Is the China Growth Story Coming Unglued? 13 comments
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Something is going on in China that simply does not add up. Let's start with the GDP. ChinaView is reporting China think tank forecasts GDP growth at 10.2% in Q3.
BEIJING, Aug. 8 (Xinhua) -- China will record a GDP growth of 10.2 percent in the third quarter, roughly the same as the second-quarter level, according to a report released on Friday by the State Information Center, a government think tank. The report said consumption would continue to be a major driving force for the national economy. However, auto and home purchases ebbed notably in the first half, adversely affecting consumption in the third quarter.
I doubt 10.2% growth is anywhere close to sustainable in a world economy slowing so fast that a global recession is visible on the horizon. Furthermore China has a major pollution mess that needs to be addressed. China is poisoning its land, air, water, and most importantly its citizens.
Pollution In China
The guardian has a gallery of eleven stunning images of Pollution In China. Here are a few of them.
Yutian, Hebei province: Cyclists ride through a cloud of pollution produced by a nearby factory. Photograph: Peter Parks/AFP/Getty Images
Wuhan, Hebei province: A man collects dead fish in Donghu lake, where officials say an estimated 30,000kg of fish have been killed by a combination of pollution and hot weather. Photograph: Wuhan/AP
Lanzhou, Gansu province: A resident takes a water sample from the polluted Yellow river. Photograph: Dang Yun/ChinaFotoPress/Getty Images
Here is a second piece of a puzzle that just does not quite fit.
China considering economic stimulus package
Forbes is reporting China considering 370 billion yuan economic stimulus package.
China is considering a 370 bln yuan package of fiscal expenditures and tax cuts to stimulate the economy, the Economic Observer reported, citing a source close to the matter. The report said the plan includes 220 bln yuan in government spending and 150 bln worth of tax cuts.
The plan received initial approval from the Central Leading Group on Economic and Financial Affairs, a body under the State Council, but further details will be finalized by the finance ministry and other government departments.
If China was growing as fast as reported, one might think they should be putting on the brakes. Instead China is considering a stimulus. Other than pollution control, exactly what is it that needs stimulating? The stock market perhaps? Let's see how a third piece of the economic puzzle fits.
China May Turn to Bond Sales to Bolster Stocks
Bloomberg is reporting China May Turn to Bond Sales to Bolster Stocks, Official Says.
Aug. 26 (Bloomberg) -- China may let investors sell bonds that can be swapped for shares to deter equity sales and support the stock market, the world's worst-performing this year.
The China Securities Regulatory Commission is studying exchangeable bonds as part of a package of measures to restrict sales of state-owned shares, said a Beijing-based official of the regulator who declined to be identified before a proposal is made public.
The plan would enable state shareholders to raise funds without selling stock on the market, limiting supply after the benchmark index slumped 55 percent this year.
Lockup restrictions are set to expire on shares accounting for more than half the combined $2.29 trillion capitalization of the Shanghai and Shenzhen markets. The overhang is the legacy of a 2005 government-led shakeup that converted non-tradable shares into common stock that can be bought and sold on exchanges.
Under the commission's plan, shareholders wanting to sell after lockups expire would have to transfer their stakes to a third party such as a clearing house, according to the official. They would then be allowed to sell bonds to investors that could be swapped for the shares later.
Shanghai Index
click on chart for sharper image
Whatever is going on in China, one thing is perfectly clear: The Shanghai Stock Index does not seem to care much for it. To that I will add that China's ridiculous scheme to prop up prices simply will not work.
The Olympic Bust
Another piece of the puzzle to consider is China's Olympic Sized Bust. The opening ceremonies were fantastic, but where was the payback? In a command economy there does not have to be a payback. Appearances are often more important than reality, and deviations from plans are simply not tolerated.
Buses Ran On Time
Sometimes economic highlights appear in the strangest of places, like sports columns. Thomas Boswell, sports columnist for the Washington Post is reporting They Made the Buses Run on Time.
