China

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I did three segment interviews
with TechTicker on Yahoo Finance: 

href="http://finance.yahoo.com/tech-ticker/vitaliy-katsenelson-reveals-%22the-...">Segment
1 – The Case for Pfizer and
Vodafone

href="http://finance.yahoo.com/tech-ticker/china-won%27t-crash-but-it%27s-time...">Segment
2 – China (My China
comments need slight clarification.  The Chinese slowdown will
have a significant impact on the Chinese economy and commodity-centered
economies, e.g., Russia; but I don’t believe it will tank the
world economy.)

href="http://finance.yahoo.com/tech-ticker/get-used-to-dow-10000-value-maven-p...">Segment
3 – href="http://finance.yahoo.com/tech-ticker/get-used-to-dow-10000-value-maven-p...">Get
Used to Dow 10,000

Just in case you were mystified what "excess capacity" cheerleader #1 Jim O'Neill thinks of the world, be mystified no more. Spoiler alert: Jim uses the words "remarkable analytical mind" and "Alan Greenspan" in the same sentence. And with that out of the way, read on, and while you are at it, buy buy buy.

Janet Yellen, who in mid-November completed a "fact-finding" trip to Hong King and China, provides some insightful observations into the closely tied monetary fates of China, Hong Kong and the US, as well as China's Catch 22 paradox of overcapacity. As Yellen points out, US monetary policy is a critical factor for both Hong Kong and the mainland "both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the policy the Federal Reserve has chosen to promote recovery." In essence, and in confirmation with Zero Hedge's "vassal theory" of the Sino-US relationship, China has a "considerable interest" in the Fed's exit strategy. Yellen demonstrates that while China is forced to look to growing its own internal economy now that the export-led, current account surplus model is over, the transition will require yet more stimulus, thereby further inflaming the asset bubble, spurred by the massive overcapacity already in place in the country, and further pushing the country into a monetary-fiscal zone of disequilibrium. This would be exacerbated by any move to strengthen the Yuan, which is what has to happen for the US to keep inflating its troubles, yet won't happen so long as China continues being in denial about its bubble conditions, thanks to a phenomenal precedent set by none other than the Federal Reserve itself. Yellen won't go so far as admitting it, but all the ingredients for a massive Chinese (and thus, U.S.) crash are now in place.

Last week the China Investment Corporation (CIC), also known as China's sovereign wealth fund, and the entity that allocates China's nearly $3 trillion in foreign assets, posted its first ever 13-F filing, which disclosed holdings of just $9.6 billion. Missing were CIC's Blackstone stake and the fund's first 2008 Morgan Stanley investment. Furthermore, the listing omits any real estate, fixed income, and foreign securities, implying that the true holdings of the sovereign wealth fund are likely much more extensive. We are confident that the CIC likely is a major holder of Treasury securities. As a reminder the CIC reported about $300 billion in AUM at the end of 2008 in the fund's first annual report. Combing through the 13-F (presented below) indicates that while the fund has a soft spot for commodities and financials (its investments in Teck, MS and Blackrock), the prevalent holdings of CIC are, surprisingly, in ETF.

Even as China is days away from yet another hike in reserve requirements to control "excess liquidity", the nation is preparing for cold war with the US. An independent survey of Chinese-language media for The Sunday Times has found army and navy officers predicting a military showdown and political leaders calling for China to sell more arms to America’s foes. The trigger for their fury was Obama’s decision to sell $6.4 billion (£4 billion) worth of weapons to Taiwan, the thriving democratic island that has ruled itself since 1949. “We should retaliate with an eye for an eye and sell arms to Iran, North Korea, Syria, Cuba and Venezuela,” declared Liu Menxiong, a member of the Chinese people’s political consultative conference. War pulled America out of the First Great Depression. It is only fitting that war will be the result of the Second one. The only problem is this one won't be won by America.

Zero Hedge has been following the topic of Chinese FX reserves, and specifically their change over time, with great interest, as this (presumably) primarily dollar-denominated amount is the critical "dry powder" that our key foreign purchaser of Bonds, Notes and Bills uses when bidding on Treasury Auctions. Should China's FX reserves decline, or be forcibly diversified, the amount left over for UST purchases will be correspondingly less at a time when every UST auction could be the last should PDs, Indirect and Direct bidders not have enough bidding interest to cover growing supply. As China is very secretive about the composition of its FX reserve portfolio, there is usually a lot of guess work involved in tracking where and how the money flows. What we do know, according to a January 15th report by People's Bank of China (PBOC), is that in 2009 FX reserves increased by $453.1 billion to a total of $2.399 trillion... Or so we thought. Yesterday China's official State Administration of Foreign Exchange (SAFE) released an update on FX reserves, according to which FX reserves increased... by only $382.1 billion, a $71 billion differential from the PBOC's number.

