Is China a Bubble ?

[Larry1234 10]

Folks are invited to discuss about Chinese economy, currency and their relationship with us. If china is a bubble, will it impact us or not ?

 

I recently came to know that China is back in the news. A new video from CBS 60 min shows ghost towns in China... Analysts are talking about the biggest bubble in history!

 

Is China a bubble? We don't know.

 

Does it matter? Well...yes...maybe. If China melts down or blows up the demand for oil and other resources goes down. The Chinese have pumped billions into development projects. That money helped to keep people on the job...and also kept the ships full of stuff, going back and forth across the worlds' oceans.

 

Trouble in China is trouble everywhere - particularly in Australia (which has been selling itself by the ton to the Chinese) and in Europe (which sells its precious, high-touch products by the boatload). Drive around Beijing and you see German autos, Italian shoes, Swiss watches and French perfumes.

 

But hey...why worry? The Chinese can print money too! When China does something, it tends to do it to excess. That's why there are so many empty buildings in the Middle Kingdom and why it might have created the biggest bubble in history.

 

China overdoes it when it comes to central bank stimulus measures too. In fact, no central bank has done more than the Bank of China when it comes to pumping up the economy. And investors know it.

 

That's why bad news for China...like bad news for the US economy...could be good news for the stocks. The feds will pump more money; stocks will go up!

 

Isn't it so easy ?

[Mysticforex 13]

I am not much of an economist, or even a fundie trader, But I would be interested in others opinions on what's going on in China.

[Seeker 11]

I think it's the nature that almost all things are as bubbles, then they burst then they decline, then they start up again.

 

Everything must change. If everything changes and you add in human emotions and desires, then you end up with a bubble.

 

Doesn't help me know when it is going to burst unfortunately.

[Niko 10]

From a TA perspective, it does not quite looks like a bubble, is kind of in the chop.

 

[Larry1234 10]

Hi Niko,

 

Can you explain the graph ?

 

From a TA perspective, it does not quite looks like a bubble, is kind of in the chop.

 

[Niko 10]

Sure, as i said this is TA based, so i am not discussing chinese PMI or GDP, as I do not really follow that.

 

From what can be seen, during the last few years, the market has been in a trading range, a contracting one (hinge, triangle). What that tell me is that traders are somewhat in accord about the value in the market, perhaps long ter accumulation or distribution, we will have to wait to know for sure.

 

If one looks at bubbles charts (nasdaq in 1999, s&p in 2007, trasuries now, or the tulips back in the day) one sees a strong up trend, one that keeps getting momentum as more suckers are pouring money into the market at even higher prices, that is not what i see in the chart.

 

Perhaps europe collapses, the us goes bankrupt and china has to make a living without trading partners, so the breakout could be to the downside, or perhaps everything goes back to business as usual and a new technologic breakthrough gives the us the opportunity to grow at double digit rates in which case the break could be to the upside, we dont know , and perhaps i am being a little extreme.

 

The fact is that i do not see the signs of a bubble in the chart, but as always in the markets i could be wrong!:doh:

[bakrob99 11]

The forum question should read: Is China a Ponzi Scheme?

 

Answer: Yes

[Qiman 10]

One of my degrees was in international economics, and a professional graduate degree in international relations. So I do keep up with international developments as time allows. Here is an extremely important PDF to read, written by some hedge funds:

 

http://www.globalsecuritieswatch.org/Hedge_Funds_Perspectives_China.pdf

[SunTrader 10]

......... A new video from CBS 60 min shows ghost towns in China... Analysts are talking about the biggest bubble in history!

Thanks for the head up. I missed the episode. Watched on their website.

Don't catch the program live as much as I like to anymore.

 

But with all the money the Chinese printed "they can build it but they won't come". And they also won't buy .... the Shanghai Stock Exchange index (as per chart) showing down channel while Dow/S&P/Dax/etc going the other way - for now anyway:

[SunTrader 10]

QE: Gun boat diplomacy toward China's currency

 

(Futures Magazine - By Justin Pugsley)

 

U.S. and Japanese central bank quantitative easing programs are placing China between a rock and a hard place in which a revaluation of the Chinese yuan vs. the U.S. dollar may turn out to be the least bad solution from the point of view of China's leadership.

 

If that turns out to be the case, it would be seen as an important victory for the U.S. and Japan. QE would have scored where hardnosed negotiations so often failed. It would also set a worrying precedent in which QE is no longer just viewed as a means for economic stimulus, but also as a weapon. Possibly one far cheaper and more effective than gunboats.

