DEAR CHINA: YOU’RE MAKING ME NERVOUS……
Behind China’s wall, there is much, much more than what meets the eye. Have you taken a look INSIDE those newly built skyscrapers of theirs? There isn’t an inside, just an outside. I’m no poet or Hemmingway, but are not China’s empty skyscrapers a metaphor for China itself? Did you know that North Korea has one of the largest hotels ever built in the world?! Who is staying there? No one; the building was constructed to simply provide the smoke and mirrors for North Korea’s government. And that’s exactly it, the government is in control of what is seen or hidden. Ultimately, putting one’s faith in China is putting your faith in China’s government. I was once told by the former NFL player and coach Herm Edwards; “what you do in the dark, will eventually come to the light.”
There are 3 main areas of China that are to be discussed: growth, real estate, and the society.
Let us start with growth. For those who are in investment banking or company valuations, growth is a supreme creature. When valuing a company, one typically looks at growth and margins, among other things. If a company is experiencing high growth, it can be assumed that the growth will eventually lead to a level of sustainability (typically 5 – 8 percent). Otherwise, a company may end up growing into infinity, NOT REALISTIC. But, what is obtainable is preserving the margins that the company had during the high growth years. There may be other instances where margins are reduced by the entrants of competition instead of market saturation. Looking at Procter & Gamble who has the 4th largest market cap as an example, who has annual revenue of roughly $80 billion, still maintains an operating margin (EBIT/Revenue) of 20% while its revenue grows between 5-8 percent annually. Let us return to China, their GDP has grown an average of 10% for the last 30 years, and they now have the third largest nominal GDP in the world (behind the U.S. and Japan). Growth will start to decline in China simply due to the fact they have reached a size where growth will come from the growth of other foreign GDPs and efficiency improvements. When growth rates decline, future earnings estimates decline, and equity prices fall. The Shanghai SE Composite Index, which is composed of 30 Chinese stocks, is down nearly 60% from its highs of October 2007. Since the first trading day of 2010, the Chinese index is down over 26%. Compared to the Dow Jones Industrial Average during the same period, the U.S. has outperformed China by 19%. Once again, China’s growth will have to come from foreign GDP growth and efficiency improvements. Both take time to develop and implement.
China’s real estate has been a topic of major discussion recently. Values of property have been increasing faster than what was seen during the U.S. housing bubble. In fact, real estate values in Beijing’s city center have leaped as much as 6.5% in a single week. The demand for property is truly driving the prices. With a rush to the developed cities from the farmlands by Chinese citizens combined with the entrance of foreign professionals, a siege of demand has swept over the property market. Most notably is the type of new housing projects that are being and have been constructed in China, the “upscale” or “luxury” condos. For anyone who has been following the U.S. housing crises, the amount of deserted high-rise luxury condos has been astronomical. The city of Miami is a perfect example of this. It’s not the ultra wealthy who are living in these types of condos, but the newer upper-middle class who depend significantly on their paychecks. When a recession happens, this upper-middle class is the first to downgrade, leaving their condos behind. So what has the Chinese government done? They have implemented some restrictions on individuals buying second and third properties and increased the down payment requirements. But the banks are still exposed like never before. In a press release issued by credit rating agency Ficth, they described how Chinese banks are packaging the loans and selling them to investors at an incredible speed. Hmmm, sound familiar? In fact, it was reported that Chinese banks are now involving themselves in vastly complicated transactions to circumvent the restrictions implemented by the government. It gets worse, the Chinese banks are now realizing the increasing public following of their transactions and large loan balances so they are cutting off more and more access to information on their balance sheets. Scared yet? Going back to the demand side of the Chinese housing, it is still there. However, it is the uncertainty of future government actions and the knowledge of the U.S. housing crises that has frightened some buyers.
Finishing with the society of China, one can really begin to understand the country’s future. China has a political system known as Communism, and a business system known as Capitalism. Although it is not true capitalism, it is very strong system. We need to understand the basics of human demands. First there are things like food, water, and shelter. Then love and growth, etc. What is happening in China is that many of the first order needs of society have been met, and now the second level has been fulfilled too. But humans always want more, and the Chinese people want more as well. New desires like the right to vote, travel, own property, and privacy are now being demanded. Many of these, the communist government does not want their people to have. It is through the growth and prosperity of the economy of China that has silenced the cries for more rights. It is in the best interest of the government to do everything in their power to keep the economy vigorous. It’s now that one can see that putting faith in China is ultimately putting one’s faith in their government.
Comments
great post.... but please,
great post.... but please, break the larger paragraphs down into smaller ones (its just easier to read online with smaller paragraphs IMO)
looking for that pick-me-up to power through an all-nighter?
Thanks LIBOR! I agree with
Thanks LIBOR! I agree with you, I needed some breaks in there
Yours truly,
The Young Investor
Not a bad post. Being a
Not a bad post. Being a follower of China, I would say that the Communist leadership is trying to stimulate economic growth and create jobs in order to stay in power.
When China reaches critical levels of unemployment, the heads of the leadership will be the first to roll. That's why all this growth, attraction of foreign investment and capital is so important.
Another thing: don't trust China's GDP growth numbers. I have a relative in a statistics agency and let's just say that their methods are less than perfect.
SinoMonkey, I think you are
SinoMonkey, I think you are right on. Those GDP numbers can't be as accurate as we hoped. Also, I'd like to know more about China's "ghost economy", that is the part of the economy where the transactions are 'under the table' and not properly recorded.
