James Lewis

There's No Bubble in China

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.
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.

U.S. in Worse Shape than Japan Was

Japan and the USA share very large structural, social, demographic, power, political differences. The fact so many smart people comapre the countries surprises me greatly. It is like comparing chalk and cheese.

Due to the USA effective control on the monetary system and trading system through its ability to print the reserve currency. The USA can circumvent deflation without any trouble what so ever. They can create 15 trillion USD overnight and in the short term no one could do anything about it. China, Japan and Russia, OPEC countires are all holding so much treasury debt that in effect prisioners. They can not, will not dump USD in retailation because it would destroy their countries reserves. If they did, such a hostile move would prompt the FED and the US government to freeze these soverign countries holdings.

So unlike Japan the USA has unlimited short-term ammuntion. I am not discussing medium and long term consequences of creating 15 trillion USD. Merely giving an example that defaltion can be conquered very easily if need be. Of course creating such a huge amount of new money could cause stagflation if structural/trade balances persist. But this is not what Japan experienced and from where we stand now is the main threat facing the US.

The Japanese also had an export-led model going into their crisis, unlike the USA who have a consumption based economy. These two systems are so structurally different that it is impossible to say similar outcomes will emanate.

The Japanese were high savers, the US people spent too much.
Another huge difference. It is a lot easier to get people to spend less than to spend more.

The size of the US is different to Japan as well as natural resources. The US is the major military power, which in effect gives it the power to colonise countries in order to add net assets and net wealth to the US.

Further to this, Japan giant GNP before it collasped was compeltly and utterly fake due to the enourmous asset price bubble Japan went through. GNP was overstated around 30% due to the rediculous bubble, the USA property, asset bubble (as large as it was) really does not compare to what happend in Japan. Property in Japan feel 80% in some places. Real Estate Asset values were not even justified by sales/purchases. Just phantom fake asking prices.

The USA will face very difficult challenges:

Mainly Stagflation - the extent dependent on how it learns to protect its trade inbalances.

China: 2010 Is Clouded in Uncertainty

The government in China has become very confident on its ability to mico-manage. And therefore will not go to either extreme of allowing liquidity to build up into the system or pulling too much liquidity out of the system.

Their aim is simple, keep growth growing so there is no possible chance of a double-dip recession. Whilst at the same time not risk future economic growth by allowing an acceleration of asset prices. The stock markets and property market are strong, but not strong enough to cause serious worries to policy makers. The overcapacity issue is more pressing however this is something the government feels it can manage by controlling SOE participation and tweaking policy.

Therefore there will be a very gradual move to re-balance the economy, get asset price inflation under control. But not to start exiting from fiscal/monetary stimulus. Infact the exit from these will only come when the government becomes:

a) confident the west will not cause risk to the economy through protectionsim. Until this happens domestic policies will always be ready to protect the chinese against what the see as agressive moves against them.

b) The world starts to recover and export increase, which in turn stimulates employment and decreases social risk.

The fiscal stimuls is in effect a permanent policy and will last until 2012. Monetary stimulus will be fine tweaked based on developments.

The only possible way that Chian will begin to tighten monetary policy outside of the factors above is if hot money flows start to de-stabilise the system by re-inflating assets to undesirable levels. If this occurs I am sure China will try and use more unconventional tools to control it. The first being capital controls, the second being more arcane protectionsim against forign money being used in China.

The chinese do not inact such huge stimuls programs with the view of having them run 1 years. The time horizion planned would have been around 3 years (until Hu Jinato steps down). So do not expect large moves. In fact if we start to see large policy changes it will either be because the world economy recovers or because there is a hot-money issue at hand.

**Probably a good time to invest here still**

WSJ: Most Jobs for Chinese Wind Farm in Texas to Go to China

The USA is trying to show willingness to allow China to enter some of its markets. It is a gesture of goodwill in the hope that China will reciprocate and stop aiming to secure a win-lose relationship with the US.

Of course the only way the US is going to be able to enter win-win is if it strengthens its negotiating position.

The Risk in Relying on the Chinese Consumer

wow...that was a bit bold!

China in a Bubble?

Andy Xie is a very good economist, infact an amazing one. The only problem is he has a very pesimistic bent and the Chinese government use him to balance out their exceptionally pro-growth policies.

