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James V
68 Comments
Inflation, Deflation and the U.S.-China Relationship
But lets not be under any illusion, the USA is not falling behind on payments. How can they, when all they need to do is print more USD.
China has no choice but to carry on business as usual.
The question is not whther the USA will pay them back, but what the dollar will be worth when they pay them back. Something that they hold full responsibility for as a result of their currency regime. These were the terms of the agreement.
In terms of consumption, impossible....
The Chinese will take 20-30 years to reach a high level of consumption and they won't be buying chinese made goods. Ask any Chinese person if it easier to sell to foreigners or Chinese and see what there answer is. The next generation maybe...not this one.
Also the consumption trends of the past will stay in the past.
People are hitting the harsh reality that wasting money daily buying stuff they dont need is the wrong thing to do.
In short the golden age of easy Chinese growth is finished, now every penny of GDP that China generates will be far far harder than it has ever been. Large economies take a long time to mature. China has certaintly got to second base, but very far away from home run status.
I also have a thought for everyone.....
What is structually different from what the USA has done over the past 10-20 years when compared to Europe, parts of Asia, UK etc.
Everyone seems to believe that the US caused the contagion. When the reality is their system was just the first to blow up.
Every aspect of society is leveraged up very seriously. Not just the banks. Most people's personal balance sheets are highly leveraged.
This delevarging of business/personal finances has just changed the rules.
Business as we know it has just changed dramatically. It will a few years for people to realise.
Bailout Bill Passes; What Happens Now?
The USA has just convinced China to buy another 700 million USD of useless assets.
Wasting taxpayers money - sorry guys....the government runs a deficit.
That money has already been wasted.
As long as USA has the most power, there will not be deflation. The amount of inflation depends on how much foreign owned USD can be wasted saving the system in relation to how much USD needs to be printed to save the system.
As things stand the 700 million USD is just be repatriated back to the US in return for an IOU paying interest below the real level of fiat money devaluation. Makes sense to me.
Anyone play Monopoly....
America is the fat kid that is always the banker, everytime he runs low on money he puts his hand in the pot. Now back that fat kid up with the most powerful military in the world and a printing price.
Bobs your uncle, thats Uncle Sam.
Actually the Chinese are the ones getting shafted here.
Anyone that can not see that does not get the USA masterplan.
Yes Gold is a good investment
China: Holiday Thoughts on Misunderstanding Data
This agression has been deflected away from the establishment by erasing the line between the CCP and the Chinese culture. A lot of the Chinese believe that they are betraying their culture in speaking out against the CCP because in effect they have been taught that they are shunning their culture and inate origin. This is a very effective strategy because of the cultural feature of group psychology the Chinese have so deep inside their being. The Chinese see the red flag and believe it is the connecting symbol of their Culture. The CCP is synominous with this red flag. If you say anything against the red flag/CCP you say something against the Chinese Culture.
Anyone that knows the history of how the CCP got its deep influence in the mainland chinese thinking process understands the deliberate and well thought out strategies and actions that induced the line being erased between the CCP and the Chinese Culture.
The problem is the foreign governments/media don't understand this and flame the hatred by making comments on the Chinese people as a whole rather than the policies of the CCP. This even had an effect this summer during the protests of angering the oversees Chinese. The mis-communicated views punctured a very painful aspect in a lot of Chinese people and as result the outpouring of nationalism was very easy for the CCP to orchestrate. Of course most of the ultranationalist youth in the Olympic stadiums watching the olympics were hand picked by the CCP anyway. Also all the demonstrations were organised centrally by the CCP through the oversees networks.
I think Micheal the people you come in contact with are a 'special calibre' Free-thinking people who have decided they wish to accumulate knowledge. It is only natural that you attract people of this calibre because of your path in life. The earthquake in Sichuan/ Dairy Scandal/Olympic Games have certainly had a very strong effect on how the Chinese see the CCP, themselves and foreign nations/people. And things are heading in the right direction, but we have a very long way to go. And my fear is that we will never get there because of politics.
China: A Run on the Bank of East Asia
They are all very very angry that the Domestic Banks/Government/Insur... companies have taken such a hit investing in international markets. They know this has been borm out of the fact they have no markets themself to do so, so are forced to recycle all their inflows through other markets. They also hope to drive the next level of growth through developing their markets as they can see they have saturated their export growth and that domestic spending growth will be very hard to enginner because of the fear of the people in China.
So the CPP figure, we need to improve and mature our markets.
So we can avoid sending our money to other markets.
