Yes Virginia...It's a Bubble...

[Polish_Silver]

Re: Yes Virginia...It's a Bubble...

And Goldman Sachs, Morgan Stanley, Bear Stearns, Lehman Brothers, Citigroup, Bank of America...

The Chinese are running this experiment on a scale we haven't seen before (Chanos' "Dubai times 1000"). Who knows how it ends? But I'll bet it looks very much like all the other splatter patterns when the SHTF, only bigger. Much bigger.

I think any country that grows rapidly will have a convulsion after the rapid growth. The reason is that during the growth a lot of people are working on the new infrastructure, new housing, new factories, roads, everything. When the growth slows down, all the carpenters, road pavers, etc. have much less work to do---they are just maintaining existing stuff. They have to learn new professions. Companies have to be liquidated.

[GRG55]

Capital MisAllocation...

Misallocation of capital in China? Never...

After all those planners in Beijing are so smart such a thing could not possibly be allowed to happen, eh.

China’s cooldown: Charting a new path for commodities

BEIJING AND OTTAWA — The Globe and Mail

Published Saturday, Apr. 20 2013, 8:00 AM EDT

Last updated Saturday, Apr. 20 2013, 10:13 PM EDT

Zhang Lianjin remembers the 2008 global financial crisis well. It nearly shuttered his brand-new metal casting factory in Wuhan, the steel centre of China.

Sales for the firm, SAFE-Cronite Asia, have been recovering slowly since the crisis. But while orders are still rising, so far this year they’re growing at only about half the pace the company was expecting. The company’s automotive business is strong, but there’s been a drop-off in orders tied to heavy machinery. And the broader steel industry in China is a worry.

“Many steel mills are really impacted. Some are even closing. There is too much [capacity] in steel mills in China, the economy is slowing down, the market doesn’t need so much and the production is much higher than the market needs,” said Mr. Zhang, the Beijing-based general manager of the European-owned company.

On top of overcapacity and massive overstocking, some competitors are also caught in a shadow banking crisis in which companies borrowed money against their inventory and find themselves unable to repay. [Not to mention those firms that became part of the shadow banking system because they lent retained cash into the property market as the speculative returns there were much better than the beaten down margins in their own businesses].

Now, firms like Mr. Zhang’s are having to adjust to the reality that China’s economy is maturing, and double-digit growth is a thing of the past...

...There are signs of further slowdown ahead, with Chinese exports to the U.S. and Europe dropping sharply. Iron ore stocks are a third more than average, now piling up into three-storey mounds at Qingdao port, while copper stocks are double the usual average, filling Shanghai’s bonded warehouses and spilling into their parking lots.

Property developers are complaining of slower starts and fewer purchases...

...“If you’re talking about the new normal, we think 7.5-per-cent growth is not necessarily the new normal. We think the new normal is an ongoing deceleration of growth over the next decade,” said Andrew Polk, resident economist for the Conference Board China Centre in Beijing, which says China’s trend growth – the amount the economy can sustain without exceptional inflationary pressures – should look more like 5.5 per cent between 2013 and 2018...

[Polish_Silver]

Re: Capital MisAllocation...

Misallocation of capital in China? Never...

After all those planners in Beijing are so smart such a thing could not possibly be allowed to happen, eh.

Wow!
That rings a bell! I was in Taiwan around 2006, and a guy was telling me there was a shortage of steel. Prices rising world wide. But China was working on some humungous steel mill. I'd be curious to see the P/L on that mill at this point.

Another intesting example is the Nowa Hutta steel works build near Krakow, Poland.

Poland had a reputation for disliking communism. Polish farms were never centralized, but remained under the control of individuals. Krakow always had a high opinion of itself, having long been the national capital and having the oldest university in the nation.
To give the region more class consciousness, a large steel mill was built there.

From Wikipedia:

The reasons for building such an industrial town near Cracow (Kraków) were mostly ideological and were against laws of economy (coal had to be transported from Silesia and iron ore from the Soviet Union; the products were shipped to other parts of Poland since local demand was relatively small). This became visible in the 1980s, when the economic crisis halted the city's growth.

The locals resented the whole thing. Valuable farm land had been taken up by this pollution belching monstrosity. During the 1990's there were attempts to privatize the steel mill, all unsuccessful to my knowledge.

China's a bit smarter than that, but still, you have to wonder.

[GRG55]

Re: Capital MisAllocation...

