The China Bubble

[Kubes.SG]

Time for a serious topic not all this Sail and Front Office CRAP.  I have been predicting 2010 as being a year that things start to go seriously bad.  The masses of retards, on the other hand have been fighting each other to see how much they can bid up already grossly over priced property and stocks all over Asia.    Hype and Truth are different.

The bell tolls.  China is not the great savior, but the great house of cards.  

Ohh, and be sure to apply the Crisis Checklist against rabid arrogant little Singapore.  By my count SG scores 9 out 10.  My god it is going to be ugly - these stupid greedy people.

The China bubble
GREG HOFFMAN
April 12, 2010 - 2:57PM


Edward Chancellor, a member of the asset allocation team for Boston-based GMO and, interestingly, the author of a recent Financial Times piece on Australian property, is a financial historian and bubble expert.

His 1999 book, Devil Take the Hindmost: A History of Financial Speculation, examined past speculative manias. Perhaps you've read articles comparing the tech boom and 1990s' bull market to tulipmania in 1630s' Holland.

The difference is that Chancellor was making that comparison before the tech bubble burst, some years before Alan Greenspan claimed it was futile trying to predict bubbles at all.

Chancellor's timing may have been fortuitous. To accurately predict something once might mean little. To repeat the feat perhaps means something more.

His next major piece - Crunch time for credit: An enquiry into the state of the credit system in the United States and Great Britain - included this prescient paragraph:

''The growth of credit has created an illusory prosperity while producing profound imbalances in the British and American economies...When credit ceases to grow, the weakened state of these economies will become apparent.''

That report was written in 2005, years before the credit bubble burst. Chalk two up to Chancellor.

Third time lucky?

He's now turned his attention to China, a fertile ground for his fertile mind. Released last week on the GMO website, China's Red Flags is split into two parts.

Crisis checklist

Section one identifies speculative manias and financial crises, offering a checklist for those trying to identify bubbles in advance of their bursting. Chancellor offers 10 criteria for what he calls ''great investment debacles'' over the past 300 years (the report explains each in far more detail);
 1. A compelling growth story;
 2. A blind faith in the competence of authorities;
 3. A general increase in investment;
 4. A surge in corruption;
 5. Strong growth in money supply;
 6. Fixed currency regimes, often producing inappropriately low interest rates;
 7. Rampant credit growth;
 8. Moral hazard;
 9. Precarious financial structures;
 10. Rapidly rising property prices;

Although all these criteria need not be present in order for a bubble to be present, you can see where Chancellor's heading: not-so-subtly steering readers towards his own conclusion. In section two he takes each factor and applies it to the case of China.

Ponzi scheme

His conclusion is alarming; The very factors that have allowed China to grow so rapidly over the past few years despite the global slowdown - an investment boom, a credit boom, massive increases in money supply, moral hazard and risky lending practices - are all factors that investors and the mainstream press feel they can safely ignore because China is growing so rapidly.

After the past few years, we should all understand the potential negative implications of such major imbalances. But there seems to be general agreement that a ``build it and they will come'' approach is warranted in China because it keeps growing rapidly. There's a Ponzi-like element to the circularity.

Chancellor is concerned that China's high GDP growth is no longer a function of impressive natural growth. Instead, growth is being engineered to achieve high GDP numbers. It's producing a system that's unsustainable and prone to collapse.

