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Art Cashin On Corriente's "Enormous China Bubble"
Some time in January, we presented an extended analysis by Mark Hart's Corriente Fund in which the successful hedge manager presented a comprehensive case for the Chinese bubble. Today, about a year later, and after China is finally on the verge of realy pulling in the liquidity avalanche, tired of importing Bernanke's rampant inflation, Art Cashin looks at the very same Mark Hart in his market commentary: "Several readers asked if I had more details on Mark Hart’s bearish call on China. I pulled up a couple of articles, most notably the U.K. Telegraph. Mr. Hart manages Corriente Advisors. He set up a bearish sub-prime fund in 2006 and a bearish European debt fund in 2007. The anomalies he sees in China are somewhat familiar: Excess floor space exceeds 3.3 billion square meters and there are still 200m being built this year; The price to rent ratio is 39.4 times versus 22.8 times in America before the housing crises; Banks are hiding their exposure in Local Investment Vehicles; On a Sovereign level, China’s debt to GDP comes out at 107%, five times published numbers; China has consumed just 65% of the cement it has produced in the last six years; There are 200m tons of excess steel capacity, more than the EU and Japan’s total production this year. According to the articles, Mr. Hart has been growing bearish on China for months. Several other successful hedge fund managers are also said to be making negative bets on China. It certainly bears watching." We would like to help Art, and provide with a redux of what we posted back in January that summarizes Corriente's outlook.
A Contrarian View Of China: Tying It All Together
The paper's conclusion provides some unique observations:
- Over the past decade, China has accumulated a massive sum of total FX assets - approximately $2.7 trillion, by our calculations
- Conventional
wisdom suggests that China's accumulation of FX assets is an indication
of strength and high savings, and that the RMB will only move higher
vs. the USD - Our work suggest otherwise. Based on our analysis, we conclude that
- Because of the peg and the common perception that the RMB is undervalued, the RMB has been in a bubble for several years
- China's accumulation of FX reserves is the result of extensive monetary expansion
- A significant and underappreciated source for China's FX reserves has been speculative capital inflows
- Massive
monetary expansion and speculative foreign capital inflows have fueled
asset bubbles within China that inevitably will burst - The next significant move for the RMB vs the USD is most likely LOWER.
And
here are the Corriente-proposed catalysts that could cause the Chinese
government to devalue the RMB vs the USD (whether the US will allow such
a move, is a totally different topic altogether).
- Stronger
US Dollar: As a net exporter of goods, China has benefited from a weak
dollar. If the USD (and, as a result of the peg, the RMB) were to
strengthen vs. other major currencies, then Chinese exports would become
less competitive, adversely affecting the Chinese economy and hampering
job growth. If the USD strengthens vs. other major currencies, we
believe it is highly likely that China will devalue the RMB vs. the USD
to remain competitive. Further, we believe this to be a highly probable
scenario, as global USD-denominated debt deflation reduces the amount of
USD outstanding and pressures the USD to strengthen vs. other major
currencies - Protectionism/Trade War: Rather than China
implementing import tariffs of its own, which would heighten trade
tensions, protectionist policies by the U.S. could be met with a
currency devaluation. - Bursting of the Chinese Asset Bubbles:
Declining asset prices would cause foreign capital flight out of China,
shifting demand to buy USD and sell RMB, especially by speculator who
funded their asset purchases with USD-denominated debt. In addition, the
resulting wealth destruction and unemployment in the construction
sector would likely compel the government to devalue (or allow a
depreciation of) the RMB to boost its export sector. - Removal of
the Peg: Removing the pef and allowing the USD/RMB exchange rate to
freely adjust to market forces would eliminate China's primary rool for
monetary accommodationm thereby creating a drag on the Chinese economy
and asset markets. Paradoxically, unless the PBoX were to compesnate
enough through other means of money creation, the ensuing fall in asset
prices would result in foreign capital flight and downward pressure on
the RMB.
Full Corriente presentation is certainly a must read for anyone interested by China.
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This is the model I still think is in force, and why I am on the King Dollar bandwagon.