China Trade Implies Slower Growth




China’s external sector is probably expanding much more slowly than overall export growth implies.Have a look at “unusual surges” in China’s “reported shipments to Hong Kong.” It seems the entire country is either channel stuffing or dumping goods or ever cooking books via inflated invoices. Another thesis is that Exporters are “repatriating capital through export transactions rather than through traditional methods” to avoid Mainland’s controls and/or taxes.

In other words, China’s exports as well as growth prospects have been somewhat exaggerated...

[Polish_Silver]

Re: Capital MisAllocation...

In other words, China’s exports as well as growth prospects have been somewhat exaggerated...

The business model of vendor financed purchases was always somewhat suspect. I am just amazed it lasted this long.

[ProdigyofZen]

Re: Capital MisAllocation...

China Trade Implies Slower Growth




China’s external sector is probably expanding much more slowly than overall export growth implies.Have a look at “unusual surges” in China’s “reported shipments to Hong Kong.” It seems the entire country is either channel stuffing or dumping goods or ever cooking books via inflated invoices. Another thesis is that Exporters are “repatriating capital through export transactions rather than through traditional methods” to avoid Mainland’s controls and/or taxes.

In other words, China’s exports as well as growth prospects have been somewhat exaggerated...

Looks like China has found it's next Capex investment....

http://www.businessweek.com/articles...=email_article

In China there’s a giddy feeling that the next energy gold rush is about to begin. Beneath the mountains of Sichuan province, the deserts of Xinjiang, and elsewhere, China contains twice the shale- gas reserves as the U.S., says the U.S. Energy Information Administration. China’s national planners enthusiastically back boosting natural gas production, which accounts for just 4 percent of the country’s total energy mix now. The government wants to double that share by 2015. “There’s a lot of exuberance,” says Zhou Xizhou, who leads the research firm IHS Cera’s China Energy practice. “In Beijing, if you work in energy, you probably receive a sha

[GRG55]

Re: Yes Virginia...It's a Bubble...

And like all good bubbles it goes on much longer and inflates to a much greater extent than anyone could have imagined.

Is it finally the beginning of the end? Maybe. Maybe not...

Still going strong apparently.

Even the much vaunted "centrally planned world beating" Chinese economy is having difficulty figuring out how to get off the mercantile + cheap-credit investment driven growth model treadmill. Too many vested interests, too much corrupt money being made.

So there's every reason to believe they'll just keep coming back to it over and over again until something finally breaks...

China April housing inflation quickens to two year high

BEIJING | Sat May 18, 2013 4:28am EDT

(Reuters) - China's housing inflation accelerated to its fastest pace in April in two years, driven by a jump in prices in Beijing and Shanghai, complicating the task of policymakers trying to cool the property sector while supporting economic expansion.

Average new home prices rose 4.9 percent last month from a year ago, after a year-on-year increase of 3.6 percent in March, according to Reuters calculations from data released by the National Bureau of Statistics(NBS) on Saturday.

The rise was the sharpest since April 2011.

Rising home prices have reignited concerns about property inflation, adding to pressure on policymakers who are struggling to curb house prices and still spur a strong economic recovery...

...Worried about a rebound in home prices, China's government unveiled a fresh round of measures in March to try to cool the sector, though those measures were less stringent than market expectations.

New home prices in Beijing rose 10.3 percent in April from a year earlier and Shanghai's prices were up 8.5 percent in April from a year ago...

...China's fight against property speculation has headed into its third year but many middle-class Chinese are still priced out of the urban housing market...

...Home prices rose month-on-month in 67 of 70 major cities monitored by the NBS in April, down from 68 in March.

The accelerating year-on-year home price gains were mainly caused by low bases last year as over 60 percent of 70 cities saw month-on-month price drops last April, said Liu.

China's home prices began their latest climb in mid-2012 when the central bank started expanding monetary easing as part of Beijing's growth-supporting policies...


China inflation data shows central bank policy dilemma

BEIJING | Thu May 9, 2013 7:53am EDT

(Reuters) - China's annual consumer inflation accelerated more than expected in April while factory prices fell for a 14th consecutive month, highlighting the dilemma facing the central bank as it balances support for the economy against the threat of rising prices.

With global growth sputtering, China's central bank has limited room to move, unlike counterparts in South Korea and Australia which both made surprise rate cuts this week.

Any easing could fuel property market risks, while tightening would hurt a nascent recovery after economic growth unexpectedly slowed to 7.7 percent in the first quarter from 7.9 percent in the previous three months. .

Instead the onus may be on the government to push structural reforms to help sustain long term growth in the world's second largest economy.

