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  • China Downturn Would Have Huge Ripple Effects in Emerging Markets [View article]
    The only way I see it is that Jim Rogers could be playing this smartly - he is to say in public one thing while doing the opposite in reality. That is - unless he is so stubborn he isn't willing to admit that China has entered uncharted territory in its willingness to take risk to an all new level.

    On the ground in China I can't see anything but a serious correction occurring (it is only a matter of when). How can the misplaced investment continue to go on indefinitely without a serious consequences? The retail stores and 5-star hotels largely lack customers, and the office towers and luxury residential property sit mostly empty even while more buildings get built. Does it make any sense?
    Jan 10, 2010. 10:01 PM | 2 Likes Like |Link to Comment
  • NYT Explains Chinese Mercantilism (But Not Completely Correctly) [View article]
    Paul Krugman has brought up an important point that has not been lost on the readers. I would also state that further understanding can be had from game theory and the prisoners' dilemma.

    If say the two prisoners are USA and China then we will lead to the outcome of both being made worse off through protectionism but in repeated games the two players will learn to cooperate. Right now though we are early in the game and the US will need to do what is only in its best interests until China realizes that it can't continue to do what is only in its interests at the expense of the global economy.
    Jan 8, 2010. 09:21 PM | Likes Like |Link to Comment
  • Leverage and China's Property Market [View article]
    What happens when finally it is realized that continuing to build real estate no longer makes sense? The property sector is a very large component in this domestic economy and there is no viable alternative investments to replace it. Thus this will ultimately unravel with dire consequences for the overall economy. This is looking much worse than Japan in the 1980s! China has failed to create a sustainable economy.
    Jan 7, 2010. 07:04 AM | 5 Likes Like |Link to Comment
  • Jim Chanos Bets Against China [View article]
    Here is an article from Wall Street Journal that discusses just one means being used to hide the debt load taken on by the SOE banks.

    online.wsj.com/article...
    Dec 17, 2009. 10:01 PM | Likes Like |Link to Comment
  • Jim Chanos Bets Against China [View article]
    Mark sorry to burst your bubble. But try to justify your position by using some finance and economics as to how it isn't a bubble!!!

    On Dec 17 03:48 PM Mark Anthony wrote:

    > What a load of nonsense.
    >
    > How could any one claim that China, at 4.5 times the population of
    > the USA but yet only 1/4th of the GDP of the USA, is a bubble?<br/>
    >
    > You can talk about a China collapse when China's GDP exceed 5 times
    > the GDP of the USA, and the world simply does not have enough copper,
    > zinc, iron and precious metals to sustain China's growth. That will
    > be a few decades away, and even by then, you wouldn't want to short
    > copper.
    Dec 17, 2009. 09:25 PM | 1 Like Like |Link to Comment
  • Jim Chanos Bets Against China [View article]
    Is Jim Chanos correct that China is 1,000 Dubais?

    I'll argue here that Jim is probably correct in his assessment of the situation and likely to succeed by shorting China (albeit it could take awhile yet).

    China's real estate sector really does remains a mystery and yet it is among the main pillars of the Chinese economic juggernaut. There are few, if any, reliable and accurate statistics pertaining to the real estate sector in China - perhaps because it is in the best vested interests of all but those but who are outside looking in. Property developers, real estate agents, those who already are property owners, speculators, and the government to keep it all a mystery. This is well discussed already in a recent article in Forbes (www.forbes.com/forbes/...).

    However, even without the data, I'll try to illustrate using some simple math just on observation why this market is wholly unsustainable. The elephant in the room can no longer be ignored!

    I'll begin by looking at Beijing and use these observations and figures to extrapolate for China as a whole. I'll be doing so on the premonition that for every non-performing asset there is either a non-performing liability/equity.

