There's No Bubble in China 25 comments
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I find it utterly amazing how the same group of commentators who could not “see” the U.S. housing bubble – the largest asset-bubble in human history, can suddenly see “bubbles” everywhere (except in the U.S. economy).
The most frequent target of these “bubble sightings” is China, where the simplistic reasoning of these “experts” seems to be that if China's economy is growing much faster than anywhere else, then this must be where the next “bubble” will occur.
However, much as these “experts” were all wrong in failing to see the massive U.S. bubble, they are wrong again in imagining bubbles where none exist. For the benefit of those who need assistance in understanding what an asset bubble is, the definition is very simple. There are two components: over-valued assets, and an excessive amount of leveraged debt. While both conditions are necessary, neither is sufficient by itself.
The mere presence of over-valued assets does not represent a “bubble”. Assets become mis-priced in markets all the time – sometimes under-valued and sometimes excessively valued. When this happens in normal market conditions, markets “correct”; whereas with a bubble, there is inevitably a subsequent “debt implosion” of varying degrees of magnitude.
The reason why a true asset-bubble always ends in some manner of debt-implosion is because of the second (necessary) component of a bubble – excessive, leveraged debt. Again, even too much leverage (by itself) does not indicate a “bubble” if the underlying assets are not mis-priced.
It is over-valued assets which inevitably lead to a market “correction” at some point in the future, and it is the addition of leveraged debt which turns a “correction” into a “debt-implosion” - because of vast numbers of defaults on that debt. Corrections alone do not imply defaults, because if the debtors have not taken on excessive debt, then they can withstand a correction without defaulting.
Having dealt with definition of terms, let's look at the facts of the Chinese economy. First, there are vast levels of savings in the Chinese economy. It was because of the vast amount of savings in the Japanese economy that an economic downturn of well over a decade resulted in relatively few bankruptcies and defaults – despite the fact that all the other ingredients of a huge asset-bubble were present.
China's economy is growing much more rapidly than other economies. A growing economy generates real increases in wealth. Rising wealth supports higher asset prices, thus a rapidly growing economy can sustain a much more rapid rate of asset-appreciation.
However, the China-bashers still insist that there is one ingredient of a “bubble” in China: too much leveraged debt, they claim. Given that these same “experts” were totally incapable of spotting excessive leveraged debt in the U.S. economy, it should be of little surprise that once again the experts are totally wrong.
China's four largest banks, which account for nearly half of new loans originated in China this year, have seen their total deposits quadruple while lending has only tripled. It should be obvious even to the inept, China-bashers that if China's biggest banks are taking in $4 of deposits for every $3 dollars that they lend, that they have been getting steadily less-leveraged all year. This is in contrast to the behavior of U.S. banks during the housing bubble (and Wall Street Ponzi-scheme) – where U.S. banks were lending out $30 of debt for every $1 they took in, in deposits. Can you spot a slight difference here in the degree of leverage?
To provide even further assistance in educating the experts, let me introduce them to a real “bubble”: the U.S. bond market. At a time when the U.S. is dumping more supply onto the market than at any time in history, bond prices remain near all-time highs. It is straight out of Economics 101 (presumably the experts managed to pass that course) that when you increase the supply of any good that you depress the price. An extreme increase in supply should result in an extreme decline in price. Thus, the first condition for a bubble is satisfied: a grossly over-valued market.
It is even easier to point out the excessive leverage, because it exists in so many ways. To begin with, the U.S. debt-to-GDP ratio is increasing exponentially – a sure sign of excessive leverage of the U.S. government, by itself. However, there is an even more obvious indicator of excessive leverage: the need for the U.S. government to “buy” much of its own bonds to prop-up the prices. Without any possible doubt, this is the most blatant example of an over-leveraged market on the planet – yet it remains “invisible” to most of the experts (and all the China-bashers).
As a further note, we are seeing very similar behavior in U.S. equity markets, where the Plunge Protection Team permanently pumps-up valuations of U.S. equities through buying-up shares, and in the U.S. housing market – where U.S. banks have also artificially (and radically) reduced supply, through simply holding millions of foreclosed U.S. properties off of the market (see “Fantasy Housing Numbers a Prelude to NEXT U.S. Crash”).
You don't suppose the same group of experts who already totally over-looked one, enormous U.S. asset-bubble could fail to see several more, do you?
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I dont like corruption and the shafting of the ordinary man on the street either. But do try to keep my views on asset markets outside my political, social leanings.
The author however has some exceptional points in this article.