In reference to his comments on urban growth and population trends in relation to house buidling activity I would like to bring everyones attention to the fact he did not substantite his calculations. His conclusion was that enough property capacity could be built in a few years to house every chinese person. Having read the entire reserach report, I would like to once again state he did not substantitae this. It can not be substantiated, as in 10 years China;s population will be larger than it is now. And it will take an awful lot of building to house China's population if the government wishes to improve living conditions.

Having been involved in the property market in Shanghai, i would like to make it very clear that higher middle class chinese can afford to buy property in good areas of Shanghai and do so with 50% LTV mortgages. Of course the rich have built up a lot of speculative inventory but this is perfectly normal. One needs to be clear that private ownership is relatively new, so there will be extreme price inflation at the start of the private property reform. especially based on the fact China has gone from 'sick man of Asia' to the worlds creditor. Make no mistake property prices in Shanghai and Beijing are in line with China's financial and political power. Shanghai is still a lot cheaper than Mumbai, Hong Kong, Singapore, New York, London, Paris etc etc. Stating that wages are low and justifies that property prices are overvalued is incorrect. China will shortly have second biggest economy on GDP basis, the government holds 2.3 trillion USD of reserves and the Chinese people are sitting on 2 trillion USD of personal savings. This amount of wealth has to be somewhere. The bottom line is the middle class and upper class have amassed a fortune during the last 30 years. Property prices are where they should be. And will grow at around 10% per year on average for the next 10 years.

Those that are on low wages in the rural areas already have been prescribed land that they can build their homes on. They are not homeless, they have their own homes (without the right to sell). Those that are city-dwellers on low wages can not afford to buy property and as a result are an underclass but this does not fuel the arguement of a property bubble. It fuels the arguement that there is serious and very disturbing social inequality and as a result the risk of sever social unrest. The government is above scared of such social risk and as a result is building low cost homes. In effect subsidising property for low wage people. They are only doing this to reduce risk of social problems, but be clear this is happening.

As infrastructure is improved more property will be built in suburbs. This will have the effect of releasing more property to the public at lower prices. Anyone familar with Shanghai will know this has already happend in areas such as Nanhui.

So as we stand, forgot about a property bubble bust. There is no bubble in the property market or the stock market. There IS a credit loan bubble, which if it bursts could hamper the functioning of the banking system and cause property to fall. But with savings on local and government level and the banking system being an organ of the Chinese government. The loan situation would have to be very serious. The Chinese government could pump 500 billion into the banking system quite easily. (it would cause the Yuan to rise in value however).

If property goes up in value past the 10% per annum increase, then it could be said that property prices are being removed from fundamental reality. But as they stand are about fair value.

Global Markets in Review: Reversal in Financial Markets

Correct me if I am wrogn but those that were saving last year did not have their pants pulled and smacked. While those that invested were led off a cliff.

It is bad that the savers are being subject to low interest rates, but in a climate of deflation they are still positive. Of course if the government did not bail out the banks, these savers would have lots all their money because the bank does not have it being insolvent.

China: Unhappy with U.S. Trade Policies, Launches Retaliatory Investigation

Lets be clear, Amercias support of its industry via subsidies, industrial policies, social policies (such as keeping liviing conditions poor by setting wages too low) is 1/1000 of what China does. In effect the entire system in China is subisidised and mico/macro controlled.

China is trying to exhibit that it will not be pushed to do anything so it can further delay its stance on its policies and put itself in an even better position. America so far has been weak in every respect and even though I really have a bias towards the US their policies in so far has been so poor, stupid and weak. That if China does in fact carry on achieving its aims and goals I will not be in the slightest but unhappy. Becuase the USA does not deserve to be at the top of the food chain due to its inferior behaviour.

If I was the USA I would smile and start pulling out all my technology and high capital investments out of China. Re-structure the countries supply chain. Then escalate the amount of disputes through the WTO. China can never win at the WTO because they so un-compliant on every level.

I personally think the WTO is a complete waste of time, after all the largest exporter in the world does not respect, adhere or even take any of the WTO policies/idealogies into account.

When is the USA going to grow some bulls and do something about it.

***MAYBE THE COMMERCIAL MORTGAGE CRASH WILL PROMPT THEM INTO DOING SOMETHING***

Banking Concerns and Chinese University Rankings

It is good to hear that Peking Uni is following a more balanced approach to developing both the right side and the left side of the brain. Left side being the prominent area that mainland chinese people have developed, contributing to great success in developing the economy but complete failure in devloping fair and just society. As well as problems with realising innovation potential.

