My China Prediction for 2010
Why We Could See a China Bubble Pop Next Year and a US dollar downward trend
Too Much Stimulus, Too Fast
3 Reasons this China Bubble Could Pop Next Year
This weekend I spent a few hours pondering over China and its role in the global economy for the remainder of 2009 as well as early 2010...wanted to share the toughts with you...
I see China has slowed down from its breakneck speed the first half of 2009. China’s growth was rather unsustainable, but the massive stimulus package definitely helped.
While I do not believe government spending has ever dug any government out of a debt hole, I do believe this stimulus was a necessary evil considering how bad the markets were in 2008. At least China spent their stimulus quickly. They didn’t drag their feet as they have been here in the U.S.
So why would the U.S. drag their feet in the first place? Well, it’s assumed that by doling out stimulus slowly, you’ll be able to spend wisely and regulate the whole process. Unfortunately, so far the U.S. government has not really set a good example for this.
On the Chinese side, the spending was un-regulated and some of it has ended up in the wrong places. That’s creating a trilogy of effects that will plague the Chinese this year and next year.
How Chinese Managed to Misspend Their Stimulus
Again, the way I see this, it looks like China has managed to bungle their stimulus spending in three main areas.
Rapid Loan Growth
Asset Bubbles
Fiscal Deficits (State Level)
Let’s look at these one at a time. First, let’s turn to China’s recent rapid growth…
There has been an explosion of loans during 2009. Nearly 7.2 Trillion RMB (yuan) worth of loans were issued in 2009. Obviously to do this, they had to lower the lending standards, and ignore many safeguards to fuel the growth targets set up by the banks on the government’s instructions.
Hmm-mm… Where have we heard this story before?
Obviously due to these lax standards, we will be seeing significant spikes in Non-Performing Loans (NPL). We’ll also see personal/small business bankruptcies as the year progresses. But a serious spike will be seen next year (2010) when many of the banks will have to report on the performance of the loans at the first year anniversary.
Too Much Growth Too Fast = Bubbles!
Rapid Loan growth without strict standards has also created asset bubbles lately in several places. The Shanghai Stock market is up over 60% in 2009. Real Estate values have skyrocketed and we are seeing clear signs of over-inflated asset valuations everywhere.
Yes, we can count on the China Growth story and that it will mean economic growth. But it will also mean significantly higher valuations for companies on the Stock Exchange. In fact, it kind of reminds me of the NASDAQ at the height of the tech-boom in 2000.
Real Estate purchasing patterns in China have to be understood with an emphasis on cultural differences. Chinese usually buy real estate with the intent to buy and hold over the long haul. They also have habits of buying entire floors of commercial real estate properties when one or two offices would have sufficed. But despite such oddities, the real estate valuations are looking over-blown at best.
Again, this reminds me of the U.S. at the top of our market. I was looking to buy a house, but I took one look at the real estate valuations and said, “This cannot end well." I have still not bought a home and I estimate I have saved tons on falling home values that I would have lost had I made a purchase.
Fiscal Deficits Are NOT Helping Either
Here is a rather unknown fact about China: The Chinese budget law does not allow local governments to run budget deficits.
When they announced the federal stimulus plan, they relaxed this law of 'no' local deficits. The central government budgeted to spend RMB1.2 Trillion of the RMB 4 Trillion announced. That is about 30% of the budget. The rest would have to be financed by local governments and investment projects.
Signs advertising real estate in China, Bloomberg News, July 2009
The local governments cannot raise this capital. They’re facing increasing pressure in raising capital from their tax and non-tax revenues because of economic slowing down and the weak property market since 2008.
In order to raise equity capital, more than 3,000 local investment companies were set up across the country (according to a recent June report). Raising capital has become the top priority in the local government agenda.
But they’re facing problems. Raising this kind of capital takes sophistication and patience. With their reckless attitude these days, there are bound to be serious negative consequences of such borrowings.
And I am not sure this will end happily either.
