The China Bubble

[tothemax6]

Hi All,

I'm raising this issue to see what peoples thoughts are. I personally currently see China as the next most likely country to have a serious crash. Whilst other countries do look arguably crook in their own ways, do to specific things (US monetary and fiscal policy, for instance), as far as I see it China has the strongest indications of the 'unsustainable boom followed by crash' scenario playing out.
As the US did prior to 2008, China is currently sustaining negative real interest rates. They are also busy piling resources and credit into building things that are not getting used (yes this includes the empty cities). This smacks of a artificial credit-induced boom. Then you have the fact that the Chinese government is still far from full-capitalist, leaving plenty of room for socialistic market distortions (a recent example was the reactions from officials regarding food inflation, along the lines of 'banning hoarding', 'price controls' etc).

Now my reason for raising this thread is as follows. Given that China will have a substantial correction of some form, when there are finally enough empty buildings that the construction boom crashes to a halt - how do we gauge when it will occur, or how close it is to occurring? I think it is reasonable to say that many people would wish to be out of their shares prior to this occurring, ready to buy in when the ASX has fully collapsed.

So what are peoples thoughts on checking China for indications of an approaching crash? It could happen 1 year from now, 5 years from now, so one can't really leave the market entirely until it happens.

 

[medicowallet]

I don't think it really matters, as long as they are exporting more than they are spending.

It is where communism is so effective.

Here in Australia, we get paid billions from our mineral wealth and we plough it back into Plasma TVs and cars etc.

In China they get trillions from selling plasma TVs and plough it into cities.


IMO, it is Australia who has the most concern, as if china slows, they will stop purchasing so many resources, which we depend upon (because of a wasteful and inept government (oh, and imo, both labor and liberal are useless, just labor is moreso).

The problem is we waste so much money on "assets" which do not generate revenue for the country, instead of investing in assets which generate revenue for the country (read "COUNTRY" and not "GOVERNMENT" - hence why NBN is such a stupid waste of money)

It sure as heck works fantastically in my business dealings, yet the government is too stupid to understand how a business should be run (and are quite happy to excessively tax those who lead by example)

 

[aramz]

Great comment medicowallet. I agree with alot of what you have just said. I read in the paper today that the Western Austrlian government could reach a debt totalling $20 billion in the next few yrs. That is hard to believe with how much money they would be receiving in mining royalties among other things. The gov has been criticised for spending excessive amounts on projects that are deemed politically attrative and therefore please the crowds rather then income raising and more wisely spent projects... so typical.

I also think that China is massively overheating and unsustainable tothemax. It will be very interesting to see how this all unfolds over the next 2 years with Euro debt woes to re surface later this year imo if not sooner and the same for the US with added inflation issues.

 

[tothemax6]

Well there are a few things there I would normally like to debate, but I'd like to keep this thread on topic please.

Yes, my point is that a China crash will smash the ASX, since many of our companies are fueled by demand for resources from china. The concern is 'how do we gauge how far we are from this event, so as to sell off prior'.

 

[c-unit]

Well there are a few things there I would normally like to debate, but I'd like to keep this thread on topic please.

Yes, my point is that a China crash will smash the ASX, since many of our companies are fueled by demand for resources from china. The concern is 'how do we gauge how far we are from this event, so as to sell off prior'.

Watch Chinese inflation and the way the government over there disclose data, imo. Food price inflation is obviously a huge concern for the gov, as (from what I've read) food prices were the primary driver of the Tianenmen Square protests. The problem with China is that everything they produce and trade are at such low margins that they have real difficulty absorbing inflation. Once the gov start doing funny things with the numbers to understate inflation, thats when to get weary.

Was reported today that they have stopped releasing their residential house price index...

 

[GumbyLearner]

Watch Chinese inflation and the way the government over there disclose data, imo. Food price inflation is obviously a huge concern for the gov, as (from what I've read) food prices were the primary driver of the Tianenmen Square protests. The problem with China is that everything they produce and trade are at such low margins that they have real difficulty absorbing inflation. Once the gov start doing funny things with the numbers to understate inflation, thats when to get weary.

