Tuesday, 23 November 2010 07:03

China Is In a Self-Imposed Bubble That Has Nowhere To Go But Bust! You Don't Get Something (Growth Through Stimulus) For Nothing (No Economic Consequences)

I have not had a chance to revisit my China thesis in a while, but it is coming once I round off the European recap and finish up my US technology thesis. China will most likely play a key portion in global financial and economic contagion that is simmering over in Europe. A commenter on another popular blog had this to say of my most recent post regarding Ireland (Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up???):

Mr. Middleton,

Although I have no connection with financial investing or services, I read your analyses, and those of others, to be informed of events and topics of great economic importance.  What strikes me as odd, is that in all the stories on European Contagion I find no mention of China's position.  Given China's significant economic connection via trade with the European Union, it is puzzling we don't see more overt action from China to protect/affect the health of it's export recipient's economies.  Am I to infer there is covert action (via GS, Central Banks, IMF for example), China is simply not concerned about the economic stability of the European Union, or it's just waiting for the appropriate time for action/influence?

We definitely know where China stands on U.S. trade and Fed's policies, and it's relations with the other BRIC countries.

Is there a story here that I've missed?

I replied:

I believe China's ability to alter its own course is grossly exaggerated. As a net exporter with relatively minimal internal consumption as a source of economic activity, it is basically at the mercy of importing nation's ability to buy their goods. Any attempt to stoke the ability of these nations importing will be ancillary at best. The "reported" success of their bubble blowing is showing only one side of the equation - the bubble blowing. Signs of a traditional bubble (such as the one whose bursting the US and Europe are struggling to escape from) are everywhere, yet the mainstream media has not focused nearly as much attention on such. Unless the laws of basic human nature has changed, expect to see China suffering from the effects of profligate excesses just as the others that tried to inflate their economies the quick and easy way did.
Less than an hour after typing said reply, Bloomberg reports: China Inflation May Be Too Hot for Controls Amid Cash Glut

Standing near his 12-table noodle shop on Beijing’s Yonghegong Avenue, owner Liu Heliang says meat and vegetable prices have climbed 10 percent in a year and staff wages are up 40 percent.

“I’m struggling to make ends meet with costs going up like this,” said Liu, a native of Sichuan province who pays his workers as much as 1,800 yuan ($271) a month, or 88 percent more than the Beijing minimum wage, to serve up a staple Chinese meal. “Raising prices is the only way out,” he said, predicting he won’t be able to hold out beyond two months.

Premier Wen Jiabao’s cabinet last week announced it will sell grain, cooking-oil and sugar reserves, ordered an end to tolls on trucks carrying produce and threatened price controls to rein in a 10 percent inflation rate for food. Because the measures would do nothing to counter the 54 percent surge in money supply over the past two years, the risk is they will prove insufficient to cope with the challenge.

“They are just not addressing the fundamental problem at all,” said Patrick Chovanec, an associate professor at Beijing’s Tsinghua University. With the expansion of credit and cash in the economy stemming from China’s response to the global crisis, “you’re sitting on a volcano,” said Chovanec.

Now, it didn't take a genius to figure out this would happen. As a matter of fact a slight dose of common sense (when was the last time you got something for nothing, really?), a little historical perspective or a BoomBustBlog subscription would have sufficed.

BoomBustBlog China Focus: Inflation? Thursday, May 20th, 2010

Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let’s Look at the Facts Wednesday, February 3rd, 2010

What Are the Odds That China Will Follow 1920’s US and 1980’s Japan? Wednesday, March 10th, 2010

BoomBustBlog China Focus: Interest Rates Thursday, May 20th, 2010

My China Ruminations Have Come to Pass As the Country Enters a Bear Market Tuesday, May 11th, 2010

From Bloomberg: China Inflation Accelerates as Loans Surge, Property Prices Rise by Record

May 11 (Bloomberg) — China’s inflation accelerated, bank lending exceeded estimates and property prices jumped by a record, increasing pressure on the government to raise interest rates and let the currency appreciate.

Consumer prices rose 2.8 percent in April from a year earlier, the fastest pace in 18 months, and property prices jumped 12.8 percent, the statistics bureau said in statements today. New lending of 774 billion yuan ($113 billion), announced by the central bank, was more than any of 24 economists forecast.

Chubble (The Unmistakeable, Yet Thoroughly Argued Chinese Bubble), Unemployed/Deleveraging Shopaholics Pushing Retail Stocks & Other News Thursday, April 15th, 2010

Now That the MSM and Chinese Officials Admit There Is a Bubble In China…Tuesday, July 20th, 2010

Wednesday, July 7th, 2010, Excerpts from the HSBC forensic analysis featured in this post:

Below are the full forensic reports available for download to subscribers (click here to subscribe):

icon HSBC 170610 Professional & Institutional (554.65 kB 2010-07-07 06:23:52)

icon HSBC 170610 Retail (388.56 kB 2010-07-07 06:22:25)

We have performed a decent amount of analysis on HSBC in the past as well, and it has served as a very profitable short position in 2008. I have decided to release the dated analysis to the public for free,  it is available by clicking here: icon HSBC_Holdings_Report_04August2008 – pro (138.89 kB 2008-11-06 10:11:09)

For anyone interested in the myriad risks and opportunities abound in the HSBC market’s macro environment, I strongly suggest you review our sovereign contagion models (subscribers only):

icon Sovereign Contagion Model – Pro & Institutional (1003.48 kB 2010-05-04 12:30:48)

icon Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46)

And as China goes, Australia will most likely follow...

Aussi Bubble Video to Go With You Aussie Bubble Speculation? Saturday, June 12th, 2010

In Australia, Tax as a Contagion

Australia: The Land Down Under(water in mortgage debt)

As an extension of the Chinese macroeconomic discussion at BoomBustBlog throughout 2010, there may be an “Asian Contagion” spreading as a result of a Chinese investment slowdown.  Those at risk are the countries and regions that have supplied China with the commodities necessary to build empty cities.  While the (comparatively, in terms of GDP) enormous Chinese stimulus package from the first part of the financial meltdown in 2008 has generated incredible growth in GDP and asset prices, the game appears to be over for flipping 1000 square foot apartments in Shanghai.  After the direct hit taken to China, the picture looks very grim for Australia, where a bursting Chinese housing bubble could drive industrial commodities lower, sparking higher unemployment in one of the nation’s largest sectors, and in turn pop their domestic housing and property bubble.  In the near to medium term, Australia is showing some major red flags.

Last modified on Tuesday, 23 November 2010 07:16