At 3 a.m. on most Olympic nights, a bus with a few reporters would return to the Beijing Tibet Hotel. A dozen security officials met us to make sure we had credentials. During the day, knee-high tape outside the hotel created lanes for entering and exiting -- a reasonable way to keep things organized.
But in the middle of the night in a sleeping city, the tape was irrelevant. So, exhausted, we'd step over the tape and take the direct route to the front door. And every night the security people objected, insisting forcefully that we obey the stupid tape maze.
Finally, a Chinese solution was devised. Instead of stopping by the front door, our bus continued to the side of the hotel so, even though our walk was longer, the direct route now obeyed the tape.
Common sense was irrelevant. The tape -- symbolic of a decision made by somebody somewhere in an unknowably complex and security-conscious control structure -- was all that mattered. They had uniforms. We didn't. That's big everywhere. It's huge here.
All day long, every 20 minutes (to the split second), hundreds of buses run back and forth from media hotels to the Olympic venues. There's even a special "Olympic lane" for all official traffic to the Games. Because the Chinese are obsessed with appearing efficient, the number, size and frequency of buses comically exceed the need. I often had a bus to myself.
However, I can barely believe what I saw Saturday when, by accident, I had to return to my hotel at 1 p.m., when almost no reporter has reason to leave the Olympics. Several football fields full of buses all pulled out simultaneously, headed to hotels all over Beijing, theoretically transporting media.
But I was the only rider on any bus I saw. They still made their runs. They still wasted fuel. They still clogged traffic. But nobody, in an activity as state-controlled and Communist Party-scrutinized as these Olympics, would deviate from the original plan, no matter how stupid it might be.
Everyone was helpful until you went one inch past where you were supposed to go. Then, arms sprang out to stop you. Everywhere you went, even alone at 2 a.m., you felt completely safe. Because every hundred feet there were a pair of guards -- at attention in the middle of the night.
The complete lack of dissent here -- not one person could get a permit to use the designated Olympic "protest area," though some were detained for trying -- has an eloquence of its own.
I'll leave here more concerned about China's future, and its impact on those around it, than the future of the United States. Part of that is probably xenophobia, though I've spent a lifetime repeating, "Patriotism is the last refuge of a scoundrel."
Some of it, however, is my suspicion that the cycles of capitalism and the inflexibility of authoritarian regimes make for a spectacularly happy marriage in the virtuous-cycle good times, but perhaps an ugly partnership in the inevitable bad periods.
China got aboard the free-market love train at roughly the time -- in the early 1980s -- that worldwide capitalism hit one of its long secular hot streaks that frequently last 15 to 20 years. Money couldn't wait to invest itself here. Let's see how the Party enjoys its first secular bear market.
When political writers wander into sports, they often sound like rubes. The odds are high that I've merely flipped that script. But if China were a stock, based on what I've seen and felt at this Olympics, I'd downgrade it from buy to hold.
Maybe things will get back to normal now that the Olympics are over. And maybe normal, whatever normal means, will start making sense. Maybe the Shanghai index will soon be headed back to a new all time high. And maybe China's pollution mess just doesn't matter or better yet the mess will be cleaned up next year. But maybe, just maybe, China's growth story is starting to come unglued, in more ways than one.
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This article has 13 comments:
The language barrier, the bustling of the city, the population density and the traffic all can contribute to a first time traveler's anxiety about China making the first time traveler happy to be returning home.
Nice reading while @ work, thx for the laugh
I'm serious here!
You are giving a new dimension to “digressing”
Is that analysis? Give me a break please…
The fact that it is down around 50% is striking, but irrelevant. It soared to a ludicrous height, mostly on momentum and the unfortunate tendency of the Chinese to gamble with gusto, whether there is any basis to what they are betting on, other than optimism and a belief in their own luck or destiny or whatever.
The fact is that although many in China are doing very well, and there has been a dramatic economic surge over the last decade, the average company does not have a solid financial foundation and there is nothing resembling modern securities laws - just faith in the upward-ticking average to guide you.
