Consider_this

China's Bubbles and Demographic Trends

I've never seen so many shouting and yelling about China stocks being overvalued in my life. There're 5-6 articles on this position alone on the front page *PER DAY* on SA. This is similar to what you find on blogs, forums, financial websites.

If it's due to "concern" and kind advice for the investors, this quantity of unsolicited is giving me a lot of "warm and fuzzy". Wow, such caring words from so many people who want to look out for my interests! Words from people on Wall Street and financial companies! Ah... I must express gratitude at their graciousness and concern.

On the other hand, the cynical side of me can't shake the feeling that some fund managers and/or hedgies have missed the boat (and missing the market average, and they're due to be compared to the average soon, as Q3 closes), and are trying to "talk down" the market so they and their clients can get on.

Or it could be shorts with a bearish position, trying to talk down the market to alleviate existing losses or make new positions.

I don't doubt that viewpoints on "bubble or not" exists all the time, but when articles clamor endlessly and without solicitations to incite selling, esp in great quantities and with forceful assertions, I tend to disbelieve.

Call me a media skeptic.

China's Growth an Accounting 'Miracle'

This article and the electricity quote is misleading. Since the author is going to be quoting from "the American Enterprise Institute", lets try a balance from the opposite end of the bias: "Xinhua news".

news.xinhuanet.com/eng...

" The slowing demand was mainly contributed by the industrial sector, according to CEC data. About 3.43 trillion kilowatt-hours of electricity was used by the industry last year, up 3.83 percent from a year earlier, slower than the overall social power consumption growth rate for the first time.

Electricity used by the service industry and the rural and urban residents continued rapid growth, as the group was less affected by the financial crisis. "

There. The switch from export oriented economy to an internally facing one boosts "Service" economy and shrinks the exporting factories. This will cause a dip in raw electricity demand, when in face, the service sector's electricity use is growing very rapidly.

The truth is probably somewhere in the middle of the two bias.

What happened to USA's switch from manufacturing to to service economy happened over decades, China is having to do it in a few years; hence electricity supply/demand didn't have a chance to adapt.

GDP can grow despite electricity decline, precisely because of the switch to internal demand; as well as infrastructure construction, which doesn't take as much electricity as factories. Check the demand in raw concrete, copper and steel to see the truer picture.

The recovery is not all fake.

China's Demand Makes Old Signposts Useless

The fear that China's brewing a bubble is overblown. USA went through countless bubbles before it got to where it is today, and is in the midst of one of the biggest one in history yet. No I'm not talking about housing, I'm talking about the debt bubble, which has yet to burst.

USA's bubble scheme is the biggest in history and are orders of magnitude bigger than what China offers. If you think it's over, you have a few decade of surprises waiting for you going forward.

From a realistic point of view, if you're trading assets/monetary credits from a massively bubbled economy; to a somewhat bubbled economy; you're actually doing risk reduction. Thus, running away from USA/USD based assets to hard commodity and Chinese stocks makes sense.

For people who're warmongering, even fictitiously on this forum, know that China doesn't have to fight to end any war. Pending a crisis, just cover and blind eye and "release" a couple of billion of refugee a day to the world/USA, and everyone will have a humanitarian and economic crisis immediately.

What are the countries going to do? Bomb the refugee ships? Sure that would be acceptable to the democratic public. Also, even if 50% of them slips through, you still have a crisis in the country.

This is Sun Tzu's art of war. You have to think outside the military box.

The China Stock Bubble Is Back

The market can remain irrational a whole lot longer than you can remain solvent or patient.

That is the key key mantra.

I do not doubt China is blowing a bubble; I also do not doubt that some of the stocks are overvalued. However, consider this with the big picture, and you tell me where to put your money:

USA is coming off the biggest bubble scheme in history. A never before seen perfect storm collision of: Credit, Housing, Debt bubble and even stock are bubbling orders of magnitude bigger than what China offers.

From a realistic point of view, if you're trading assets/monetary credits from a massively bubbled economy; to a somewhat bubbled economy; you're actually doing risk reduction.

Due to global savings glut, there's really no "non-bubbled" places of the 1980's kind left in the world anymore, this even includes Oil and Glod.

Thus, you have to view our current market in perspective. GS is more right than wrong, that China's stock bubble is going to take a while to run to exhaustion -- far longer than how other bubbles is going to unwind.

The big bubble you should worry about is UST and the real RE market that's currently being covered up through a series of Mark to Model, TARP, Not going to foreclosure, Not relisting REO, Not recognizing security paper losses problem.

China's tiny stock market pales in comparision.

Should We Be Hoping for More Protectionism?

Actually I want to point to one paragraph:

"I will, but color me skeptical. There's a reason "conventional economists" are frightened of a trade war: it distorts economic activity, increases inefficiencies, carries the deadweight loss of the tax and of the lost scale returns, and so reduces output. In the midst of the worst global economy since the Great Depression, that seems to be the last thing we should be seeking."

It seems to me that this is the PERFECT thing to do at this point! Our demand is obviously faltering. If we don't quickly reduce the global output to match, you'll end up with massive deflation of prices and layoffs.

Efficiencies and Productivity is the enemy in a great depression. What you want is a "reset" so people can get back to work, *and then* add back in the productivity later.

See any companies making big capital or productivity investments in this environment? Nope, instead they're reducing their size, layoffs, reducing output, etc.

Don't get me wrong, I don't like Protectionism, but I just feel like if we're to debate, at least we should get the logic correct.

