M.R. Henderson

The Specter of Excess Capacity

Overcapacity is NOT the same as owning oil reserves; it is wasted capital, spent too soon. Everything depreciates. Does Dr. Justin Lin fail to mention China, though its manufacturing overcapacity is greater than any other country's? So Chinese of him. Of course collapsing consumer demand will affect exporters and importers oppositely. And people are just beginning to wake up to the cliff China's economy is standing on if global demand does fall to half 2007 even while the banks lend and state chosen CEO's talk of increasing capacity to further employment. In this situation, there is a serious need for liquidation, as it saves some capital. And China, more than any other nation, faces a threat of severe deflation.

I would disagree with the deflation argument in that it is likely there will be inflation in some sectors (like food) while there is deflation in others, like electronics. This deflation may have no solution beyond liquidation and monetary expansion we are seeing.

Yet Another Huge Economic Number Coming out of China. Hard to Believe

Chinese data has never been accurate, but has always implicitly or explicitly served the purposes of those who report up the ladder. Recently a team of 1st tier western demographic economists were told not to come to China this fall to help design the first real household survey here. I would take this to mean that data is not becoming more transparent. There are some statistics we can use to get closer to China's economy, but they are most definitely not internally generated numbers, but rather estimates of oil imports, reports by foreign run franchises, imports and protectionist measures.

As for those looking to invest in this incredibly volatile and opaque market, more people are getting sick here, as could be expected with no regulation. And while the stimulus has pushed up the stock market, a number of medical suppliers have been red-flagged, pushing down their prices even while hospitals are being build across the country. A basket of flagged hospital suppliers could deliver a nice return.

A note to boot: along with money and relationships, health care has become a very important gift between business men, like gifts of Wisconsin ginseng, or reclusive qi gong doctors who can heal anything, medicine has become the preferred medium of Chinese business bribes.

China's Migrant 'Floating Population'

China could well be having a revolution now and our hotel press core would not know. What happened in Xinjiang was political and small, except for the likely false death count. In South China, however, in the week prior, some 50,000-70,000 workers destroyed police offices and other government buildings in Hubei. The army was brought in to fight them. Stunning unrest kept the blog censors busy all week deleting reports as they appeared. Amazing a country can keep this kind of incident invisible in our day and age.

Summers’ New Model: Details, Contradictions, and Odd Assumptions

money and the economy are separate? economies are a phenomenon of circulation, and they are finally, on a macro scale, only this. so when you ask us to compare bank and non-financial balance sheet you mean to say that banks are, in a way, opposite their bricks and mortar counter part. money and the economy are not separate; one is the blood in the beast, but separate?

as for Summers... for investors, the most important thing he has said is that the economu will likely get worse.


On Jul 12 03:29 PM derryl wrote:

> Simon wrote,
> "Summers has commendably switched some of his rhetoric, so now he
> emphasizes nonfinancial technology development – presumably in the
> private sector – as the road to sustainable growth. And he rightly
> contrasts this with the financial engineering that brought us to
> this point. But does his model really offer the most plausible or
> appealing path from here to there?"
>
> Technologies can improve efficiency and productivity in the physical
> economy, but our problems at root are not physical. They are monetary.
> All of the workers, productive facilities and raw resources are still
> there ready to go to work producing goods and services. But nobody
> can do anything because everybody has too much monetary debt.
>
> Money and the economy are 2 separate systems. The best way to see
> this is to look at a bank balance sheet compared to a non-bank balance
> sheet. On a bank balance sheet your account balance--your money--is
> their liability. On a bank balance sheet your loan--your debt--is
> their asset. Bank assets and liabilities are the opposite of non-bank
> assets and liabilities.
>
> Banks alone have the right to create money. If the economy creates
> money it is called 'counterfeit'. You can produce all the goods
> and services you like but unless somebody has money to pay you for
> them you can never repay your money debt to the bank. You cannot
> solve a monetary problem with economic solutions. The solution must
> be monetary.

GM: To File or Not to File, That Is the Question

Looks like it's believed bonds will pay 10%. Any word on new symbols?

Krugman to China: Go Green or Pay the Price

Reading Krugman's column, I believe there is an argument to be made that it is irresponsible of him at this time to suggest "green" means by which rising global protectionism could be implemented against China. A China without growth could disintegrate into a larger polluter than it is currently.

I'm reminded of an essay that detailed how the Chinese might diplomatically outflank global protectionism (and specifically a US consumption tax) making use of "green" arguments. To level the playing field, as it were, I leave the link below.

sinocircle.wordpress.c.../

Krugman to China: Go Green or Pay the Price

Thanks for the update on Krugman.

However the world's current views will remain in history, the argument that the U.S. wiped out the native americans and the British used child labor should not be an indignant explanation for the destruction of cultures and the exploiting of childhood in 2009. I believe this goes for pollution, too. Not to mention the scale on which industry is now working. That said, of course the name of the game is push and pull, talk loud, talk soft, but it is also a strategy of moves within moves.

I would note a slyness to Krugman's actions in the face of a nation that uses diplomatic tactics not unlike a five year old throws temper tantrums.

China Medicine Drops Despite Improved Q1

Three Questions, and I'd invest:

Are their relationships in the right place? Anyone well connected on the board, children of former premieres?

