Wednesday, 20 January 2010 18:00

Some Light Shown on My Developing China Thesis

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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)




·         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)




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.


Read 10143 times Last modified on Wednesday, 20 January 2010 20:39
Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at, where we're ushering the P2P Economy.


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