    Now lets do the math for Beijing beginning in the commercial sector in the Central Beijing District (CBD). Just on observation in an evening walking a couple km radius are literally 20 to 30 major projects completed in the past 2 or 3 years that remain largely unoccupied. There are an equal number of major projects in construction (and highly likely that they have no major tenants assigned for leasing when they are completed). Each of these projects cost between say $20 million and $1 billion to build. It is also quite likely that there will be little or no operating income for the next 5 or even 10 years. What has occurred in the commercial sector in CBD is occurring to some extent throughout Beijing, and in the residential and retail sectors. But at least in residential they have somebody who has paid for the unoccupied space (probably an SOE buying on speculation from credit given by the SOE banks) and retail spaces are currently being rented but at much reduced rates (many stores lack actual sales).

    Now lets add up all the non-performing property assets in Beijing. Assume that on average each project is $100 million and that there are at least 50 of these in CBD alone. That makes $5 billion even before adding in residential and retail and doing so for the whole city. It would probably be fair to say that the figure would easily add to $50 billion in Beijing (and we haven't even added in the Olympic venues that are no longer providing a viable income to even support upkeep).

    Now if Shanghai, Shenzhen, Tianjin, and other 1st tier cities are in a similar situation - and in my own observations they appear to be so - we can extrapolate that first tier non-performing assets accumulate to in excess of $200 billion. 2nd and 3rd tier cities are not exempt - they may have fewer projects but it is highly visible that they too have projects that won't be occupied in the foreseeable future. These can be easily added to $300 billion (say $3 billion each x 100 cities). Thus we have without much effort found $500 billion worth of non-performing property assets in China.

    But it doesn't stop there. There is already excess capacity in almost all industrial sectors. Many of these sectors are supporting the construction in the property sectors. How will this ever be sustainable?

    Some will argue that rural-urban migration can come to the rescue but it has been already discussed by Michael Pettis among others (at SA) that this is an unlikely scenario. Migrant workers freed by the hukou system aren't going to anytime soon occupy the office or residential towers. Too little, too late (in 10 years the demographics already start to turn ugly).

    China investors need a reality check. Chinese depositors need to ask questions about their savings. Investment banks need to reassess their ethics when they keep stating that China is a buy. There is an elephant in the room and it can't continue to be ignored. The chinese government officials need to radically change their approach - I am afraid it might already be too late. This situation is clearly unsustainable?
    Dec 16, 2009. 10:40 PM | 5 Likes Like |Link to Comment
  • Urban Migration: The Solution to China's Problems? [View article]
    Find an excellent article that describes how the property market is actually working in China here: forbes.com/forbes/2009...
    Dec 14, 2009. 10:02 PM | Likes Like |Link to Comment
  • Urban Migration: The Solution to China's Problems? [View article]
    James

    While I agree with you that real demand (by people who actually live in the property) will sharply increase (at least temporarily) if prices drop by say 30-50%, I disagree with you about the number.

    There are already countless apartment buildings throughout China that have been sitting idle for well over 5 years without occupants. These buildings have detererioted to an abysmal level and without proper maintenance the new ones being built will fall into the same state of disrepair.

    Everywhere I go in China are literally cities of empty apartment buildings - who is going to fill them up?? As you have pointed out the rich already have a nice condo to live in and the migrant labour can't afford them. New graduates from universities average between 1,500 and 3,000 RMB/month. They can hardly afford to buy apartments that cost from 10,000 RMB and up for just one square metre. It is a time bomb ticking. The risks in the property market are immense.
    Dec 14, 2009. 09:59 PM | 1 Like Like |Link to Comment
  • Understanding Chinese Statistical Data: The Devil Is in the Details [View article]
    Great article Susan. As always!
    Dec 12, 2009. 07:36 AM | Likes Like |Link to Comment
  • Why Krugman Is Wrong About the Yuan [View article]
    Hi Shaun

    There is a timely piece by Susan Weerts (another SA writer) that gives an Econ 101 lesson to better understand monetary policy and money supply. By reading this it perhaps will come easier to understand why the US is growing money supply and for China to peg the exchange rate only means that it gives up control of its own monetary policy. In other words, what is good for the US - isn't necessarily good for China! This is becoming more evident each day with asset inflation now a very real problem in China.

