The Other Imminent China Bubble

Financial commentators are obsessively debating whether the recent rise in the Chinese stock market means there’s a bubble — and if so, when it’s going to burst. My take? Who cares! What happens to the broader Chinese economy is what we should really be watching. It will have a far-reaching impact on the rest of the world — much more far-reaching than a decline in stocks.

Despite everything, the Chinese economy has shown incredible resilience recently. Although its biggest customers — the United States and Europe — are struggling (to say the least) and its exports are down more than 20 percent, China is still spitting out economic growth numbers as if there weren’t a worry in the world. The most recent estimate put annual growth at nearly 8 percent.

Is the Chinese economy operating in a different economic reality? Will it continue to grow, no matter what the global economy is doing?

The answer to both questions is no. China’s fortunes over the past decade are reminiscent of Lucent Technologies in the 1990s. Lucent sold computer equipment to dot-coms. At first, its growth was natural, the result of selling goods to traditional, cash-generating companies. After opportunities with cash-generating customers dried out, it moved to start-ups — and its growth became slightly artificial. These dot-coms were able to buy Lucent’s equipment only by raising money through private equity and equity markets, since their business models didn’t factor in the necessity of cash-flow generation.

Funds to buy Lucent’s equipment quickly dried up, and its growth should have decelerated or declined. Instead, Lucent offered its own financing to dot-coms by borrowing and lending money on the cheap to finance the purchase of its own equipment. This worked well enough, until it came time to pay back the loans.

The United States, of course, isn’t a dot-com. But a great portion of its growth came from borrowing Chinese money to buy Chinese goods, which means that Chinese growth was dependent on that very same borrowing.

Now the United States and the rest of the world is retrenching, corporations are slashing their spending, and consumers are closing their pocket books. This means that the consumption of Chinese goods is on the decline. And this is where the dot-com analogy breaks down. Unlike Lucent, China has nuclear weapons. It can print money at will and can simply order its banks to lend. It is a communist command economy, after all. Lucent is now a $2 stock. China won’t go down that easily.

The Chinese central bank has a significant advantage over the U.S. Federal Reserve. Chairman Ben Bernanke and his cohort may print a lot of money (and they did), but there’s almost nothing they can do to speed the velocity of money. They simply cannot force banks to lend without nationalizing them (and only the government-sponsored enterprises have been nationalized). They also cannot force corporations and consumers to spend. Since China isn’t a democracy, it doesn’t suffer from these problems.

China’s communist government owns a large part of the money-creation and money-spending apparatus. Money supply therefore shot up 28.5 percent in June. Since it controls the banks, it can force them to lend, which it has also done.

Finally, China can force government-owned corporate entities to borrow and spend, and spend quickly itself. This isn’t some slow-moving, touchy-feely democracy. If the Chinese government decides to build a highway, it simply draws a straight line on the map. Any obstacle — like a hospital, a school, or a Politburo member’s house — can become a casualty of the greater good. (Okay — maybe not the Politburo member’s house).

Although China can’t control consumer spending, the consumer is a comparatively small part of its economy. Plus, currency control diminishes the consumer’s buying power. All of this makes the United States’ TARP plans look like child’s play. If China wants to stimulate the economy, it does so — and fast. That’s why the country is producing such robust economic numbers.

Why is China doing this? It doesn’t have the kind of social safety net one sees in the developed world, so it needs to keep its economy going at any cost. Millions of people have migrated to its cities, and now they’re hungry and unemployed. People without food or work tend to riot. To keep that from happening, the government is more than willing to artificially stimulate the economy, in the hopes of buying time until the global system stabilizes. It’s literally forcing banks to lend — which will create a huge pile of horrible loans on top of the ones they’ve originated over the last decade.

But don’t confuse fast growth with sustainable growth. Much of China’s growth over the past decade has come from lending to the United States. The country suffers from real overcapacity. And now growth comes from borrowing — and hundreds of billion-dollar decisions made on the fly don’t inspire a lot of confidence. For example, a nearly completed, 13-story building in Shanghai collapsed in June due to the poor quality of its construction.