Inflation Fears Hang Over China
Finally, let us not forget the ever-present fear of inflation due to a huge amount of increase in the Money Supply in China. The M2 (measure of cash in the economy) has reached a growth level of 28.4% when the normal levels historically had been 11-12% each year.
All in all, I am optimistic about the growth that will come out of China over the next few years. But I am not sure that the current trajectory of growth will continue for too long and I certainly expect there to be negative consequences of this rapid expansion. In other words, start watching for a bubble and short-term pullbacks.
I would continue to stay long China but with caution, make sure you use tight stop losses and be selective as to sectors for investing in China. If you’re buying China’s currency, you can always hedge that position with a few other emerging market currencies.
Special Comment…about US and China on Trade.....
Protectionism Back in Vogue
And the Currency That’s Profiting from This New Trend
On Friday morning, I told the early risers here at the office that both foreign currencies and gold were so strong, that we should all close up shop and go home because it wasn’t going to get any better than that. Boy did I nail that one on the head! Let's get to the goings on.
The currencies added to their gains during Friday morning, only to see them give the gains back later in the day, as the "boys" in NY all headed to the Hamptons. Then I checked the markets last night before I went to bed, and most foreign currencies were trading very close to Friday's close, as they were this morning.
Introducing the One Currency That’s Bucking the Trend
There is one currency going against the grain. In fact, it remains hot as a fire-cracker this morning. It’s the Japanese yen. Not that it had any fundamental reason to do so, but that didn't matter, as yen bulls looked around and found something to hang their hats on.
The news that pushed the Japanese yen higher came from the U.S. where the administration announced a tariff on Chinese tires. Passenger and light truck tires to be exact. This really heats up the trade protectionism between the U.S. and China, folks.
If China and the U.S. are going to be battling it out on the Trade Protectionism front, the Japanese yen would look to be the "better bet" in Asia.
I do believe that protectionism was going to become the style once again soon.I really thought that countries would use their currencies as bargaining tools, in trade. But leave it to the U.S. to pull a rabbit out of the protectionism hat.
Now, we have this tariff. What do you think this will do to U.S. / China relations? YIKES!
You know, if the U.S. Trade Commission was really concerned about the tire shipments to the U.S. displacing thousands of jobs, why didn't the Trade Commission work with the U.S. tire companies and work out a price adjustment?
Ahhh, grasshopper, that would be too difficult to do! It's far easier to slap tariffs on the one country that has bought your debt year after year, without batting an eye.
So, could this new tariff be the juice that moves the dollar to the next big leg down? It very well could, but it won't happen overnight, folks. These things need to work themselves through. Just like in 2001, it took several months before the dollar really began a strong downward trend. But, keep this in the memory bank...
China Strikes Back
Meanwhile, China, feeling that they had to retaliate, announced a probe of U.S. auto, and chicken imports. See how this works folks? If you get this debate going, it could spread throughout the globe, and push all the hard work to get out of the global recession into the dumpster!
This is plain stupid! US government should have known better! Okay, lets get off this government stuff, they give me a big rash anyway!
You can't defend the dollar – make sure you diversify!
China is taking a bath on its U.S. investments – losing as much as $270 billion a year. So they're picking up their marbles and heading home. And when America's largest financial backer leaves the table, rest assured it will be bad news for the dollar.
Why should you care?
Because a weaker U.S. dollar hits you squarely in the wallet..... It means HIGHER costs everywhere... Soaring gas prices, mortgage rates and food costs for starters. Slashed purchasing power. standard of living goes south like Singapore or Tokyo (small suitcase style apartments and 40 year mortgages)
You can't control the fate of the dollar. But you can take charge of what happens to your wealth. Hedge with AUD/Indian Rupee/CAD/Gold....NOT with Euro they will have their own issues come 2010....
Cheers
Legal Notice: Nothing herein should be considered personalized investment advice. Some of the contents taken from others and to be used as information purpose only NOT for any financial gain.