    seekingalpha.com/artic...
    Nov 25, 2009. 01:49 AM | Likes Like |Link to Comment
  • Why Is China Booming? Surprise, It’s Not the Stimulus [View article]
    Peter

    Rather than being just another person who travels to Shanghai or Beijing and makes an assessment from a couple days there - I would challenge you to go a little further afield. Not all is bright in China. For the average household in China (even in the first tier cities) while they have come a long way and made great progress, they remain struggling to make ends meet. In Shanghai and Beijing (other first tier cities) some is real and much is an illusion. Many retail shops are largely just billboards for window shopping - there is a distinct lack of people actually buying, and nearly half the offices and almost as many residential properties sit empty (the amount of NPL in the real estate sector has to be massive!!).

    It takes more than just replicating and putting up buildings to get sustainable growth. The reality is until the government does more than lip service, the consumer will remain crowded out. This economy desperately needs to be readjusted.

    China has great opportunities ahead but unless the course of direction is changed the full potential won't be reached. Too many things are being done now that will be looked back on as monumental mistakes (i.e., massive monetary and credit expansion).

    Unfortunately too many mainland Chinese believe it is their nationalist duty to say that all is good in China and the rest of the world is in downfall. But putting one's head in the sand and acting as though all is good (and all is bad elsewhere) will only make the situation worse - putting the whole economy at risk. Rather I firmly believe any good citizen that wants to have a sustainable economy and a high standard of living shared by its people must be willing and encouraged to point out problems so as to correct them. Self-criticism is absolutely essential. Any country/company that has stood the test of time - knows this only too well - downfall comes to those who don't.

    I would caution people of the work of the 50 cent party on this website. They have migrated from the Economist. en.wikipedia.org/wiki/...
    Nov 23, 2009. 09:13 PM | Likes Like |Link to Comment
  • Why Krugman Is Wrong About the Yuan [View article]
    Krugman is right on the money!

    The RMB will need to appreciate. If China continues on their current course then the asset bubble (i.e., property prices, stock valuation) will only get worse. The reality is that by pegging their currency they are only prolonging the due process of making an adjustment to consumer based society. By gradually making the changes now they won't be forced by international will to do it under duress (because world is growing less tolerant). It is even in the best interests of China to do so - albeit gradually rather than overnight.

    It isn't so much that the currency is undervalued but rather a system of subsidies in China (artificially low interest rates, input costs, etc..) that tax the domestic consumer to subsidize excess production that finds an outlet in the export markets.

    The current China exchange rate regime is unsustainable. It is also unfair. It isn't just America that has a problem but rather Europe (taking the brunt of the US dollar depreciation), Mexico, and every other country that would like to compete with China on equal ground.

    Here are a couple of articles that add to the argument:
    money.cnn.com/2009/11/...
    forbes.com/feeds/afx/2...

    P.S. Shaun you need to do a lot more research before publishing your articles. The facts are wrong (begin by checking what the US exports - you would be surprised!)
    Nov 23, 2009. 12:54 AM | Likes Like |Link to Comment
  • Five Reasons China Is Not a Bubble [View article]
    Frank

    Where do I begin.

    Some of what you have said is correct but much of it is misleading.

    Lets go through briefly your points.

    1) Consumption Continues to be Strong

    Yes consumption is growing (at least temporarily) but could be unsustainable. Refer to what I have written latter using the expenditure equation.

    2) Structural Changes to Domestic Economy

    The reality is that much of the stimulus funds are going to SOEs not the private sector. Most of it to fund things with negative returns (especially if we had to account for the subsidized interest rates)

    3) Stimulus Exit Strategy in Place

    Nothing is in place. It is a tug a war battle in central government in China and those winning want to keep the pedal to the metal. Unemployment is the priority not inflation.