This growth will result in a huge pile of bad debt — as forced lending is bad lending. The list of negative consequences is very long, but the bottom line is simple: There is no miracle in the Chinese miracle growth, and China will pay a price. The only question is when and how much.

Another casualty of what’s taking place in China is the U.S. interest rate. China sold goods to the United States and received dollars in exchange. If China were to follow the natural order of things, it would have converted those dollars to renminbi (that is, sell dollars and buy renminbi). The dollar would have declined and renminbi would have risen. But this would have made Chinese goods more expensive in dollars — making Chinese products less price-competitive. China would have exported less, and its economy would have grown at a much slower rate.

But China chose a different route. Instead of exchanging dollars back into renminbi and thus driving the dollar down and the renminbi up — the natural order of things — China parked its money in the dollar by buying Treasuries. It artificially propped up the dollar. And now, China is sitting on 2.2 trillion of them.

Now, China needs to stimulate its economy. It’s facing a very delicate situation indeed: It needs the money internally to finance its continued growth. However, if it were to sell dollar-denominated treasuries, several bad things would happen. Its currency would skyrocket — meaning the loss of its competitive low-cost-producer edge. Or, U.S. interest rates would go up dramatically — not good for its biggest customer, and therefore not good for China.

This is why China is desperately trying to figure out how to withdraw its funds from the dollar without driving it down — not an easy feat.

And the U.S. government isn’t helping: It’s printing money and issuing Treasuries at a fast clip, and needs somebody to keep buying them. If China reduces or halts its buying, the United States may be looking at high interest rates, with or without inflation. (The latter scenario is most worrying.)

All in all, this spells trouble — a big, big Chinese bubble. Identifying such bubbles is a lot easier than timing their collapse. But as we’ve recently learned, you can defy the laws of financial gravity for only so long. Put simply, mean reversion is a bitch. And the longer excesses persist, the harder the financial gravity will bring China’s economy back to Earth.

Comments

[Sober Realist:]

Another thing to keep in mind is that this bubble could go on for some time(1 to 2 years) with periods of pull back and consolidation, but with an eventual collapse like in 2007.

Jul 26 02:41 PM

[Alan Young:]

"My take? Who cares [what happens to the stock market]!"
--Well, anyone who owns Chinese stocks cares. That's a lot of people.

"Mean reversion is a bitch."
--Yes, indeed. China's economy dominated the civilized world in the 14th century, and has been underperforming ever since. Maybe it is only now reverting to its long-term mean?

Jul 26 05:22 PM

[LeeT:]

Like most people in the world. Chinese are realistic. They look for money – Only money talks.
So, the most worrisome is the salary gap between government workers and so call industry workers. For the state-own companies (included most traded companies), there is huge gap between manager’s payment and workers. Since Chinese believe those managers are using state-money (tax payer’s money) to enrich them and there is corruption in very levels. This is social-unstable waiting to happen (plus, there are so many men in China).

Jul 26 07:21 PM

[jj Roberts:]

The situation in China is very important to understand. I have heard from foreigners working there, that the western business activity has dropped very significantly in the last year. The Chinese government intervention in their economy is to try and reduce the economic collapse's pain. Will the intervention succeed in giving it a soft landing in restructuring a renewed economy? You won't know until you can look back. We are in the beginning stages of the state induced economic stimulus. With Japan's 20 year experience in stimulus as as example, the answer is that China probably will fall far short of its' intent. I look to China and Eastern Europe as being the pivotal players in leading the world into the second phase of the current economic crises. Have no worry; if you can anticipate the markets you will be successful in any direction they take.