And make money ourselves in the process.
So what do you they do, introduce short selling/margin trading???!!!!
This is the worst thing they could ever have done, they dont seem to understand that their financial sector is not developed because they refuse to give a piece of the pie to the foreigners. Even cirumventing their WTO policies by endless delaying etc. These protectionist policies are very much getting in the way of reform/development.
They also dont seem to understand that there are no 'mature' market participants.
The fund managers/stock buyers are just pure gamblers. The corporations/state owned companies are also just gambling/soliciting their power/influence for their own ends in stock manipulation/pyramid stock scams. There is no such thing as capital allocation and 'long term investment' in the Chinese markets. But the authorities can not see that because of their unbelievable nationalistic/pro-chin... views.
They anaylse everything one dimensionally and as a result, you get policies like this.
Their protectionsit policies do nothing but protect their close business contacts and put the poor everyday Chinese people at risk. The Chinese should be able to invest in Mutual Funds/Pension Plans without the worry that the market is going to shoot up/down 5% most days of the week. The Chinese should be able to be confident that they can keep their money somewhere long term and get a decent return without having to worry that some high level corruption/fraud will take away their savings. This is also a reason why the Chinese like to get in and out quickly. They are afraid their money is going to be taken from them. And rightly so, having spent a number of years in China among the Chinese people. I can not tell you how unfair the social fabric is.
The chinese really get bad effects from the protectionist policies of China. Simple example, if Import taxes were in line with those of the west. Better quality foriegn food could be imported into China and made available to the Chinese people at a cheaper price than domestically made food. Already it is cheaper to buy 'proper' milk from New Zealand (Anchor) then the higher grade brands from China.
The Chinese could buy foriegn cars at the same price of danagerous domestically made cars.
The markets in China can only mature if they are opened up, if Hong Kong/English/Singapore... fund managers come and live in Shanghai/Shenzhen and run a great deal of the funds. If they come in and help to properly mature the markets/train the market participants.The markets in China can only mature if the industry is truly opened up.
The financial district in Shanghai is just lots of big buildings right now.
With very little added value to the financial services industry.
The short selling/margin policies will send the market soaring short/medium term. Its like giving the Chinese a tab to gamble with. But at some point the tide will turn again and I see us going even lower. This very well could cause a lot of problems. Property/Banks/Social Order... everything.
There is a very real possibility, that this new margin could send the markets up, stimulate fake growth and pull even more inflows in. And we are all know what that sets everything up for.
I am very confident that a very prosperous mirage is about to appear.
And that it will send everything up..but thats all it will be a mirage.
I
Investing in China Is Still the Best Long Term Play
I understand a lot of peoples concerns that the banks have a lot of real estate on their books. But anyone who has purchased over the last 3 years has put at least 20-30% down due to government rules. Very different from USA/UK situation. There have been no fancy payment terms offered. In china you either get fixed (very rare) or floating exchange rate. So there are no resets etc to shock the market.
Because of the large down payments, there will not be the negative equity spiral which is what causes extreme price falls due to it being financially more rewarding to walk away then pay the mortgage. On this basis I expect good property to rise in good locations (in tier 1 cities) by around 10-12% by this time next year. Wild speculators have already been driven out of the market and I expect investors/banks that hold a lot of property on their books (banks through the use of fake client mortgages) to slowly de-leverage themselves by selling to people who want to buy property as homes. Good property in Tier 1 cities will be ok. But presents very little if any investment opportuniy because of the taxes/transaction/sell... costs.
I
Investing in China Is Still the Best Long Term Play
In terms of infrastructure/water/c... energy/ecological/food safety industry and higher technology development. We will without doubt see unbelievable growth.
In terms of Industrial growth, exports will be down. However lets be honest they are declining from a very high level. We all knew this would not continue forever. But of course the downside is limited because as things stand consumers in the west are shifting to buyer cheaper products. And we all know where cheaper products are made.
Any decrease in exports will have a very serious effect on factories going under because of the huge overcapacity present in China. There will be a lot of bankcrupticies without doubt and of course this is negative for some of the domestic banks balance sheets. But because of the huge foreign investment in factories, we will see a lot of foreign factories going under. So the banking system will not have to take such a huge hit.
There will then be a lot of service businesses going under as well, because of the sheer overcapacity in the service industry. Anyone who has spent any amount of time in Shanghai knows that there is huge oversupply in restaurants/coffee shops/estate agents etc. As the chinese cut back their spending (which they will do going forward) a lot of businesses will go under. But this is a normal adjustment going into the end of the business cycle.