    4) Government Controls on Flow of Money

    Lending numbers remain high and there is plenty of speculation that taps on money won't be turned off (when the priority of the government remains unemployment). There are 6 million university graduates (with lots without jobs) from last year, and there will be even more this next year, and still plenty of migrant workers without meaningful work.

    If the service sector is growing why are so many university graduates not finding work?

    5) China’s Long-Term Goals Match Up With Short-Term Goals

    RMB is pegged but the external pressure is getting very intense.

    [Also posted elsewhere]
    I will try to use some econ 101 to explain how things are.

    Lets begin with the expenditure equation:
    Y = C + I + G + NX

    Using the equation above lets then explain what has happened in the crisis and China's response.

    NX (net exports) are down significantly and the government in response has increased both fiscal spending and monetary expansion to unprecedented levels. The result has been an increase in I and G.

    The government (G) spending increased directly - infrastructure spending, etc... while the investment increased via lending to SOEs (as instructed by the government). Sounds all good so far.

    But what are the consequences if real GDP is to exceed the potential GDP. In the short-term the economy grows but long-term when real GDP > potential GDP we have inflation. In fact, even though inflation isn't yet showing up in CPI or PPI numbers, it is every bit matching in asset inflation (with M2 growth). Property prices and stock market valuations have dramatically gone up even though nothing else has changed to warrant it. It doesn't stop there. Inflation has a two year lag, so what the government in China has done now in money growth won't be seen for another 1 to 2 years. Furthermore, the increase in I and G in the short-term have temporarily boosted C (multiplier effect) but in the long-run consumption will be crowded out by G and I to correct the equilibrium, bringing real GDP = potential GDP.

    It gets worse. Much of the government spending and investment (I) is being wasted on marginal projects, and already it is becoming all to evident that investment is adding capacity to industries with already chronic overcapacity (an increase in NPLs). Without a significant rebound in net exports (NX) - the increased production from new investments must find an outlet. However, consumption (C) is unlikely to grow anywhere near enough to absorb these inventories. Why?

    Already I mentioned above that C will be crowded out by G and investment (I) plus we could in the foreseeable future have inflation eroding (taxing) the consumer budget for everyday items.

    The property market is now out of reach for many consumers at current prices. People who would have bought a new home are instead having to save for longer, and they are also putting off spending on all the new furnishing. This need for more savings not only dampens spending on a home purchasing but also overall consumption demand on everything. This will become more evident once the purchase subsidy programs (auto, appliances) wind down.

    It gets worse. US interest rates are now extremely low and thus there is a huge amount of hot money floating in the world markets (especially the emerging markets). Some of this money has found a temporary home in China.

    At the same time, remember that China has increased money supply partly to fund its stimulus program and partly out of the need to keep the RMB pegged to the US dollar without buying even more US T-bills (giving very low returns). M2 growth in China has more than matched money supply growth in USA. But what is good for the US isn't necessarily the right policy choice for China. US so far haven't had an inflation issue because much of the new money in the economy isn't going into the real economy but rather the financial system. China on the other hand is seeing a lot of new money entering the real economy (via I and G).

    The US can probably maintain the stimulus program for another 6 months to 1 year without inflation while in China they already need to be exiting. However, China is unwilling to wind down the stimulus because unemployment is a higher priority than inflation.

    That means the bubbles get bigger in China without any effective means to keep them in check until the US must increase interest rates. When the US has reduced money growth to control inflation the bubbles in China will have already gone from large (now) to massive, and the hot money will quickly find the means of exiting China. When hot money flows out of China (quickly deflating China's most important sector), and export growth remains stagnant, the scene could get very ugly.

    Pivot Capital Management have an excellent report available that illustrates a poignant point about over investment that is lost on many readers. China is no longer a developing nation when it comes to much of its infrastructure. Therefore, the old development model is no longer applicable. Check the report here: pivotcapital.com/r...
    Nov 17, 2009. 01:07 AM | 2 Likes Like |Link to Comment
  • China's Stimulus: Wasteful or Wise? [View article]
    Adam

    I suppose I am one of those who have become very skeptical about the sustainability of China's growth. I see just too many things to remind me of Japan in the 80s. Things could perhaps be even worse.

