Top 5 delusional ideas China bulls have29 May, 2012, 13:46. Posted by Zarathustra
Early last year, we published 10 reasons to short China, with practically nobody believing in it as everyone was still rushing to get a piece of China.
The result speaks for itself: S&P 500 is almost unchanged since the piece was out, but both Shanghai Composite and Hang Seng (HSI) have been down by about 20%, while Hang Seng China Enterprises Index is now down by about 25%.
Even with the actual performance, there are still many who think bears were wrong, and China bulls are getting ever more delusional. Either they refuse to believe in the deteriorating macro data trend as a manifestation of hard landing, or they believe that China can surely stimulate its way out of the economy. Better still, they have so much faith in the Chinese government to a point that the same thing being done by the Chinese government will surely not work for the US government. They loathe what the developed world has been doing, yet they hope the same thing will be done by the Chinese government for the sake of maintaining GDP growth.
Below are just some of the most delusional ideas they have.
1. US and Europe will become third world countries, and China will become first world country
Even if China overtakes the US economy in terms of its total size, on a per capita basis China is still much poorer than US and Europe.
2. Federal Reserve printing dollar will make dollar going down to the toilet, while China printing RMB is fine
This is a manifestation of a very common crazy logic of China bulls, that if the US or Europe and China do the same thing, somehow it is bad to US or Europe but good for China.
China is the mother of all quantitative easing. Its money supply growth was among the fastest, and the total money supply of China relative to its economy is almost 2 times of the economy, far greater than the US’s mere 65%. The pace of monetary expansion in the US even after quantitative easing is dwarfed by that of China, with annual growth of more than 30% at some points after the 2008 financial crisis. If China bulls are so confident that RMB will have to go up despite the pace of monetary expansion, why US dollar is going down when its monetary expansion is miniscule compared to China’s?
Besides, Japan has been printing Japanese Yen for a long while, and Japanese Yen has been strong. Who says printing money would invariably lead to weak currency? And if one believes printing money would invariably lead to weak currency, why Chinese Yuan could be an exception?
3. US or Europe are doomed because they are heavily indebted, but China will spend their way to prosperity
This is yet another manifestation of the above mentioned crazy logic that when the same thing is done in both developed world and China, somehow it is invariably good for China but disastrously bad for the developed world.
The US and Europe got into the “mess”, they reasoned, because they have been spending too much so that they are hugely indebted. The solution to that, they reasoned, is of austerity, pretty much like a household running up huge amount of debt has no way but to either save more or default. Unfortunately, this is just not true. US is in better shape than most realise, and as mentioned previously, the US government has been making negative contribution for GDP growth for many quarters, while Europe’s mess is not a debt crisis, but with a flawed monetary system.
Also, they are not realising that China is just the same: borrowing and spending. Worse still, we can be assured that China’s official debt count will be invariably understated. And surely, at least in theory, China can spend a huge amount of money (in the order of trillion) for the sake of maintaining GDP growth, and China bulls think that this is fine. But the same thing is going to bad for US and Europe according to delusional China bulls. Why?
Debt contributes to the problem in developed world, but it by no means suggests that the west is doomed and the solution for the west must be austerity.
4. China can surely stimulate its way out of any downturn, but no stimulus is ever going to work in the US or Europe
On a related point, and again, a manifestation of crazy logic that what good for China is bad for others. China bulls are often rather convinced that US and Europe going down the road of Japan, that with even endless rounds of quantitative easing won’t reflate the economy for a decade.
However, China’s printing money will certainly be able to help China avoid any pro-longed downturn while money printing for the US will only makes US dollar toilet paper. They believe that cutting RRRs and interest rates are magic that makes dream comes true. Unfortunately, most have overlooked the point (or ignore the point) that China is also dreadfully similar to Japan in the late 1980s (and for that matter, US in late 1920s), with trade surplus, real estate bubble, ageing population, and large foreign exchange reserve.
5. China’s US$3 trillion plus foreign exchange reserve means that China is rich
People who think that China’s foreign exchange reserve is a manifestation that China is rich has no idea what this large foreign exchange is all about.
The foreign exchange reserve accumulation is done at that scale because China is massively intervening in the foreign exchange market. By not allowing RMB to appreciate quickly so as to protect the export sector, the trade surplus and foreign investments were forcing the central bank to buy huge amount of foreign currencies, thus accumulating reserve. The other side of this foreign exchange purchase is money creation, essentially the central bank has to print a lot of Chinese Yuan/RMB to buy a lot of foreign currency. The size of the foreign exchange reserve speaks of absolutely nothing about the wealth of average citizen, not to mention that this is behind the crazy monetary expansion as mentioned above.