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