Looking forward to the latest shadow M3 numbers for confirmation
A Conundrum for the hyperinflationist. A monkeyhammer for Gonzo Lira'
So short FTSEchina? and/or Hang seng?tia
I don't believe the Yuan is going lower. It's already too much undervalued.
However, China's economy is still bubblish. A bursting of Europe's economies would pop the China bubble. Eventually it will pop anyway.
China has a real estate bubble that will end up making ours look extremely mild, by comparison.
They also have a 'labor is the world's cheapest commodity - race to the bottom' problem. But that's a topic for a different day and intermingles with our own structural problems in the U.S. and Europe.
What to buy...what to buy...Hmmm
Where is Fat Ass willy to lecture stupid Americans on the superiority of the Chinese (oligarchial/fascist)economic model? Must be writing Friedman's next column.
Did you see this week's yet? This time he completely came out of the closet, lionizing 5-year plans.
What do you expect of the son of a TBTF US Auto industry executive?
this is a stupid excuse for a pitch book and belongs alongside Chanko's tirade about the Great China Bubble (a/k/a Why You Should Give Me Your Money to Manage). Here's a little insight: China will spend its reserves on stuff in order to meet demand, particularly in light of price controls on soft commodities. What China bears don't see to get (or don't want to get) is that a command economy under a totalitarian government, doesn't play by free market rules. These guys need to get another job.
If they have a command economy, why not command inflation to stop? They could also order the tide to stay out as Knut tried.
I believe Martin Armstrong (aka Mr. Yen) was right when he says "Nothing Private, or Public will ever prevent the natural course of events to unfold. Man can pass all the laws and regulation he desires, but he cannot change human nature by decree"
Jim Rogers on a China overheating and the government having to put the breaks on (after having left it too late).
''Urban areas littered with empty office buildings, half-built luxury town houses, deserted department stores. The state banks were left holding a bag of worthless loans.'
This happened in 1994. Sudden shock followed by renewed growth. I wouldn't put money in China right now but China won't cease to be an economic power house after a crash, just like the US didn't vanish after '29.
'Why not command the inflation to stop?'- Calmyourself.
That is what they did in 1994. Interested to read that the Tiananmen protests had their roots in 28% inflation which resulted in very tight money being implemented by the authorities.
History might help us figure out the possible scenarios for China this time round- but China won't go the way of Japan (in my opinion of course), instead of hitting a wall and bouncing back they will hit a wall, crash through it, be dazed and bloody but eventually start picking up pace again.
good comments, history (1931 Britain, 1985 Japan) should be consulted. Thus
China will get deflation (stock/property bust, rising RMB)
US will get inflation to work off it's high personal/government debt levels
These decisions are political in nature and Corriente's analysis is very poor, How does a property bust and desire for higher exports lead to lower RMB? Lower property prices is deflation, politically there's enourmous pressure on China to sell into domestic markets to get away from a mercantalist model
I have heard this presentation given in person, and Mark Hart does it very convincingly. The missing step though, which is what I think you are trying to figure out, is why does the property bust and desire for higher exports lead to a lower RMB? The answer that makes the most sense to me is what has happened here in the US and in Japan, and is that when their property bubble bursts, Chinese banks and local governments holding the worthless non-income-producing loans will need to be bailed out. The Chinese government could decide to use QE to print its own currency to cover these non-performing loan losses, causing a devaluation of the RMB.
Mark Hart didn't specifically say this, but I think that this is why he is saying that he thinks they will have to devalue.
While my comment was somewhat tongue in cheek, I appreciate the reply. I will need to research the tight money policies post Tiananmen. Is it possible for them to do that this time and continue to fix the RMB and fund foreign purchases while keeping the peasants on the farm? My point being their balancing act will by necessity be more dangerous and difficult than ours.
Jim Chanos doesn't have the China BubbleGeddon wrong, and he's not one to just talk his book.
The Shanghai Composite Index is really on shaky ground again and continues to be a global underperformer.
Does Art Cashin think the stock market rally is real yet since the DOW is now up 5000 points from when he first wasn't sure about it???
This guy is a stupid moron-turn him off!