The more I look into the China, the stronger the short thesis becomes. With my China shorts performing quite well as they are, I have decided to spread the thesis around.

"The fun fact I'll give you is there is almost 70 billion sq. feet under construction right now in high rises, commercial, residential and light manufacturing. We estimate about 30 billion sq. feet is commercial, what we would consider is office space. That's a 5x5 cubicle for every man woman and child in China. They are building high rises in cities with already 15-20% vacancy rates, and those are the government's numbers. The real vacancy rates are higher... The Chinese banking system is the problem, it is loaded with bad debt...Our geostrategic position is a lot better than China. Keep in mind China imports almost all its essential materials... They send us stuff, we send them pieces of paper, who would you rather be." - Jim Chanos

As James Cameron's brainchild, Avatar, continues to light up the box office the world over, relentlessly charging towards a date with damn near every conceivable box office record imaginable, the Chinese government has (rather predictably) succumb to the specter of its symbolism and attempted to pull the plug on Avatar's unparalleled success. Good luck with that CFG ~ China Film Group; ask the RIAA how 'that' worked with N.W.A.

The quasi-communist / quasi-mercantilist nation's state-run movie distributor, China Film Group, has pulled the film of the year from 1,628 2-D screens in favor of a biography of the ancient philosopher Confucius.

This is how the cold war will look like in the post-Lehman era (when all the debt risk is held on the public balance sheet): one country urging another to sell a third's bonds. According to Hank Paulson's soon to be released memoir, Russia had urged China to sell its GSE holdings in August 2008 "in a bid to force a bailout of the largest U.S. mortgage-finance companies." China refused... That time. Of course, what has transpired since is that China, through the Fed custodial account, has rotated a vast majority of its GSE holdings into Treasuries, in essence doing just what Pimco's Bill Gross has been doing since the beginning of 2009: offloading hundreds of billions of Fannie and Freddie bonds straight to the Federal Reserve. Alas, the Fed is 93% done with MBS QE... What happens when residual selling of bonds finally hits the public market, and the bottom falls out?

China has created a new housing bubble. Here are some excellent reports on what the bubble looks like and some ominous glimpses on how it may end. Like all bubbles it will burst and the economic fallout will impact China's economy and the U.S.'s. The frenzy indicates that the blow-up will occur soon.

~ Information Technology, Social Media & the Structural Integrity of the Internet in the 21st Century ~ after China got caught with its hand in Google's POP3 Port 995 cookie jar, US Secretary of State Hillary Clinton fired THE first salvo in what will likely prove itself to be the terrain of WW III ~ the digital battlefield. This highlight is intended to set the stage for a short-series that will delve deeper into the multivariate 'strategery' of the issue du jour ~ China, Computers & Freedom in the 21st Century.

Yesterday we brought attention to China's overheating economy. In response, Deutsche Bank analyst Michael Spencer is now estimating an earlier than expected rate hike for the newly-minted second largest world economy. "We think January CPI inflation will be similar to December, but in February inflation could rise to 2.5%, above the 2.25% benchmark deposit rate. This implies some likelihood of the first rate hike coming in the second half of March, earlier than our current expectation of an April rate hike." Just look at China markets at what tightening means for equities. Then extrapolate to the U.S., once Bernanke someday wakes up on the right side of the bed and realizes that America is in a very much comparable situation (although 10.7% GDP growth would be something even Obama would have some problems with digesting). And now that Volcker is finally about to supplant the soon to be defunct Larry Summers as Obama's key financial advisor, one can extend Deutsche's conclusion and say that the rate hike in the U.S. may also come earlier than expected.

Here is a glimpse at an internal debate between BoomBustBlog analysts on the merits of the China bubble short, and its comparison on the merits to a short in the EU and CEE contries. It appears as if the China bubble thing is about to heat up.

Chinese GDP is officially in the redzone: at 10.7% YoY, while Q3 was revised to 9.1%. For all of 2009, Chinese GDP rose at 9.7% (2008 came in at 9.6%): China's mystical printing machine helped the country avoid any aspect of the global recession, and these are not the droids we are looking for. At the same time the country announced a 1.9% CPI increase YoY in December, even as 2009 saw a -0.7% decline in CPI, compared to a 5.9% increase in 2008. Retail sales in 2009 surged at 15.5% nominal and 17.5% real.