The easy solution that statist powers take almost universally through history is monetizing debt to lubricate the economy. Taking this route is still a form of "command economy" whether your system of government is democratic or a dictatorship. When you look back to the instability that led to the communist take over in China in 1949, it was fueled first by a destructive war with Japan for over 10 years and then by run away inflation by the state trying to renew economic activity with little resources available. They printed those resources of liquidity and failed because they went too far too fast. The economy couldn't absorb it. A collapse ensued. While today there is nowhere near that danger of economic contraction in China ever taking place, yet the current bubble seems unable to be sustained over time.

An Achilles heel in China is their stock market restrains shorting. Certainly this one issue will lead to excessive overvaluing and hence another bubble to pop.

Another issue China has to deal with is their assault on population growth. The government for the last generation has been so keen on population control that their forced abortion policies and societal traditions favoring the male child has led to a 6 male to 1 female birth ratio for over 20 years. Certainly a western society based in family is not going to be seen in China anytime soon. Seems like a beehive system to me. Lots of worker bees sustaining the drones. The lack of family can in no way support a consumer economy into the future. Therefore do not look to China for support of the world economy.
It won't happen.

Jul 26 07:52 PM

[Locked Out:]

"Globalisation has made corporations very rich at a huge cost to the western consumer. Now that all the piece good jobs have been exported the tertiary manufacturing of most Western countries has all but disappeared. Western economies have been turned into service economies with only Mc Jobs to offer. Everyone will attest to the declining quality of goods carrying brand names such as HP, Toshiba, DeWalt ,Stanley, G.E etc: with retail prices just marginally less than they would have been were they manufactured domestically, the profits to the distributors are massive. China has always had a quality problem but has offset it by price and to a large extent the brand manufacturers have been complacent because profits are so high.
If China wants to have a proper economy then it has to generate its own consumers, have fair working practices, a fair legal system, an end to sweatshop labour, and a decent social system and a proper distribution of wealth. This will take many years but what exists now is reminiscent of the cotton mills and mines of 19th century Britain. That will blow up in their faces very soon and then we will see a situation reminiscent of Britain in the 50's ad 60's where there was a total absence of reliability or quality, or a return to hard line communism." - W. Palmer

Jul 26 08:33 PM

[notsosmart:]

i was there a few years ago & happy to leave. i could hardly breath the blue air.they better provide medical care as i think they will have a lot of sick people.a lot also smoke.

Jul 26 09:27 PM

[doubleshortetf:]

Been to China over 30 times since 1998 while working for 3 multinationals. It's amusing to see "experts" who has not been to China or spent few days in the big Chinese cities recommending Chinese stocks... Wonder if they ever spent weeks at a time in gritty factory towns or poor interior areas...

Some sober facts:

1. China is a communist country ruled by 1 party with iron grip. Party bosses pick the politicians and many private company managements since many private companies are ex-SOE (communist state owned enterprises).

2. Corruption in China is rampant and one of the worst even down to lower ranking employees. Even factory canteen chef gets "envelopes" in scheme where he claims he received 10 bags of rice when only 8 bags are delivered.

3. There is almost no "law" since law itself is written to support the communist party or corrupt local communist bosses. Judges are appointed by the local communist boss and few if any understand law. Many judges got job thru "guanxi" or connection and of course bribes.

4. The Chinese banks in are BIG TROUBLE. E&Y got in heaps of trouble for discussing hidden bad and uncollectible debts. Local communist cadres dictate banks to lend to their pet projects and of course friends who bribe them not to mention COMPLETE lack of transparency.

5. No one except pea size brains trusts the communist government's statistics which are MANIPULATED.

6. Many of the listed companies numbers are COOKED. Auditors and their management can be bribed and extorted. It's beyond me how anyone would trust Chinese companies' financials unless audited by Big 4. And even Big 4s audited numbers are suspect since most Chinese companies carry multiple books including one for taxation and another for real book with slush funds.

7. Latest Chinese share and commodity appreciation have lot to do with communists pumping money to the economy by directing the banks to make loans. This kind of stimulus cannot go on.

