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Ethan Backus
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Ethan Backus currently lives in Guangzhou, China and is interested in the Chinese economy. The Chinese financial system is still very early in its development stage. This presents many risks and opportunities for investors. Being fluent in Mandarin and having spent several years living in China... More
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  • Chinese Iron Ore Imports Fall for 3rd Month Indicating Slow-down in Housing

     

    I recently read a Bloomberg article that seems to have gone unnoticed by most people watching China. It says that iron ore imports for June were down 9%, however steel exports rose to their 2008 high! So, this means that Chinese steel producers must be cannibalizing their inventories and domestic steel demand must be falling at a drastic clip.

    China already has a gigantic excess steel capacity. This is partly attributable to the fact that there are so many mom and pop operations producing steal in China. This means that production is highly uncoordinated and it makes a situation of massive over-production more likely.

    The cause of the fall off in steel demand is a slackening of the auto and construction sectors of the economy. I bring this article to your attention because a decrease in steel demand is a great leading indicator on the direction of construction. It would support the thesis that China is cooling off, and more specifically that the massive building spree that has propped up the Chinese economy is slowing down.

     http://www.bloomberg.com/news/2010-07-10/china-iron-ore-imports-fall-for-third-month-amid-weakening-producer-demand.html



    Disclosure: I am currently short FXI.
    Tags: TAO, FXI
    Jul 24 8:17 AM | Link | Comment!
  • Speculative Fever in China: Part 1 A View from the Ground

    Chinese people love status symbols. While it is true that Chinese people in general are big savers, they save for a single purpose: to buy things that show people how rich they are. In the past six months the volume of luxury cars I see every day on China’s clogged streets has exploded. A year ago I would see a few Mercedes and BMWs each day, but now I daily see dozens of them along with Porches, Lexus’ and the occasional Lamborghini (usually driven by a 20-something with a baseball cap listening to rap music.)

    Being rich is everything in China. These days a woman’s parents insist that any man she marry must have a new car and a new apartment (no small feet in China.) This weighs men down with enormous pressure and has fostered an out of control get-rich-quick mentality of using all the capital you have and all that you can borrow to make as much money as soon as possible.

    I meet so many more rich Chinese people than I did two years or even ten months ago. I have made a hobby in China of always asking anyone with money, “how did you make your fortune?” Invariably, the answer is always the same: real estate. Whether it is putting up apartment buildings, speculating in real estate or the corrupt government official who gets paid off to award a no-bid contract, everyone is getting rich off of the real estate boom (it’s used to be exporting whenever I asked, but in the past two years everyone I ask always attributes their wealth to real estate.) Speculative fever has gotten to almost everyone I know: professors are pre-buying un-finished student dormitories then flipping them, businessmen are taking their profits and buying three or four apartments, anyone who has a relative working at a bank is trying to leverage that connection to get as many loans as possible to buy before getting “priced out of the market.” This is a phrase I hear all the time, and it always reminds me of scared Americans in 2006 who took out jumbo mortgages to “buy before it’s too late.”

    Look out of any window in a Chinese city and you will most likely see one or more cranes constructing 20+ storey apartment buildings or a shopping center. Yet, when I look out at night at recently completed apartment complexes I see something astonishing: there are no lights on – no one is home. I remember a few months ago going to a six building, thirty storey apartment mega-complex with more than four hundred units just to ask about what kind of people lived in such place. The guard I ran into said he didn’t know what kind of people lived in such a place either, because as of yet, no one had bought one of the units and actually moved in. It was all speculators anticipating future demand. The place was a ghost town.

    Drive to the outskirts of a Chinese city and you will encounter, among the fields where China’s poor peasants still toil, monolithic residential complexes – all empty. Think of the future, I am always told. The peasants will all move to the cities, the immigration will be endless and the profits bigger than endless. I too wish that one could see the future by shining a mirror on the history of the past and guide oneself like Perseus slaying Medusa, but it isn’t always that easy folks.

