The Chinese Financial Public Relations Machine

Includes: FXI, GXC
by: Christopher Balding

The markets are overjoyed because Goldman Sachs and the Chinese Premier Li Keqiang have pronounced the Chinese economy sound based upon improved GDP data. Let's ignore that Premier Keqiang has been quoted as saying GDP is a man made invention in China and just focus on how fraudulent we know Chinese GDP to be. Not surprisingly, official manufacturing data remains decidedly stronger than unofficial reports.

What should be concerning is how weak the Chinese corporate sector is. Not only is it the operating losses in airlines, debt in steel companies 1,300 times larger than profits, and the financial shenanigans I have already covered but the total weakness of the corporate sector. Baiju growth is 3% underperforming a consensus 10% expectation. Additionally, all this optimism also ignores the buildup in copper inventories because of the lack of demand. What makes the excess capacity so much more interesting is that previous demand growth was driven not by consumption demand for say construction, but rather by arbitrage opportunities.

Scratching beneath the surface in banks and real estate reveals nothing but problems. Despite the pronouncements by Goldman Sachs, even official Chinese outlets are increasing their reporting on the concern over bad loan growth. The Shenzhen Daily pulled no punches writing "Chinese bank executives signaled concern that bad loans could rise, as earnings continued to slow in the face of declining economic growth." Want more evidence of financial weakness? All of a sudden, banks are racing through regulatory hurdles to approve secondary equity offerings to shore up their capital base. However, as no secondary offerings have actually taken place, it will be quite telling the future of the Chinese economy what will happen when investors are asked to put money in.

How overheated are housing prices? According to unofficial data from a real estate company surveying 100 major cities in China, the average per square foot price is $159. To put that in perspective, only Baltimore, New York City, Los Angeles, and San Francisco had higher per square foot prices of major cities in the United States. In other words, the average per square foot price for an apartment in 100 major cities in China is higher than almost the entire United States. The final point, the average price of apartment price growth in these 100 major cities was nearly 9% with major cities growing by nearly 25%. That to me sounds a lot like a bubble.

Put aside the official pronouncements by the economic propaganda department and look at the underlying data on how corporations and industries are faring and there are a lot more problems.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.