Why We Could See a China Bubble Pop Next Year and a US dollar downward trend
Too Much Stimulus, Too Fast
3 Reasons this China Bubble Could Pop Next Year
This weekend I spent a few hours pondering over China and its role in the global economy for the remainder of 2009 as well as early 2010...wanted to share the toughts with you...
I see China has slowed down from its breakneck speed the first half of 2009. China’s growth was rather unsustainable, but the massive stimulus package definitely helped.
While I do not believe government spending has ever dug any government out of a debt hole, I do believe this stimulus was a necessary evil considering how bad the markets were in 2008. At least China spent their stimulus quickly. They didn’t drag their feet as they have been here in the U.S.
So why would the U.S. drag their feet in the first place? Well, it’s assumed that by doling out stimulus slowly, you’ll be able to spend wisely and regulate the whole process. Unfortunately, so far the U.S. government has not really set a good example for this.
On the Chinese side, the spending was un-regulated and some of it has ended up in the wrong places. That’s creating a trilogy of effects that will plague the Chinese this year and next year.
How Chinese Managed to Misspend Their Stimulus
Again, the way I see this, it looks like China has managed to bungle their stimulus spending in three main areas.
Rapid Loan Growth
Asset Bubbles
Fiscal Deficits (State Level)
Let’s look at these one at a time. First, let’s turn to China’s recent rapid growth…
There has been an explosion of loans during 2009. Nearly 7.2 Trillion RMB (yuan) worth of loans were issued in 2009. Obviously to do this, they had to lower the lending standards, and ignore many safeguards to fuel the growth targets set up by the banks on the government’s instructions.
Hmm-mm… Where have we heard this story before?
Obviously due to these lax standards, we will be seeing significant spikes in Non-Performing Loans (NPL). We’ll also see personal/small business bankruptcies as the year progresses. But a serious spike will be seen next year (2010) when many of the banks will have to report on the performance of the loans at the first year anniversary.
Too Much Growth Too Fast = Bubbles!
Rapid Loan growth without strict standards has also created asset bubbles lately in several places. The Shanghai Stock market is up over 60% in 2009. Real Estate values have skyrocketed and we are seeing clear signs of over-inflated asset valuations everywhere.
Yes, we can count on the China Growth story and that it will mean economic growth. But it will also mean significantly higher valuations for companies on the Stock Exchange. In fact, it kind of reminds me of the NASDAQ at the height of the tech-boom in 2000.
Real Estate purchasing patterns in China have to be understood with an emphasis on cultural differences. Chinese usually buy real estate with the intent to buy and hold over the long haul. They also have habits of buying entire floors of commercial real estate properties when one or two offices would have sufficed. But despite such oddities, the real estate valuations are looking over-blown at best.
Again, this reminds me of the U.S. at the top of our market. I was looking to buy a house, but I took one look at the real estate valuations and said, “This cannot end well." I have still not bought a home and I estimate I have saved tons on falling home values that I would have lost had I made a purchase.
Fiscal Deficits Are NOT Helping Either
Here is a rather unknown fact about China: The Chinese budget law does not allow local governments to run budget deficits.
When they announced the federal stimulus plan, they relaxed this law of 'no' local deficits. The central government budgeted to spend RMB1.2 Trillion of the RMB 4 Trillion announced. That is about 30% of the budget. The rest would have to be financed by local governments and investment projects.
Signs advertising real estate in China, Bloomberg News, July 2009
The local governments cannot raise this capital. They’re facing increasing pressure in raising capital from their tax and non-tax revenues because of economic slowing down and the weak property market since 2008.
In order to raise equity capital, more than 3,000 local investment companies were set up across the country (according to a recent June report). Raising capital has become the top priority in the local government agenda.
But they’re facing problems. Raising this kind of capital takes sophistication and patience. With their reckless attitude these days, there are bound to be serious negative consequences of such borrowings.
And I am not sure this will end happily either.
