James Lewis

Investing in China: Why the Nine Nations Matter

Wow, you are a very smart guy Patrick.
I know a huge amount about China, its culture and am very very well travelled.

But I am pale into comparsion to you.
Please please keep on posting further pieces to this article.

Very interested for you to start breaking down and talking about the new trends emerging in the nine nations. Hangzhou developing into financial backend (administration) centre to support Shanghai's as the front end financial operator.

Why Krugman Is Wrong About the Yuan

Yes Dixon,

Purchasing power of US consumers is taking a hit as credit is being withdrawn. However it US consumer purchasing power was at such highs this had to happen. After all a few years ago, people with very low monthly income had the ability to buy exceptionally expensive properties with no downpayment. In China if you have no money, you can eat with no problem but you can not buy things like high end computer goods, cars and certainly/certainly not property. You have people earning 1000USD/Month buying 600 000USD houses. Bloody rediculous.

This being said the USA will trade its way out of trouble, but by the time it does so. China would have cemented its power as number two.

Why Krugman Is Wrong About the Yuan

I like your work Shaun, I have great optimism like yourself for the consumer economy in China. I agree with a lot of your work.

I have to say however I do not agree with what you have stated in this article. The USD is not weak on any long-term relative basis, purachins power basis. If you look at long term currency charts you will see it is exactly in the middle of its range. Not expensive, not cheap. Not high, not low.

You also go to say that the market is taking the USD lower due to its structural imbalance. High trade deficits, budget deficits etc. This by your own definition means you understand that fundamentalyl the USD is stronger than it should be. The truth is the USD is overvalued because Asian countries are running large trade surpluses and buying the USD, this is artifical demand because the Asian currencies are weakening their currencies by buying the USD. This is the source of the problem as a lot of Asian currencies are not based on market pricing mechanism. We all know that the USD is maniuplated by the FED through polciy from time-time. But this is different from direct peg and guided price levels.

The point here that has been missed is that Obama is ok with the RMB-USD exchange rate. As long as it goes in the right direction. 4-5% revaluing per year is exactly what Obama wants. Anything more than that will create huge issues for US companies, inflation (important when you are creating new money through QE) and the funding mechanism for the US through selling Treasury Bonds. You have said this but missed that Obama is playing lip service to hide the fact that the Europeans are being forced to take the adjustment. The USD is falling against Euro, pegged to the Yuan means that Chinese goods in Euros are cheaper. And US goods are cheaper in Euros. The US and China share common goals in this respect, I would dare to say that both parties know this at the top level.

The US does have a lot to export to China but the exports are being blocked through protectionism. Import tariffs, lack of access to supply chains, no way in to distrubution networks, technology requirements that shut US companies out, subsidy loans, local laws that require joint ventures be set up (always bad for interntional partner). This is the true issue that Obama is focusiing on. The rmb is a red herring. It allows China to show it is not bowing down to US pressure, so Hu and Wen can keep face inside the Politburo and to the nation. It also gives them a little more room to allow some advantage to the US in China's rise.

Relations between the two countries are probably better than most people think. However there are very large risks, after all Hu and Wen do not hold all the power and there are a lot of right wing policitcans abd business leaders that want to see China hold all the cards in everyway. Hu knows that the best tactic is to concede some ground in negotiations, so's not to start a trade war with the US (its best customer). Being a surplus country starting trade wars with the main party who is a deficit country does not make sense. This has nothing to do with the China-US arguement, just pure economics.

The RMB is 15-20% undervalued due to the amount fo USD reserves it holds. The USD is overvalued, in part because one of its largest trading partners, China holds a peg.

Expect 5% revaluing on the Yuan per year for next three years.
Expect USD to go down a little lower, before making long term base. If this does not happen there will be serious trade wars and the US may retailate not by stamping duties of chinese imports but destroying the value of the dollar.

All very interesting

Check-Up on China and the Baltic Dry

The question is, is the Baltic at new highs because shipping companies have cut capacity and routes. The shipping industry has colluded and it working together to manipulate freight transit rates. So to me the baltic index is just a manifestation of the reduced capacity when the west is restocking for christmas.

