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Patrick Chovanec  

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  • Recent Developments In China Make Caterpillar A Stronger Buy [View article]
    CAT is a fine company, but -- from my perspective here in China -- I could not disagree more with the interpretation of how trends in China will affect its fortunes. The author offers a 30,000-ft view that assumes monetary easing will automatically translate into continued growth, and ignores the severity of the structural problems China is facing. In particular, it ignores the collapse in real estate prices over the past several months, and the freezing effect this is likely to have (in fact, already having) in 2012 on both private and public-sector construction, as well as raw materials -- such as iron ore and copper -- to supply this construction. China is NOT a positive story in 2012 for Caterpillar, it is a "buckle up and hang on" story for an otherwise solid company.
    Jan 7, 2012. 11:54 AM | 2 Likes Like |Link to Comment
  • China: Initial Thoughts On PBOC Easing [View article]
    Keep in mind, Ben, that the reason bank reserve ratios are kept so high is to sterilize the inflow of new RMB deposits caused by China's purchase and accumulation of foreign reserves. Releasing these funds into the economy would be extremely inflationary. This is precisely what happened to fund the stimulus in 2009 (banks were allowed to draw down on their reserves) and what fueled the asset, wage, and consumer inflation that China has been experiencing. In theory, China has massive capacity to ease; in reality, it has very little room to maneuver.
    Dec 6, 2011. 08:22 AM | 2 Likes Like |Link to Comment
  • China's Biggest Investment Risk Is Political [View article]
    Caixin is right to question the salary figures cited by Chen Zhi. RMB 3,000 - 4,000 per month is at the very high end of a migrant's salary in Beijing. RMB 5,000 - 6,000 per month is a decent college graduate's salary, although not the high end.
    Oct 30, 2011. 01:22 AM | 2 Likes Like |Link to Comment
  • Signs Of Continuing China Inflation [View article]
    I wouldn't say it was printed to "counter" QE 1&2 (it was imported, and released in order to boost GDP as a counter to slumping exports), but to answer your question, the money that was created went to fund an investment boom, not a consumption boom. It went into asset inflation -- rising prices for real estate, raw materials, gold, jade, art, etc. -- which doesn't feel like inflation, it feels like a boom. In fact, the investment boom expanded capacity in many industries, which by reducing real prices helped mask inflation in goods. A very similar thing happened in Japan in the 1980s, during its bubble.
    Sep 7, 2011. 08:31 AM | Likes Like |Link to Comment
  • Signs Of Continuing China Inflation [View article]
    I think your observation about the quality of informal vs. formal lending would be more true a year ago than it is today. What has happened, over the past year, is that the formal banking system, restricted (at least to some degree) in its ability to issue formal loans, has turned more and more to off-balance sheet methods of extending credit. These methods include: replacing loans with bonds (from the same borrowers); sponsoring private wealth management vehicles that use quasi-deposits to service borrowers' needs, while circumventing bank reserve requirements; extending letters of credit to Hong Kong banks which then lend into the Mainland. The borrowers in many of these schemes are the same state-owned entities or state-sponsored projects (or state-boosted real estate developments) that were the (problematic) recipients of the stimulus lending boom.

    The problem is that the formal lending sector, with all its distorted practices and incentives, has invaded the informal lending market and exploded its size. That's far more alarming than if people were simply abanding a distorted formal system for a more market-driven informal one.
    Sep 1, 2011. 10:23 PM | 1 Like Like |Link to Comment
  • Four Signs the China Growth Story is Cooling [View article]
    In the first few years of Germany's post-WWI hyperinflation, wages rose as fast or faster than consumer prices. In fact, rising wages were a main contributor to the inflationary spiral. I'm not predicting hyperinflation for China, but we can learn from the extreme example. Today, 10-20% wage inflation (driven by monetary expansion to pay for stimulus projects) is one of the main transmission mechanisms for inflation in China, and a key factor pushing other prices upwards.
    Sep 1, 2011. 04:59 AM | Likes Like |Link to Comment
  • S&P's Downgrade: Sound and Fury Signifying Nothing [View article]
    The US fiscal deficit affects the nation's net savings rate, which is reflected in a capital account surplus and a current account deficit. This is why economists often talk of the "twin deficits" being related.
    Aug 8, 2011. 08:00 AM | Likes Like |Link to Comment
  • Thoughts on Dagong's U.S. Treasuries Downgrade [View article]
    Correct, I jumped the gun. In fact, S&P today announced that it is downgrading U.S. debt from AAA to AA+. However, I wouldn't say that this changes my perspective on Dagong' A rating or the rationale behind it.
    Aug 6, 2011. 07:40 AM | 1 Like Like |Link to Comment
  • China's Runaway Local Debt [View article]
    Ben, there is a fundamental distinction you are confusing between liquidity and solvency.