    I will try to use some econ 101 to explain how things are.

    Lets begin with the expenditure equation:
    Y = C + I + G + NX

    Using the equation above lets then explain what has happened in the crisis and China's response.

    NX (net exports) are down significantly and the government in response has increased both fiscal spending and monetary expansion to unprecedented levels. The result has been an increase in I and G.

    The government (G) spending increased directly - infrastructure spending, etc... while the investment increased via lending to SOEs (as instructed by the government). Sounds all good so far.

    But what are the consequences if real GDP is to exceed the potential GDP. In the short-term the economy grows but long-term when real GDP > potential GDP we have inflation. In fact, even though inflation isn't yet showing up in CPI or PPI numbers, it is every bit matching in asset inflation (with M2 growth). Property prices and stock market valuations have dramatically gone up even though nothing else has changed to warrant it. It doesn't stop there. Inflation has a two year lag, so what the government in China has done now in money growth won't be seen for another 1 to 2 years. Furthermore, the increase in I and G in the short-term have temporarily boosted C (multiplier effect) but in the long-run consumption will be crowded out by G and I to correct the equilibrium, bringing real GDP = potential GDP.

    It gets worse. Much of the government spending and investment (I) is being wasted on marginal projects, and already it is becoming all to evident that investment is adding capacity to industries with already chronic overcapacity (an increase in NPLs). Without a significant rebound in net exports (NX) - the increased production from new investments must find an outlet. However, consumption (C) is unlikely to grow anywhere near enough to absorb these inventories. Why?

    Already I mentioned above that C will be crowded out by G and investment (I) plus we could in the foreseeable future have inflation eroding (taxing) the consumer budget for everyday items.

    The property market is now out of reach for many consumers at current prices. People who would have bought a new home are instead having to save for longer, and they are also putting off spending on all the new furnishing. This need for more savings not only dampens spending on a home purchasing but also overall consumption demand on everything. This will become more evident once the purchase subsidy programs (auto, appliances) wind down.

    It gets worse. US interest rates are now extremely low and thus there is a huge amount of hot money floating in the world markets (especially the emerging markets). Some of this money has found a temporary home in China.

    At the same time, remember that China has increased money supply partly to fund its stimulus program and partly out of the need to keep the RMB pegged to the US dollar without buying even more US T-bills (giving very low returns). M2 growth in China has more than matched money supply growth in USA. But what is good for the US isn't necessarily the right policy choice for China. US so far haven't had an inflation issue because much of the new money in the economy isn't going into the real economy but rather the financial system. China on the other hand is seeing a lot of new money entering the real economy (via I and G).

    The US can probably maintain the stimulus program for another 6 months to 1 year without inflation while in China they already need to be exiting. However, China is unwilling to wind down the stimulus because unemployment is a higher priority than inflation.

    That means the bubbles get bigger in China without any effective means to keep them in check until the US must increase interest rates. When the US has reduced money growth to control inflation the bubbles in China will have already gone from large (now) to massive, and the hot money will quickly find the means of exiting China. When hot money flows out of China (quickly deflating China's most important sector), and export growth remains stagnant, the scene could get very ugly.

    Pivot Capital Management have an excellent report available that illustrates a poignant point about over investment that is lost on many readers. China is no longer a developing nation when it comes to much of its infrastructure. Therefore, the old development model is no longer applicable. Check the report here: www.pivotcapital.com/r...

    Nov 17, 2009. 12:45 AM | 1 Like Like |Link to Comment
  • China: Consequences of the Sleeping Lion Awakened [View article]
    The similarities between China now and Japan in the late 1980s have substantial overlap. Be cautious folks! I live in China and not all things are what they seem.
    Nov 16, 2009. 09:14 AM | 14 Likes Like |Link to Comment
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