 

For millennia China's rulers have been deeply preoccupied with unemployment and inflation, which have the potential to cause popular unrest and un-seat rulers. Even the departing Premier Wen Jiabao recently warned that keeping prices in check would remain a key challenge for the country's policy makers.

 

China holds a dim view of the U.S. Federal Reserve's money creation programs because they are causing commodity prices to rise and are fuelling hot money flows into countries not pursuing easy money policies, such as China. With the Bank of Japan promising to be every bit as aggressive as the Fed, there is likely to be even greater pressure on China's inflation.

 

With inflation looking like more of a threat to China than unemployment at the moment, China may have no other choice than to revalue CNY upwards vs. USD.

 

China's consumer prices registered a 10-month high in February of 3.2% year-on-year, but more seriously in terms of popular discontent potential, food prices rose 6%. That's partly down to China's New Year festivities. But flows of speculative capital driven by foreign central bank QE programs could see China's inflation levels pushing higher.

 

The magnet for that hot money is partly because CNY has risen in value pulled up by its USD peg. According to the People's Bank of China there was 684 billion CNY ($109 billion) worth of foreign currency exchanged in January, a record for a single month.

 

Large inflows of hot money can spur imbalances in China's economy as it feeds the already significant shadow banking system and speculative activity in real estate and commodities, making them more expensive for industry and households.

 

China could simply try and clamp down on those capital inflows and that's still a possibility. But it has porous capital controls and the authorities want China to become an international finance center and for the CNY to one day become a reserve currency. Enforcing stricter capital controls would be a retrogressive step in terms of achieving those objectives.

 

The downside of allowing CNY to appreciate, especially against USD, is that it will make many of China's exporters uncompetitive and that will create unemployment in the coastal cities. Also, rebalancing toward a consumer driven economy and more value added activity still has a long way to go.

 

Depending how a CNY revaluation was managed it could suck in even more hot money if speculators were left anticipating further appreciation. But it should make the cost of fuel and food cheaper for Chinese citizens, and therefore sustain their disposable income, which would help develop a more consumer-driven economy. At the same time a stronger CNY would make it cheaper for Chinese companies to acquire assets abroad and encourage some outflows of money.

 

Another important factor, the U.S. has stopped publicly accusing China of manipulating its currency. That could be an opportunity for China to review its currency peg without losing face and attribute such a move to domestic factors such as helping to control inflation.

[Larry1234 10]

I am saying China a bubble. Its because China has a housing problem.

 

But this problem is much different than the one we had here in the USA or the one in the EU.

 

Let me talk about the same in details -

 

when U.S. housing prices were rising, the government actively took part in inflating the real estate bubble by pushing rates lower and offering zero-down loans (subprime) to middle to low-income buyers.

 

Yes, who cares that you earn the median income of just $45,000 a year, you can get your $450,000 dream house in Sedona, Arizona.

 

Coming to the China's housing bubble, its definitely a non - bubble because the government here is actively trying to pop it and housing prices are rising but the rise is under control. This is especially true in second and third tier cities, ie: not Shanghai, Hong Kong, Guangzhou and Beijing.

 

There’s also nothing close to a mortgage backed securities bubble and no sub-prime lending. In the latter part of the 1990s, China’s real estate prices were inflating above China’s disposable income. By 2001, disposable income per capita moved steadily ahead of housing prices.

 

The government has engineered a cyclical downturn in the Chinese real estate market instead of a structural collapse. In Asian housing markets, that means a trimming of at least 20%. In some cities, 40%. But in the process, no one was foreclosed upon. Banks didn’t go belly up. Unemployment did not increase.

 

“You don’t see the same amount of bank stress that you see in the U.S. because the debt levels are significantly lower, both for the builders and for the buyers,”.

 

China banks have a limit to what they’ll lend for housing. Currently, buyers need to put between 20% and 30% down on the value of a house before securing a loan. In the U.S., when the housing bubble popped, we all know what the down payment requirement was. Today, it is closer to 20%. Chinese people are savers. Americans are not. Americans don’t have 20% to put down on a house. So the market remains sluggish as a result.

 

China housing was running out of control pre-2008 crisis. The government decided to do something about it in 2010 and put in place a number of restrictive policies that prohibited speculation. By mid-2012, real estate investors left the market. Now, says So, the market has bottomed. Transaction volume is picking up and prices are starting to rise again. Property tax legislation has been put on hold.

 

“We don’t think the government is going to take their foot off the break too quickly. This is a hot market, no doubt. A lot of urbanization is yet to come.” China is about 50% urbanized. In Russia, it is 73%. In Brazil, 87%.

