by Charles Biderman
The next big financial crisis we are likely to face will not come from Europe, which everyone already knows is in recession, but rather from China. China is in big trouble and most investors do not even think that is possible. Everyone still believes that China, even with a slower growth rate, will be the engine that pulls the globe out of economic distress.
What we have discovered recently is that not only is the quality of China's economic numbers even worse than those of the U.S., but real time numbers indicate to us that China is probably already in a recession. Our buddy Dennis Gartman pointed me towards a May 14 Financial Times item that quoted Li Keqiang, China's premier in waiting, as saying back in 2007 that China's official GDP figures are man-made and therefore unreliable. The FT added that Mr. Li focuses on three sets of data, electricity consumption, rail cargo and bank loans. Guess what? Electricity consumption now is barely growing after years of double digit gains. Rail cargos volumes are also now barely ahead and new bank loans are actually dropping.
Then there is what looks to be a collapsing Chinese real estate market. Real estate in China is the fiefdom of local governments according to TrimTabs head of quantitative research and Shanghai native, Minyi Chen. To understand the real estate market, it is important to get that local governments have been giving land plus financing to developers who then build and sell homes to pay off the local government. But that game could be over as sales and prices are slowing.
Patrick Chovanecat, a professor at Tsinghua University in Beijing, in his April report said that Chinese residential real estate sales were down 17% in Q1 and other real time indicators indicate that demand and now prices for Chinese home are actually dropping. Professor Chovanecat also says he does not believe official economic numbers and says that the real China economy is now shrinking.
Wow! What will happen to the stock and commodity markets when CNBC, Bloomberg and the Wall Street Journal all headline the Chinese reversal? Cannot be good. On the other hand, I assume that the Chinese central bankers graduated from the same money printing 101 course attended by the Fed and the ECB. Therefore I expect China to announce various stimulus packages soon that could boost emerging world stock prices and even the U.S. market.
To step back, what a mess this world is in if not only Europe is contracting, but so is China. In my opinion, there is very little that justifies global stock prices being as high as they currently are. That does not mean markets will be collapsing tomorrow or even next month, but over time gravity does work. The central banks cannot levitate asset prices forever. The only question is not if-- but when-- will the Black Swan fly.
Disclosure: No positions