Now is good time to buy FXP when all the investment gurus in unison are recommending Chinese stocks.

Jul 26 10:01 PM

[doubleshortetf:]

Excerpts from latest Barron's:

MONDAY, JULY 27, 2009
INTERVIEW
The Four Cheapest Plays in Emerging Markets

When we spoke earlier this month, you mentioned that you were bullish on China short term, but much less so over the long term. Is that still the case?

I've changed my mind since we last spoke. We are negative on China short term as well. The reason is that the stimulus package there has been absolutely massive. As a percentage of GDP, it is three or four times the size of the U.S. stimulus. In this year alone, they've had new loans worth over $1 trillion, of which more than $250 billion was issued in June. It is massive.

What's your biggest concern about that?

I believe that a lot of this money is not going into productive investment. What we are hearing anecdotally is that a lot is being lent by the banks, which, remember, are government-owned. Who are they lending to? For the most part, this money is going to state-owned enterprises, which are not particularly efficient companies.

We know that they are buying real estate, and they are doing all kinds of things that we don't think in the long run is particularly productive investment. Now, in the short run, the stimulus works, because it puts money in the hands of people who are buying and consuming stuff. So therefore, car sales in China hit an all-time record last month.

What will be the consequences in China?

Two things are likely to happen. First, longer term, if the banks don't have a problem with bad loans now, they will almost certainly have a lot more bad loans two or three years from now. Second, from a short-term point of view, at some point the government is going to get really worried about having too much credit-creation; that leads to a credit bubble, just like you had in this country and everywhere else. As a result, they will start to withdraw liquidity by tightening the gates on money. I don't know when that will be. But I worry that it is coming.

A fair amount of the stimulus money has found its way into the real-estate and stock markets because China has a closed economy. So there is no way for money to leave the country. The stock market and real estate have had huge spikes. So when that liquidity is withdrawn, it seems inevitable that the stock market will take it badly.

Jul 26 10:03 PM

[Wei Jiang:]

As a Chinese citizen living and working in the United States, I certainly do not want to see China suffer from a massive financial crisis. However, I have an increasingly stronger feeling that such a crisis will be inevitable.

I agree with Vitaliy on most of his points, except his political view toward the Chinese government. In addition, I'd like to add a few words about the housing bubble in China. Housing prices in major Chinese cities started to rise significantly since the government announced the stimulus package earlier this year. The driving forces of the spike? 1. Easy mortgage loans from state-owned banks. As long as housing price is going up, the banks will keep lending and therefore drive the price even higher; 2. Funds siphoned from the stimulus package at local levels to be used for real estate speculation. Officially, the stimulus package is directed toward investment in infrastructures such as rail roads, highways, power grids, but local officials usually are creative enough to divert funds from the stimulus package to be used in more "profitable" investment in real estate. The result is unsustainably high housing price. For example, in my hometown, a mid-sized city in eastern China about 300 miles away from Shanghai, the average monthly salary is about 1,500 RMB yuan (~ $200), whereas the average price for a new 1,000-sq foot apartment is probably 400,000 yuan (~$55,000). For a double-income family, the price of a new apartment is more than the family's entire 10-year income. In large cities like Beijing or Shanghai, housing is even more unaffordable to regular salary-earning people. Simply put, China's housing bubble is getting bigger each day. I don't know when or under what circumstance the bubble is going to burst, but I think when that happens, it's going to be ugly, painful, and devastating to China's fledgling financial industry, its economy as a whole, and eventually the recovery of Western developed countries. I wish that day never comes and I wish I am just worrying too much.

Jul 26 10:05 PM

[Teutonic Kn...:]

Let us face it, and I am not a China basher, the true investment grade and value of any Chinese equity is indeterminate and in my view, speculative.

Why? That country has no independent judiciary, inside and outside of the government, and no independent media. Without these guarantees of the due process, it is hard for anyone to peg a value.