 

Right now, many China investors are paying closer attention to second and third tier cities away from the busy, saturated coast. That’s where a lot of the government’s fixed asset investment has been going. As a result, there’s been tons of overspending. These are the areas in western China, in the inland part of the country, where you are hearing about “ghost cities”: residential apartments with no buyers. That hasn’t killed too many developers, however. The home builders in Asia tend to be gigantic. In troubled times such as these, they gobble up smaller construction companies. Banks have yet to feel any severity from non-performing debt stemming from their property builder clients. Large scale development companies have been able to handle the vacancies.

 

We see two trends in China real estate right now. The consumption story in China will help commercial retail office space. For investors, So says mainland China provides more reward for the risk.

 

“There’s not a lot of value in Hong Kong. If you’re buying things cheaply elsewhere, Hong Kong gives you protection. It’s the financial capital of Asia. We’d never be out of Hong Kong even with the government there wanting to cool off the housing market. It wouldn’t surprise me to see prices decline,” he says.

 

What’s a place go for in Shanghai? That depends on where you’re living.

 

In glamorous Xintiandi, an affluent district in Shanghai, a 3,500 square foot apartment will run you between $5 million and $6 million. It’s a market made primarily of rich Chinese and those from Hong Kong and Taiwan who see Shanghai as a discount market.

 

The middle class is getting pushed out.

 

“It’s a world class city and that tends to happen in places like that. We’ve seen it in New York, Paris, London. The middle income move to the outskirts or settle for smaller properties even though they could do much better further out,” says So. “If you move to a second tier city you’d pay about $150,000 for a more normal-sized 1,000 square foot apartment.”

 

And even that’s expensive. Per capita income in China is around $6,500. That makes a property like that 20 times income. In the U.S., housing prices are around five times per capita income of $49,000

 

This can be a bubble in China.

[Larry1234 10]

The forum question should read: Is China a Ponzi Scheme?

 

Answer: Yes

 

Why do you think that China is a Ponzi scheme. I would rather say US is Ponzi scheme. They are issuing new debts just to repay the earlier one and the interest on earlier debts.

[bakrob99 11]

Why do you think that China is a Ponzi scheme. I would rather say US is Ponzi scheme. They are issuing new debts just to repay the earlier one and the interest on earlier debts.

 

To answer this you need to understand what makes something a Ponzi scheme. Basically, it is attracting new money (investors) for the promise of high future returns and using the funds of the new money to payout returns to prior investors to keep the whole thing rolling.

 

In the case of China - the State is the controller and will make whatever rules or changes they need in order to keep the money flowing and the ball rolling to appease the population. They are digging a much bigger whole than the US dug IMO in the housing bubble. This is because the market is not determining prices - the State does. And it leads to massive inefficiencies.

 

It's popular in trading forums to consider the US in disastrous shape - the negative sentiment is so biased because of short term problems. But the US is able to do something about it without having the concern faced by the Chinese Government. The inevitable consequence of the Chinese mismanaged resource allocation is the loss of most or all of the middle class savings which will result in a revolution that puts democratric reform in place. This may take decades but it will happen. It may come much sooner.

 

bakrob99

[SunTrader 10]

To answer this you need to understand ...

+ 1

 

As the woman in the 60 minutes video said the U.S., even with all of its problems, still atrracts Chinese people to come here because of ..... democracy. But she also believes democracy will happen in China too very soon, i.e. less than 20 years.

[Larry1234 10]

Democracy in China - I guess its a long way to go. But I am sure of one thing that the United States would definitely welcome a democratic China. Its because a democratically governed China would share mutual interests with the United States and the international community, including human rights and the adherence to the rule of law.

 

As with other peoples, the Chinese want to live in a free society and choose their own government. The immediate impact of democracy in China would presumably terminate the instances of unjustly imprisoned dissidents. However, the past shows that such humanitarian objectives are not Washington’s primary interest.

 

Beyond civil society concerns, economic and strategic interests play a bigger role in shaping White House policies toward China. Issues such as the growing U.S. trade deficit with China, the artificially undervalued Chinese yuan and Beijing’s increasing military budget cause the most anxiety in Washington.

 

U.S. policy toward China must avoid the dangers of an all-inclusive policy, assuming that the democratization of China is the universal remedy.

 

In the economic sphere, a democratic China might be a more accessible trade partner and comply with its World Trade Organization obligations. Beijing would stop manipulating its currency and entertain U.S. advice to boost domestic consumption. With stout anti-piracy laws and intellectual property protection, U.S. exports to China would thrive and the trade deficit may even turn into a surplus.

