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Another view of China


goldfinger
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Is the implication "this time it's different"? ;D

 

Cheers nwoodman

 

Not at all. It is about understanding what is happening there before producing ideas and forecasts.

I would tend to believe that things will go bad when they need to really tighten. For now I have problems believing

they are saturated like we used to be during the housing bubble.

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I hope to god this guy is right. LOL

 

I dont think this time is different, but hope it is. He is on the ground so that goes along way compared to us Arm chair economists.

 

His explanations converge a lot with many things Rogers say about China (Rogers traveled to China when it was barely opening to the west):

- they both say that over-construction has always (for more than 25 years now) happened in China: build first relocate later.

- they both say the same about leverage and real-estate.

- they both say that mostly the rich can play the high-end real-estate game.

 

Rogers said that resource constraints and particularly water may endanger the Chinese story. Right now it seems they are running into all sorts of energy related issues.

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Not at all. It is about understanding what is happening there before producing ideas and forecasts.

I would tend to believe that things will go bad when they need to really tighten. For now I have problems believing

they are saturated like we used to be during the housing bubble.

 

I don't dispute the inherent advantage of taking a hands on approach to understanding the issues.  However it was more this statement that prompted me to comment

 

"It is easy to look at China’s construction boom, and the real-estate market there, and compare it to what has happened in the US, Dubai or Japan but in reality the market is very different.  Spending on infrastructure has a purpose, the trend is towards rising incomes and increased spending power, and property buyers are not exposed to anywhere near the level of risk that led to collapses elsewhere."

 

I too hope China hasn't succumbed to significant misallocation of capital under the guise of GDP growth. Thanks for posting the article.

 

 

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Not at all. It is about understanding what is happening there before producing ideas and forecasts.

I would tend to believe that things will go bad when they need to really tighten. For now I have problems believing

they are saturated like we used to be during the housing bubble.

 

I don't dispute the inherent advantage of taking a hands on approach to understanding the issues.  However it was more this statement that prompted me to comment

 

"It is easy to look at China’s construction boom, and the real-estate market there, and compare it to what has happened in the US, Dubai or Japan but in reality the market is very different.  Spending on infrastructure has a purpose, the trend is towards rising incomes and increased spending power, and property buyers are not exposed to anywhere near the level of risk that led to collapses elsewhere."

 

I too hope China hasn't succumbed to significant misallocation of capital under the guise of GDP growth. Thanks for posting the article.

 

 

 

Got you. Agreed. It probably has mis-allocated some. But may be not to the level described by Chanos. I have no doubt that China will hit serious road blocks on the way.

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If you have a command economy it is axiomatic that you are going to have greater misallocation of capital and resources. Who exactly knows in the west where the leverage exists in the Chinese economy but it exists, credit growth has exploded.

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I would highly suggest going to visit China with someone that knows the country.  I was fortunate enough to spend 10 days traveling in the small towns (only about 1mm people) :). I was able to see first hand the factories, standard of living, energy problems, etc...I ended up visiting 5 different cities and it was eye opening.  I find that there are many misconceptions of people here when I talk to them about what's going on over there. 

 

If you have the chance, you should really go see it.

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Guest misterstockwell

I would highly suggest going to visit China with someone that knows the country.  I was fortunate enough to spend 10 days traveling in the small towns (only about 1mm people) :). I was able to see first hand the factories, standard of living, energy problems, etc...I ended up visiting 5 different cities and it was eye opening.  I find that there are many misconceptions of people here when I talk to them about what's going on over there. 

 

If you have the chance, you should really go see it.

 

What did you conclude after your visit?

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China was so undercapitalized as a country that when they first started making good investments in the 1970s, it was a target rich environment.  It was easy to make substantial improvements in GDP through capital investment.

 

The problem is diminishing returns.  Now it takes more capital to get an additional % increase in GDP than ever before.  Meaning much of it is misallocated to nonproductive, i.e. speculative endeavors.

 

There are some Chinese economists who have argued that misallocated capital investment was China's way of keeping inflation in check.  That is excess capacity was deflationary.

 

Lastly, leverage is not at the household level.  It is with SME businesses, local city/provincial/county govts and nongovermental off-balance sheet development companies.  Development companies and govts depend on the speculation continuing to pay off the loans that support real estate development.

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Misterstockwell,

 

That's a good question, but it’s hard to know where to start.  One large topic that stuck me was the use of energy in various cities.  My initial comment would be, if they ever starting consuming oil/gas/electricity like we do here look out.  Prices of those commodities will be much higher.  For example, in one city I was in they turned the power off, city wide, from 8am until 7pm.  We received a notice from the hotel the night before, so we wouldn't get stuck on the 22nd floor of our hotel without the use of an elevator.  We ate breakfast that morning using candles.  This is a city of 1mm plus people and a ton of manufacturing.  I was told this is not uncommon throughout many parts of the country (I saw it in another city on a smaller scale).  In addition, every factor we were in used almost no power outside the actually factory.  They had heat in the offices, but didn't turn it on.  They had lights, but didn't use many of them.  It was very interesting to see.  I never took my coat off (winter coat) in the meetings.

 

The hotels we stayed in were decent, but the multifamily facilities nearby would make places in Detroit look nice.  No one ever asked me for money, but they are definitely not living on much money per day.  Some of the farm houses (if you can call them that) were very poor.  I doubt many of the ones I saw had running water and most didn’t have windows.

I have tried to keep this very brief.  There are so many amazing things from the new airports, to the high speed rail lines that aren’t yet finished, to the pollution that I could talk about, but it would take pages.

 

Again, these areas that I’m highlighting with my comments above are not the big cities (Shanghai/Beijing).  Those cities are amazing.  Beautiful and huge. Great restaurants and tons of people.  I guess that is another thing I would say.  I have never seen so many people.  When I returned home it felt weird not being completely surrounded. 

 

Truly an amazing country, for so many reasons.

 

 

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Another article based on insiders' views where a few points are made that corroborate Jim Rogers points:

- There are multiple real estate markets with different price levels. Shanghai is one of the most expensive.

- Leverage for buyers is not as high as feared. In many cases most of the transactions are in cash.

- The risk is in the property developers camp. There will be bankruptcies in this sector.

- Property development loans share is 7% of the total.

 

http://blogs.forbes.com/kenrapoza/2011/05/08/afraid-of-china-real-estate-bubble/

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