China's exports have been ok the last 2-3 months.
Not great, not as bad as last year.
The Shanghai market is awash with liquidity.
The Shanghai property market is awash with liquidity.

Hot money flows are quite high.
Savings are coming out the bank.

Expect things to slow down as we enter winter,

Post-Holiday Chinese Market: Five Key Factors, Part 3

Love your work, I know you like to trade and can see you have a bias to the downside on the Chinese market Susan. My view is that the Chinese government has a very precise 1-2 year plan with reference to their policy decisions.

In effect they are flooding the system with liquidity, inflating asset prices by whatever means necessary. The market will not drop until they start exiting their liquidity policy or if they find themself in a postion that they can not control the market anymore. Therefore my view is that of they want assets to carry on going up, then really we will break 3000 from here and move to the high of the year.

Central Huiji Investment Ltd have clearly sent a very clear message to the market and given a timeframe of one year before it will cease buying new stock. Because of their affiliation with the government, they can not lie like this to unload stock because of the social fallout. Therefore I very much think that the Chinese government exit strategy will not begin until at least 2Q, 3Q next year. Maybe the Chinese government will take its foot of the acceleration peddle. But a huge amount of liquidity has already gone into the system, so assets will still rise even if they do cut the amount of loans going into the system.

My view is that the Chinese government wants to see the market around 4000 before selling into it. They want to pull in the retail customers with their savings and unload stock to them. If they do this mid-business cycle, they probably hope that the economy will be doing well enough to absorb their exit strategy and still continue.

They will be right if they have created a significant improvement in the domestic economy by raising wages. However if they don't and then they decide to extend their liquidity assistance past their original 1-2 year timeframe because of reduced exports due to proetctionism from the west. Then they are going to put a big hole in their trade surplus and hot money outflows will be enourmous as everyone runs to the door.

Short-Term everything looks very very rosy.
Medium Term/Long Term - work needs to be done.

Very interesting, the property market in Shanghai is heating up.
I have a friend selling his house, 5 people have viewed it since they listed it 2 days ago.

Post-Holiday Chinese Market: Five Key Factors, Part 1

Hello Susan,

You stated 'Chinese banks raised the foreign currency deposit rates while held the local currency rates steady in September.'
This was after saying that there seemed to be 'hot money' outflows.

Are you saying that banks reacted to the hot money outflows by increasing foreign currency deposit. Is watching the foreign currency deposit rates for large increases a good way to guage if there is a rush of 'hot money exiting' china.

Thanks

James

CAF: If Money Flows into Mainland China, It's Where You'll Want to Be

Lots of confusion.

People looking at western markets look for inflows from the Chinese Government trade surplus that is being collated in the chinese soveriegn fund.

People looking at Chinese market looking at inflows from foreign investors through the QF11 program.

Hong Kong investors looking at the illegal flows from the mainland into Hong Kong through the various underground channels.

Who's right?

I belive the Chinese market is fundamentally driven by the excess liquidity in the banking system that has built up due to the giganitc reserves built up and not sterlilised, the huge QE program the goverrnment has been involved in and not to mention the enourmous capital that has emanated from loan growth. It really has nothing to do with the QF11 programs. After all the western banks have very little disposable income on their balance sheets as they are just about reaching solvency.

If one is looking at Chinese market, one really needs to take a look at domestic policies, earnings, liquidity issues and valuations. Trying to work out what the western banks are going to do is useless. They are not calling the shots, this of course is what the chinese government wants.

In terms of premiums, the yuan is not freely convertible so there is no arbitrage analysis that can be done. The Hong Kong listed chinese stocks are priced in HKD, Shanghai listed in RMB, US listed in USD. There is inherent currency risk as the RMB could resume its strengthening even through a one time maxi revaluation.
Therefore to say Shanghai stocks are expensive compared to basket of stock in HK/USA is not true. A full analysis would have to be made of the corresponding currencies. Very hard to do as the RMB FX rate is only reliant on where the government decides it is to go. Anyone that has looked at the forward RMB-USD market will be able to appreciate how arcane future movements are.

I would say that I woudl happily pay 10-15% more for stocks in Shanghai quoted in RMB if my investment time horizion was more than 3 years and I thought now was a good time to buy. (Note I am not saying buy Chinese stocks here)

The best one can do right now is sit tight and watch what the chinese government has to say over the next couple of weeks. This will dictate price movements short (and maybe medium term).

