Wednesday, April 29, 2009

Is China the Next Great Bubble?


Much like here in the US, the China story is one where people evaluate data points in a vacuum and conclude that recovery is on its way.

For instance, the Shanghai Composite bottoming and rising nearly 30% is a positive sign in isolation. However, months ago Michael Pettis had identified that the growth in lending that the market rose on the back of was actually heavily attributable to sham transactions to appease Chinese government directives. Further, evidence coming out of China was demonstrating that 1/3 of the lending that did take place was not done so for productive investment purposes, or even consumption. Rather, it went into the stock markets, which indicates a complete unsustainability (um, since debt has to be paid back and not always at the best or most liquid of times).

In my post PIMPCO Strikes Again, I disputed the recovery case in China because sustainable signs are non-existent.

Vitaliy N. Katsenelson, CFA, Director of Research at Investment Management Associates in Denver, Colo presents an excellent case of support in "The Next Great Bubble?" I have excerpted portions, but the entire post is definitely worth a read.

...I get the distinct feeling that investors’ prayers are now being answered: There’s a new bubble now - or an old one is being re-inflated, depending on your perspective even as I type this. I’d like to call it the Troubled China Revival Program (TCRP).

Why start reserving bubble-naming rights? Well, I recently received an email from a friend that had the following subject line: “China … Record Loan Addition, RecordMoney Supply, Record Auto Sales, Record Imports of Copper, Iron Ore, andCoal, Strong Property Sales.”

I checked every figure (the hyperlinks above are mine), and every single one checked out. I couldn’t quite believe what I was reading. I had thought China was in a spiraling-down recession. But even the decline inelectricity consumption — a true gauge of economic growth — decelerated from 3.7% in January and February to a mere 0.7% in March. (Take a look at the FXI for more.)

So is China really the first nation to rebound? Is this the first sign of a rebounding global economy?

I’m sorry to say that the answer to both questions is no...

...Though China can’t control consumer spending, the consumer is a comparatively small part of its economy: Currency control diminishes the consumer’s buying power. All of this makes TARP 1 and 2 look like child’s play. If China wants to stimulate the economy, it does so - and fast.That’s why we’re seeing such robust economic numbers...

...It’s literally forcing banks to lend - which will create a huge pile of horrible loans on top of the ones they’ve originated over the last decade (though of course we can’t see them). Don’t confuse fast growth with sustainable growth. As I’ve discussed in the past, China is suffering from Late Stage Growth Obesity. A not-inconsequential part of the tremendous growth it’s seen over the last 10 years came from lending to the US. Additionally, the quality of late-period growth was, in all likelihood, very poor,and the country now suffers from real overcapacity...

...Now China needs to stimulate its economy. It’s facing a very delicate situation indeed - which is a nice way of saying that China’s screwed. China needs the money internally to finance its continued growth. However, if it were to sell dollar-denominated treasuries, several bad things would happen...

...This is why China is desperately trying to figure out how to withdraw its funds from the US dollar without driving the dollar down. Good luck with that...

1 comment:

  1. buying copper and stock piling it to build more GHOST cities of commercial real estate is not a good idea. build it and it will collect dust!

    Your right, good luck with that!
    Great post again!!

    ReplyDelete