Why I Sold My China Positions

by: Microcap Speculator

Like many microcap traders, jumping in and out of the dozens of U.S.-traded Chinese microcaps has been my bread-and-butter over the past few years.

Until now.  Something has changed, and until I get a better sense of how severe the change is I am staying away from China stocks.  Today I sold my last positions, HQ Sustainable Maritime (HQS) and China 3C Group (OTC:CHCG-OLD), even though both posted good numbers.

China itself is going through a massive transition from breackneck growth to….I’m not sure what.  As Kevin Depew explained on Minyanville:

I saw this morning where Nouriel Roubini has said he believes growth in China could slow to 4 to 5%. I believe that may be too optimistic. China is already experiencing massive deflation.

  • According to a recent report from Mitsubishi UFJ Securities (NYSE:MTU): the Toyota (NYSE:TM) Corolla, which was selling at 250,000 yuan last year is now selling at 90,000-130,000 yuan, a drop of about 50%.
  • Mercedes C Class cars prices have declined from 800,000 yuan to 350,000 yuan.
  • Audi A4s from 300,000 yuan to 50,000-60,000 yuan.
  • While official government figures show the average price for housing sales (in 70 large and medium cities) rising at 6.2% year-over-year, in Shenzhen’s Jini Mieda district (an expensive residential area), the average price per square meter has declined from 18,000 yuan in autumn 2007 to 11,000 yuan (finished) recently.
  • Steel-related prices have seen a marked decline.
  • Iron ore prices started the year at $250/tonne, fell to $100 in July and now stand at $83

Incidentally, Mitsubishi UFJS notes that 65% of bank lending in China is secured by real estate.

These deflationary trends should have the greatest impact on Chinese retailers like China 3C Group and LJ International (NASDAQ:JADE), and manufacturers like China Precision Steel (NASDAQ:CPSL).  Biotech/pharma companies like American Oriental Biosciences (AOB) and exporters like HQS might be less affected, but at times like this I’m inclined to step back from the whole group.

Disclosure: No positions