"We cannot rely too much on the central bank to support the economy," said Xu Hongcai, senior economist at China Centre for International Exchange (CCIEE), a top government think-tank in Beijing.

The government will instead rely on fiscal policy by boosting infrastructure investment and cutting taxes to underpin the economy, said Xu, a former central bank researcher...

...Tightening, meanwhile, is unlikely given a series of factory and services PMIs issued earlier this month that signaled tepid economic activity in April.

Chinese factories are saddled with excess capacity due to weak demand, putting downward pressure on producer prices that in turn erodes their profits.

"On policy, the priority now is industrial reform to tackle the problem of excess capacity...

...The National Bureau of Statistics said that China's producer prices dropped 2.6 percent in April, the 14th consecutive month of year-on-year declines and sharper than a drop of 1.9 percent in March.

China's biggest listed steelmaker, Baoshan Iron & Steel (600019.SS), said on Thursday it would cut its main steel product prices for June bookings, its first reduction in nine months, underscoring demand worries amid a fragile economic recovery...

...Consumer inflation quickened to 2.4 percent in April from March's 2.1 percent due to higher food costs, data from the National Bureau of Statistics, showed on Thursday...

...Food prices rose 4.0 percent in April from a earlier, quickening from the 2.7 percent rise in March...

..."Monetary policy is likely to stay relatively accommodative as China's economic recovery remains fragile."

[GRG55]

Re: Yes Virginia...It's a Bubble...

China Credit-Bubble Call Pits Fitch’s Chu Against S&P

Chinese banks are adding assets at the rate of an entire U.S. banking system in five years. To Charlene Chu of Fitch Ratings, that signals a crisis is brewing.

Total lending from banks and other financial institutions in China was 198 percent of gross domestic product last year, compared with 125 percent four years earlier, according to calculations by Chu, the company’s Beijing-based head of China financial institutions. Fitch cut the nation’s long-term local-currency debt rating last month, in the first downgrade by one of the top three rating companies in 14 years.

“There is just no way to grow out of a debt problem when credit is already twice as large as GDP and growing nearly twice as fast,” Chu, 41, said in an interview.

Chu’s view puts her in a minority among those charting the future of the world’s biggest nation. She questions how long China can maintain the model of growth driven by bank lending that has allowed its economy to sidestep the global financial crisis...

...Amid the global credit crunch of 2008, China ramped up lending by state-controlled banks to prevent an economic slowdown. The assets of Chinese banks expanded by 71 trillion yuan ($11.2 trillion) in the four years through 2012, according to government data. They may increase by as much as 20 trillion yuan this year, Chu said April 23. That will exceed the $13.4 trillion of assets held by U.S. commercial banks at the end of last year, according to the Federal Deposit Insurance Corp.

Chu says companies’ ability to pay back what they owe is wearing away, as China gets less economic growth for every yuan of lending...

...Some loans, often for real estate, are bundled together and sold to savers as so-called wealth-management products, while other assets are sold to non-bank financial institutions, including trusts, to lower the lenders’ bad debt levels, according to Chu. Wealth management products and trusts are sold to investors eager to get more than the government-mandated benchmark of 3 percent annual interest on bank savings accounts.

“The data may be somewhat accurate for the on-balance-sheet loan portfolios of the banks, but banks have substantial off-balance-sheet positions for which there is no asset-quality information,” she said...

...A jump in the ratio of credit to GDP preceded banking crises in Japan, where the measure surged 45 percentage points from 1985 to 1990, and South Korea, where it gained 47 percentage points from 1994 to 1998, Fitch said in July 2011. In China, it has increased 73 percentage points in four years, according to Fitch’s estimates.
Reliable Predictor

“You just don’t see that magnitude of increase” in the ratio of credit to GDP, Chu said. “It’s usually one of the most reliable predictors for a financial crisis.”...

[bart]

Re: Yes Virginia...It's a Bubble...

Recent SHIBOR rates sure aren't in the "safe" zone.

[GRG55]

Re: Yes Virginia...It's a Bubble...

Recent SHIBOR rates sure aren't in the "safe" zone.

The recent gyrations in various currency crosses, the mini bond market rout in May, the rollercoaster known as the Japanese stock market, now visible cracks appearing in the few remaining real estate bubble markets (notably Australia and Canada) and your chart above would suggest that we are losing the enjoyment of the low volatility, "no immediate negative consequences" phase of global QE.

Do you think we're at an inflection point in this grand monetary experiment?

[c1ue]

Re: Yes Virginia...It's a Bubble...