I vividly remember watching China state T.V news (CCTV) while holidaying in Beijing in 2009, a story about the Chinese military firing shells into the sky as part of a state-controlled cloud seeding project.

Rate rises on a Volcker 1979-early 80's scale are ahead for China 2011-2012 and also price increases for rare earths.

Protectionism meh

DYOR

 

[tothemax6]

Watch Chinese inflation and the way the government over there disclose data, imo. Food price inflation is obviously a huge concern for the gov, as (from what I've read) food prices were the primary driver of the Tianenmen Square protests. The problem with China is that everything they produce and trade are at such low margins that they have real difficulty absorbing inflation. Once the gov start doing funny things with the numbers to understate inflation, thats when to get weary.

Was reported today that they have stopped releasing their residential house price index...

Good points c-unit. Regarding the house index: .

 

[GumbyLearner]

"You have to be in the world execution business."

Hats off to a westerner who has been able to live and adapt in the east.

http://techcrunch.com/2011/02/23/pc...ker-extraordinaire-raises-another-26-million/

PCH International isn’t your normal Chinese manufacturing company. They’re located in Shenzhen, a sleepy fishing village in the 1970′s that is now home to 9 million people. It’s an Irish company, headquartered in Cork, Ireland. And to make things even more interesting, it was named after the Pacific Coast Highway (PCH), in California. Founder Liam Casey has been dubbed “Mr. China” – as a Westerner he has a competitive advantage in dealing with U.S. and European brands trying to figure out how to make stuff in China.

The company designs, produces and packages electronics and accessories in partnership with major gadget brands. Revenue has skyrocketed, from next to nothing a few years ago to $400 million last year. And they are extremely profitable, says Casey. If you’re a gadget freak, there’s a good chance something they’ve made is in your pocket or on your desk.

PCH is backed by U.S. venture capitalists. They raised $21 million in 2008 from Lightspeed Venture Partners, Norwest Venture Partners and Focus Ventures.

Now they’ve taken $26 million more from those same investors. And two new investors have joined this round as well – Triangle Peak Partners and Cross Creek Capital.

Why raise more capital when the company is already so profitable? Casey says the Chinese domestic market is growing at a very fast pace, and he needs to expand to meet this new demand. “We’re opening new facilities to serve the Chinese domestic market,” he said with his crazy-unintelligible Cork accent.

 

[Agentm]

Well there are a few things there I would normally like to debate, but I'd like to keep this thread on topic please.

Yes, my point is that a China crash will smash the ASX, since many of our companies are fueled by demand for resources from china. The concern is 'how do we gauge how far we are from this event, so as to sell off prior'.

korea has closed its door on its 8th bank as the infectious run on the banks escalates.. not that its being reported anywhere.. imho it a concern if the disease infects china a little,, imagine a billion little feet doing a run on their banks..

what the black swan event will be is hard to pick, imho it will be could be a sovereignty issue that may develop out of the current M/E flood of reform hitting home in asia. i think when that happens the need to be in a market versus the need to keep wealth will see some shakedowns like no other..

 

[tothemax6]

korea has closed its door on its 8th bank as the infectious run on the banks escalates.. not that its being reported anywhere.. imho it a concern if the disease infects china a little,, imagine a billion little feet doing a run on their banks..

what the black swan event will be is hard to pick, imho it will be could be a sovereignty issue that may develop out of the current M/E flood of reform hitting home in asia. i think when that happens the need to be in a market versus the need to keep wealth will see some shakedowns like no other..

I have heard nothing of any trouble in Korea, I guess I'm not tuned in. Could you post a link to something? I suppose the issue would be 'are the economic connections between Korea and China strong'.

 

[CyberBird]

hello everybody. the wonders of the internet being what it is, i randomly came across this website today and found it interesting enough to join in the discussion

Chanos has long been arguing that China has moved from being dependent on manufacturing for its growth to fixed asset investment, which accounts for more than 60% of China's overall GDP. As with most property bubbles alot of this property investment is speculative driven.