Accounts receiveable declined 25%. Is this solely due to the government lowering prices? If this company must purchase and import everything it auctions over the internet, what is the longest period for inventory turnover? Have import barriers ever blocked these products' historically, due to political spats?

Most importantly, how many internet drug auction points of entry are there into the Chinese market? Does Alibaba have a presence here? This is something that if abused could lead to widespread closure.

Death of the Asian Development Model: Exporters Chasing a Failing Strategy?

If he is wrong, and now jobs are created, while consumption levels return in a year to levels that allow factories to turn a profit running under capacity, and as just happened (largely unreported) the government quietly pays off the bad loans of its banks allowing them to continue with little adverse affect, then China will have in place a more efficient infrastructure with which to develop the internal economy that it also knows is strategically necessary in the case of a war. Most of China's stimulus projects have been on the books for years. They are being accelerated, with 1/3 of the stimulus leaking, which arguably isn't that bad a thing right now in the face of declining domestic demand for goods and property. We call this corruption, Keynes would call it demand. It doesn't really matter where it comes from, if it takes cars off the lot and liquefies overbuilt apartments. And that's not even considering the deflationary effects of increased savings amidst over capacity. So this first salvo of stimulus is not necessarily a mistake for China.

But if demand from the world for China's goods does not come back to a certain level, if as Soros and others suspect, we are at a paradigm shift, and savings rates around the world increase, then China will need to rapidly increase long term employment, possibly through health and other public safety initiatives to help control things at a simmer for awhile. However, the Chinese consumer, fed by Hollywood, may need little stimulus to increasingly recycle its earnings, the Chinese multi-child boomers (1970-1981) are now coming into peak profit earning age. They do not save like their parents, indeed they spend their parents savings.

Why Are Companies Hesitant to Cut Dividends?

there is this idea of serving shareholder value (and with the future very uncertain, exec pay excessive, etc...)

who could mention a stock that has cut dividends and exec pay?

The Death of the Asian Development Model

Would holding the currency steady aid the under performing factories that had a product to sell - yes. After some years the strong would survive. Would collapsing it help employment, well, yes, for a few months of growth. China has taken a middle road at this point, and unavoidably now the question asked should be who else has tried to appease all suitors at once. What year and when has this happened?

China Investor Update

To have China pay for expensive Brazilian deep-water exploration which no one else would pay for, can only open up cheaper supplies to everyone else. Even if China takes all the oil, it is oil they are not taking from somewhere else. This is clearly a win for Brazil, for China, only time will tell if they are spending too much.


On Apr 22 10:44 AM CautiousInvestor wrote:

> Chinese corporations and the state owned sovereign wealth fund are
> striking keen deals across the globe and and are securing long-term
> access to needed resources at bargain prices.
>
> The Chinese have what nobody else has at the moment: cash. This gives
> them tremendous leverage as does their willingness to strike deals
> with countries that have strained relationships with the US, e.g.
> Venezuela.
>
> They appear to be focusing upon oil and minerals, both essential
> to the Chinese economy. In the literature there is a debate of sorts
> whether these deals will expand supplies or simply give China secured
> access at the expense of other buyers such as the US, Europe and
> India.
>
> However it unfolds, China is doing whats best for China..........and
> I wish the US would follow its example.
>
>

China Investor Update

Regarding interesting articles, a (subscription) FT article on Chinese property (quoted here: sinocircle.wordpress.c...) has a comment I found interesting, that even if Chinese lending is being fraudulently diverted into dead mortgages, this will serve the purpose of shoring up demand in the near term.

Also, an article in the WSJ (online.wsj.com/article...) suggests Chinese bank regulators may retroactively ask banks to reappraise their short term loans, which have been leaking into stocks. If this happens, in the next few days and weeks there may be quite a bit of selling of Chinese stocks as these short term loans are repaid or reallocated out of domestic equities.

With exports still contracting - falling 17% in march - this is not yet bottoming. FXP, anyone?

China's Stimulus Effect: Bounce or Recovery?

can you point to any "farm land resident" financing programs? how are these working? the domestic consumption stimulation i see is through work units.


On Apr 20 01:14 PM huangthomas wrote:

> The impact of the current world financial crisis on China is mainly
> due to plummeting export to developed countries. The external demand
> is beyond Chinese control and it takes time to whip up domestic demand
> and consumption. Since export accounts for 20 to 30% of GDP growth,
> the GDP growth drops from official goal of 8% to 6 - 7% range is
> to be expected. Q1, 2009 GDP growth of 6.1% is still a healthy and
> respectable number. It always takes time for the society to adjust
> to a new situation. In a time like this, higher expectation is unrealistic.
>
>
> GDP number does very little to the unemployed, low-skilled migrant
> workers. There are 20 to 25 million of them. Chinese government carried
> out a series of social welfare programs, such as subsidy and financing
> for purchase of electric appliance, water heater, air-conditioner,
> bike, motor bikes.....etc. These benefits are only for the farm
> land residents to make them happy while waiting for the economy to
> recover.

Some Preliminary Thoughts on the New Face of Demand

very interesting on the Japanese.

on the Chinese: keeping the yuan low while calling for no trade barriers seems to work pretty well. and if the IMF hammered out some kind of U.N. reserve currency, why do you write it just does not work? Unless someone stops them? Except no one stops them...