Wednesday, 20 January 2010 23:00

Some Light Shown on My Developing China Thesis

First, in today's news.

Yen Weakens Against Higher-Yielding Currencies After China Growth Quickens

Jan. 21 (Bloomberg) -- The yen declined after a Chinese report showed economic growth accelerated to the fastest pace since 2007, damping demand for Japan’s currency as a refuge.

The yen weakened against all of its 16 most-active counterparts on speculation the nation’s central bank will keep interest rates low as the economy struggles to gain momentum. The euro was near a five-month low against the dollar on concern Greece will default on its national debt as credit-default swaps on the country’s five-year sovereign bonds climbed to a record.

“The data suggest a bright outlook for China’s economy,” said Yoh Nihei, trading group manager at Tokai Tokyo Securities Co. in Tokyo. “The sentiment is for risk to be on and the yen to be sold.

The yen slipped to 83.66 per Australian dollar as of 2:25 p.m. in Tokyo from 83.04 in New York yesterday. It fell to 129.06 per euro from 128.68, and lost 0.3 percent to 12.44 South Korean won. The yen was at 91.61 per dollar from 91.24.

The euro traded at $1.4088 versus the dollar from $1.4106 yesterday after dropping to $1.4068, the lowest since Aug. 18.

Japan’s currency declined for the first time in six days against the euro after China’s statistics bureau said gross domestic product increased 10.7 percent last quarter, faster than the median forecast of 10.5 percent in a Bloomberg News survey of economists.

China's Growth Accelerates to Fastest Since 2007 as Bubble Risks Increase

Jan. 21 (Bloomberg) -- China’s growth rate accelerated to the quickest pace since 2007 in the fourth quarter, adding pressure to rein in surging credit that threatens to destabilize the world’s fastest-growing major economy.

Gross domestic product rose 10.7 percent from a year before, more than the median forecast of 10.5 percent in a Bloomberg News survey, a statistics bureau report showed in Beijing today. Asset-price gains, particularly in property, are creating problems for the government to guide the economy, Ma Jiantang, who heads the bureau, told reporters after the release.

The report stokes speculation the central bank will start raising its benchmark interest rate and tighten restrictions on the nation’s lenders. The one-year swap rate, an indicator of future changes in borrowing costs, climbed and the People’s Bank of China guided three-month bill yields higher for the second time in two weeks.

“Today’s data suggest that tighter policy is just around the corner,” said Brian Jackson, a Hong Kong-based strategist on emerging markets at Royal Bank of Canada. “Policy makers will need to move soon to stop the economy from overheating,” he said, forecasting officials will end an exchange-rate peg and boost interest rates starting this quarter.

The following is an excerpt from the subscriber document " pdf A Note On Potential Short Opportunity Opinions in China 2010-01-21 01:13:06 475.18 Kb " which is available to retail and pro Subscribers as a 6 page PDF document, Pro subscribers are invited to the discussion/debate between myself and my analysts on the merits of the China short as it compares to the up and coming European Sovereign Crisis short opportunities I will be publishing very soon (a preview is available here: Deflation, Inflation or Stagflation - You Be the Judge! - please excuse the fact that I compressed several European nations into EU charts). Click here to view the debate and add your opinion. I think many will find it very interesting and fact-filled. Click here to subscribe.


The apprehensions regarding the Chinese
economy going bust, raised by many analysts appear substantiated to a certain
extent taking into account the current economic scenario in China witnessing inflation,
huge bank lending, rising real estate pricing lending. However, there are some
strong arguments that lead to a contrarian view that China's recent surge is
supported by fundamental growth, and a comparison to the US and Japanese Crisis
is not appropriate.

Concerns over China's unsubstantiated
surge:

1. Overflowing
liquidity led by large government stimulus packages and bank lending:

·
Banks in China had extended ¥600 billion ($US88
billion) in loans during the first week of January 2010, compared with a
combined ¥674.6 billion given out in November and December 2009. Moreover, new
loans of ¥ 10 trillion (US$1.5-trillion) flowed into the property sector in
2009.

·
Beijing's combined stimulus spending and
government-directed bank lending amounted to 40% of gross domestic product in
2009.

·
Moreover, as noted by economist and author
Richard Duncan to maintain growth of 8% this year, banks will need to crank out
another round of lending equivalent to 30% of GDP.

·
According to reports by the state-run Xinhua
news agency, the central government has budgeted ¥992.7 billion (US$145
billion) on public investment for 2010. The key concern here is that the
expanded spending and new loans from state-owned banks will bolster production
capacity, fuelling excess, and inevitably compounding deflation.

2. Formation
of property and asset bubbles in China

·
Many analysts say that money, along with huge
foreign inflows of "speculative capital," has been funneled into the
stock and real estate markets which is driving the growth in the both stock
market and real estate market.

o
China attracted a total of $48.7 billion of "hot
money" in December 2009, the largest amount in eight months, according to China
International Capital Corp.

·
Y-o-Y growth in home prices during 2009 has
increased continuously (see chart below)

image001.jpg

·
The Shanghai composite index is trading at a P/E
ratio of 34x higher compared to 24x of S&P 500 (US - which is also
witnessing a bull run) and 26x of SENSEX (India - another developing market).

