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The most distinct differences between China and US in the crisis

After 2005, A share market behaves more like Japan back in late 80s, Japanese residential net saving is only 12% of GDP now and possibly by next year, it’ll be all gone by government borrowing. But back in the 80s, the story is different, like we Chinese are now, plenty cash, low government debt, rising currency, despite all the stories, there’s no real difference.

 

Usually country in this stage can beat off one or two waves of crisis easily, and this is what happen in China and happened in Japan before.

 

The most distinct difference between China and US is that:

1)      The banks actually lend, a lot.

US market started the bust at around 25x p/e ratio, very low base compared to Japan 70x back in the 90s, this is one of the reason(in my previous email) I believe US crisis will be shorter than Japan. Deleveraging started in late 2006 when the housing price started corrected its first 10%, reason is simple, the subprime and Alt A CDOs given from 2005 only has 6% of household equity in them, so naturally you’ll see flood of foreclosures coming to the market when the price dipped below their equity and wiped them all. Things in US is different from here, people there believe in a second chance, the laws says after 7 years following the foreclosure, your credit status will be restored, so you can actually walk away, and normally you would do so.

 

Ok, we all know what happened in 2008 for those 30x leveraged banks. The housing market has still not bottomed, probably another 15% south, even with the mortgage modifications in place. Most of the TARP money flowing into the bank will never be loaned out, but just sitting on the balance sheet to cushion the equity.

 

Back in China, probably 10 trillion RMB will be handed out to everyone that has a connection, or a project, or just an idea for an investment, all those money like flood and lift everything up. It happened because we got the cash. Yes, we have the cash, but just for now. The bad debt will come back and haunt in the years to come. So enjoy when the party is still on.

 

2)      No salary or job cut, not just in the SOEs.

What’s different between Now and 1998 in China is that the SOEs don’t cut jobs, and they’re doing so because their boss, the government- said so. As opposed to the restructuring and sacking jobs, only 5% (vs. 58% for the globe) of Chinese companies plan to cut 10%+ jobs in 2H09, according to Mercer. With that 11% unemployment coming in America, we’re indeed in the comfort zone. So the Chinese not only have cash, but also our jobs and most importantly not likely to lose it. So next thing you want to do is naturally shopping.

 

I’ll digress a little, the reason we like/have to focus on economic data is that it aggregates what's happening on individual level and gives you a whole picture, back in late 2008 the opinions of 2009 China GDP growth rate ranges from 4% (Dr roubini) to 8%(some practioners), now everyone thinks it’s over 9%, the 4% may not seem large, what’s important is the events it indicates will unfold, like, unemployment, FAI, import/export, IP etc, so there’s no wonder you see the top performing A share mutual funds in 2008 has now ranked last, because people tend to carry forward their thinking and picking up turning points is not easy at all.

 

So have the market reflected everything? In America, obviously not, during the past two weeks, among the 500 companies released Q2 results in America, 70% beat consensus, highest rate since 1998, so despite the over 35% bull run during past several months, the general market still underestimated what's going on in reality.

 

Anyway to predict the top or bottom?

 

Well, interestingly, there is a way, it’s just that it’s not that timely, the interest rate yield curve.

 

During the long growth phase of a normal business cycle, economic expansion causes central banks to slowly increase their rates on short-term money in an attempt to reduce business growth. This action typically continues until the peak of GDP expansion at which time yield curves are often flat or even inverted. This event occurred in 2000 and in 2006 and early 2007. The flattening of the yield curve usually develops at the stock market peak. So inverted yield curve tells you sth is going to happen, but it never says exactly when. But you should be aware. If you care to look, the yield curve has steepened by end of 08, so the base building has started.