True, the country's prospect for economic growth is tremendous, as a rapidly developing country, its rate is rising exponentially at least for the immediate past. However, the foundation for sustainability is still elusive, for the above reasons.

Thus, my suspicion is that the current euphoria is another Wall Street baby Bubble.

Jul 26 11:39 PM

[knownothing:]

The point is the whether the Chinese government's strategy to buy time in hope of world economic recovery could succeed. If this strategy could succeed, the cost of overlending and aggressive fiscal stimulus is OK. Otherwise, nobody knows what will happen to the China economy.

Jul 26 11:43 PM

[doubleshortetf:]

Wei,

How the flats market change in big Chinese cities...

My Chinese friends including many from HK and Taiwan were gloating over the real estate appreciation from speculations. I almost went in buying a flat with HK friend in Shanghai in 2002. Prices in Nanshan district in Shenzhen went up like there's no tomorrow 2 years ago... But the market sort of collapsed year ago where the swarm of real estate agents were hawking for customers in the wide new streets under hot summer sun. There were stories of many speculators losing everything they had. Now the prices are back up along with frenzy.

What I see is that Chinese people's penchant for gambling may be behind the bubbles in the stock and real estate market. It may take another bubble collapse for people to realize that only people who will win the gamble are those with "guanxi" connections and communist comrades.

Jul 26 11:53 PM

[williamwu:]

After three decades of double digit growth, even if this were a mega-bubble, when it pops it could only fall by so much. Could you honestly believe China will revert back to the living standards of the 70s? When the dust settles it will climb again, perhaps at a slower pace but who cares. China has done a mighty good job for so long, lets give credit where credit's due.

Jul 27 12:54 AM

[doubleshortetf:]

Interesting article from an insider on the Chinese stock market. Credit goes to another SA poster who provided the link below. Read the last paragraph which summarizes that China’s stock market is manipulated and akin to gambling.

www.theepochtimes.com/...

The Truth about China’s Stock Market
The truth about China’s stock market is actually not a secret, and most investors probably already knew it. That is, China’s stock market is a tool used by the government to re-distribute and re-organize social wealth on a grand scale, which means that it is a tool to clean out Chinese people’s savings accounts. The biggest winners in this process are, of course, government officials and their relatives who are the most well-informed about the actual value and re-organizing plans of those that control state wealth; as well as institutional investors who collaborate with them and who rely on insider tips to control the stock market. Those people have already made huge fortunes in the process. This is the truth about China’s stock market.

Actually, the goal of China’s stock market was not purely an economic one when it was originally established. When former Premier Zhu Rongji set up stock market in Shenzhen, he said that China’s stock market was meant to get money--to get money in the market and give it to companies that were unable to get money, and because these companies were unable to make money, they needed monetary support.

In Western countries, a fundamental criterion to allow a company to be listed is that the company must have performed well for at least three years while meeting other standards. The company must obtain approval from the Securities Regulatory Commission prior to issuing stock. Under supervision, the issued stock can also be pulled from the market to ensure and safeguard in particular small and medium sized investors.

China’s stock market has been established to operate like an ATM for the listed companies. For the majority of the listed companies, economic reform is nothing but a mechanism to trap money. Many heavily indebted State-owned companies have been listed in the stock market after re-packaging. All of a sudden, they become the new stars in the market with easy loans and finance. The foundation of a stock market is the listed companies. With a weak foundation, how can any high stock price be affordable? The deflation in stock prices is therefore predictable.

Other than the fact that the listed companies would benefit from the weak structure in the Chinese stock market, the true “beneficiary” of this contrived structure is the “interest group” who would profit from the initial establishment of a listed company and the trading thereafter. As for the investors, China’s stock market serves to mentally “entertain and exercise” them. It gets investors far more emotionally involved than any intellectual game could hope to.

In an interview after the market dived for several days prior to the Olympics, economist Tang Min points out that, “No economists can make sense of China’s stock market.”