    In my next post I will give you the hard facts about why a sustained real estate boom in China is not only unlikely, but impossible. I will outline some Chinese ADRs that have an interesting non-linear relationship to the Chinese housing sector and thus have not yet accumulated significant short interest from the China bears who have begun to speculate against China this past year. For now please think twice before buying real estate ETF (NYSEARCA:TAO), or a Chinese banking and large-cap ETF (NYSEARCA:FXI), or making a physical investment yourself in Chinese real estate, as so many Westerners and Western corporations are now doing.


    Disclosure:
    I am short FXI
    Tags: TAO, FXI
    Jun 11 10:14 AM | Link | 3 Comments
  • Short These 3 Chinese Stocks Before they Implode!

    People are getting more and more bearish on China these days. Some people want to cash in on a possible real estate bubble, while others just want to hedge the exposure they have to higher quality Chinese stocks currently in their portfolio. Here are three stocks that have had a considerable run up over the past year and seem overvalued on several metrics. The last two have significant exposure to Chinese real estate. These Chinese growth stocks are sure to implode if there is a slow down in China as surely as the internet bubble popped.

    Moreover, Chinese ADRs (American depository receipts) are great to short because they have a natural speculative run-up caused by the fact that they are the only choice for small investors looking for China exposure.

    1) China Southern Airlines (NYSE:ZNH) is set to crash and burn. Recently it has skyrocketed out of control up to $24 a share from it’s March 2009 low of $5.50 . However, it lost $6.30 a share over the past 12 months, and for the past five years the stock has made only pennies per share of earnings during the years it actually turned a profit. It is a great example of the speculative mania that has accompanied China's rise.

     Morningstar.com Writes: “China Southern Airlines is one of the three largest airlines in China. The firm operates a highly leveraged business, both financially and operationally, in a cyclical industry. We believe investing in its shares entails very high uncertainty.”

    Recently, I flew on a short flight from Kunming to Canton on China Southern. After waiting in line an hour at their ticket counter I got to my gate, boarded the plane, where I was rudely told there was a mechanical problem with plane. We passengers all got off the plane and had to wait two hours for our luggage. The incompetence continued another 24 hours until I finally reached my destination. Additionally, China Southern’s food sucks.

    Warren Buffett doesn’t touch airline stocks, so I advise you not to touch this one. There are so many things that could crash this stock: higher oil prices, increased domestic competition, a recession that would slow business and tourist travel. There is little reason to expect a turnaround. The company's debt levels are out of control and set to get worse.

    2) E-House (China) Holdings Limited (NYSE:EJ) is a real estate services company. From 2005 through 2009 its revenue is up 700%. Although the stock has a solid P/E of 12, if there is a major disruption in housing activity in China, its revenues could easily shrink. It works through a number of subsidiaries, and doing this in China is notoriously hard because the hectic nature of the legal system and fraud at all levels of society. Also, this is one of the most overvalues Chinese ADRs in the housing sector.

    3) China Real Estate Information Company (NASDAQ:CRIC) is a subsidiary of E-House. It runs a database used in 56 cities all over China for finding information on parcels of land and existing developments. The stock trades at about $8 with 2009 earnings of .63 cents a share. However, in 2006 and 2007 the earnings per share were each only .03 cents! What is truly amazing about this stock is how gigantic the revenue growth has been in the past few years, from 2006 to 2009 revenue grew 1700%. If and when the Chinese real estate bubble does burst, its profits should really be eroded and its current earnings multiple of 14 be turned into 140. In case of a slow down, all the investments the corporation has made in anticipation of its next leap of 1700% will turn awry.

     BONUS: If you think that China real estate will go bust, short FXI, a China ETF. It is full of Chinese banks and financial institutions. It is the best way I have found to get access to Chinese banks, and on the reverse side, the best way to short them without flying to Hong Kong and opening a brokerage account!

    Disclosure: I am currently short ZNH, EJ, CRIC and FXI.
    May 11 11:26 AM | Link | 1 Comment
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