The China Bubble

Discussion in 'Economics' started by MarketOwl, Oct 30, 2011.

  1. The baton is being passed from Europe to China. On Europe: if everyone is bearish and knows how bad things are, then its too late. The fundamentals justify the bearishness, but the European stock prices reflect this. But China is different. I am still surprised at how many believers remain in the China story despite the stock prices being quite weak. Maybe it is because they keep growing, that has traders mesmerized. But then why aren't the share prices going up? Why is it so much weaker than US equities?

    I have never seen such a big disconnect between GDP growth and stock prices in a major market. When you have 9.7% GDP growth, the stock market shouldn't be so weak. It has to be the real estate bubble. The smart money is now out of China. They know that the gig is up. The dumb money is getting anxious. Property prices are falling now.

    China GDP growth has been induced by a property bubble that has non-real estate companies investing in real estate. You have insane projects like high speed rail that no one can afford, empty malls, ghost cities in the middle of nowhere. It is not quality GDP growth. It is just dumb central planning. The banks are loaded up with bad loans. They will become zombie banks. This is a repeat of Japan in 1990. Chinese companies face the double whammy of growing wage pressures and a bursting real estate bubble. The profit numbers will look like a train wreck in 2012. I see a lot more similarities between China and Japan, than I do with U.S. and Japan. China has a real estate bubble based on overinvestment, just like Japan did in 1990. The US was an overconsumption story. China is an overinvestment story.

    This will have ripple effects on the commodity exporters of iron and copper, and to a lesser extent crude oil. That is why Brazil and Australia have been so weak. The market usually foretells of dire situations. I see the Australia dollar getting weaker along with their stock market. Same for Brazil. I wish there was CDS on Beijing and Shanghai real estate, because I would go all in on that trade.
  2. Majority of the GDP is on infrastructure development, ie roads, sewage plants, hospitals, broadband, pipelines, electricity power, oil drilling, agriculture, etc. Remember, China is still a predominately state owned economy and those industries which service the above are 90%+ owned by the government. Those profits are not distributed to a public market but line the coffers of the state and sovereign funds. The privately owned and publicly traded companies have all traded at dotcom valuations, hence the gap between GDP growth and share performance the past several years. The China public markets were a huge bubble in 06/07, got pummelled and have yet to recover in any meaningful way, yes mostly due to consumer Real estate speculation which the government has been trying to deflate. (Note the word trying and have succeeded). But mainly because after correction, stocks still trade at nosebleed valuations with Shanghai up 20,000% since 1990. More importantly is the Shanghai exchanges represent a very small % of the overall Chinese economy.

    I do agree to a certain extent that China will enter a corrective period. But by no means is this a default and debt scenario like the West or Japan. US is more the Japan story because both were entangled in a real estate derivatives bust and the massive ensuing bailout. China doesn't write and trade MBS or CMBS. That's the big difference. We're bailing out European banks now because their losses in MBS is in the trillions.