Real Estate has certainly slowed, but you know as yet in Shanghai and other big cities prime property is only a little soft.
China: Markets Surge, But Little Has Changed
In terms of the Milk powder I think it is a combination of the price controls but also the opportunity reward of doing such a thing to the 'milk gangsters' as a result of inflation.
No Rest for the Chinese Stock Market
I think the only question remains:
Is the fact that everyone is so bearish actually a reason to start becoming bullish.
or...
Is everyone bearish because we all sense that a mutli-year depression is coming.
Shanghai Should Continue to Sell Off
Shanghai stockmarket to 1000!
Come on, this is not a true reflection of the reality of where things are going. We all know that there are a multitude of problems in almost every aspect of the Chinese Economy, Chinese Legal structure, Human Rights and the Chinese Business culture.
But the fact reamins China is the creditor of the West.
Has more than 2 Trillion USD of reserves.
Has enough money, enough political will and enough power to bail out the entire system at least once. Also they know exactly how to do it, having effectively helped the US government in bailing out its financial companies by writitng a blank loan cheque to save its investments.
Property is not as weak as everyone says it is.
The stockmarket is falling because it was bubble overvalued in the first place because of the pyrmaid selling scheme set up by the corporates/local and central govt. And set a light by typical gambling psychology of the Chinese.
The insurance companies are arbitraging dual listed Hong Kong and Shanghai listed stocks. As soon as Share Values are the same over both exchanges, then the selling will stop. Currently there are still a lot of stock that are 30-50% more expensive to buy in Shanghai exchange than the Hong Kong exchange. Once this is removed and the big 2005/2006 IPO stocks (Ping an etc) is priced the same in Shanghai as Hong Kong, we will see normalisation of market.
Shanghai stocks are not cheap, they are certainly not expensive and they have not hit their lows yet. But they are not going to 1000, maybe 1800.
Property is still very cheap compared to International standards.
Shanghai property is 350-400% cheaper (like for like) than Hong Kong, Tokyo and Singapore property.
Shanghai property is 300% cheaper than Mumbai property.
Shanghai property is 450-475% cheaper than London/Moscow/New York property.
So unless the entire worlds property market gets hit very hard (I am not saying this wont happen), then Shanghai property will at the very least stabilise where it is. Infact if the worlds property market crashed I would still rather own Shanghai property than other countires.
Please also note that currently only new property is getting hit in Shanghai, second hand property in central location has not moved. There is no new properties coming on the market in Shanghai in downtown locations. The new proprty that is getting hit was drastically over priced, in second rate locations and was bound to correct.
Short and medium term 'doomsday' predictions are not warranted.
I see another 3-4 years of prosperity.
Long Term we could see a phase of political fallout and a whole host of problems that China has experienced many times in the past, but as yet we are not there.
Hu and Wen I am sure will keep things smooth until they leave in 2012. After that then it is a totally different ball game.
China: CPI Surprisingly Low, Trade Surplus High
Firstly at ground level, incorrect numbers are given for the obvious reason that there are price controls, so sellers have to under estimate the figures somewhat.
Then they are manipulated using the basket weight, as well as a final 'audit' on the numbers by the statistics bureau. If the pro-growth camp currently holds influence over the stats bureau then they will be played with to represent their aims. However at the moment I believe the manipulation is coming from a lot lot higher in an attempt to:
a) give positive messages to market.
b) give positive message to foreign investors to control capital outflows.
c) stem inflation expectations so there are no 3rd round effects. (we have already had second round effects)
I must say that vegetable oil has come down a rediculous amount recently. And so fast. Of course oil has fallen, but it usually takes a lot longer to see the prices come into the actual market place (ie supermarket). Also the price has fallen a lot more than it should. It as if they have passed on the savings (plus some) instantly. Looks pretty obvious to me that the prices have been driven down (with implicit instruction from the government ) . This would effect the CPI to create positive number, But far far more importantly it is an attempt to communicate to the public prices are coming down to displace price fears/expectations (the Chinese are very sensitive to issues like this, more than the westerners). By displacing price fears they are hoping to give consumer spending a boost and improve the gloomy sentiment that a lot of people are feeling. Reducing the price of cooking oil (and of course pork) is a very effective to communicate price reductions. The Chinese watch very closely the price of cooking oil, it is a product that everyone buys and the Chinese attach a huge huge amount of significance to cooking oil. In old times, cooking with oil was a symbol of wealth. Having oil on your clothes signified that you ate good food.