If the stats are true, then in effect bank lending in China is in line with standardised norms. I have argued for a very long time bubbles do not exist in the real estate market here in China. The markets are now priced at about fair value. For a long-term (5-10 years) now is still a good time to invest.
Also there is very little chance of a debt implosion at the banks because they are controlled by the government, have guarantees by the government. And the government is sitting on 2.3 trillion usd of reserves.
Further to this, all the QE that has been going on worldwide makes a banking system default in the next 10-15 years very unlilely. Unless of course we do actually get some real bubbles.
And by bubble I mean the property market going up 25%+ for 3-4 years. Based on the exit strategies that will come into fruitation in europe over the next 6 months, the US/UK/China over the next 12 months. I very much doubt that we will see extreme asset price spikes. If we do, no doubt conditions will be tightened. Not 3 continuos years of these price spikes being allowed.
So:-
Underweight - Gold
Overweight Property/Certain sectors in China/food
Neutral - US/Europe Equities/industrial metals.
I get the sense we are in for a boring 10 years in most areas.
The Boom Camp and The Doom Camp will all be proven to be wrong.
On Nov 06 05:45 AM James Lewis wrote:
> This author hates the USA and loves gold. Not sure why the gold bugs
> always hate the USA. Maybe its becaus etheir entire thesis of gold
> appreciation is based on the demise of the USA.
>
> I dont like corruption and the shafting of the ordinary man on the
> street either. But do try to keep my views on asset markets outside
> my political, social leanings.
>
> The author however has some exceptional points in this article.<br/>If
> the stats are true, then in effect bank lending in China is in line
> with standardised norms. I have argued for a very long time bubbles
> do not exist in the real estate market here in China. The markets
> are now priced at about fair value. For a long-term (5-10 years)
> now is still a good time to invest.
>
> Also there is very little chance of a debt implosion at the banks
> because they are controlled by the government, have guarantees by
> the government. And the government is sitting on 2.3 trillion usd
> of reserves.
>
> Further to this, all the QE that has been going on worldwide makes
> a banking system default in the next 10-15 years very unlilely. Unless
> of course we do actually get some real bubbles.
>
> And by bubble I mean the property market going up 25%+ for 3-4 years.
> Based on the exit strategies that will come into fruitation in europe
> over the next 6 months, the US/UK/China over the next 12 months.
> I very much doubt that we will see extreme asset price spikes. If
> we do, no doubt conditions will be tightened. Not 3 continuos years
> of these price spikes being allowed.
>
> So:-
>
> Underweight - Gold
> Overweight Property/Certain sectors in China/food
> Neutral - US/Europe Equities/industrial metals.
>
> I get the sense we are in for a boring 10 years in most areas.<br/>The
> Boom Camp and The Doom Camp will all be proven to be wrong.
Referring to this as a "battle of opinions" is still a euphemism - since what we are seeing is a "propaganda war". The reason I am so harshly critical of the China-bashers (and the Europe-bashers, and the commodity-bashers) is because in many cases I am convinced these people are not sincere.
I pointed out how there is absolutely no comparison between the REAL bubbles in the U.S. and the imaginary "bubble" in China. How could anyone capable of performing arithmetic be that wrong?
At some point, we MUST conclude that many of these people are propagandists, intentionally spreading disinformation - rather than simply "analysts" acting in good faith (and making one HUGE mistake after another).
On Nov 06 10:08 AM John Cordes wrote:
Why is it that any time anyone critiques American anything someone always says: "They hate America". That is very bizarre. Jeff never alluded to hating America he simply pointed out bad policy.
James wrote:
"Also there is very little chance of a debt implosion at the banks because they are controlled by the government, have guarantees by the government. And the government is sitting on 2.3 trillion usd of reserves."
Do you really believe that? I happen to think that this brand of blind 'patriotism' is actually very un-American.
James, seriously, why do you think it is USA bashing to critique government policy? This is how Nationalism starts and it ends with Fascism were any critique of the ruling party is considered 'Unpatriotic' and must be put down.
On Nov 06 05:45 AM James Lewis wrote:
> This author hates the USA and loves gold. Not sure why the gold bugs
> always hate the USA. Maybe its becaus etheir entire thesis of gold
> appreciation is based on the demise of the USA.
>
> I dont like corruption and the shafting of the ordinary man on the
> street either. But do try to keep my views on asset markets outside
> my political, social leanings.