Protectionism would solve the "too much output" problem, but at a cost of reducing everyone's output capability and our collective standard of living. It's synonymous to solving famine by killing people (who eat food), until there's enough food for people.

Surely there's a better alternative????

Can China Take Up Consumption Slack From the U.S.?

The point is, China has options, USA doesn't.

China can choose to forgo it's export industry and raise it's currency. In doing so, it can either sell some foreign reserves for domestic buildout; or borrow against it's RMB by issuing bonds itself. No doubt painful, it is non-fatal and actually yields positive results.

The choices here may start out bankrupting exporters, but non-export industries will benefit, exporters can convert to domestic purpose and consumer's standard of living will be allowed to raise. This will lead to raising prosperity.

USA's choice boil down to either issuing more debt (in the hopes that someone will buy it), esp as it recklessly bails out everyone; or letting it's currency devalue, which again will mean much higher interest rates on new debts, so that the govt can service it's own finances.

Both choices here lead to lower standard of living and widespread poverty.

The writing is clear on the wall.

The Impact of China's Manufacturing Crisis

Response to Chris B:
What will it take for the US to attract buyers for its debts? Will interest rates have to rise? Will the dollar fall again? Both?

Note that in an environment where there's no active Chinese supporting of the dollar:

if the dollar falls, then the interest rate has to raise even MORE for a foreign country to justify buying the "new supply" of govt bonds.

So as Chinese support drops, either dollar stays same, interest raise; or dollar drops and interest raise MORE.

Pick your poison.

The Impact of China's Manufacturing Crisis

Invest in China's infrastructure companies.

This is the era that China builds infrastructure to match previous USA's equivalent of the I-95 and the east-west railroads, the equivalent of Hoover's Dam, upgrade schools and sewers, and the communication networks.

There is money to be made if you invest it right.

Building these right now, when there's slack in the economies and the materials, is EXACTLY the RIGHT TIME.

The author's right on. This will allow china upgrade project to be done cheaply.

Ultimate Economic Showdown: China vs. the U.S.

China's exchange "PEG" with the dollar hasn't changed, despite USD raising almost 20%+ in a short time. It has gradually floated "up" from 1 dollar = 8 yuan at about Jan 07, to about 1 USD = 6.8 today.

This acts as a double whammy against it's exports: (A) It's export did not become cheaper from the USA's perspective even as USD climbed. It's exported goods are just as equally expensive as a few months back, if not more so. (B) The yuan increased relative to other countries, like EUR or rest of Asia, which makes these regions consume less goods from China.

Also consider that the Chinese govt has scaled back the tax benefits of exporting.

And yet, the yuan is still relatively pegged against USD and shows no sign of reversing it's climb against USD. What does this tell you?

It says that China is intentionally weaning off it's export dependence. It's yuan, as it gets strong, will one day no longer need to "PEG" to USD. A strong currency will also start to serve boost domestic consumption power.

In this backdrop...

Try pricing the China's stock market value against other measures: like EUR, Gold, etc. And you'll see that Chinese stock market didn't really drop as much as the above graph suggests.

That's pretty impressive for an Emerging Market country.

China Wants the U.S. Dollar to Drop Dead

Before every start dishing that China's economy is export oriented and all that. Do some research: www.allroadsleadtochin...

Although the "headline" number of export/gdp ratio is 40%. It is very misleading. (As an example, Malaysia's headline ratio is 104% of GDP!) Because it doesn't strip out the cost of the goods used to make the export. Look at the study by UBS (link above): Chinese actual "value-added-portion" of export is only 9% of GDP!

It's domestic consumption is 40% of GDP and the central government now had room to grow that up to maybe 60%. Already, export has been slowing for more than a year (remember USA's Christmas orders are all "filled" in China by July, so China's whole year's export numbers are pretty much already known by this time) and yet the expected GDP for 2008 will be north of 9%.

I think a lot of people will be caught off guard by how well China rebounds in this crisis. A lot of people who're short Chinese stocks or sold their china-emerging-market stocks too early will regret it.

China Wants the U.S. Dollar to Drop Dead

This is a long term prediction, so it won't happen overnight.

However, for someone with a long term investment timeline, trying to take advantage of this seismic shift in power, I think the recommendation would be to buy Chinese Stocks.

Not just any random companies, but solid non-export oriented companies that is focused on China's internal economy.

Couple of ideas come to the front:
- Infrastructure
- Insurance
- Internet
- Food/Seed companies

Good thing is that Chinese Stocks have dropped so much, that with this long term strategy, that buying them now could make one very wealthy.

The Case for Buying China Now

The question here is not whether it will crash further. The author was trying to point out that we're pretty close to a bottom. I agree with him that the bottom is close.

Believing we'll go back to 2005 prices is dreaming, with a country growing at 10-12% GDP.

Also, waiting for a clearer sign also means that by then, the market will have gone up and it'll seem too high then. It'll always keep looking too risky and too high, since this is an emerging market. You can make the same or even more pessimistic argument (about the country not being ready, social/political risks, etc) all the way back from when Shanghai index started.

Look at an emerging market as it is, with all it's risk and reward together. There is risk, but if you believe in the China growth story, then we're very close to a good entry point if you have a 10-15 year outlook.

The Case for Buying China Now

People hear about china's stock market crashes and create a mental block about China's stocks. Looking at the chart and forward, much of the crash already happened. This is actually a good price point to enter into China.

The stampede of the 2007 is actually the worst time, yet ironically, everyone is screaming to buy china then.

Now it's a very good deal, yet everyone is ignoring China.

Go figure!

I think infrastructure play in China is the way to go. There's a lot of build out to go.