Add to that, China's central bank has failed to cap this speculative bubble and instead made things worse by forcing banks to create "off balance sheet loans" that look alot like the mortgage backed securites that crashed wall st.

the thing is people like chanos have been calling the imminent collapse of China for a while now.... its probably impossible to predict when a chain of black swan events will create the perfect storm. But i think its highly likely.

Given its highly likely to occur but impossible to time, wouldn't it be best to create a trading strategy heavy in fixed guaranteed returns like govt bonds with a small but significant amount leveraged and shorting australian mining stocks? Or even better shorting some property developers directly on HKEX. You could probably do the maths to get the fixed return assets to cover the more volatile bets, so you could rollover until the **** storm finally hits?

(apologies im not actually an active financial trader so less useful in that regard)

 

[tothemax6]

hello everybody. the wonders of the internet being what it is, i randomly came across this website today and found it interesting enough to join in the discussion

Chanos has long been arguing that China has moved from being dependent on manufacturing for its growth to fixed asset investment, which accounts for more than 60% of China's overall GDP. As with most property bubbles alot of this property investment is speculative driven.

Add to that, China's central bank has failed to cap this speculative bubble and instead made things worse by forcing banks to create "off balance sheet loans" that look alot like the mortgage backed securites that crashed wall st.

the thing is people like chanos have been calling the imminent collapse of China for a while now.... its probably impossible to predict when a chain of black swan events will create the perfect storm. But i think its highly likely.

Given its highly likely to occur but impossible to time, wouldn't it be best to create a trading strategy heavy in fixed guaranteed returns like govt bonds with a small but significant amount leveraged and shorting australian mining stocks? Or even better shorting some property developers directly on HKEX. You could probably do the maths to get the fixed return assets to cover the more volatile bets, so you could rollover until the **** storm finally hits?

(apologies im not actually an active financial trader so less useful in that regard)

Welcome to the thread (and the forum).
Like I said, the issue is that it could take 2 years before the bubble bursts, or it could take 2 months (I hope not!). In the former case, this would mean forgoing investment profits for 2 years. It would clearly be better to detect the approaching collapse in advance, so as to not be waiting in cash for two years to 'buy when the blood is on the street', as they say. Also, it is difficult for the small investor to hold a long term short position against mining stocks, it is also even more difficult for him to hold a short position on a foreign exchange (although I might be wrong on this).

Secondly, I would not be holding a position in government bonds, I see no guarantee in them at all (although Aus gov bonds are probably rather safe).

Regarding the black swan event, I don't think it takes a perfect storm. I think it is closer to 'the straw that broke the camels back'. There must be ways to see that the camels back is about to give way. The bubble is there, just the same as the tech bubble, the japanese bubble, the sub-prime bubble. I will probably start analyzing these previous bubbles around the 'bursting' period, to see what information started to indicate that the burst was about to happen.

 

[greggles]

Revisiting this thread seven years later as I think the situation for China is much more precarious now than it was back in 2011.

Chinese economic growth has flatlined at around 6.7%-6.9% for the last few years. Meanwhile, Chinese debt levels continue to rise year on year as the growth in the economy is increasingly fuelled by debt. As a consequence, the bad loans in the banking system are continuing to stack up. The Chinese government, obsessed with economic growth, continues to print money which just ends up fuelling the speculative economic bubble as it has nowhere else to go. Hence the rise in Chinese ghost cities and spending on questionable infrastructure under President Xi Jinping's "Belt and Road Initiative".

The more I read, the more concerned I become that the Chinese economic situation is unsustainable and it's not a matter of if, but when, the Chinese bubble bursts.

 

[basilio]

The Evergrande situation in China is ominous. Huge property development company with $300 BILLION in debts that it cannot service.
Crashing share price.

I suspect that a bad crash in China will will quickly and inevitably impact on the rest of the world economically. May we (not) live in interesting times.

Shares in the group were down nearly 10% in Hong Kong on Tuesday. The statement also said it had failed to find a buyer in the distressed sale of its electric vehicle and property service subsidiaries, prompting shares in those businesses to fall by 22% and 8% respectively.