 

Building on the democratic peace theory, Washington can claim that the democratization of China could eliminate the threat of military confrontation. President Obama’s recent “pivot” to the Asia-Pacific would thus not need to be a policy of veiled containment, but rather a policy of bilateral cooperation in the region.

 

But unfortunately, democracy is not a panacea. In fact, a democratic China may not be much different from today’s China.

 

Before accepting a democratic China into the international system, it would behoove Washington to soften its superpower mindset toward Beijing. A democratically governed China would likely still have great power ambitions and Beijing could legitimately claim the role of the “second superpower” in the next decade.

 

Democratization would upgrade China’s political power and credibility in the international community. The United States and the European Union would forego the leverage of confronting China about its policies, as China’s laws would be the result of a popularly elected government.

 

A democratic Chinese government would face significant obstacles, some unforeseen, that have toppled regimes or caused civil wars in the past. Indeed, China’s Communist Party claims that political liberalization would lead to “chaos.” At the same time, the party feels compelled to imitate democracy, creating a liberal facade to justify its rule. Whether real or imagined, Chinese democracy may not bring the effects everyone hopes for.

[SIUYA 11]

for those interested in views on China....

 

Will the Chinese Be Supreme? by Ian Johnson | The New York Review of Books

[Larry1234 10]

One of the good news for the US is that the Chinese government will allow its currency, the renminbi, to float on international markets sometime within the next five years, after more than a decade of stable currency policies, which have been routinely criticized overseas, particularly by the U.S.

 

China would have no choice but to reform its interest-rate system if they wished to cement the yuan as a global currency, insisting that the current system could not last forever. China would become a net exporter of capital as currency restrictions are relaxed.

 

The Chinese government introduced policies that will allow foreign financial companies to invest yuan raised offshore in its domestic markets.

 

Presently, the yuan is tightly controlled and can only trade 1 percent above or below the guidance set by the central bank every day on the mainland. The yuan was kept stable for a decade, before China allowed its currency to strengthen 21 percent from July 2005 to July 2008. Appreciation was then halted again for almost two years during the global financial crisis and the currency has advanced 10 percent against the dollar since controls were loosened on June 19, 2010.

 

Do you think Is the RMB (Chinese Yuan) Displacing the USD in Asia?

 

any thoughts ????

[SunTrader 10]

Foxconn Plant in Peanut Field Shows Labor Eroding China Edge

 

Foxconn Plant in Peanut Field Shows Labor Eroding China Edge - Bloomberg

 

“China’s advantage in low-cost manufacturing will end much sooner than expected, I believe within five years,” said Shen Jianguang, Hong Kong-based chief economist at Mizuho Securities Asia Ltd. “Wages are rising faster inland than on the coast. More companies will consider moving to countries such as Vietnam, Indonesia and the Philippines.”

[Eric Larson 10]

I month ago I compiled: Data on China

 

From the hard data, there is nothing that screams "bubble". Not that I can see, anyway.

[Larry1234 10]

Even if the data does not show any bubble for China, but lots of Economists are of the opinion of bubble in Chinese market and that is Chinese Housing bubble.

[SIUYA 11]

FWIW - (hearsay, one persons opinion, an anonymous website )

We had dinner in London with a Chinese friend who lives in Beijing last night.......his wife is in property development and they also buy places around the world - so i dont take his advice lightly and would prefer it to an economists.

 

For the first time he said the rise in property prices per sq foot was so quick in Beijing that he is starting to worry about a bubble. He also understands that we might only be at the first stages of any blowoff and he thinks the government is powerless to stop it and its likely that as per most governments do - they will stop it when its too late, and their reaction will be to cause a sudden collapse and losses for those late to the party. (typical bubble)

In the meantime - expect headlines screaming about how expensive it is - lets wait for the one that says - the rally will never end (that will probably be the day to buy puts)

 

As per any price action trading when the bidders stop hitting the offers and the sellers need to actually do more than simply put a for sale sign up - then there will likely be a short window of opportunity....until then.

[delta 10]

can someone compare India & China?

[SunTrader 10]

I prefer szechuan!

 

[Baker 10]

ghost towns dont mean anything. china also has ghost towns in africa that they plan on occupying relatively soon most likely.

[SunTrader 10]

You obviously don't own property then.

 

Although it is nice to have price appreciation on your land and/or structure it is also nice to have someone paying you rent or in the case of a bank a mortgage payment.

 

Ghosts don't do either.