One thing I find interesting is that I talked to a Chinese business student who is getting their Master's in Banking & Finance, and she said that the best job to have in all of China is to be working for the government! She further went on to say that her wish to work for the government is shared by a large majority of Chinese citizens.
Interesting.
Yours truly,
The Young Investor
It is true, Government
It is true, Government officials get paid for jacksh!t but they have power in their hand, guess what.....gray area income is 10x or 20x greater than government's paycheck.
The Young Investor
SinoMonkey, I think you are right on. Those GDP numbers can't be as accurate as we hoped. Also, I'd like to know more about China's "ghost economy", that is the part of the economy where the transactions are 'under the table' and not properly recorded.
One thing I find interesting is that I talked to a Chinese business student who is getting their Master's in Banking & Finance, and she said that the best job to have in all of China is to be working for the government! She further went on to say that her wish to work for the government is shared by a large majority of Chinese citizens.
Interesting.
Simply because the government has true power in China while in US the corporations have true power.
China has been pissing me off
China has been pissing me off for a long while. Their government tries to have the international power equivalent to the other major nations, while trying to say that they're too young to follow any of the restrictions placed on those nations (think Kyoto Protocol for global warming, etc). It's like watching the younger brother whine about not being able to watch rated R movies when his older brother can, but not wanting to do any of his chores first.
"Despite a voluminous and often fervent literature on 'income distribution', the cold fact is that most income is not distributed: it is earned."
-Thomas Sowell
Under the table is how most
Under the table is how most stuff gets done in China. Its *all* about relationships.
A great book to read is "One Billion Customers." I would especially recommend reading the chapter about the Morgan Stanley - CICC joint venture
See my other WSO blog posts
china is a gigantic enigma.
china is a gigantic enigma. it is a huge contradiction in itself. you have to be there long enough to understand all the incredible conflicts that are formed by a combined force of thousands of years of traditions and customs, decades of political turmoil, and rapid westernization (which happened only in the last 20, 30 years or less). Even in China itself, almost no one really trusts the stats such as GDP or CPI. For the chinese this is an era of having faith in nothing, doubting everything they hear or read, yet at the same time having no choice but to find their way to live in a shitty and false reality. i follow china quite often and if u ask me, something is going down sooner or later. that or someone who actually knows what he is doing comes to power.
Anyone buying China long term
Anyone buying China long term can have my GlennGary files.
Where I unload on Twits and take verbal S***s
moranges wrote: China has
China has been pissing me off for a long while. Their government tries to have the international power equivalent to the other major nations, while trying to say that they're too young to follow any of the restrictions placed on those nations (think Kyoto Protocol for global warming, etc). It's like watching the younger brother whine about not being able to watch rated R movies when his older brother can, but not wanting to do any of his chores first.
And when the US resorted to using exorbitant tariffs at the turn of the 20th century to complete with industrialized Europe, it was perfected acceptable for emerging nations to gain an edge in order to grow domestic markets. I think the analogy is more akin to an older brother complaining that the younger brother gets special treatment, when he himself had such privileges when he was younger and was the only child.
northdakota wrote: china is a
china is a gigantic enigma. it is a huge contradiction in itself. you have to be there long enough to understand all the incredible conflicts that are formed by a combined force of thousands of years of traditions and customs, decades of political turmoil, and rapid westernization (which happened only in the last 20, 30 years or less). Even in China itself, almost no one really trusts the stats such as GDP or CPI. For the chinese this is an era of having faith in nothing, doubting everything they hear or read, yet at the same time having no choice but to find their way to live in a shitty and false reality. i follow china quite often and if u ask me, something is going down sooner or later. that or someone who actually knows what he is doing comes to power.
This "shitty and false reality" is infinitely better than the lives their ancestors led for the past 150 years.
The Chinese middle-upper
The Chinese middle-upper class has found wealth through cheap credit, just like the US for the last 30 years.
This will not end well. As an FX Trader, I am watching the AUD, CAD, and other commodity suppliers that have supplied the materials for the Chinese real estate bubble and in return are fueling their own bubbles.
Looking forward to more of your posts.....if you use smaller paragraphs.
The group I worked with had a
The group I worked with had a 3 hour meeting on the Chinese real estate market a couple weeks ago (we have a couple positions in Australian mining companies). It is a HUGE bubble. The wealthy just buy houses instead of invest in fixed income/equities. There are tons of unfurnished houses that have never been lived in. The rich just buy more houses because the housing market keeps going up (pretty much the definition of a bubble). They don't live in them, they don't even go there on vacation. These houses just sit, completely unoccupied. What's worse is that these are nice houses, so when they bottom falls out they won't be able to sell them to the middle/lower class. Not sure when it's gonna pop, but when it does it is going to put the US housing bubble to shame.
yah i dont know why us equity
yah i dont know why us equity markets haven't followed shanghai or hang seng... i think itll happen sometime soon
looking for that pick-me-up to power through an all-nighter?
FXTrading wrote: The Chinese
1 "Growth will start to
tsong: Did you know that
Yours truly,
The Young Investor
You can't deny that a proper
China's economy is far from
"This is why I still like
Personally, I believe that a
Yours truly,
The Young Investor
accountspayable
The Young Investor
small government is good,
tsong wrote: small government
The Young Investor
The Young Investor
sanjose04 wrote: Wow man, I
Tsong is right on the