End of the China bull?

[Trembling Hand]

Another day, another documentary about slowdown in China.



It feels like it is staring you in the face... but at the same time, do you have the conviction to land the big short? Will you be right? Will you make profit whilst being right?

I wish I run a macro hedge fund and short with other people's money

Its the same same as it ever was. Lots of themes out there to make money from but usually people are not creative enough to land the killer punch.

Dot.com
Then Dot.con explosion
China Bull 2003-2007
GFC
5 year QE rally
Next..........

Most will just say after its gone "no one predicted that". Even worst spend 5 years wanting a replay and get all out of sync...

 

[kid hustlr]

hmm I dunno about that. I personally think this China thing has more to play out but I also believe in the words

"I've never seen a crisis where everyone was expecting it before hand". The more publicity this stuff gets the less of a factor it becomes.

 

[notting]

It's been a 5 year decline on the Chinese stock market what more do you want?

What ya gonna short now? Now that it's all over the news!

It's been dead bull in a paddock with cold bones for about a year now.

Maybe there will be a great capitulation.
There will certainly be a Hindenburg moment - I promise.
But timing that from here at this low point is obviously tough. If they stimulate, short after the market has rallied on the back of that.

The Chinese have reserves to fake it out for a few years more if they want to and make it even worse as they have done for about 10 years.
The present leader is the best thing that has happened in China for about 60 years.
Xi has been far more candid than the previous monster dictators.
But things are so bad in China it's hard to see how it can ever get cleaned up unless Xi is a total genius with balls and muscle to fit.
The political challenge is colossal.

 

[CanOz]

But things are so bad in China it's hard to see how it can ever get cleaned up ...

Shhhhh, don't say it too loud, they might hear you. Honestly, they have no idea. They're all so addicted to credit they really believe it will just go on forever...

 

[skc]

hmm I dunno about that. I personally think this China thing has more to play out but I also believe in the words

"I've never seen a crisis where everyone was expecting it before hand". The more publicity this stuff gets the less of a factor it becomes.

I read this book some years back and one passage stuck with me.

http://www.amazon.com/Diary-Very-Bad-Year-Confessions/dp/0061965308/ref=pd_bxgy_b_img_y

The guy recalled how he had to let go one of their investment managers because that manager made the wrong bet on subprime. A few guys from the office were seeing the anecdotes before the collapse - empty apartments in Miami, predatory lending adverts on TVs etc etc. But the subprime investment manager was able to bring up hard facts that vacancy rates were still under control, and arrears were still low. So they held on to the subprime securities until it's too late.

The media can pick on the anecdotes and make good TV out of it. But to put in context, one ghost city for 200k people is a drop in the ocean compared to the urban migration 50m people. And that's where I struggle to have the conviction that the things we see about China will indeed lead to a collapse.

I don't think I've expressed it very well, but I don't think the China situation is one that is obvious and could go either way.

Another analogy - you see a bus heading towards a cliff at some speed. The driver is still there looking somewhat calm and in control. Will it go over?! Perhaps common sense and logic will prevail and the bus will change course before it's too late. But what if the driver is not in full control? Or he didn't know his brake paddles are not working? Or he turns a sharp left only to drive into a lake?

It's been a 5 year decline on the Chinese stock market what more do you want?

What ya gonna short now? Now that it's all over the news!

You'd short the debt rather than equity now.

 

[kid hustlr]

fair points SKC

 

[Trembling Hand]

I read this book some years back and one passage stuck with me.

I had one of those moments myself.

In June 07 I was sitting in a certain trading floor in Sydney discussing what was about to happen because everyone was talking about "subprime". My guess and what I said was we were about to have a nasty fall and then a sharp recovery and all will be well. One of the bond boyz said "not f@$#%ing likely". Made me look really hard at the possibility that the bull market was over.

We had the fall and snap back recovery to new highs in October 07 and then boooom. It was nearly a year after the first tremors until we made a lower low and didn't stop falling until the XAO was cut in half.

No one saw that coming...

 

[notting]

But to put in context, one ghost city for 200k people is a drop in the ocean compared to the urban migration 50m people.

This is the illusion.

This is the reality - The money the so called migrators are supposed to have to pay for the the multitude of 'apartments' owned by the few who have been sold concrete rooms in concrete towers because they had no where else they were 'allowed' to put their money, is not going to happen.

The communist party may decide to build airports, schools, shopping centers and super fast railway systems to connect up the ghost towns but Kinda isn't much of a solution given there is no one to buy the empty apartments apart from this grand illusion of rural penniless and clueless farmers suddenly all jumping up to being some middle class miracle on the back of you must buy this apartment :twak: buy this apartment :twak:

 

[DB008]

Will we have a false start, then a massive drop, like the GFC?

I couldn't get the Four Corners video to work, so punched it into youtube and got this one, pretty much the same one (I think).



Some pretty impressive stats too.

In the 5 years since the GFC, they built x number of cities, 25 airports, 3 of the worlds longest bridges, x-miles of roads and high speed rail. Probably what Oz would do in 50 years....if that.

Will it all come to tears?

Short RIO, BHP, ASX200?