This, in essence, is Chancellor's argument:
- Investors are adopting an uncritical attitude to China's growth forecasts;
- Because of the way local officials are incentivised, it's likely that migration of the population from country to city is much further along than the official numbers suggest. So when you hear of another 350 million internal migrants arriving in cities by 2025, many of them are actually already there;
- Hence, future productivity growth will be much more reliant on efficiency gains than urbanisation. China's record in this area isn't at all strong;
- Beijing imposes GDP growth targets on local governments. Thus, ``GDP growth is no longer the outcome of an economic process, it has become the object''. `When the allocation of resources, whether at the corporate or national level, becomes all about ``making the numbers'' then poor outcomes are to be expected';
- In 2009, Chinese fixed asset investment contributed 90% of total economic growth (an incredible statistic and a natural consequence of the previous point);
- Significant overinvestment is present in many areas. For example, capital spending in the cement industry increased by two-thirds despite capacity utilisation running at an estimated 78%;
- The efficiency of investment (incremental GDP growth for each additional unit of investment) is trending downwards towards wasteful levels;
- Interest rates have been kept way too low for decades, sparking economic growth but also imbalances and bubbles;
- China's enormous foreign exchange reserves are not necessarily a plus. As Michael Pettis pointed out recently, only two countries have previously accumulated such large foreign reserves relative to global GDP - the United States in 1929 and Japan in 1989. Oh dear;
- The Chinese stockmarket is in bubble territory. Last October, a new Nasdaq-style exchange opened in Shenzhen with 28 new listings. The minimum price rise (the laggard of the 28) rose 76% on the first day. Price/earnings ratios averaged 150;
- The residential property market also appears to be in a bubble. In Beijing, the house price to income ratio has climbed to more than 15 times, versus 9 times in Tokyo in 1990;

Assuming Chancellor is right, what are the implications for Australian investors? That's what we'll look at on Wednesday.

[poi]

Ok I buy the story. When the bubble burst who will suffers more? Singapore or Australia. The answer is obvious.
Most people predicting a China bubble comes from the US and not from this part of the world. A case of sour grapes?

[Vulcanl]

Kubes,

Here are my thoughts on the below:

*Unless this guy can show actual hard facts and data, he is just another blowhard spewing hot air (not unlike you and I!   ).  That is the #1 problem re: China - good data is hard to find
*At this juncture China is in all likelihood in a bubble phase, however so is most of the World.  So we as investors need to identify those bubbles which are not likely to pop any time soon.  I don't see any major issues out of China this year (perhaps next - but that is a discussion for another time).  China's massive reserves provide ample buffer for any bubble mitigation
*Do not dismiss the discussion about the Front Office so lightly.  These useless parasites are the ones who inflate these bubbles and continue to lead the World off a cliff.  They also have custody of YOUR money and deploy it to ends contrary to our best interests.  Think about it
*You've been crowing about imminent collapses of all kinds in Singapore for years now...and look at the place now.  It is bustling, and set to have a great 2010.  I don't share your alarm

[And anyway...]

This time it's different.

[Classic!]

"Most people predicting a China bubble comes from the US and not from this part of the world. A case of sour grapes?"

That's like...

"Most people predicting an internet bubble comes [sic] from the financial industry and not from the tech industry.  A case of sour grapes?"

or

"Most people predicting a property bubble comes [sic] from the manufacuring sector and not from the real estate industry.  A case of sour grapes?"

Because people from within the bubble are ALWAYS the first ones to call it, yeah?

Hahah, absolutely CLASSIC.

[gram]

Obviously, it is wise to be prepared and look into all possible outcomes.

China may very well suffer some sort of setback some time in the near future but the long-term picture of an industrialising economy starting from quite a low base remains valid. In the near term, the fact that so many people are so positive on China is in itself a reason to be careful.

An economic slowdown in China will have significant implications for the Australian economy, which is now considered a 'Goldilocks economy'. I think I have already read the second part of the article from another source but it would be interesting to see if anything new is added on Wednesday. Property in Australia is something that is looking more and more doubtful and the investment letter from which the article is sourced also did an interesting piece on the probably overvaluation of Australian property. Property prices in Australia will be one of the things to look out for in the event of a significant slowdown in China.

[first in]

Ok I buy the story. When the bubble burst who will suffers more? Singapore or Australia. The answer is obvious.
Most people predicting a China bubble comes from the US and not from this part of the world. A case of sour grapes?

History shows that Singapore will be the first country into recession/ depression and the last one out. Singapore has had 4 recessions over the past 17 years while Australia has had none.

Its all about good economic management which is sadly lacking in Singapore

[P.O.D.]

I think its also to do with whether your economy is service-based like Singapore hence dependent on world trade, or producer-based (manufacturing/mining/agriculture).
What Australia has got to sell is, and always will be, in demand.

[Dr. Phil]

Debt is also important.
Sorry, do we call it leverage? 

I am no expert but would guess cash is king in China hence excessive leverage may not be on the same level as elsewhere. It was this debt, too easily created by banks using our savings, which brought the global economy to the brink of disaster, where it remains.