U.S. vs. China: Has Trade War Begun?

Yes...very interesting....for sure the gold breakout was a protectionist outlash against the US by the Chinese. We all know that Gold would be higher if it wasn't for the US government smashing it down.

But it makes sense to me for the US government to set up a mini-crash shortly. There must be a fear that China would just buy gold up if they did this. If the US does not smash gold down, then to me it will become very clear that the US is fearful of the power of China's two trillion dollars worth of reserves.

Wow.....this could escalate hugely

China's Stock Market: The A vs. H Premium

The Premium will drop as it becomes easier for banks to arbitrage.
As China opens up the rmb, the spread will narrow. Please also note that H-Shares are priced in HKD and A Shares in RMB, so there is significant fx issues with looking at the spread.

Because the US markets are strong, due to ample liquidity; you will find a lot of emerging market funds based in USA buying chinese stocks in Hong Kong. So the premium will also be reduced.

Liquidity and lack of arbitrage opportunity drives the premium not investor behavious/pe etc.

Fund Flows Behind the Recent Chinese Stock Market Reversal

Thank-you Susan,

This is very powerful information.
In fact using this data alone you can get a good idea of the 'smart money' movements in and out the market.

I wonder what % of these funds consist on 'shadow government money'. And their projected exit strategy.

I also wonder what % of these funds have 'un-official lock ins' dictated by the government.

If a new business cycle started this year. These investments will prove to be very good. I question though if the recovery is a mirage, what the effect of everyone exiting at the same time!

Morgan Stanley's Wang Misreads China

Qing Wang from Morgan Stanley should go and work for a Chinese Bank where they can all agree how amazing China is and how rubbish the USD IS.

I havce read her piece and frankly its the biggest load of garbage I have ever read. I thought economists are meant to be driven by objective analysis by economic indicators not driven by 'pseudo-nationalism'


The only reason why China holds its holdings in USD, is because if they sold them. The RMB would rise to its natural level and further erode China's export driven economy. Not to mention devalue their current holdings.

China should not be moaning about the dollar being devalued relative to the RMB because they are setting the initial rate. By running a mercantile agenda they are also making it impossible for the USA to do anything but create more money through QE. Maybe if they imported as much as they exported for the past 8 years. The USA would have other options. On this point China should expect a 'depreciation charge' on their USD holdings, due to the monopoly on manufacturing they are trying to create by circumventing every free trade and WTO rule in the book.

To then go and say that building useless roads that lead to no where. Dams that are totally useless. Is o.k. because it has a number of other benefits to the PEOPLE. Rubbish, how about instead of building useless roads, the money is spent on giving the Chinese clean drining water, improve the polluted air. Raise the living standards on those left behing in the west.

I really wish these people would be true nationalists and genuinly care about the people. As apposed to living a fantasy world.

Trade Deficit with China Continues to Expand: Why?

Ha Ha Ha Ha....

You are going to take a pounding from readers, especially the pro-nationalist camp.

I do agree with you on most things you say.
But you do not have a way with words.
You would make a very bad diplomat.

Try and put you view over in a way that you will not alienate the entire world in future. But keep your content coming!!

U.S., China Increase Trade Deficit: Win-Win Situation

Amercia adds the most value $-$ in its manufacturing than any other country in the world. So please stop, USA can not make anything anymore. Because they can and do.

Bernanke created 1 trillion USD today. With a couple of computer entries and some admin, the USA would have created the equivelent of 50% of China's Surplus in one sitting.

America are paying for good from China with money it can create. Its like me buying something off you with Monopoly money and someone else looking at the transaction and saying I am paying too much for what I am buying.

You can not compete with USA when they are printing the reserve currency and have the strongest military.

China: Holiday Thoughts on Misunderstanding Data

The source of the angry ultranationalist youth is actually a reflection of the pain, suffering and discontent felt by the Chinese people towards the CCP. The CCP over the past 59 years has tried to deflect this agression against the establishment and reflect it towards foreign nations/people. This is of course a very common aspect of 'pseudo communism'. I say pseudo because I don't believe there are any modern day versions of 'native american type' communism and village community dynamics alive today. Communism source should be based on Love for all, fairness for all, support for all and justice for all. Not control of the weak/poor by the establishment..