Still going strong apparently.

Even the much vaunted "centrally planned world beating" Chinese economy is having difficulty figuring out how to get off the mercantile + cheap-credit investment driven growth model treadmill. Too many vested interests, too much corrupt money being made.

The 2nd article you list notes 'surprise' interest rate cuts in South Korea and Australia. Surprising how given Abenomics?

I agree China has all sorts of venal reasons why it won't easily shift out of its existing model, but then again, even if they didn't - there would be simple inertia to overcome. Be that as it may, the splash going on right now is due to Japan's contribution to the latest 'beggar thy neighbor' round.

[GRG55]

Re: Yes Virginia...It's a Bubble...

The 2nd article you list notes 'surprise' interest rate cuts in South Korea and Australia. Surprising how given Abenomics?

I agree China has all sorts of venal reasons why it won't easily shift out of its existing model, but then again, even if they didn't - there would be simple inertia to overcome. Be that as it may, the splash going on right now is due to Japan's contribution to the latest 'beggar thy neighbor' round.

The use of the word "surprise" in (alleged) financial journalism is exceeded only by the use of the word "unexpected". And that should come as no surprise to any of us here...

[bart]

Re: Yes Virginia...It's a Bubble...

The recent gyrations in various currency crosses, the mini bond market rout in May, the rollercoaster known as the Japanese stock market, now visible cracks appearing in the few remaining real estate bubble markets (notably Australia and Canada) and your chart above would suggest that we are losing the enjoyment of the low volatility, "no immediate negative consequences" phase of global QE.

Do you think we're at an inflection point in this grand monetary experiment?

There are inflection points that occur virtually every month, but their management by CBs and political entities have been successful. I don't foresee the possibility of any large crises for a while, but think there will be some large bumps later this year.

"It's all good" is getting long in the tooth.

[GRG55]

Re: Yes Virginia...It's a Bubble...

Repeat after me:

China property is a "cash market";

The Chinese government "won't let" the property market crash;

China has 1.1 Billion people that need homes so all the empty apartments will get filled;

It's different in China because a centrally planned economy and a totalitarian government can make and implement good economic decisions so much more quickly and effectively than the USA or any other democracy...

(feel free to add your own China myth to the list)

Misallocation of capital? In China? Perish the thought...

Last updated: April 16, 2013 5:32 pm

China local authority debt ‘out of control’

...

One of the other things I have posted a few times in the past is my firm belief that, contrary to popular political opinion in the USA, the Chinese currency is OVERvalued, and if it was allowed to free float it would decline, not rise, against the US$.

Excerpt of an interview with Stanley Druckenmiller:

Stan Druckenmiller is Chairman and Chief Executive Officer of Duquesne Family Office. He founded Duquesne Capital Management in 1981, which he ran until he closed the firm in 2010. Previously, he was a Managing Director at Soros Fund Management, where he served as Lead Portfolio Manager of the Quantum Fund and Chief Investment Officer of Soros


Q: What are the risks of investing in China that are not well understood in your view?

Stan Druckenmiller: The growth in credit at a time when GDP growth is slowing is a problem for China. And I think this is the 2009-11 stimulus coming back to bite. I understand that it had to be done to fund entrepreneurs and the private sector, but it’s easier said than done if you’re channelling funds through local government investment vehicles. I’m a believer in markets. A few men sitting around a table and deciding how to allocate capital goes against everything I’ve ever believed. Not only are they not great at capital allocation, such an exercise also needs to deal with a lack of property rights and corruption. In essence, the frantic stimulus China put together at the end of 2008 sowed the seeds of slower growth in the future by crowding out more productive investments. And now, the system’s building enough leverage and misallocation of resources to warrant risks of a financial crisis, but the timing of that is still uncertain in my mind. What we’ve seen in China since 2009 is similar to what happened in the US in 2005, in terms of credit growth outpacing economic growth.

I think ageing demographics is a bigger issue in China than people think. And the problems it creates should be become evident as early as 2016.

You also need to keep in mind that for China to grow and evolve further, it will need to compete with a more innovative Korea and now a more competitive Japan. I don’t think China can do that with where its exchange rate is today. I think productivity is a key concern too. And I think that could be one of the reasons why the US has been so supportive of Abenomics.

People mention lack of infrastructure as a constraint. But when I go over there, it looks like they have a lot of infrastructure. It seems ahead of the population, not behind. I see expensive apartments in empty cities that 300 mn rural Chinese are expected to migrate to. That looks very unbalanced to me. Nobody’s ever had investment to GDP at 47%. Japan and Korea peaked at 36%-38%, so as a result I think capacity is way ahead of demand in some areas in China...