Everybody knows China is non-cyclical
like the old Soviet Union. It's all
good. A tree growing to the sky thanks
to totalitarianism. Tell me another
one, bulls.
China's the last refuge of the bullish assclowns
who used to worship at the altar of
Japan.
Wall Street never gets out. They drive
the speeding car right into the friggin
wall every single time. Uncanny.
If a "real" rally consists of mainly fueled by trillions of Fed dollars that it doesn't have - then yes -you're dead right. This is a "real" rally.
Otherwise - this rally is just another ponzi scheme - and the Fed and Wall Street are getting more and more desperate to sucker in the retail investor.
We've been accumulating dogshit
for months. Someone has to take it
off our hands. Are you game?
Riches await you, I assure you.
An interesting article ...
http://english.caing.com/2010-12-01/100203697.html
Who would have thought a sell call would rile China's ruling elite?
I'm shocked they didn't denouce that "international investment bank" as a capitalist roader.
Whoa. Keep an eye on China. More cheap goods coming our way for cheap dollars?
At least China bought steel and cement.
U.S. bought McMansions and plasma TVs.
At least I can watch Dances with the Stars while the bridges and highways crumble around me.
Amusing thought process some people have on this topic. People thought Japan would overtake the US, they now think China will overtake the US. Some people are saying China is a bubble. Therefore China must be the same as Japan.
China is more like the U.S when it rose to power. The U.S had major issues in 1907, 1920-21 and 1929. How do you think those people who decided to never invest in the U.S due to one of those problems felt about it?
China has had inflationary problems. The period prior to Tinanmen Sq, 1994 etc. They have always bounced back. I would not invest in China right now, and probably would want to find a way of shorting China, but when the dust settles and the herd are consigning China to the fate of Japan I would head to HK to find some nice dirt cheap real estate (just an example of an investment possibility).
We may see social unrest and probably will see tight money and a major bust, might even see the Communist government fall (but that would help the Chinese economy long-term). But 1billion+ Chinese who want to increase their standards of living won't vanish. And while the property market has, by all accounts, become a little ridiculous in China, there are still a tonne of poor people who will aspire to own one of those nice condos.
gold
$2.7T in FX
when the bubble does burst it will become cover time. nothing changes that, other than WHAT?
Jury is still out on whether a China crash is a plus or minus for the yuan. Japan is a poor non-model.
A collapse in China, where expectations of a non-voting population are sky-high, might well threaten the CP's hold on power. The masses might not take kindly to disappointment. Social unrest might lead to capital flight, which did not happen in Japan. The yen was already an international currency. Japan had massive overseas investments other than USG paper, and as they began to sell them off (Pebble Beach, Rockefeller Center, etc.) and repatriate the funds, the yen began to rise. China has overseas assets, but many are in mining and natural resources, which have value mostly because China is now a massive resource accumulator. If China needs to sell off the sources of things that go into building a massive property and infrastructure bubble, they are unlikely to find another buyer.
The cover will be in the $2.7 Trillion FX positions. You are very right, they will be unlikely to find another buyer as their positions start to get slammed. It seems more are now learning how they are exposed, the question becomes how do they unwind before the bubble bursts and if that is done how much faster does the bubble break?
nothing changes this from taking place NOW other than the big WHAT IF?
Same ol same OH.
Where's the report? False advertising?
Country to build 10 million houses for low-income families in 2011
08:43, December 03, 2010
The Ministry of Housing and Urban-Rural Development (MOHURD) has set the goal of building 10 million houses for low-income families in 2011, and is collecting construction plans from local governments, the 21st Century Business Herald reported Thursday.
The number of houses for low-incomes will increase by 72.4 percent next year compared with the 5.8 million supplied in 2010. The additional houses will mainly serve as low-rent public housing and the total investment in the program for the coming year will edge on 1.4 trillion yuan ($210.21 billion).
The report said that more favorable policies will be given to local governments on such programs in 2011, including the Real Estate Investment Trusts (REITs) for low-income housing projects, policy-related loans, and more land supplies.
In 2008, it launched the low-income housing program and provided 1 million houses for the group. And in a period of only one year the figure tripled to 3.3 million.
- Source: China People's Daily