>
> The author however has some exceptional points in this article.<br/>If
> the stats are true, then in effect bank lending in China is in line
> with standardised norms. I have argued for a very long time bubbles
> do not exist in the real estate market here in China. The markets
> are now priced at about fair value. For a long-term (5-10 years)
> now is still a good time to invest.
>
> Also there is very little chance of a debt implosion at the banks
> because they are controlled by the government, have guarantees by
> the government. And the government is sitting on 2.3 trillion usd
> of reserves.
>
> Further to this, all the QE that has been going on worldwide makes
> a banking system default in the next 10-15 years very unlilely. Unless
> of course we do actually get some real bubbles.
>
> And by bubble I mean the property market going up 25%+ for 3-4 years.
> Based on the exit strategies that will come into fruitation in europe
> over the next 6 months, the US/UK/China over the next 12 months.
> I very much doubt that we will see extreme asset price spikes. If
> we do, no doubt conditions will be tightened. Not 3 continuos years
> of these price spikes being allowed.
>
> So:-
>
> Underweight - Gold
> Overweight Property/Certain sectors in China/food
> Neutral - US/Europe Equities/industrial metals.
>
> I get the sense we are in for a boring 10 years in most areas.<br/>The
> Boom Camp and The Doom Camp will all be proven to be wrong.
Regarding your argument against gold, you apparently accept that QE is sufficiently massive to keep the whole world afloat. And, on top of the global effects of QE, does not the US continue to run gargantuan deficits and are not China and other non-US economies growing organically at a much greater rate than US/Europe? So then, why will the currencies of the low growth countries (e.g., US) being diluted through QE and deficit fiscal policy not fall against those of the high growth, non-diluting ones? Any relative weakness in the value of US currency must be reflected as a rise in the US dollar price of objects in widespread global demand such as gold.
Granted that it is theoretically possible that dollars could be soaked up "just in time" as has been alluded to; however, given past history of the dollar under Fed management and the current need to weaken the dollar to have any hope of reducing trade deficits and paying obligations (debt, health care, retirement programs, etc.) I consider that an unlikely scenario.
Hank
On Nov 06 05:45 AM James Lewis wrote:
> This author hates the USA and loves gold. Not sure why the gold bugs
> always hate the USA. Maybe its becaus etheir entire thesis of gold
> appreciation is based on the demise of the USA.
>
> I dont like corruption and the shafting of the ordinary man on the
> street either. But do try to keep my views on asset markets outside
> my political, social leanings.
>
> The author however has some exceptional points in this article.<br/>If
> the stats are true, then in effect bank lending in China is in line
> with standardised norms. I have argued for a very long time bubbles
> do not exist in the real estate market here in China. The markets
> are now priced at about fair value. For a long-term (5-10 years)
> now is still a good time to invest.
>
> Also there is very little chance of a debt implosion at the banks
> because they are controlled by the government, have guarantees by
> the government. And the government is sitting on 2.3 trillion usd
> of reserves.
>
> Further to this, all the QE that has been going on worldwide makes
> a banking system default in the next 10-15 years very unlilely. Unless
> of course we do actually get some real bubbles.
>
> And by bubble I mean the property market going up 25%+ for 3-4 years.
> Based on the exit strategies that will come into fruitation in europe
> over the next 6 months, the US/UK/China over the next 12 months.
> I very much doubt that we will see extreme asset price spikes. If
> we do, no doubt conditions will be tightened. Not 3 continuos years
> of these price spikes being allowed.
>
> So:-
>
> Underweight - Gold
> Overweight Property/Certain sectors in China/food
> Neutral - US/Europe Equities/industrial metals.
>
> I get the sense we are in for a boring 10 years in most areas.<br/>The
> Boom Camp and The Doom Camp will all be proven to be wrong.
"China's four largest banks, which account for nearly half of new loans originated in China this year, have seen their total deposits quadruple while lending has only tripled. It should be obvious even to the inept, China-bashers that if China's biggest banks are taking in $4 of deposits for every $3 dollars that they lend, that they have been getting steadily less-leveraged all year. "
You correlation here is absolutely absurd without the base of deposits and base of lending being established. You use your 2nd grade math skills to extrapolate that well they have 4 times the deposits and only 3 times the lending then that means they lent out $3 for every $4 they took in. Yeah China!!!
If deposits were $1 Million in the previous year and now they are $4 Million doesn't mean they were Lending $1 Million from the previous reporting cycle and now lending $3 Million. What if the previous year deposits were $1 Million and previous years lending was $3 Million. Now USE your 2nd Grade math and you get $4 million in deposits and $9 Million in lending.