This agression has been deflected away from the establishment by erasing the line between the CCP and the Chinese culture. A lot of the Chinese believe that they are betraying their culture in speaking out against the CCP because in effect they have been taught that they are shunning their culture and inate origin. This is a very effective strategy because of the cultural feature of group psychology the Chinese have so deep inside their being. The Chinese see the red flag and believe it is the connecting symbol of their Culture. The CCP is synominous with this red flag. If you say anything against the red flag/CCP you say something against the Chinese Culture.

Anyone that knows the history of how the CCP got its deep influence in the mainland chinese thinking process understands the deliberate and well thought out strategies and actions that induced the line being erased between the CCP and the Chinese Culture.

The problem is the foreign governments/media don't understand this and flame the hatred by making comments on the Chinese people as a whole rather than the policies of the CCP. This even had an effect this summer during the protests of angering the oversees Chinese. The mis-communicated views punctured a very painful aspect in a lot of Chinese people and as result the outpouring of nationalism was very easy for the CCP to orchestrate. Of course most of the ultranationalist youth in the Olympic stadiums watching the olympics were hand picked by the CCP anyway. Also all the demonstrations were organised centrally by the CCP through the oversees networks.

I think Micheal the people you come in contact with are a 'special calibre' Free-thinking people who have decided they wish to accumulate knowledge. It is only natural that you attract people of this calibre because of your path in life. The earthquake in Sichuan/ Dairy Scandal/Olympic Games have certainly had a very strong effect on how the Chinese see the CCP, themselves and foreign nations/people. And things are heading in the right direction, but we have a very long way to go. And my fear is that we will never get there because of politics.

Shanghai Should Continue to Sell Off

OH MY GOD!!!

Shanghai stockmarket to 1000!

Come on, this is not a true reflection of the reality of where things are going. We all know that there are a multitude of problems in almost every aspect of the Chinese Economy, Chinese Legal structure, Human Rights and the Chinese Business culture.

But the fact reamins China is the creditor of the West.
Has more than 2 Trillion USD of reserves.
Has enough money, enough political will and enough power to bail out the entire system at least once. Also they know exactly how to do it, having effectively helped the US government in bailing out its financial companies by writitng a blank loan cheque to save its investments.

Property is not as weak as everyone says it is.
The stockmarket is falling because it was bubble overvalued in the first place because of the pyrmaid selling scheme set up by the corporates/local and central govt. And set a light by typical gambling psychology of the Chinese.

The insurance companies are arbitraging dual listed Hong Kong and Shanghai listed stocks. As soon as Share Values are the same over both exchanges, then the selling will stop. Currently there are still a lot of stock that are 30-50% more expensive to buy in Shanghai exchange than the Hong Kong exchange. Once this is removed and the big 2005/2006 IPO stocks (Ping an etc) is priced the same in Shanghai as Hong Kong, we will see normalisation of market.

Shanghai stocks are not cheap, they are certainly not expensive and they have not hit their lows yet. But they are not going to 1000, maybe 1800.

Property is still very cheap compared to International standards.
Shanghai property is 350-400% cheaper (like for like) than Hong Kong, Tokyo and Singapore property.
Shanghai property is 300% cheaper than Mumbai property.
Shanghai property is 450-475% cheaper than London/Moscow/New York property.

So unless the entire worlds property market gets hit very hard (I am not saying this wont happen), then Shanghai property will at the very least stabilise where it is. Infact if the worlds property market crashed I would still rather own Shanghai property than other countires.

Please also note that currently only new property is getting hit in Shanghai, second hand property in central location has not moved. There is no new properties coming on the market in Shanghai in downtown locations. The new proprty that is getting hit was drastically over priced, in second rate locations and was bound to correct.

Short and medium term 'doomsday' predictions are not warranted.
I see another 3-4 years of prosperity.
Long Term we could see a phase of political fallout and a whole host of problems that China has experienced many times in the past, but as yet we are not there.

Hu and Wen I am sure will keep things smooth until they leave in 2012. After that then it is a totally different ball game.