.

The prices are sky high with ~2% net rental yields in many places and extreme overbuilding.  5-10% net rental yield is probably a better fair value.  So prices could easily drop >50%. 

 

The age old real estate bubble with an enormous credit cycle I think will still apply here.  I think the bust will be bigger than almost anyone expects.  Interesting to think of the secondary and tertiary effects.

 

And it is not just China - I think it is a big emerging markets and related bubble that will go into a bust.

Other real estate bubbles that are related to the commodity boom may include Australia, Brazil, parts of Canada, and others.

 

Of course almost noone will believe it until after it happens.  It has gone on for so long and the skeptics have all been wrong.

But that breeds complacency, overconfidence and optimism.

 

2% net yield on residential properties is very prevalent in India as well. With the logic being that historic inflation (at least for the past 4 - 5 years) of 7 - 10% along with 2% rental yield gives a reasonable 9 - 12% return. For comparison, the 10yr Indian Govt Bond currently yields ~9%.

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For the Chinese this is a new phenomenon as they could not buy real estate for themselves until recently.

 

This is the first time they have been able to buy and they have only seen prices go up. Just like all other markets - they will learn their lesson's that there is a limit to what price makes sense or else you destroy capital. I dont see how this will be good if it happens - but yes Chnia should do well in the long run. This implies better buying opportunities at some point in time.

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what are some amazing company's operating in china? Like where everything is just right, BYD type company's. Moaty, good management that is clearly honest etc. The ones that are expensive now despite being in China? We should make a list. I only have clear media and BYD now.

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I think we need to think a bit more about this...

 

- impressive growth does not necessary mean good opportunity for investment. In China wealth went into a few politically connected.

 

- a lot of over building is by local governments, not private enterprises.

 

- China has its own currency and can print rmb all they want.

 

- how do we know it is not in a recession already?

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Another cultural difference - the best and the brightest actually want to work for the government in China. Many EM fail to emerge because they do not have competent managers. Due to its large population and historical ties to a large expatriate community, China probably has the best human resources among the EMs.

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They haven't been too bright in their allocation of construction resources.  Of course, I suppose they could say the same of the U.S. circa 2006 but these excesses correct, albeit painfully, in a capitalist system.

 

The government panicked during the 09 crisis. Like everybody else, they had no idea how bad things could go. The heads of state banks were commanded to open the loan spigot. The one head who didn't follow order out of concern for future non-performing loans was demoted as a punishment while his peers all received promotion. In hindsight, the surge in construction loans was excessive but how many people had the foresight to go all-in in 09. 

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they have been more than bright -  they purposely overbuilt - and at inflated prices too - using government funding -  because that allowed the capital to flow into the pocket of select few....

 

it got a bit out of control which is why the new regime ; in fact even the last one ; started down the path of trying to get control on corruption & "cool down" the economy... 

 

The problem in China is no different than that of the US - too big for anyone to fully comprehend and only a select few - and thank God they exist - in the powerful offices have the ability to handle it. 

 

i'd personally spend more time trying to find the next alibaba at its infancy and buy now instead of thinking about when the world might come to an end.

 

 

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that's why they are reforming - starting with a more market based interest rates. IMO, the next 10 years will be great for the on-the-ground entrepreneurs, a second round of privatization/breaking the back of many state monopolies is very likely. Similar to investing, you should always stay open minded when new information emerges and make decisions not based on perceived notions but on objective analysis. The overall long term trend is toward a more liberalized market based economy, can't say the same about the U.S.

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There is some pretty significant and ridiculous misallocation of capital taking place in China. What they need is non-stop construction of very very low cost affordable housing. Instead, they are building expensive condos that are unaffordable even by New York standards. Instead of addressing an obvious social demand, they are inflating a speculation binge. Imagine if developers started building 50 million dollar condos in Flint, michigan. I'm worried enough about this to have purchased (losing, so far) insurance premiums via steel and mining related companies.

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