    Cash reserves are held by banks to ensure liquidity on the asset side of their balance sheets -- i.e., that they are prepared to meet obligations as they come due (which, in the case of demand deposits, could be at any moment).

    It's the amount of capital on the equity/liability side of the balance sheet that determines whether a bank (or any business) is solvent or not -- i.e., whether their total assets exceed their liabilities. That is why banks are supposed to maintain capital adequacy ratios -- and why Chinese banks have been frantically trying to raise capital this year.

    A bank can be solvent but illiquid, which will certainly cause it problems (and may even push it into insolvency, if it has to sell off assets at fire sale prices). A bank can be liquid even though it is insolvent, although that probably won't last for long as the situation starts to dawn on people and they rush to get their money out.

    The fact that Chinese banks have 21.5% reserves -- a number that the PBOC may well push higher -- is completely irrelevant to whether they have enough capital to sustain the losses that are likely coming.
    Jul 17, 2011. 09:19 AM | 2 Likes Like |Link to Comment
  • China: Timing Is Everything [View article]
    Thanks for the shout-out, Cam. People may not realize that I'm a SeekingAlpha contributor. You're welcome to follow most of my blog posts on China's economy here.
    Jun 16, 2011. 02:20 AM | Likes Like |Link to Comment
  • China: Timing Is Everything [View article]
    yes, and that was option #3
    Jun 16, 2011. 02:19 AM | Likes Like |Link to Comment
  • Does It Make Sense to Be Bearish on China? [View article]
    "I would guess that most of the people writing the most doom and gloom-filled articles on China have never been there."

    But as you know, there are plenty of commentators who live in China, including myself, who have deep concerns about what we are seeing there.

    In particular, I think you are underestimating the problems in China's real estate market and the exposure of its banking system to property values.
    Apr 5, 2011. 09:43 PM | 1 Like Like |Link to Comment
  • Lilly Sees Big Opportunity in China [View article]
    Health care is an extremely promising sector in China, but investors should also be aware that it is also one of the worst when it comes to endemic corruption.

    They should also draw a distinction between outsourcing research or prodution to China (which has potential IP risks, depending on your counterpart, but it's been shown that those risks can be managed) and selling to the Chinese market. With anything other than the highest-end drugs, equipment, or supplies, it can be very difficult to get hospitals to stock or doctors to prescribe without paying bribes. This can present an extremely problematic situation for MNCs, whether working on their own or with partners.
    Apr 5, 2011. 09:38 PM | 4 Likes Like |Link to Comment
  • China's Non-Manufacturing PMI Worth a Look [View article]
    Most economists focused on China are CONCERNED about high PMI figures, in light of inflation worries, and took comfort when the numbers appears heading downward. You may interpret this as a sign to be bullish, but to me, it rings alarm bells on overheading and inflation.
    Apr 5, 2011. 09:31 PM | Likes Like |Link to Comment
  • Chinese Banks' Illusory Earnings [View article]
    In 2009, 90% of China's net GDP growth came from investment in fixed assets. In 2010, it was 57%. So the vast majority of the GDP growth we've seen in China over the past two years was due to the very same investment boom driven by Chinese banks' expansion in lending. All that measures is the amount of investment that has taken place -- not whether those investments are good or bad, or the return on those investments, just the sheer amount of money the banks put into the economy. So really, although we tend to assume that GDP growth is a good thing, in fact it could either be a blessing or a curse depending on how it was used.

    My point is, because of what's happened to China's GDP lately, you're unconsciously making a circular argument. Chinese banks lend a lot of money, which pumps up GDP, GDP is growing rapidly, therefore Chinese banks have nothing to worry about. Not true, if their problematic lending was what has been generating unsustainable GDP growth.
    Apr 5, 2011. 09:10 PM | 1 Like Like |Link to Comment