You have to be delusional to be a huge China bull now2 May, 2012, 13:56. Posted by Zarathustra
Since perhaps late 2010, I have been bearish and getting more bearish on China
The reason I got bearish on China at the very beginning was not particularly sophisticated, but from an observation that the Chinese stocks market have been doing very badly probably since 2010.
Bulls must have thought that I have had it wrong for one and a half year now because GDP growth is still looking absolutely fantastic (so you think).
But think twice.
The simple fact that one of the fastest economy to have its market behaving as if it were Europe is enough to make bulls wince, and it does not really matter whether you are talking about shares in Shanghai or in Hong Kong, they just did poorly, especially in 2011.
And as much bashing on US economic policy as you would like to make, US markets did way better than China. That is a fact.
And if the Chinese economy was really that fantastic, we wouldn’t be seeing companies issuing profit warnings all over the place and profits missing expectations. How many of the people in the market, after all, expected such a bad year 2011 for Chinese companies, really?
Bears have already either made money by shorting China, or at the very least protect their own capitals in the past year or so by not being in China. If you still insist that China bears were wrong despite the fact that China bears have done much better in the past year and a half than you bulls, you are delusional.
|Image source: Metro Centric @ Flickr|
Despite the fact that the economy has shown signs of stabilisation in the past 2 months, we are also seeing more pieces falling into place for the bear case. For instance, I have been suggesting that the Chinese economy is full of debts, and that the real estate market bubble obviously cannot be not powered by debt, optimists have always tell us that households can’t borrow that much to purchase a flat as they are required to put 30%, 40%, 50%, or whatever-seeming-high-percentage of the purchase as down payment. Some suggest that Chinese people don’t like to borrow because that’s a cultural trait. The even more naive view is that because the government is actively poking at the bubble, surely there is not bubble.
But the evidence has been incontrovertible: simply by looking at the amount of money floating around in China, just look at the size of China’s banking asset relative to its economy, and you have to question your optimistic assumption that there is not much debt in China.
On top of the very high M2/GDP ratio in China, which is almost 2 times of the economy (in US, that ratio was only 60-ish per cent), and a total banking asset of way over 2 times of its GDP, there is a massive amount in the shadow banking activities going on in the form of loan sharks, pawnshops and banks packaging wealth management products. Pieces are falling into place, we are seeing more and more reports on debt problems everywhere as borrowers found it increasingly difficult to service their debts.
As Warren Buffett said, “It’s only when the tide goes out that you learn who’s been swimming naked”.
We did not know about underground banking system debts until bosses in Wenzhou escape and killed themselves and Ordos truly becomes a city for ghosts.
We did not start to have a grasp on some of the chains of financings that kept many real estate companies going until we start to see a few real estate companies going bust.
As we can see now, those who insisted that there is not much debt in China have all looked the wrong way.
There are debts everywhere, you just did not look at the right place. And how much assets there are against these debts today is not important, because assets values are going to fall.
And surely, many will continue to refuse to believe that there has been a real estate bubble until the real estate market is destroyed.
In early 2007 when the US housing market was it is early stage of what we now call a “crash”, or in the summer of 2007 when just a few hedge funds playing in the mortgages market blew up, or just when Bear Stearns was acquired by JPMorgan, there are a lot of people who were more than willing to jump in and declare “the worst is behind us”.
We have heard quite enough of that in the recent weeks on China. “The worst is behind us”.
Surprisingly, even after the massive housing crash of the United States and in some places in Europe (think Spain) and the never-ending bear market in Japan, many still do not understand, or refuse to accept what it means to have a massive real estate bubble being deflated.
I have already mentioned the study which shows that wealth effect on consumption from real estate is likely to be higher than holding of shares and other financial assets, meaning that the fall of the value of your home has more impact on your consumption pattern than the fall of the value of your portfolio investment.
And because China overbuilt in the first place, the burst of the bubble will mean weaknesses in fixed asset investment, which will inevitably feed into weakness in consumption, and that makes rebalancing of the economy more difficult.
With so much debt behind all these, which has now become more and more apparent, the true bad debts on banks’ book will surge even though they may or may not tell you. We are off for a debt deflation scenario, and the future will be deflationary.
No, I don’t think the worst is behind us. The economy could have stabilised for the moment, but I am still expecting a huge leg down for the Chinese economy.