Just pure absolute garbage.
Your analytical skills are non existent.
GreatWhite
"There are a few issues with that argument. Firstly, the size of the Government’s debt is vastly understated. Not included in the public debt figures are the liabilities of the local governments, which the Ministry of Finance estimated
at $680bn as of the end of 2008. In addition to that, a large part of the loans extended this year (estimated at $350bn) went to finance public infrastructure projects guaranteed by local governments. Furthermore, when the Chinese
government bailed out its banking system in 2003, it set up Asset Management Companies that issued bonds to the banks at par for the non-performing loans that were transferred to them. These bonds, worth about $260bn, are
explicitly guaranteed by the Ministry of Finance and the Central Bank and sit on the balance sheets of the big four banks. The Chinese government also explicitly guarantees $400bn worth of debt of the three “policy banks”. In total,
these off-balance sheet liabilities are equal to $1.7tn, which would bring China’s public debt to GDP ratio up to 62%, a level that is comparable to the Western European average.
Finally there is also the issue of the aforementioned “hot money”, the cumulative sum of which has since 2007 added up to about $500bn according to our calculations. “Hot money” can leave the country and indeed in 2009 has done so, and as such should not be counted as a part of reserves that can be “spent”.
This latter point raises a bigger issue: how much of its central bank’s reserves can a country actually “spend”? Since theoretically reserves are needed to satisfy claims for the conversion of local currency into foreign exchange, as well as the transfer of foreign exchange that was acquired as a part of a liability, we have to look at the ratio of reserves to the sum of local money and gross external debt. M2 monetary aggregate in China is $8.4tn (which is higher than M2 of $8.3tn in the US) and it is currently growing at 28%. China’s gross external debt was $374bn as at end of 2008, which in Emerging Market space is second only to Russia in size. Compared to a sample of Emerging Markets, China’s reserves in relation to its liabilities are not that spectacular (chart 8), so in that sense China is technically not in a position to “spend” its reserves."
China is not all rose gardens and vanilla shakes as this hate mongering author so often spews out of his mouth.
GreatWhite
GreatWhite
On Nov 06 01:49 PM Tony Daltorio wrote:
> Another spot-on article from Jeff Nielson!
Yawn
GreatWhite
And Nielson is a USA hate monger! I don't know how you can deny that.
On Nov 06 03:09 PM Johnny Oxygen wrote:
> @ GreatWhite
>
> Yawn
It's gettin' old brother.
Get off the meth.
You talk about CHINA'S government trying to "hide" it's debt (and talk about numbers in the billions), while the U.S. government is doing its best to forget about roughly $70 TRILLION in unfunded liabilities (which doesn't include the existing $60 TRILLION in total public/private debt).
All governments "fudge" numbers. I'm very clear about that in my writing. In the case of the U.S. government however, we are talking about lying which is ORDERS OF MAGNITUDE greater than anywhere else.
On Nov 06 02:29 PM GreatWhite wrote:
> This excerpt from Pivot Capital management will also shed some light
> on the Chinese banking system. It dissects China's real debt and
> the fact that China's M2 money supply is actually higher then the
> USA>
>
> "There are a few issues with that argument. Firstly, the size of
> the Government’s debt is vastly understated. Not included in the
> public debt figures are the liabilities of the local governments,
> which the Ministry of Finance estimated
> at $680bn as of the end of 2008. In addition to that, a large part
> of the loans extended this year (estimated at $350bn) went to finance
> public infrastructure projects guaranteed by local governments. Furthermore,
> when the Chinese
> government bailed out its banking system in 2003, it set up Asset
> Management Companies that issued bonds to the banks at par for the
> non-performing loans that were transferred to them. These bonds,
> worth about $260bn, are
> explicitly guaranteed by the Ministry of Finance and the Central
> Bank and sit on the balance sheets of the big four banks. The Chinese
> government also explicitly guarantees $400bn worth of debt of the
> three “policy banks”. In total,
> these off-balance sheet liabilities are equal to $1.7tn, which would
> bring China’s public debt to GDP ratio up to 62%, a level that is
> comparable to the Western European average.
>
> Finally there is also the issue of the aforementioned “hot money”,
> the cumulative sum of which has since 2007 added up to about $500bn
> according to our calculations. “Hot money” can leave the country
> and indeed in 2009 has done so, and as such should not be counted
> as a part of reserves that can be “spent”.