Inflation Fears Hang Over China
Finally, let us not forget the ever-present fear of inflation due to a huge amount of increase in the Money Supply in China. The M2 (measure of cash in the economy) has reached a growth level of 28.4% when the normal levels historically had been 11-12% each year.
All in all, I am optimistic about the growth that will come out of China over the next few years. But I am not sure that the current trajectory of growth will continue for too long and I certainly expect there to be negative consequences of this rapid expansion. In other words, start watching for a bubble and short-term pullbacks.
I would continue to stay long China but with caution, make sure you use tight stop losses and be selective as to sectors for investing in China. If you’re buying China’s currency, you can always hedge that position with a few other emerging market currencies.
Special Comment…about US and China on Trade.....
Protectionism Back in Vogue
And the Currency That’s Profiting from This New Trend
On Friday morning, I told the early risers here at the office that both foreign currencies and gold were so strong, that we should all close up shop and go home because it wasn’t going to get any better than that. Boy did I nail that one on the head! Let's get to the goings on.
The currencies added to their gains during Friday morning, only to see them give the gains back later in the day, as the "boys" in NY all headed to the Hamptons. Then I checked the markets last night before I went to bed, and most foreign currencies were trading very close to Friday's close, as they were this morning.
Introducing the One Currency That’s Bucking the Trend
There is one currency going against the grain. In fact, it remains hot as a fire-cracker this morning. It’s the Japanese yen. Not that it had any fundamental reason to do so, but that didn't matter, as yen bulls looked around and found something to hang their hats on.
The news that pushed the Japanese yen higher came from the U.S. where the administration announced a tariff on Chinese tires. Passenger and light truck tires to be exact. This really heats up the trade protectionism between the U.S. and China, folks.
If China and the U.S. are going to be battling it out on the Trade Protectionism front, the Japanese yen would look to be the "better bet" in Asia.
I do believe that protectionism was going to become the style once again soon.I really thought that countries would use their currencies as bargaining tools, in trade. But leave it to the U.S. to pull a rabbit out of the protectionism hat.
Now, we have this tariff. What do you think this will do to U.S. / China relations? YIKES!
You know, if the U.S. Trade Commission was really concerned about the tire shipments to the U.S. displacing thousands of jobs, why didn't the Trade Commission work with the U.S. tire companies and work out a price adjustment?
Ahhh, grasshopper, that would be too difficult to do! It's far easier to slap tariffs on the one country that has bought your debt year after year, without batting an eye.
So, could this new tariff be the juice that moves the dollar to the next big leg down? It very well could, but it won't happen overnight, folks. These things need to work themselves through. Just like in 2001, it took several months before the dollar really began a strong downward trend. But, keep this in the memory bank...
China Strikes Back
Meanwhile, China, feeling that they had to retaliate, announced a probe of U.S. auto, and chicken imports. See how this works folks? If you get this debate going, it could spread throughout the globe, and push all the hard work to get out of the global recession into the dumpster!
This is plain stupid! US government should have known better! Okay, lets get off this government stuff, they give me a big rash anyway!
You can't defend the dollar – make sure you diversify!
China is taking a bath on its U.S. investments – losing as much as $270 billion a year. So they're picking up their marbles and heading home. And when America's largest financial backer leaves the table, rest assured it will be bad news for the dollar.
Why should you care?
Because a weaker U.S. dollar hits you squarely in the wallet..... It means HIGHER costs everywhere... Soaring gas prices, mortgage rates and food costs for starters. Slashed purchasing power. standard of living goes south like Singapore or Tokyo (small suitcase style apartments and 40 year mortgages)
You can't control the fate of the dollar. But you can take charge of what happens to your wealth. Hedge with AUD/Indian Rupee/CAD/Gold....NOT with Euro they will have their own issues come 2010....
Cheers
Legal Notice: Nothing herein should be considered personalized investment advice. Some of the contents taken from others and to be used as information purpose only NOT for any financial gain.