Evergrande is one of the world’s most indebted companies, and has seen its shares tumble 75% this year, sparking fears among analysts of “a risk of contagion” spreading through China’s overheated property sector and also its banking system.

Years of borrowing by Evergrande to fund rapid growth has combined with a crackdown on the industry by Beijing to fuel the crisis.

The dramatic announcement on Tuesday follows a turbulent day on Monday which saw increasingly desperate protests by small investors and homebuyers demanding their money back.

China property giant Evergrande admits debt crisis as protesters besiege HQ

Disgruntled investors voice anger at headquarters as company appoints advisers and says firesale of assets won’t cover debts

www.theguardian.com

 

[basilio]

China's property market has some different twists to ours. The implications for the financial system are not good.


A report last week by Capital Economics said Evergrande had 1.4m properties it has committed to completing, as of the end of June.

Analysts at the Hong Kong-based market intelligence firm Reorg described in a recent report how the disputes over contractor payments intertwined with Evergrande’s large exposure of unfinished properties that buyers – as is common in China – have already paid for upfront.

“In extreme cases, if China Evergrande fails to complete pre-sold property projects on time, due to inability to pay contractors, China Evergrande will be liable to the purchasers for their losses,” Reorg said.

“In line with industry practice, the group pre-sells properties prior to their completion – as a result, banks providing financing to end purchasers require China Evergrande to guarantee their customers’ mortgage loans. If a purchaser defaults on a mortgage loan, the group may have to repurchase the underlying property by paying off the mortgage.”

China property giant Evergrande admits debt crisis as protesters besiege HQ

Disgruntled investors voice anger at headquarters as company appoints advisers and says firesale of assets won’t cover debts

www.theguardian.com

 

[divs4ever]

apart from my opinion that the global financial system is already a complete mess , is this probable default such a big thing , say compared to the GFC or even the 'Asian Crisis ' ,
now sure it will be interesting to see how this plays out ( the Chinese Government might step in and nationalize it like the US did with Fannie Mae and Freddie Mac ) or Chinese law might already have a solution built into the system , OR the CCP might just step in and throw it a lifeline a loan with extended repayments.

the world might be watching China to see if they deploy a solution , or let this all sort itself out ( spreading the pain far and wide )

 

[Smurf1976]

apart from my opinion that the global financial system is already a complete mess , is this probable default such a big thing , say compared to the GFC or even the 'Asian Crisis ' ,

The issue would be if it sets of a chain of events.

Think in terms of dominoes lined up - one falls over, hits the next which falls, etc.

Of itself one falling is no problem but if this company fails and brings down a bank, which brings down however many businesses, which brings down another bank....

That's unknown but it's the thought which comes to mind and such things can involve completely unrelated entities. Eg not in China but Greensill Capital is an example there with it's potential to wipe out half the Australian steel industry despite not being a steel company.

One thing failing is yeah, whatever, but once it takes down something else that was otherwise viable as such well then things can unravel rather quickly.....

 

[divs4ever]

i would suggest there are several areas held together with sticky-tape already

simple stuff like a lot of the biggest banks ( outside of Australia , maybe ) repeatedly perform poorly in the Basel III stress test , even when watered down

debt seems to be the key here ( and how/IF you repay it )

now IF China Evergrande managed to destabilize China that would be a biggie ( although , say only Hong Kong that would probably be a maybe )

but WHAT IF , China Evergrande broke the 'buy off the plan' model , globally , you could see civil construction stop almost dead in the water ( back to 'old school ' funding , in a world full off debt obligations )

i think the global economy is dying a death of one thousand cuts , but which will be the fatal one ( no return possible )

 

[divs4ever]

China Evergrande's snowballing debt crisis

China Evergrande's snowballing debt crisis By Reuters

China Evergrande's snowballing debt crisis

www.investing.com

Embattled Evergrande warns of growing default risks as pressures mount

Embattled Evergrande warns of growing default risks as pressures mount By Reuters

Embattled Evergrande warns of growing default risks as pressures mount

www.investing.com

being deliberately turned into a 'black swan' , perhaps

if this implodes watch which banks are smashed