“I’d advise the investors to give up the illusion that the government would restore the stock market or that the market will rebound. Escape China’s stock market while you can. If you insist on trying to profit from it, go ahead. However, do not complain if you are drained empty.”

Some say that entering China’s stock market is like gambling. That would be over-estimating the capacity of the Chinese stock market. Gambling relies on luck, and sometimes strategies—it still has fairness in it. However, China’s stock market is a manipulated and systematic black market. The majority of Chinese investors seem to have gradually recognized this. This could suggest that the end of this massive robbery is near

Jul 27 12:55 AM

[Michael Clark:]

This is one of the best articles on China I've read. Very informative.

'No economists can make sense of China's stock market.' True. And no economist can make sense of China's financial statistics -- since Chinese companies carry three books: one for taxes, showing small profit; one for banks, showing steady profits; and one for management; showing whatever they want the management to know.

China is a different kind of beast. Western students of capitalism who use China as an example of the miracle of capitalism should look at Nazi Germany as a closer model for China. State capitalism is where the corporate structure and the government work hand-in-hand to eliminate all competition for the sake of the survival of the state. China is spending and spending because the government wants to protect itself from revolution.

Jul 27 02:51 AM

[rlirph:]

We won't. That is why they call us "The Ugly Americans'.


On Jul 26 12:35 PM Observer45 wrote:

> The trouble with many is that they know a little and they talk like
> that is all to know. They hardly travel outside the country or read
> outside their narrow field and much less, understand very little
> of what is happening around in the world. The biggest mistake is
> that they try and read the world from their narrow perspective and
> in consequence, even when they mean good, they screw up.
>
> Before the financial collapse, we were actively bashing China, human
> rights, trade balance, undervalued Yuan, etc. Now that things are
> pretty much up in smoke at home, we are still passively bashing them.
> This time, overheating economy, Shanghai market bubble, pollution,
> etc. At first, it is they will not succeed, now it is they will not
> sustain! When are we going to stop all this and look at ourselves
> in the mirror?

Jul 27 03:23 AM

[Susan Weerts:]

"First, most low cost labor for export production comes from provincial areas(farms) and they are the young people under 30 years of age. Shenzhen is a good example of this. When exports dried up, yes some didn't get paid because the company went bankrupt (many were Taiwanese and Hong Kong companies), but they headed back to the farm to live with the parents.(sounds like the United States). They survived and will continue to survive, they are survivalists. They are using their savings to start businesses locally"

True that all the cheap labors are from the provincial areas(farms) and without jobs, they headed back to live with parents. However, in most of the case (99%), they are the sole income source of the whole family. As you pointed out, some of them were left unpaid for about 6-month worth of works. Without substainable job prospectives, I seriously doubt they will spend at their will.

Even if they start their own business, in a village there are approx. 30 young people starting business. What is the failure rate? Probably only 1 of them suvive.

There is no doubts that they will survive. They are probably the most resilent group. The problem is how.

It is reported that approx. 200,000 jobs were created by Shando province for one infrastuture project with more than 1billion stimulus money several month ago. There are more than 10 million migrant workers in Shando alone.

"They are leaving behind their third world status into the technology century. ..."
True that China tries to reorient the economics from export(cheap labor) to technology/consummer economics. It ain't easy, just looking at the slump of Japan and all the Asian tigers. It is arguable that they sucessfully tranfered into a new economics. Even though they have brignt spots in technology (such as samsung or hong kong as financial center). Most of them did so by moving their factories into the cheapest labor area (in China) and become service/transaction centers. With the ultimate consumption sources dries up, there goes the driving force.

The dilemma is that China has to continue sterlizing its currency to avoid its social problem. How likely do you think for a migrant workers, mostly illiterate, to find a job in a technology firm.

"The local government provides incentives for companies to start or relocate there."

Every technology companies in the world have their bases in several major cities in China by now. As you pointed out, the local goverment provides incentives for companies to start or relocate thre, BY COMPETING WITH EACH OTHER.