>
> This latter point raises a bigger issue: how much of its central
> bank’s reserves can a country actually “spend”? Since theoretically
> reserves are needed to satisfy claims for the conversion of local
> currency into foreign exchange, as well as the transfer of foreign
> exchange that was acquired as a part of a liability, we have to look
> at the ratio of reserves to the sum of local money and gross external
> debt. M2 monetary aggregate in China is $8.4tn (which is higher than
> M2 of $8.3tn in the US) and it is currently growing at 28%. China’s
> gross external debt was $374bn as at end of 2008, which in Emerging
> Market space is second only to Russia in size. Compared to a sample
> of Emerging Markets, China’s reserves in relation to its liabilities
> are not that spectacular (chart 8), so in that sense China is technically
> not in a position to “spend” its reserves."
>
> China is not all rose gardens and vanilla shakes as this hate mongering
> author so often spews out of his mouth.
>
>
> GreatWhite
"In total, these ***off-balance sheet liabilities are equal to $1.7tn,**** which would bring China’s public debt to GDP ratio up to 62%, a level that is comparable to the Western European average"
So it was $1.7 TRILLION in off-balance sheet liabilities. NOT BILLIONS BUT TRILLIONS~
Yeah China won't have any un-funded liabilities because it doesn't offer it citizens much in the arena of retirement and security. Also with it's 1 child policy it has absolutely decimated and doomed it's working populous starting in as little as 10 years (far worse than the US). They will have over half a Billion of it's population over 60 in 10 years. How is it going to feed them and provide health care? Almost 1 retired person for every 2 Workers. And you and everyone else keeps harping on the "Saving Rate" being so high. Well it is nothing more than a self taxation to try and provide for themselves when the government won't have the desire or means too.
It's also curious how you lump public and private debt together to get your $57 Trillion dollar bull crap, headline grabbing figure but you never mention how much total debt China has. I am sure you don't know this figure otherwise you have mentioned it by now. Or you know it and don't want to state it.
GO BACK TO SCHOOL! LEARN A TRADE, your not a writer.
GreatWhite
On Nov 06 06:41 PM Jeff Nielson wrote:
> So are you preparing this material for a "stand-up comedy" routine?
>
>
> You talk about CHINA'S government trying to "hide" it's debt (and
> talk about numbers in the billions), while the U.S. government is
> doing its best to forget about roughly $70 TRILLION in unfunded liabilities
> (which doesn't include the existing $60 TRILLION in total public/private
> debt).
>
> All governments "fudge" numbers. I'm very clear about that in my
> writing. In the case of the U.S. government however, we are talking
> about lying which is ORDERS OF MAGNITUDE greater than anywhere else.
>
I am a little confused by your observation:
"It should be obvious even to the inept, China-bashers that if China's biggest banks are taking in $4 of deposits for every $3 dollars that they lend, that they have been getting steadily less-leveraged all year. This is in contrast to the behavior of U.S. banks during the housing bubble (and Wall Street Ponzi-scheme) – where U.S. banks were lending out $30 of debt for every $1 they took in, in deposits."
How does a bank create new assets (loans) on its balance sheet without taking on liabilities (deposits)?
Enjoy your column.
Regards,
Colin
> I dont like corruption and the shafting of the ordinary man on the
> street either. But do try to keep my views on asset markets outside
> my political, social leanings.
>
Well, I'm afraid you can't keep your views on asset markets outside political and social leanings. 80% of the corruption in China, which you seem to abhor, comes from the process of real estate development. The cost of such rampant corruption, is then passed onto the home owners, assisted by the propaganda and commercial groups' claim that real estate is so essential that it is worth of dying for. As price climbs, so grows the apatite of corrupt officials, leading to higher cost of bribery. So on and so forth. Even a blind man in China can see that.
When you are given a choice to invest in the property market there, you can see the true color of yourself: are you a capitalist who just wants to make money by all legal means (in which case you will subsidize the real estate related corruption), or you sit out watching others making the money that could've been yours.
Jokers like Jeff Nielson, without any local social and political insights, talk about asset bubble in China within the narrow context that is only known and familiar to themselves, where the truth in China is that decent hard working people are dealing with a dire reality of not being able to afford their own homes. Bubble or not, it is just a label. We can't run away from the very simple truth that housing level is not sustainable when the most robust earners in a society can't afford. Leverage isn't the only thing that creates a bubble, its importance is second to affordability. When a well paid middle class couple, not peasants or night club tip girls, are staring at the price tag of an apartment 20 times their combined annual salary, in the city they make a living, the only thing that pops up into their mind is: bubble.