I believe that many Chinese companies could fall very hard, and prove to be worthless or nearly so, in a severe downturn. I admit I don't know, but am just inferring and hypothesizing here - but it sure looks and smells a lot like the dot-com mania of 1995-2000; then the crash of 2000-to-2002 when many companies that were favorites plunged over 90%.
Read this article published yesterday and see why PRC market is for gamblers and the why the "house" AKA the communist party will win at investors loss of course.
Here is the link to the Epoch Times article:
The Root Cause of China's Recent Stock Market Decline
Great Read!
en.epochtimes.com/n2/c...
Accumulated FXP (short/put Xinhua biased ETF) from April to May. Got buy orders at $70. Plan to ride this one down to 1500 which is far from 2300 lately. That's another 30% folks.
From Epoch Times yesterday:
The Root Cause of China's Recent Stock Market Decline
Luo Xinhui, Special to Epoch Times Aug 24, 2008
China’s stock market plummeted to a Black Monday again on August 18. The benchmark Shanghai Composite Index closed at 2319.87, down 62 per cent from its high at 6124.04 in 2007. The Shenzhen Composite Index closed at 7833.09, down 60 percent from its high at 19600.03 in 2007.
A fall like this within ten months is rarely seen in the world. According to analysts, the trading volumes of the two stock exchanges were at a record low recently. The market is dominated by caution and pessimism.
Technical and fundamental criteria can no longer be used to predict the stock market index’s performance. If this is true, then perhaps we need to analyze the actual situation of China’s stock market.
Official Explanation for the Fall
Many economic reports published by China’s state-run newspaper cited the sub-prime loan crisis in the U.S. and the roaring oil prices as the major cause of the sharp fall in China’s stock market. This is much like the National Bureau of Statistics of China’s claim in a recent economic report that the price surge in the global market was the major driving force for inflation in China. It seems that with today’s economic globalization, problems in China’s stock market have a lot to do with global economics.
However, the United States, the source of the sub-prime loan crisis, only had an 11 per cent drop in the Standard and Poors Index, whereas China is the country that has suffered the greatest loss in stock market value in the world. Does the U.S. sub-prime loan crisis have the greatest impact on China’s market?
When oil prices soared, the stock market declined in countries that rely heavily on oil. However, Europe and the U.S. have never exceeded an 11 per cent loss in value. Does the oil price also have the greatest impact on China’s market? Besides, oil prices have already started to decline recently, yet China’s stock market continues to fall. Why did this happen?
It is generally recognized that tightening monetary policy by China’s Central Bank to prevent inflation is a domestic factor that caused the sharp fall in China’s stock market. Nevertheless, despite the Central Bank’s many increases in interest rates, the interest rate on people’s savings accounts is still negative compared to inflation. Under such conditions, as long as the market is stable, capital should still enter the stock market. In addition, capital liquidation is still high in the domestic capital market.
A Lack of Confidence
Recently, the Chinese government apparently realized this also, and has repeatedly emphasized that the stock market plummeted due to investors’ lack of confidence.
What the government said was right, about confidence. But the lack of confidence is the “consequence” instead of the “cause.” What should investors’ confidence be based on? How did investors lose confidence? I think the performance of the stock market in recent years should have indicated this to investors. Accordingly, whether it was the prediction of a future strong market, as claimed by high level officials and media; or even the renowned Chinese economist Wu Jinglian, who held the view that China’s stock market would suffer a great loss, but recently emphasized the sensibility of rescuing the market—the stock market simply did not react positively to any of these statements and continued to plunge. Over 90 percent of investors have lost money.
Other commonly mentioned factors are, for example, lifting of ban of non-tradable shares and Ping An Insurance’s plans for massive stock and bond offerings. These are not normal factors in the first place. Instead, these are a direct intervention of administrative power, which has caused the stock market to fall. Who approved these plans? Who made the decisions? Without the consent of the Securities Regulatory Commission, would China’s Ping An Insurance announce its massive offering plans on its own? And those unusually high IPO prices of some companies—can this happen without the consent of the Security Regulatory Commission?