3. Comparison
being drawn with Japan in 1980s (the bubble era):

·
Extraordinarily high saving and an undervalued
exchange rate have fuelled rapid export-led growth and the world's biggest
current-account surplus. Chronic overinvestment has resulted in vast excess
capacity and falling returns on capital. A flood of bank lending threatens a
future surge in bad loans, while markets for shares and property look
dangerously set for a bubble.

·
China's total fixed investment jumped to an
estimated 47% of GDP in 2009, ten points more than in Japan at its peak. Chinese
investment is certainly high compared to most developed countries where it
accounts for around 20% of GDP.

However, a close inspection of the three
main concerns-overvalued asset prices, overinvestment and excessive bank
lending - suggests that China's recent surge could well be supported by
fundamental reasons:

1. Chinese
share prices are nowhere near as giddy as Japan's were in the late 1980s. In
1989 Tokyo's stock market had a price- to-earnings ratio of almost 70; current
figure for Shanghai A shares is 34, below its long-run average of 37. Though,
prices jumped by 80% in 2009, but markets in other large emerging economies
went up even more: Brazil, India and Russia rose by an average of 120% in
dollar terms. And Chinese profits have rebounded faster than those elsewhere,
for the three months to November 2009, industrial profits increased 70% higher
than compared to a year before.

2. Moreover,
though the property prices in China have increased (prices of new apartments in
Beijing and Shanghai leapt by 50-60% during 2009; in January 2010, National
Development and Reform Commission reported that average prices in 70 cities had
climbed by 8% in the year to December), average prices have fallen relative to
incomes in the past decade. (See chart below)

image002.gif

3. Chinese
households' total debt stands at only 35% of their disposable income, compared
with 130% in Japan in 1990. One-quarter of Chinese buyers pay cash and the
average mortgage covers only about half of a property's value. In China, owner-occupiers
must make a minimum deposit of 20%, investors of 40%.

See pdf A Note On Potential Short Opportunity Opinions in China 2010-01-21 01:13:06 475.18 Kb for the full article. Visit the Pro discussion forums to view/participate in the debate between BoomBustBlog analysts.

D

Last modified on Wednesday, 20 January 2010 23:00

2 comments

  • Comment Link Zhang Fei Friday, 22 January 2010 08:48 posted by Zhang Fei

    China's property price to average income ratio may not mean much, since China has billionaires as well as a hefty chunk of households subsisting on a few hundred dollars a year. Far more interesting would be the property price to median income ratio.

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  • Comment Link Reggie Middleton Thursday, 21 January 2010 06:43 posted by Reggie Middleton

    From the [url=The Chinese government reported early Thursday that its economy expanded 8.7% in 2009, surpassing the 8% target Beijing had set early last year, when some economists were warning that growth might reach only 5%. Growth in the fourth quarter of 2009 was up 10.7% from a year earlier, reflecting the recent recovery in global trade and a continued surge in domestic property and infrastructure. Consumer prices in December rose 1.9% from a year earlier, the National Bureau of Statistics said, accelerating sharply from the 0.6% rise in November.

    That strong growth brings China closer to overtaking Japan as the No. 2 global economy, though numbers from Tokyo won't be out until next month.

    As Japan did in earlier decades, China has grown by rapid industrialization, shifting its rural population into cities where people get better jobs and buy homes and consumer goods.

    But there's increasing concern China could be headed for some of the same pitfalls Japan encountered leading up to the early 1990s, when its real-estate bubble burst, curtailing growth for years. Wang Shi, the head of China's biggest property developer, China Vanke Co., said last month that his country is at risk of a Japan-style property bubble if rapid price gains spread beyond major cities.

    ]WSJ[/url]:
    [quote]The Chinese government reported early Thursday that its economy expanded 8.7% in 2009, surpassing the 8% target Beijing had set early last year, when some economists were warning that growth might reach only 5%. Growth in the fourth quarter of 2009 was up 10.7% from a year earlier, reflecting the recent recovery in global trade and a continued surge in domestic property and infrastructure. Consumer prices in December rose 1.9% from a year earlier, the National Bureau of Statistics said, accelerating sharply from the 0.6% rise in November.

    That strong growth brings China closer to overtaking Japan as the No. 2 global economy, though numbers from Tokyo won't be out until next month.

    As Japan did in earlier decades, China has grown by rapid industrialization, shifting its rural population into cities where people get better jobs and buy homes and consumer goods.

    But there's increasing concern China could be headed for some of the same pitfalls Japan encountered leading up to the early 1990s, when its real-estate bubble burst, curtailing growth for years. Wang Shi, the head of China's biggest property developer, China Vanke Co., said last month that his country is at risk of a Japan-style property bubble if rapid price gains spread beyond major cities.
    [/quote]

    [img]http://sg.wsj.net/public/resources/images/P1-AT429B_CHINA_NS_20100120233316.gif[/img]

    [img]http://sg.wsj.net/public/resources/images/AI-BA061A_CHINA_NS_20100120142425.gif[/img]

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