 

[skc]

Another book predicting the end...http://www.amazon.com/Coming-Collapse-China-Gordon-Chang/dp/0812977564

The Coming Collapse of China

China is hot. The world sees a glorious future for this sleeping giant, three times larger than the United States, predicting it will blossom into the world's biggest economy by 20XX. According to Chang, however, a Chinese-American lawyer and China specialist, the People's Republic is a paper dragon. Peer beneath the veneer of modernization since Mao's death, and the symptoms of decay are everywhere: Deflation grips the economy, state-owned enterprises are failing, banks are hopelessly insolvent, foreign investment continues to decline, and Communist party corruption eats away at the fabric of society.

Oh wait... the book was published in... 2001!

I guess if you were bearish on the Roman empire you'd be right at some point within a thousand years of its founding.

 

[notting]

What's happening on the ground.
http://www.ft.com/cms/s/0/0eb56cf4-bfc7-11e3-b6e8-00144feabdc0.html#axzz2ySxqfSSw

 

[CanOz]

What's happening on the ground.
http://www.ft.com/cms/s/0/0eb56cf4-bfc7-11e3-b6e8-00144feabdc0.html#axzz2ySxqfSSw

The link doesn't work, wants me to subscribe, can you please provide some detail?

 

[notting]

The link doesn't work, wants me to subscribe, can you please provide some detail?

Here you go.

A bitter turf war between China’s two most important financial regulators is hampering policy co-ordination just as the country’s debt-laden financial system is starting to show signs of real strain.

The China Banking Regulatory Commission and the People’s Bank of China, the central bank, have always been rivals, but now rising tensions are obstructing reforms and efforts to tackle risks in the financial sector, according to officials from both agencies.

From the outside, the Chinese system can often look like a monolithic structure but the various arms of the bureaucracy are often engaged in vicious institutional battles that can delay or even hamstring policy.

In just one example of how rancorous the split has become, several people familiar with the matter say a Financial Stability Council chaired by the PBoC and including the heads of the main financial regulatory bodies has met just once since it was established last August.

The row comes after several high-profile defaults in recent weeks including the first ever public domestic bond default in modern history and a small bank run in eastern China.

The council has not been able to meet because of opposition from the CBRC, which has vehemently objected to what it sees as a power grab by the PBoC.

In recent weeks the central bank, which has responsibility for overall financial stability in China, has expressed frustration at the CBRC’s unwillingness or inability to rein in the off-balance sheet activity of the state-controlled banking system, which has ballooned in recent years.

The PBoC also feels the CBRC is too close to the state banks and has failed to get a handle on the scale of problem loans at many of the country’s smaller lenders.

“One of the biggest roadblocks to financial reforms in China now is the fact the PBoC doesn’t think the banking regulator is capable of handling the risks associated with that reform,” said one person familiar with the matter.

The most pressing of those reforms include a long-delayed plan to introduce deposit insurance and the liberalisation of interest rates, which is already under way in the so-called “shadow banking” sector.

Both of these initiatives are opposed by state banks which have enjoyed a near-monopoly in the financial sector for decades.

Meanwhile, CBRC officials feel they are being unfairly blamed for not managing risks that were created by the PBoC and which they have warned about for years.

In the wake of the 2008 global financial crisis, Beijing launched a credit-fuelled stimulus that has seen assets in the formal and shadow banking sectors balloon from around $10tn to nearly $25tn today, according to estimates from Fitch Ratings.

In other words, in just five years China has added new assets equivalent to those held by the entire US banking system.

As a result, the country’s ratio of total debt to GDP has jumped from 130 per cent in 2008 to 220 per cent now.

Such a rapid build-up of credit has almost always been a precursor to a financial crisis in other economies and the CBRC has been warning of the risks since the stimulus was launched in 2008.

Another CBRC complaint has been the PBoC’s aggressive promotion of “financial innovation”, which some officials at the banking regulator say is more accurately described as “interest rate arbitrage” or “regulatory arbitrage”.

They argue that having forced the banks to carry the burden of the stimulus the PBoC then encouraged the creation of the vast shadow banking sector that it now blames the CBRC for not regulating properly.

A spokesperson for the PBoC declined to comment while a spokesperson for the CBRC said the two institutions have a co-operative relationship.

If anyone believes those figures that China provided yesterday were even remotely close to the reality you really need to think harder!! They suddenly became a consumer driven nation overnight, and a booming one at that!

 

[DB008]

If anyone believes those figures that China provided.....

The numbers that China puts out are always fudged....

 

[DeepState]

If anyone believes those figures that China provided yesterday were even remotely close to the reality you really need to think harder!! They suddenly became a consumer driven nation overnight, and a booming one at that!

So...I'm thinking:

Retail sales growth was also published yesterday. YoY was 12.2 vs prior 13.6. ie. Slowing rate of growth.

If booming, why are producer prices deflating? Exports are down. Credit growth is down. Gov't had to mini-stimulate via targeted infrastructure spend.