So going into Mid Autumn festival, the appearance of reduced cooking oil and pork is quite a good way to show inflation is under control. It has been very effective, people are already talking about it.
The price controls have contributed to the widening cpi/ppi differential. But to a large extent the differential is due to the factories not feeling they are able to pass on the increase in costs to consumers. On a great deal of products they have planned many many times over the last 4-5 months to increase their prices, at the last stage deciding not to on the basis that everyone is reining in their spending. Things are now quite tight here. If bargins is not to be had, people as a whole just won't buy. My personal experience is that it is far easier to negotiate a far lower price than it has been for at least a year and a half. Of course they are also handcuffed because of the huge overcapacity that is present in China. There are so many factories supplying similar products that there is no scope to raise prices because of the choice consumers have (non-food,non-energy). There will always be a factory that doesn't increase their prices and as a result they will gain amrket share. Businesses are in survival mode, revenue and cashflow is trumping margins. Theoretically if international markets slow then there will also be an inventory build up that the factories will then try and channel to the domestic market. Making price increases impossible regardless of PPI inflation.
In fact I think it is fair to say that China runs the risk on certain components of the economy of deflation. We have seen huge stock market deflation already, the first hand property market is under stress in most cities and has fallen in some cities. Now it could be funneling into consumer goods. I question whether we have reached such an extreme of investment that any tail off in monetary growth (however small) may lead us into a temporary cycle of deflation.
Frannie CDS Triggered
An Often Unmentioned Factor About Chinese Stocks
China Stocks: Is Now the Time to Buy?
However we could be approaching it, the only safe way to buy this market is to wait for a washout. This may come as we approach 'Golden Holiday' here. What worries me is effectively we have been consolidating around 2300 - 2400 recently. I have been looking at potential support for the market for some time at 2195, however a break of where we have been consolidating suggests we could even go lower than 2195. So picking a level is very hard. The Government will not let the market fall below 2000 due to psychological consequences. So this suggest very very strong support in the 2000-2195 zone, best bet would be to track the market and watch how it trades at these levels.
In terms of PE ratios etc, you can not use them with any degree of accuracy because earnings, revenue and profit is all overstated. Their is no transparency what so ever in these companies accounts. Every company has off-balance sheet liabilities. Even the ADR traded in the US do not conform to suitable accounting standards, just the US regulators/exchanges have not wanted to rock the boat.
I disagree with other commentators that China does not have the resources to kick start the economy and growth. On the contrary China has a lot of money it can flood into the economy, the very act will create improved sentiment in the stock markets/property markets. Which in the short term is needed very badly in order to set domestic demand back on the right track.
But long term at some point, China is going to have work off its mistakes of the long term imbalances that exist within its system. It is quite possible that this won't be until the trough of the next business cycle in 2012, however of course it very possible that we have come to the end of the 30 year cycle that started in 1978 and the mistakes of the past will start to manifest. Of course having a huge amount of money saved up for a rainy day, makes rainy days a lot easier to deal with.
A Crack in China's Great Wall
However the Chinese Economy is vastly bigger and the export ratio is vastly bigger as well. So this presents a very different picture and cause and effect realtionship.
Also we must not forget that undervalued currency breeds interest from de-stabilising trading strategies to take the peg out and profit from a return to equilibium.
In China's terms the undervalued dynamic peg has caused major structural imbalances in the economy and also the wage/income differential between its people.
Which is made more complicated by the fact that there are pockets where the dynamic peg has become the natural exchange rate and caused a revaluing in the prices of a lot of goods domestically.
The two points are the reason why the CCP are having so much difficulty predicting the outcome of revalution. Of course the positive side of the Yuan devaluing domestically due to monetary inflation is that it actually stimulates an artifical strengthening against international currencies without the price moving.
i.e. you print lots of yuan at home (to keep currency undervalued), it is worth less on the international market in real terms.
It is for this reason it is actually very hard to calculate the true equilibrium price.
Can China Carry the Post-Olympic Torch?
You state a revalution of the Yuan would:
''And this would, over time, make assets in China extra ordinarily undervalued such as real estate''
Can you explain in short terms what you mean.
Are you stating that currently in USD/Euro etc terms Chinese Fixed Assets (real estate) are cheap due to the undervalued yuan.
Or are you stating, as the Yuan strengthens against world currencies that this will create a wealth mechanism (from increased domestic buying power) that will make Chinese Fixed Assets more affordable.
Very interested in your opinion.