In UK the Labour government borrowed over 13 years, increasing the national debt from 6 billion to about 170 billion today. Debt has to be serviced and when, not if, interest rates rise (more likely for the profligate) servicing the debt becomes more difficult. For households, foreclosures will increase. "More to come" as they say.

[Vulcanl]

Kubes,

You know I love you man - you ARE the best...but if I were you I would be careful about calling any crashes come year end this year. 

It become more and more evident that Asian decoupling is the best model to describe what is happening in the World at the moment:

Singapore's GDP soars 32 percent in first quarter
By ALEX KENNEDY,Associated Press Writer - 2 hours 6 minutes ago
SINGAPORE – Singapore's economy soared in the first three months of 2010, bouncing back from a contraction the previous quarter as manufacturing more than doubled.

Gross domestic product grew an annualized, seasonally adjusted 32.1 percent in the first quarter, led by a 139 percent jump in industrial production, the Trade and Industry Ministry said Wednesday.

The economy grew 13.1 percent in the first quarter from the same period a year ago, and the government boosted its 2010 GDP forecast to between 7 percent and 9 percent from between 4.5 percent and 6.5 percent, the ministry said.

Singapore's strong GDP numbers suggest Asia has emerged from last year's recession as a leading driver of global economic growth. The city-state was the first Asian country to report first quarter GDP results, while China is scheduled to do so Thursday.

"The recovery of the Singapore economy has been stronger than expected and more entrenched since the beginning of this year," the central bank said. "Looking ahead, domestic economic activity is likely to be sustained at a relatively high level."

The bank, known as the Monetary Authority of Singapore, said Wednesday that it has shifted its exchange rate policy from a 0 percent appreciation of the Singapore dollar to a "modest and gradual" appreciation in a bid to dampen inflation.

The government also raised its inflation forecast for this year by 0.5 percentage points to between 2.5 percent and 3.5 percent.

"Inflationary pressures are likely to pick up, driven by rising global commodity prices," the bank said.

[aaaooo]

Ok I buy the story. When the bubble burst who will suffers more? Singapore or Australia. The answer is obvious.
Most people predicting a China bubble comes from the US and not from this part of the world. A case of sour grapes?

History shows that Singapore will be the first country into recession/ depression and the last one out. Singapore has had 4 recessions over the past 17 years while Australia has had none.

Its all about good economic management which is sadly lacking in Singapore

Does not matter if another recession hits Singapore. Because after every recession it emerges even stronger. The GDP keeps increasing, more people will get rich and more expats will continue flooding this place.

[cant believe it...]

Ok I buy the story. When the bubble burst who will suffers more? Singapore or Australia. The answer is obvious.
Most people predicting a China bubble comes from the US and not from this part of the world. A case of sour grapes?

History shows that Singapore will be the first country into recession/ depression and the last one out. Singapore has had 4 recessions over the past 17 years while Australia has had none.

Its all about good economic management which is sadly lacking in Singapore

Does not matter if another recession hits Singapore. Because after every recession it emerges even stronger. The GDP keeps increasing, more people will get rich and more expats will continue flooding this place.

Donkey. Period.

[Kubes.SG]

I actually laughed out loud when I read the SG economy grew by an annualized 32.1%.  How can this be called a real economy with a GDP that oscillates so violently.  The absurd number also confirms the point I have made for a few years that there are two Singapore Economies.  One that people live and work in with relatively low per capita GDP,  and some weird GDP economy that includes all the value of oil, gas, containers, shipping, that passes through SG ports and that is used as Singapore's official GDP and the basis of Govt Leaders compensation.  This enhanced GDP means that the average SG Household GDP is about $500,000 per year - complete and utter bullshit.

[Vulcanl]

Kubes,

Your post has that most acrid and pungent taste of SOUR GRAPES 

I think you're just kicking yourself for not having purchased a place here when you first arrived more than 10 years ago.

This is where it's at man...just be happy to be here!!!

[quick question]

Vulcan,

We all know you love Singapore and anyone who doesn't have your interpretation of decoupling is just wilfully blind.

However, do you really believe the gdp numbers and the gdp per capita when you look around your hdb?

Where the hell is the money?