China Watch 2010 Edition

China is in trouble.  The economy and the financial markets there appear to be not just overheating but entirely unsustainable.  China's economic figures are also so dodgy that the majority provinces are reporting above-average growth ... Beijing has, meanwhile, responded with a propaganda campaign including these gems:  "I'm proud to be a brick in the statistical building of the republic", and "I can rearrange the stars in the sky because I have statistics".  If that's not an indicator to Sell we don't know what is.  Either way, we predict that China's bubble will burst in the fourth quarter and the results could be likened to the Asian Financial Crisis in 1997.  And that's not all:  China's US dollar reserves are keeping America's currency (and economy) from hyperinflation.  The consequences of a major shift could be devastating.  And on that topic, this article should give further food for thought.

The lure of 'China' lifts share prices ...

"Dozens of tiny companies have gotten big stock-market boosts simply by adding the word 'China' to their names.  While the total dollars at stake are small, the trend is reminiscent of the internet bubble's heyday, when a company could launch its stock price to the moon merely by tacking '.com' to its official name ... I asked Wei Wang, a finance professor at Queen's School of Business in Kingston, Ontario, to study the returns of the 82 companies that have adopted new names containing the word 'China' since late 2006.  The list includes 18 last year and four so far in 2010.  Wang looked at returns from 20 trading days before the announcement through 20 days after.  He found that the average stock that added 'China' to its name outperformed the overall market by 31 percentage points over that period.  The results held up over shorter and longer periods ... Consider Apogee Robotics, a company with no revenues or assets.  It merged into a firm called Advanced Swine Genetics last September 30, immediately renaming itself China Swine Genetics Inc.  The company didn't announce the name change until October 13, however.  The next day, the stock went from $8.40 to $15.60, an 86% gain.  Then it collapsed.  Last week, a mere 100 shares changed hands at $4.50."

(Jason Zweig in the Wall Street Journal, March 20)

Commodities to come under pressure as China tightens bank lending ...

"Remember how China was importing every commodity under the sun last year -- quite inexplicably, considering exports were lagging throughout most of the period? Sean Corrigan at Diapason Commodities has a theory to explain the phenomenon ... 'Further to the suspicion that much in the way of Chinese metals imports are related to schemes to game the cheap money there by circumventing capital controls -- whether in order to bet on Yuan appreciation or commodity price rises, or both -- note that the relative prices of copper, aluminium, and zinc in Shanghai vis-à-vis that on the LME bear more than a passing resemblance to the volume of new loans concurrently granted by Chinese banks' ... He goes on:  "If -- as seems increasingly likely -- a genuine crackdown on lending is indeed in train ... a good part of the rationale for such speculative holdings would be removed, with potentially significant consequences for prices of base metals (and possibly other commodities)'."

(FT Alphaville, January 19)

Jim Rogers sticks up for China but has concerns about inflation ...

"Jim Rogers has debunked contrarian investor James S Chanos' suggestions that China's investment bubble may lead to a Dubai-style implosion ... 'It is absurd to say China is in a bubble when the stock market is 50–60% below its all-time high.  If you have a bubble you have things going through the roof.  You have everybody screaming fire every day.' ... Chanos, a hedge fund investor who predicted the collapse of Enron, said speculation in China's real estate sector was a thousand times worse than Dubai ... 'His remarks show a lack of understanding about Dubai and of China.  Dubai's economy is built on real estate speculation, whereas China's is not.  It is just part of the Chinese economy,' said Rogers.  He warns, however, that the world could be heading again for 1970s-style inflation.  He said while concerted government efforts to bail out economies may have averted a depression, it would eventually lead to spiralling price increases.  'I am sure inflation is going to go to levels seen in the 1970s, if not higher.  It is not necessarily going to happen this year, but certainly over the next few years'."

(China Daily, January 19)

Although China still looks good ...

"Reading The Herald Tribune ... my eye went to the front-page story about how James Chanos ... the man who bet that Enron was a fraud and made a fortune when that proved true and its stock collapsed -- is now warning that China is 'Dubai times 1000 -- or worse' and looking for ways to short that country's economy before its bubbles burst.  China's markets may be full of bubbles ripe for a short-seller ... but I'd offer Mr Chanos two notes of caution.  First, a simple rule of investing that has always served me well:  Never short a country with $2 trillion in foreign currency reserves.  Second, it is easy to look at China today and see its enormous problems and things that it is not getting right ... low interest rates, easy credit, an undervalued currency and hot money flowing in from abroad have led to what the Chinese government called 'excessively rising house prices' in major cities ... In the last few days, though, China's central bank has started edging up interest rates and raising the proportion of deposits that banks must set aside as reserves -- precisely to head off inflation and take some air out of any asset bubbles.  And that's the point.  I am reluctant to sell China short ... because ... it also has a political class focused on addressing its real problems, as well as a mountain of savings with which to do so ... And here is the other thing to keep in mind ... All the long-term investments that China has made over the last two decades are just beginning to blossom and could really propel the Chinese economy into the 21st century knowledge age."

(Thomas L Friedman, New York Times, January 12)