[GRG55]

Re: Yes Virginia...It's a Bubble...

Repeat after me:

China property is a "cash market";

The Chinese government "won't let" the property market crash;

China has 1.1 Billion people that need homes so all the empty apartments will get filled;

It's different in China because a centrally planned economy and a totalitarian government can make and implement good economic decisions so much more quickly and effectively than the USA or any other democracy...

(feel free to add your own China myth to the list)

Misallocation of capital? In China? Perish the thought...

Last updated: April 16, 2013 5:32 pm

China local authority debt ‘out of control’

...

Apparently urban China property prices still going strong

Blow-off phase? Or just another normal year in the effervescent Chinese property markets because...well..."China is different"...

China Home-Price Gains Add to Dilemma on Cash Crunch: Economy

By Bloomberg News - Jun 17, 2013 10:57 PM MT

Chinese property prices rose at the fastest pace in more than two years in major cities, defying tougher government curbs and constraining the ability of policy makers to ease credit in response to weakening economic growth.

New home prices in Beijing, Shanghai and Guangzhou posted the biggest gains in May since at least January 2011, and 69 of the 70 cities tracked by the government showed increases, the most since August 2011, National Bureau of Statistics data showed today in Beijing. Inbound non-financial investment rose 0.3 percent in May from a year earlier, the weakest in four months, according to the Ministry of Commerce.

The property gains limit the ability of Premier Li Keqiang to counter an economic slowdown that showed signs of deepening in May. The central bank today refrained from adding cash to the financial system and money-market rates reached the highest level in seven years this month, a liquidity squeeze that Fitch Ratings says may accelerate a banking crisis.

“The government is in a dilemma right now,” said Zhang Zhiwei, Hong Kong-based chief China economist at Nomura Holdings Inc., who previously worked at the International Monetary Fund.“It’s difficult for China to tighten the property market, while it also needs to bolster the economy, which has a strong reliance on property.”

China’s one-year interest-rate swaps rose to a 21-month high today. The yuan weakened 0.1 percent, the most since June 6, to 6.1291 per dollar, as of 11:25 a.m. in Shanghai. The MSCI Asia-Pacific Index of stocks fell 0.5 percent...

...Local governments are reluctant to enforce policies aimed at cooling the housing market, Zhang said. Former Premier Wen Jiabao in March ordered central bank branches to raise down-payment requirements for second mortgages in cities with excessive cost gains and told local governments with the biggest price pressures to tighten home-purchase limits and set price-control targets.

Today’s data showed the southern city of Guangzhou posted the biggest gain with prices rising 15 percent from a year earlier. Beijing prices climbed 12 percent, while they advanced 10 percent in Shanghai. All three cities had their biggest advance since the government changed its methodology for the data in January 2011.

The only decline in new home prices last month was in the eastern city of Wenzhou, where they fell 3.6 percent from a year earlier, according to the data.

Home prices in China had the biggest quarterly gain among 55 countries globally in the first three months of the year, based on Beijing and Shanghai prices, broker Knight Frank LLP said in an e-mailed report yesterday...

...Agricultural Development Bank of China Co. scaled back the size of two bond offerings today by 31 percent after the Finance Ministry failed to sell all of the debt offered at an auction for the first time in 23 months last week.

“We are starting to see some issues emerging” in liquidity, Charlene Chu, Fitch’s head of China financial institutions, said in an interview today with Zeb Eckert on Bloomberg Television in Hong Kong...

...Inbound non-financial investment increased to $9.26 billion, the Ministry of Commerce said today in Beijing, after a 0.4 percent gain in April. China’s outbound investment rose 20 percent in the first five months of the year to $34.3 billion, compared with a 27.4 percent pace in January-April.

The investment report follows data indicating capital inflows slowed last month while growth decelerated in exports,industrial production and lending. Confidence is fading in an economic rebound this quarter, with investment banks from Morgan Stanley to Barclays Plc cutting their 2013 expansion forecasts.

Shen Danyang, a Commerce Ministry spokesman, said at a briefing today that China’s economic situation is stable while the trade situation is “grim” for this year...

...China’s property market faces the risk of a “bubble,” and it isn’t “light,” Wang Shi, chairman of China Vanke Co., the nation’s biggest developer, said at a conference in Shanghai on June 6...

The dreaded "B" word rears its ugly head again...