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. Chen Yea-Mow, Professor of Finance at San Francisco State University indicates, “The Chinese listed companies’ profiles are questionable. In fact, the truly good and strong companies are rare in the Chinese stock market.” 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.
Can China’s Stock Market Be Independent of the Government?
Since the fall of China’s stock market, investors have been very disappointed in the government for not rescuing the market. Some investors complain that when the U.S. stock market fell 10 per cent, the U.S. government invested 200 billion dollars to save the market. However, China’s stock market has fallen nearly 50 per cent, and yet, the Chinese government has taken no action. According to Chinese Finance magazine, “China’s stock market cannot, could not, and should not be saved.” This might be consistent with the ideas of many experts and economists, that is, it is better for the government not to intervene in the market. However, can China’s stock market truly be a market independent of policy and the authority (administrative power)?
This is a challenge to the current system. First of all, the major and powerful players of the listed companies in China’s stock market are so-called State-owned businesses. According to the Chinese legislature, the State Council is the ultimate representative of the State-owned properties. But, both the China Securities Regulatory Commission and the China Banking Regulatory Commission are agencies under the umbrella of the State Council. This is like a football game where the government is both the referees and the athletes. Furthermore, the government is also setting the rules and changing the rules. Who would believe that independence or fairness in the stock market will ever exist?
Secondly, many influential economists in China are also the independent directors of many listed companies; some are even connected to the company financially. Many CEOs of major listed companies and funds are also members of the Securities Commission, Exchange Commission, and other government agencies. How can China’s stock market remain untainted from these complicated and complex relations and prolific insider trading, pushed stock prices, and administrative manipulations harbored in the system?
Furthermore, a significant factor of a capital markets is fairness, which is ensured by the free flow of information, and relies on media freedom. In China’s stock market, analysts serving in the media are those who pass the official qualification exam. Those who don’t “obey” will have a hard time passing such an exam. Moreover, there are rules to follow in the Chinese media. The analysis must comply with those rules. Didn’t CCTV’s economy program get shut down because of a few “honest” words? Ordinary shareholders can do nothing but follow the rules. It would be a miracle if the shareholders did not end up losing money.
Shi Hanbin, a Shanghai finance expert said, “However, I hoped the August 8 Olympic Opening Day would save the market.” I have said it before: “Always analyze based on the true interest, discard any expectation, and stay completely cold-blooded to maintain a complete calm. Obviously, I have not reached that level myself. I have ignored a key factor: The atheist [cadre] knows no limits.”
Shi’s sentence might be the most fundamental answer to the current market’s situation.
Thanks for your post and link to the article plus your mentioning FXP which I was not aware of. The stated objective of FXP is
"The investment seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the FTSE/Xinhua China 25 index."
This would be a great hedge for me except that when I plot it's chart against FXI's chart it looks like FXP is not working like it should. It should be perfoming inversely at a ratio of 2:1. However, over the past year their this has not occured and even worse, there have been times when they been highly correlated. For example, from November 2007 (inception for FXP) to May 2008 both were down between 10% - 20% and from Nov-07 through today FXI is down 30% but FXP is only up about 10%. That's not 2x inverse.
Do you know what's going on here?
--Sorry, I tried to cut/paste the charts from Yahoo to no avail
If the 60% drop in the China indices are not enough proof of an Olympic Bust, I have no idea what would be. Another laughable point, not just at you, but at any other reporter that would comment on it. After all, where was the Olympic Boom in the past 8 months? I'd argue that the stocks are a leading indicator, you're a couple of steps behind, and that we're already in the stage of recovering from the bust. But, that's only if I believe the Olympics really had that much to do with the stock market to begin with. In the end, fundamentals trump other forms of analysis, and the fundamentals for some ADRs look quite good.
Your comments about the economic stimulus package are definitely valid and a cause for concern. Exactly what the officials see and what they are reacting to are not within my abilities to purvue. Seems they are not satisfied with 8% growth, and want to maintain over 10% GDP growth. That is worrisome, so thank you for pointing that out.