One of my big calls for the past 18 months has been that when China slows it will not be a slow slowdown but a rapid, dramatic and painful mess. My timing has not been perfect. The bubble (and it is a bubble of sorts) has expanded for longer than I expected but it seems as if the avian flu infested chickens are coming home to roost.
My fundamental premises for expecting a China crash were thus:
1. Statistics pumped out at a National level were fraudulent and overegged the pudding in terms of growth. This in term caused investors to factor in unrealistic expectations when making investment decisions regarding Chinese assets and companies.
2. Fraud seems endemic. The number of dodgy Chinese listings in the US and UK is just horrific. As a rule of thumb I would not own any Chinese share listed here. My guess is that as the tide goes out a lot of domestically listed/HK listed Chinese companies will be seen to be wearing no trunks as well.
3. The Chinese have increased their own money supply by 50% since 2008 and have quadrupled it during the past decade. That – and artificially low base rates given the background inflation – has driven the most enormous speculative bubble in property. This is not a story just of large office blocks or blocks of smart flats which are bought/sold/traded over and over again with no-one ever actually living there. There are whole Cities that have been built to meet this speculative demand and no-one actually lives there.
4. Capital has thus been grossly misallocated as a result of this lax monetary policy creating a cocktail with vast dollops of greed. But capital has also been misallocated as it always is when a Government intervenes in market forces as the former communists who run China have done.
And so we come to what is now prompting the crash. Again there are two threads.
1. Firstly it is now clear to all but the greediest/most stupid of Chinese that their property market is a bubble. I am not sure what will be the event that causes it to crack but when it does the effects will be spectacular. What is the true value of a luxury apartment in a block where no-one lives in a City where no-one lives and so where the rental yield will (after costs) be perennially less than 0%? Correct – less than a row of noodles. As folks lose a) their life savings and b) discover the nasty side of leverage on numerous property deals there will be real problems, not least for the Chinese banks.
2. Perhaps sensing the bad times to come domestically but also with key export markets drying up in Europe and the US) all sorts of sectors are seeing a slow-down in demand. Again it is hard to quantify exactly what is happening here since all Chinese statistics are lies. But according to Platt’s demand for oil grew by just 0.5% year on year in May. That is hardly what one expects of an economy meant to be growing at 8% per annum. Meanwhile the China Coal Industry admits that coal stockpiles are at record highs – there simply is not the demand. That is not exactly what expects in an economy meant to be growing at 8% a year (although electricity demand growth has now fallen to c5% per annum and is still falling). The China Shipbuilding Industry said orders in January/February of this year were down by 40% (my guess is that March May will be worse) and that 16 key companies it monitors were running at a loss while 37 others (the field) are seeing profits down. A spokesman predicts yard closures and says “a hurricane is approaching.”
Need more? The export value of textile and garments in the January-April period stood at $71 billion, just 1.07% higher than a year ago, according to data released by the China National Textile and Apparel Council (CNTAC). The growth rate witnessed a sharp decline from the 27.05% rise registered in the first fourth months in 2011. The causes: higher labour costs at home reducing competitiveness and the global slowdown. Data out the other day showed that South Korean exports to China just fell off a cliff in May. Do I really need to go on?
So my guess is that over the next year or so you will see a couple of things. Firstly Chinese economic growth will not be a lot greater than that of many Northern European countries. For an overleveraged society where borrowers and investors have been banking on near double digit growth ad infinitum that will be pretty catastrophic. As the leverage unwinds/the frauds unravel and the speculators fry this will be anything but a soft landing.
Secondly the Chinese authorities will respond by increasing the money supply dramatically – at an even faster rate than in the past. Folks will not wish to hold cash. They will have learned their lesson on property and so they will go back to what they really love. I would expect private demand for gold to increase rapidly in the Peoples Republic.
But this is not a story about gold. It is about China. In the long run China will continue to grow and will be the world’s largest economy. In the short run the bubble is about to burst. It goes without saying that if I owned any China based Unit Trusts or shares I’d junk the lot now. Thankfully I do not.
And so this is my first blog here on ADVFN. Hitherto my inter-reaction with this website has been in being abused by some of your BB posters for my share tips over on www.t1ps.com. No doubt that will continue as the tips will keep coming and so – I guess – will be the abuse. My 12 year track record as a share tipster is actually bloody good but folks always forget the winners and bang on about the losers. So be it. If anyone wishes to comment on what I say in these blogs they can do so. I shall respond. If it is a constructive point my response will be constructive. If it is mindless abuse that you fancy, you will receive a considered but factual put down. I call a git a git.
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