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Can China Control the “Side-Effects” of Its Stimulus-Led Growth? Let's Look at the Facts
I have another paper available for download outlining my China short
thesis available for subscribers here: 
China Macro Discussion 2-4-10 2010-02-04 13:10:26 922.25 Kb.
In addition to the issue-specific ETFs (proffered (Chinese
ETFs with Exposure to Real Estate, Banks, Insurance and Export
Industrials) that I have already proferred, I will be offering my viewpoints on specific companies across various geographic regions
as well.
For
those who don't subscribe to my blog, here are some excerpts from the 11
page download..
Can China Control the “Side-Effects” of its Stimulus-Led Growth?
The strongest argument for a Yuan-revaluation relies on a basic tenet of
economics: tinkle with prices and you disturb the resource allocation
equilibrium prevailing in the economy. China’s endeavor to push economic
growth through stimulus spending and its lax control over money supply
has started to affect the “side effect” - INFLATION. The very
contrivance used to maintain stability has become a threat to economic
resurgence. And if there is one such thing that could force China to
drop its dollar peg, it is out-of-control inflation.
One of the major reasons for inflation in China is the rescue program
initiated during the recent global slowdown. The Stimulus program aimed
at creating a temporary demand within the economy has apparently worked
wonders – aiding the Chinese economy to grow by a healthy 9% in 2009.
This program has apparently overheated the economy, gorging on what may
become untamed GDP growth, currently 10.7% in 4Q09 - its fastest
quarterly growth in two years - which was uncannily higher compared to
the 6.1% growth in 1Q09, the lowest since the introduction of quarterly
GDP figures in the fourth quarter of 1999.
On a real basis, China's equity markets closely track GDP. I would
venture that a pullback of government stimulus and/or a spike in
inflation or currency values will put the skids on export driven and
financial equities. Let's explore this thesis...
The unprecedented stimulus (as a % of GDP) has given rise to what I
would consider an uncontrolled frenzy
of economic activities, resulting in excess money supply within the
economy
while keeping the domestic supply of goods and services relatively
constant in
the short term. Though the growth rate may not be a concern and may even
be
maintained at the optimum level, demand, especially from consumers and
investors will inevitably increase over a period of time driven mainly
by the
significant amount of domestic liquidity in the economy which also poses
a risk
of increasing prices. Money generally chases assets that provide the
highest
returns causing a stress on several such assets to the point of demand
pull
inflation or in other words, unwanted asset bubbles.
According to a report issued by the People's Bank of China, the nation's
commercial lenders pumped out RMB 9.59 trillion (US$1.4 trillion) in
credit in 2009, almost double that of the previous year. China's
Yuan-denominated individual home mortgage lending rose 47.9% from the
previous year, to RMB 1.4 trillion ($204.98 billion) in 2009. Meanwhile,
the Yuan-denominated property development lending gained RMB 576.4
billion in 2009, up 30.7% y-o-y. The total mid-term and long-term loans
in foreign and domestic currency increased by RMB 7.1 trillion in 2009,
up 43.5% from the previous year, and the growth rate was 23.4 percentage
points more than the previous year.
These liberal credit policies adopted by China over the past four to six
quarters have flushed the economy with excess money supply. The current
rate of production has not been able to cope with the rate of the
increase in demand for these goods and services creating a scenario
where excess money has been chasing limited goods and services, leading
to excessive inflationary pressures.
Further, easy availability of funds have rapidly increased the demand
(investment) in real estate. As mentioned earlier, real estate is
considered a high return asset, which attracts money. The result: home
prices in 70 major Chinese cities jumped 7.8% on average in December
2009 when compared with December 2008 - the steepest climb in the past
17 months.
Another key factor that has continuously driven the money supply is the
growing foreign exchange reserve which in turn is driven by foreign
trade surplus, foreign direct investment and “hot money inflows”. At the
end of 2009, China's outstanding foreign exchange reserves reached USD
2.4 trillion, soaring 23.28% or USD 453.1 billion y-o-y. Moreover, as
per industry observers out of the total increase of USD 453.1 billion,
the annual increment of about USD 167 billion is over and above the sum
of the country's foreign trade surplus and foreign direct investments.
Of this USD 167 billion, it is estimated that at least USD 100 billion
relates to hot money, which is a concern for the economy as growing hot
money inflows are propagating an asset bubble, which if left
uncontrolled could burst upon the inevitable hot money rush to the exit.
Recent Fujitsu Consulting report noted that 45% of the first home buyers who took up the extended government grant last year are now in mortgage stress even with interest rates still way below their long term averages. What’s scary is that the morons are still falling over themselves to pay inflated prices for property. 5 to midnight approaches fast.
China is moving to force people who want to buy a home to put down 40% of its value and hold onto it for at least four years. The beauty of an authoritarian regime ... ahhhh. That should put the brakes on home prices, but what to do with all that flush cash? They'll probably drive up asset prices on various other things. I think they can manage, somehow, without unpegging against the dollar.
If the dollar rises (as it is doing) the Chinese will have to unpeg or face reduced competitivenes for thier export machine.
China has a long way to go to implosion, unfortunately.
OZ on the other hand, is just a minute away from pending doom.
Look out Oz and Brazil.
Currently I'm short Aussie SPI200 and just waiting for the OZ housing bubble to burst before covering. There will be some nice pickings with water views!
Annual productivity growth of 19% and massive unemployment have been incredibly strong deflationary forces on china. Some day that will result in massive inflation, but not yet....you'll get smoked being short in the interim.
Annual productivity growth of 19% and massive unemployment have been incredibly strong deflationary forces on china. Some day that will result in massive inflation, but not yet....you'll get smoked being short in the interim.
Tucker Carlson is cute
????
Can you imagine how cheap real estate in the US will look from inside the Wall if the Yuan floats?
yea man - but that's already happenning.
I read a hilarious story about a mass vacant house auction in detroit - all these locals were complaining coz they thought they could buy these wrecked houses for under $1000, and were all complaining that they were priced out of the auctions by chinese investors paying $5000 - $10 000. Crazy days.
We're going down, worldwide jubilee.
China's bubble is fueling Australia's.
How can we rape back that surplus and Fx reserve?
I know, default!
"China and Australia both have some serious bubbles."
And OZ is a big commodities supplier to China. Especially if Chinese building construction stops, OZ is vulnerable... and their housing situation just needs a spark before it explodes.
You betcha -
I live in australia and the house prices vs median income are ridiculously stretched. Aside from short housing supply (not enough building/land releases) its only china propping it up.
When china throws the brakes on, the govt better have a sharp plan to send all the miners back east to build houses pronto
China and Australia both have some serious bubbles. You think other countries would have learned from the US and Europe recently.
It's not that they haven't learned; it because no one has figure out how to get off the bubble machine without breaking some serious bones. I would'nt be so quick to short the CCP. 1976, 89,94,97 and 2001 all looked like the wheels would come off but it didn't.They can keep the party going longer than you can remain solvent.
How dare you question Reggie's work on China.
Reggie know all about China. He reads the China finance blogs! Do you? I doubt it.
Reggie is the man! Yea, lets short China and some REIT's. Everybody in the pool! Reggie, Reggie! YOU are the greatest, man. You!
Shorting China gives me hope for change. Reggie, Reggie, whaaaaaat's uuupppppp!
Are you really that threatened by somebody's thoughts being more popular than yours, even if they are wrong - in such an innocent matter such as this ?
Nobody is never going to trade any stock or financial holdings because of this blog, but people will be a little bit more enlightened after thinking through this topic and it's arguments and counter-arguments.