From RBA Minutes: The spot price for iron ore had been volatile over recent weeks, while steel prices in China had declined and spot prices for coking and thermal coal were well below current contract levels. The fall in the price of steel in China over recent weeks was consistent with a softening in demand. At the same time, the supply of steel appeared to have been constrained by a tightening in credit conditions reflecting the Chinese authorities' concerns about pollution. Base metals prices had also declined, though rural commodity prices were a little higher.

None of this is consistent with what you are saying. What are you seeing?

 

[notting]

The thing that stood out like a saw thumb is Retail sales growth of 12%. Saying it was 13% prior was just as much of a joke.
They are trying to give the impression that the economy is making a smooth transition from Tiger to Consumer.
It's complete rubbish.
They have just eased rural bank lending conditions.
The pollution thing has trapped them from the path they have taken to this point and they have no where to go!

 

[DeepState]

The numbers that China puts out are always fudged....

Maybe so, but they can be cross-verified in important elements with other hard and measurable indicators. Their exports figure, for example, is directly verifiable by adding up the imports from other countries. Similarly, their imports are another country's exports. Interest rates are directly observable. Shipping movements...electricity production...etc. Whilst it is "amazing" that China can produce its National Accounts so fast, in aggregate and through time, their figures have been found to be satisfactorily indicative and are relied upon.

 

[DeepState]

The thing that stood out like a saw thumb is Retail sales growth of 12%. Saying it was 13% prior was just as much of a joke.
They are trying to give the impression that the economy is making a smooth transition from Tiger to Consumer.
It's complete rubbish.
They have just eased rural bank lending conditions.
The pollution thing has trapped them from the path they have taken to this point and they have no where to go!

Oh...Sorry. I did not catch the tone from a flat communication tool like this web chat. You meant the opposite and I couldn't read your posture from the text clearly. My bad.

Yes, I agree that there are many things to balance off. Looks tough. But look where they have come from. Even if the figures are accurate, it implies that rebalancing of the economy is virtually non-existent (Retail is nominal, inflation approx. 4%). What rebalancing? Banking system challenges are present, but the sovereign is underwriting and the market is not pricing in too much risk - yes, they could be wrong, but it's the best working hypothesis and inter-bank is calm. Export dependency is going away and FX suppression has its limits with the latest efforts already attracting US rancor. $4tr in FX reserves is outrageous and a source of Geopol risk right there. With Japan not making it, something interesting might develop in the year ahead. Basically, the seemingly most plausible way to rebalance is to slow the economy somewhat - or have it slowed for you much more dramatically at some stage down the track. I am impressed at efforts to add risk to the lending system and hot money flows. It's a good step. We'll see what the other reforms bring, including those relating to pollution. The power of a command economy with the ability to implement selective market reforms sequentially should possibly not be underestimated.

Thanks.

 

[notting]

The power of a command economy with the ability to implement selective market reforms sequentially should possibly not be underestimated.

Unfortunately that is the greatest myth of them all.
It's not power it's the weakness.

It is the breeding ground of catastrophic problems like massive corruption, irreversible crippling pollution and massive errors like "breed like fly's" flipping into 'one child policies' all with their own social and economical disastrous consequences.
Unlimited power leads to unlimited distortions and corruption.

Command economies breed distortions that knee cap the entire structure.
The longer the 'one' command gang remains, the worse the distortions and self destruction become.
China is the mother of all economic disasters waiting to play out.
Unless you have an omniscient visionary in command, the bumbling, far from perfect, democracies are far better self smoothing machines.

 

[DeepState]

Unfortunately that is the greatest myth of them all.
It's not power it's the weakness.

It is the breeding ground of catastrophic problems like massive corruption, irreversible crippling pollution and massive errors like "breed like fly's" flipping into 'one child policies' all with their own social and economical disastrous consequences.
Unlimited power leads to unlimited distortions and corruption.

Command economies breed distortions that knee cap the entire structure.
The longer the 'one' command gang remains, the worse the distortions and self destruction become.
China is the mother of all economic disasters waiting to play out.
Unless you have an omniscient visionary in command, the bumbling, far from perfect, democracies are far better self smoothing machines.

On average, democratic economies have produced slightly better outcomes than non-democratic economies. Not far better. The deviation of outcomes across all ranges of the spectrum across democracy and dictatorship are far wider than the slope of the relationship itself, making it very dangerous to make sweeping statements because there is a very high chance the statement will be wrong just on the stats alone. Further, there is a concept of democratization as wealth rises, as the people demand a better life and a greater say. Whilst this process is 'sticky' when examined empirically, the relationship between wealth and democratic processes is obvious. That transition is visible in China as greater autonomy is gradually being given to the local level and even democratic style elections are held in these areas. President Xi himself sees that he was elected as part of a democratic process, albeit within the CCP apparatus.

For every Angola there is a Singapore (a democracy? Really?).

I don't deny that absolute power breeds the possibility of really bad things going on, including corruption and cronyism, or that China is not riddled with them. It is. But studies on the impact of corruption on GDP do not come to the damning conclusion that you seem to. The answer is - it depends.

Just a thought. Enjoying the exchange.


Worldwide Democracy vs Dictatorship and GDP relationship:


And, when you control for Asian culture: