Sunday, November 6, 2011

China Updates

I was not sure whether my bearishness will change the way I see China for the next 2 years. I'm trying to avoid biasness as much as I can. When I arrived in Shanghai, the check out from the immigration counter was fast, unusually fast in fact. When I departed from Shanghai the last Friday, the check out was even faster. It was so fast that I felt eerie. I used to get a nice copy of Financial Times or Wall Street Journal on the planes but that was missing, budget cut I supposed. The planes were not full. These are very telling signs.

There is no doubt that the Chinese economy is slowing down. Q3 '11 GDP slowed to 9.1% and many expect it to slow down further to 8.5% next year.

The Chinese government understands credit is a double-edges sword. It can build an economy but it can also annihilate an economy. The chart below shows the dramatic increase of China's credit as a % of GDP since 2008. Even though the Chinese leadership has hinted they will fine tune their monetary policy to assist small and medium businesses after their outcry of credit crunch -- a few bosses abandoned their homes, businesses, committed suicides, borrowed from loan sharks, visiting pawn shops, etc. But I think it is unlikely that they will loosen its grip across the board.

The credit tightening effect was not only felt by SMEs but now spreads to property market. The property prices have finally fell dramatically and the new homes demand fell off the cliff. Chinadaily reported that new houses demand in Beijing fell 46% year over year. They slashed prices by 20-30% in response to mounting pressure to push out inventory. Read more here

A dramatic price drop has a huge impact to new buyers. They will wait for the prices to come down even more, reinforces the downward spiral. Retail demand reduction is one thing but the other problem is many of the SMEs companies have ventured into properties will see their portfolio decline substantially. I hope the cold will not turn into pneumonia. The Chinese government had done a stress test indicating the Chinese banks can withstand property price decline up to 40%. I can buy into that but there will be a few scars here and there.

There has been a lot of talk that the Chinese local governments have been overburdened with debts. As of end of 2010, the local government debts stood at 10.7 trillions yuan or almost 30% of GDP. If it gets closer to 50%, I think the game will be over and they are over-extending themselves --not much room to expand their infrastructure projects.

When it rains, it pours. The problems just do not seem to stop. There will be another fresh problem will show up at the door. The EU. China is doing a substantial business with them and in fact this is their number 1 export destination. With PMI flashing below 50 across EU, I think contraction is a done deal. What does this means to China?

I'm not trying to depress you till a point to reach out a few Panadols or Prozac. What I'm saying this slowing is more problematic than 2008/2009. The dry gun powder inventory is dwindling down fast. I believe they will act a lot more rationally and will not turn on the money printing press to continue to over-extend themselves. They should allow the cleansing process to clean up the toxic from their economy so that they can emerge stronger after this crisis.

1 comment:

Kingsmen said...

i more inclined to believe that euro crisis is no that easy to solve in the first place. It will definately be a very long 'yo yo' process. The EU bailout of Greece if one were to disect clearly is a actually a bailout of the french, german, american banks. And of course at the expense of the Greek people.

The Greek prime minister has been forced to withdraw the referendum on the bailout that he promised the Greek people. Europe’s rulers made it clear to the Greek PM that democracy has no role to play in the decision. Greece was told to vote the deal that was handed to you or Greece is out of the EU. The chastened PM warned the Greek parliament that the only way to remain in the EU is to submit to the dictate.

And we are only seeing the Greek debacle...what about the rest of europe? surely we are only witnessing the beginning of the end....