Looking forward to the next generation of political leaders, I very much hope that more will be right brained. The world and the Chinese society really needs this. I wonder if this is possible..

On the issue of loans, there are rumours going around that everyone is running to borrow money now to avoid the clamping down of loans later. For some reason everyone seems to think this is bullish for asset values (where most of the money will go) and are exhibitng the typical crowd mentality of bidding everything up. Cues outside real estate offices are very common right now.
It seems to me we just have a front loading of loans and purchases and if liquidity is drained out at the end of quarter 4. Then we could see a frosty winter.

all very interesting...

Bank Charge Off Rate Now Worse than During the Depression

3.4%, 4.5%

Ha Ha, loan default rates across the board at this rate.
Try 10%....if the banks are lucky.

It pays to default. That will teach the banks.
Bets wya to re-dictribute the wealth is for everyone to stop paying taxes and default on their loans.

Europe Is Breaking Up Its 'Too Big to Fail' Banks

All the banks listed above are UK Banks that are insolvent.
Not just insolvent, but with assets 50-75% than the toxic liabilities are their balance sheets. They are being broken up and sold off to re-distribute risk within the system. The agenda is huge. I think by doing this they are trying to eradicate a paper trail on the true level of writedowns necessary because of course if they did so. The UK government would be caught with its pants down, as the toxic liabilities on the books are worth 200% of GDP.The UK would not even be able to go to IMF for a loan of that size. We would have a huge sovereign default in UK which would destroy value of holdings at European Banks and Amercian Banks. Long Term Capital Management would like a bank holiday compared to the crisis this would create.

It puzzles me why so many educated people do not understand that the banking system toxic assets far outweigh the GDP of almost every government. The system is Insolvent, this is why we are printing money through QE.

Liberalization and Wealth Inequality in China

Nice comment Tony...

I think one of the tenents of globalisation is that a larger global system contains a larger amount of nominal value (may it be money, resources etc). A further tenent would be that a larger global system may create substantial innovation and further expand productivity and wealth output. So as one country develops within the global system, there is not normally a shift in net wealth. Coca Cola shareholder nominal net value will increase as well as the Chinese distributor. Of course the shift occurs when the shift in the shareholder is grosly under that of the Chinese distributor.

This of course is what everyone is so annoyed at, as China's policies crowd out the benefit of developing the size of the global economy at the expense of other countries (USA from rich side, Pakistan/Thailand/Viet... from poor side.

On a more micro-level, there is a very serious crowding out on who is benefiting from China's rise on the local level. I do see the economic value and growth of the country as a fixed pie. The government, banks, powerful business people do in effect decide what chunk goes to who. After all it is the government who is keeping wages low to increase export competitiveness. This is a very direct policy and clearly concentrates wealth at the top.

I do not agree the middle class is slave to the corrupt communist oligarchy. It is the lower class and fast becoming the lower middle class. Which accounts for a huge % of the population. Rebellion here is where the issue is. Please also note the relationship between the ethnic minorities and the lower class and also the concentrations of lower class in the west of the country. There is a very clear definitive pattern. For now this can be mitigated.

It is if the lower-higher middle class divide widens substantially that there will be problems. After all these people are educated, know how to use computers, know how to organise themselves and know that they are not being given the same chances as the 'others'. To stop this from occuring, I hope the Chinese government will raise wages, build more low-cost homes, distribute wealth more evenly by reducing corruption. And start to form a proper anti-corruption bureau that does not answer directly to the government. A court system that is not run by the government.

Of course this will take time, but is China moving in the right direction?

U.K. Gilts Could Be World's Best Short

Clive comments are very interesting. If we were to join the Euro, then we would first need to bring interest rates in line with europes and peg our currency on 1pound-1 euro. Therefore this suggests slight weakening of the pound. So owning Gilts if you are an interntional investor may be a bad idea because of currency risk.

Of course the pound joining the euro is a very big step as we are essentially a monarchy. The pound with the queens head on it is the only real thing we have left from the days when we ruled the world through the British Empire. Of course with the Labour Government owning most of the banking system - we could join the Euro if things got really bad this side of the water. And Europe pushed forward. However I am not sure if this is the case, after all Spain and Italy are in such terrible state they may want to pull out of the Euro.

