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GMO's Article on China Bubble


vinod1
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GMO has a new article on bubble developing in China. One tidbit - only two countries previously had as much in foreign currency reserves as a percent of GDP as China has now, US in 1929 and Japan in 1989.

 

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IICi3XDk3kgShyaxnDe%2ft3GtNdfbW3V%2bu5X9OpjBFxQN1nv8Ys%2bCNCqeh9QLxflkBbA2yu17szUivY6GTiSswW%2bdKMPr52uvAJo%3d

 

Vinod

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Thanks for the great article.  I found the following comments most interesting and would suggest the 8% growth is no longer sustainable over the long run.  Add to this the over supply in many sectors and it looks like China's growth will be pulling back soon.

 

https://srv111.services.gc.ca/WordDefinition.aspx?id=Provisions

 

Wall Street also tends to downplay the darker aspects of the Chinese demographic story. China’s population is set to decline in 2015. The worker participation rate will peak this year. It’s anticipated that the number of people joining the workforce will fall off quite rapidly. Yet it’s this section of the population that tends to move to the cities and has provided China

with an apparently limitless supply of cheap labor.

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Im just glad Im learning about this now. I think its safe to say this is the next big bubble that we were all looking for. The problem is when  and what causes it to pop. For now I am quick happy staying away from China centered investments. Though that would include the other BRICs, and commodity investments.

 

Those pictures from the article are very telling and this definitely will be a rough one. China is creating a boom in Russia, Canada, Australia, and Brazil via commodities. If they crash then the world will slow down everywhere. I can see why they dont want to let the currency float.

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Guest Bronco

I just finished "The Greatest Trade Ever" about John Paulson - great fun book IMO.

 

I am so inspired now to short the next bubble.  I am ready!

 

 

 

Getting a little more serious - anyone have ideas on how to short China when the time is right?  There must be better ways than shorting the FXI.

It would be nice to get a dialogue going... 

 

 

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I didn't find any Chinese real estate operations companies, but I found two real estate agency/brokers with ADRs.

 

E-House Holdings Ltd (EJ) has a network of 3,500 sales agents in 28+ cities

EJ is trading for $20 with estimated earnings of $1.10 this year and $1.40 next

Ej has been profitable since '04. $0.62 in '07, $0.48 in '08 and $1.25 last year on sales of $80M.

 

IFM Investments LTD (CTC) is a Century 21 franchisor operating in 34 cities with 4.7M property listings

CTC is trading for $7 with estimated earning of $0.65 this year and $1.00 next

CTC lost money in '06, '07 & '08 -$.015, -$0.69 & -$1.25 respectively. They made $0.46 last year ('09) as sales more than doubled to $95M.

 

I don't see either as a bargain, or significantly overvalued...

 

 

 

 

 

 

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Thanks, a very good read.

 

Here is the Krugman Article referenced in the Article and by Chanos

 

http://web.mit.edu/krugman/www/myth.html

 

Thanks for that article, but as I understand, much of China's growth in the last two decades comes from growth in total factor productivity. Also, China does some very smart things like leverage its monopoly over rare minerals to lure high-tech manufacturing and the accompanying talent. If you factor in China's emphasis on high level science and math education, and the below average labor participation rate of Chinese women, there is a good argument for China's long-term prospects.

 

Can someone link the Chanos presentation that has been so influential?

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You might want to look at what occurrs when you overlay demographics on top of the input/output approach. While social organization remains a factor (usually by replacing tradition with a more 'cash' orientated outlook), there were also just a lot more 'new' people to start with.

 

The forced lower birth rate (one-kid policy), matricidal practice (girl babies are drowned), & hostile work conditions (deaths to accidents, toxic fumes reducing fertility, & accumulated toxins disabling workers early) virtually guarantees that in 10-15 yrs the chinese domestic workforce will be a lot smaller than it is now (assuming no foreign worker imports); & that it will stay low. With fewer kids to take care of ageing parents (tradition), & fewer fertile women to have kids with, material social unrest is almost assured. And the 'party' has historically not reacted all that favourably to unrest. 

 

You have to think that the best 'export' will be young people independently setting up (& investing) in the 'West', & that the most prominent 'import' will be the gradual repatriation of the BOP surplus. The best 'investment' is a chinese minority partner in your NA business; and an approach very similar to the 'sea-turtle' reality of Japan.

 

SD

 

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