" doubt it very much if they will collapse anytime soon"
They won't collapse anytime soon. The question is what kind of growth will be in the future. The current growth looks artifical. If they only grow by pouring in the money, it will collape on its own weight. "if you build it, he will come" is not necessiarly true here.

"Before the government provided medical care free and now you pay. The government is moving to provide medical insurance (ala medicare) focused on low income (farmers) and rural areas. "
The SOEs had to do away with meical care and other welfare several years ago since they made them insolvent. This is part of the reasons for the giant profits recently and cheaper labor. If all the costs are back on the balance sheet of these companies, there goes all the low cost benefits. Even with government picking up the medical taps, how quickly do you think it will eat a large chunk out of the budget suplus?

Jul 27 09:30 AM

[doubleshortetf:]

Latest from John Maudlin:

www.minyanville.com/ar...

Why China Won't Save the Day

If I told you the next US stimulus package would be $4.5 trillion dollars, mostly given to banks that would be forced to loan out the money quickly, do you think that might jump spending and GDP in the short term? Would you start looking for a few bubbles to be created? What about the dollar?

That’s the equivalent of what China’s now doing. The volume of credit that’s flowing into the country is equivalent to one-third of their GDP. Banks that already have large problem-loan portfolios are now lending even more, in a very short time frame. China has severe capacity-utilization problems, as trade has sharply fallen; and the US consumer is unlikely to return to anywhere near the level of consumption that was the case in 2006.

The Chinese stock market is up 85% this year, and commodity and real estate prices are rising. And no wonder: The money supply shot up 28.5% in June alone. That money is looking for a home. My friend Vitaliy Katsenelson has written a very perceptive essay for Foreign Policy magazine, talking about the nature of the current growth in China.

"But don't confuse fast growth with sustainable growth. Much of China's growth over the past decade has come from lending to the United States. The country suffers from real overcapacity. And now growth comes from borrowing -- and hundreds of billion-dollar decisions made on the fly don't inspire a lot of confidence. For example, a nearly completed, 13-story building in Shanghai collapsed in June due to the poor quality of its construction.

"This growth will result in a huge pile of bad debt -- as forced lending is bad lending. The list of negative consequences is very long, but the bottom line is simple: There is no miracle in the Chinese miracle growth, and China will pay a price. The only question is when and how much."

I’m going to quote at some length from Simon Hunt's latest note. He travels very frequently to China and is one of the world's true experts on the copper market. Copper, we’re told, is the metal with a PhD in economics. If copper prices are rising, then the economy is booming. And historically, that’s more or less been the case. But there may be reason to believe that a PhD may be no more useful this time around than a regular Ivy League degree.

Jul 27 12:50 PM

[recession g...:]

8% growth is absurd... chinese market seems to have been decoupled from economic reality for a couple years. growth is still impressive when compared to western economies but the chinese domestic economy is still not large enough to drive double-digit growth without robust global trade and a crippled american consumer.

keep in mind pre-BSC/LEH people were talking about chinese real estate and credit bubbles and since then chinese equities have rallied . this is a high beta market that seems to be a long way out of whack- a big macro disequilibrium seems to have emerged, the big question now is when it will finally crack and how far it moves.

the chinese government can attempt to replace the american consumer by pumping money into the system, but there are some serious limitations in the short run. the bureaucratic structure of china lends itself to wealth destroying investment, while the large pushes into infrastructure (although necessary) will not generate returns for years.

also, consider the effect of the composition of chinese markets.. lots of retail investors, significant government interference in capital market access (and over which issues foreigners have access to), debateable accounting, and the potential for a political catastrophe in the form of civil strife.

Jul 27 04:07 PM

[Ricard:]

What I think is truly frightening about this article is the implications for the 'dot-coms', i.e., America. Lucent is still around (ALU), but nearly all of the dot-coms it serviced aren't.

Jul 30 03:05 AM