In terms of who will buy our debt. I urge readers to remember that that the FED was essentially an offshore UK banking network. The USA will (if they can) step up and buy our debt. But there will need to be some interest rate rises. But not the amount everyone is predicting. And maybe this will not strengthen sterling because of the state of the UK economy and the very obvious need to devalue the currency through QE.

As crazy as this may sound to everyone, my feeling is that the UK is in such deep trouble. That any attempts to restriant the QE program through concepts as 'rsponsible money supply control etc' will be very damaging. We need to print as much money as we can through QE as quickly as we can. We need to devalue our currency by 25% from where it is now. And we need to subsidise manufacturing so we can build a manufacturing industry on the back of weak sterling. We need to reduce un-employment benefits and have those that want to be unemployed working in low skill factories for a few days per week to get their money.

On top of this we need to inact vary favourable incentives for rich people to come to UK from other countries. Further to this we need to subsidise living costs by taking away greedy private companies making money on the back of running our country (utility companies etc) and by definition drive down wages.

This is a very tall order, I guess that not even 5% of the above will be done. Therefore expect a year of growth before the s*h*t really hits the fan. The UK is in a very bad place

Three Myths About Business in China

I like you work Shaun, I am not sure how objective you are. Especially as you have pro-growth business. If you do not see opportunities, then you can not add value to your clients by offering your services.

However every chinese household in tier 1 cities has all the gadgets nd necessities that westerns have in the west as well as jewlery, cars. Most if not all eat out in restaurants, enjoy hobbies such as bowling and indulge by going out at night. If the Chinese manage to hold the price of property/stock market basically stable then we can expect consumption to continue increasing. It is too small currently and needs to increase if exports do not recover.

I am not sure we will see 50% of GDP being domestically generated through service industry in 5 years as asset price bubbles could inflate further or burst. Unless of course the economy is re-balanced. However a genuine 40%-45% is all that China needs if it is spread between enough people. Not juts the upper middle and upper class buying huge ticket items and asset speculation being counted in the figures.

Chinese Railways and Speculating Pig Farmers

Interesting comments today, we have a lot of new commentators. Some however need maybe to put their responses in a slightly more polite way.

On the issue of the high speed trains, I must say that improving the railway by expanding the network is a very positive move. In the mediuma and long term it will not be value destroying. Having spent a lot of time on trains in Shanghai/Zhejiang/Jian... I can comment that they are very busy. Huge productivity is lost due to their not being enough trains and the productivity loss is more valuable than the cost of the improvements in the medium and long term. Just because wages are low I feel it is not correct to say that improving this area of infrastructure is value destroying. Sometimes one needs to transcend past 'pure mathmatical equations' to asses value destruction. Having hundreds of people waiting for trains for hours is very negative in lots of ways. Also I would like to pull from my own experience of deciding to drive instead of waiting for the trains because of the poor train infrastructure (and make no mistake as it stands it is very very poor). By driving I am value destroying by using up subsidised petrol and polluting the air. Which in turn makes people more ill and less productive.

Most of these routes are not covered by planes and I must say it would be the most wonderful thing for most people if a few domestic carriers went bankcupt because everyone was using the new train infrastructure. It would be good for China long term oil security and make green transport an easier goal to reach. After all China could have many hydo and solar projects along the tracks powering the electricity needed.

As long as all the normal areas of wastage (bribes, money being sent to other projects etc) are not too high than there will be a very positive retrun in the medium/long term. Especially if we move through a sustained cycle of inflation.

Feng, your comments are very unfair. Michael is not a China-basher, just very pessimistic. To say he does not socialise with Chinese middle class is wrong. After all he teaches students who are by definition in the middle class.

The Stimulus is not estimated to peak until 2011, so exit strategy talk needs to be called off. India is starting to exit their policies, but India is always trying to be infront of the curve. Based on their mistakes so far (have you seen how poor india infrastructure is), they are not a good indicator of what should be done.

There is a very definitive strategy in place, that is designed to monopolise as much worlwide demand as possible regardless of its short term cost. This strategy so far has worked. If the Chinese come 75% close to their aim. Property Prices, Social Issues, Wasted Spending, production-consumption% of GDP will really mean very little. China has just risen the stacks, rather than everyone pondering on what they have done wrong. Maybe they need to work on strengthening their position.

The only thing thast can stop China from where I am sitting is protectionism.