China: To short or not to short?

Jorgé's picture
Rank: Neanderthal | banana points 2,124

China; the birthplace of Kung Fu, fireworks, hot asian women, and fake Louis Vuittons. It's meteoric rise in power is unparalleled throughout history.

Though largely hated in the old world, some say that it's the future, the new frontier, the place where dreams come true and fortunes are to be made.

I absolutely agree, I think it's a great short.

And here's why:

Dollar peg- By shorting the Yuan forever to keep their rates low, China has become the exporting and economic giant it is today.

But:

*Low rates: cheap credit has allowed people to buy way more than they could afford; their credit to GDP ratio is at 140% as of 2009. A conservative number some even say.

*Their real estate bubble: the price to earnings ratio in Beijing is at 27:1, add a culture in love with RE (it is also a must to buy a home for your sons) plus a belief that prices won't go down, a government preoccupied with growth and stability, a huge meltdown is certainly on the way.

*QE2: the Fed's second dose of quantitative easing will ram fist up China's ass, letting them import inflation and rising commodity prices. This is turn will leave their citizens with less purchasing power and higher costs for their already inefficient industries, thereby killing growth.

2008 anyone?

Poor investments- China has embraced the mantra of growth at all costs, setting targets for their provinces to hit and throwing money at it to materialize.

The results?

*Massive ghost towns: playing catch up with Beijing hasn't been doing great for the other provinces; Ordos, an entire city built from scratch, is completely uninhabited. The world's 2nd largest shopping mall, the South China Mall, is 99% empty. Extreme examples yes, but these appear to be quite prevalent in lesser degrees all over the country.

*Overcapacitized production: they make 500 million tons more steel than the EU, the US, Japan, and Russia combined. Aluminum and cement? They're way up there too. However, the percentages of these that are idle are now in the double digits, and the fact that they maintain these instead of closing them down are draining even more money.

Granted these are just a few examples but what do you guys think?

I always believed their growth was unsustainable but this is ridiculous.

Anyway, are the bears wrong on this one?

If not, how can they actually do it?

Also curious as to what the bulls here have to say.

Comments (20)

Nov 8, 2010

interesting

Nov 8, 2010

I would not want to short China simply because it is a totalitarian regime that needs the economy to hum along to keep the masses from revolting. I think you will see GDP slowly trend downwards, but nothing so drastic that I would want to short it.

Nov 8, 2010

Bet you it'll be pretty hairy to short too, if Rogers was a little spooked to short Japan before, imagine what these guys would do. You'd probably never get your money back.

Off topic, for some reason when I read squirtz's reply I pictured pedo bear doing the evil finger pyramid. Ha.

People like Coldplay and voted for the Nazis, you can't trust people Jeremy

Nov 8, 2010

Well, if you want to short China buy this ETF: CZI. or short this one: TAO

  • eyelikecheese
  •  Nov 8, 2010

Ahh yes yes the unfortunate side effect of a centrally planned economy is the misallocation of resources.

Nov 8, 2010

people have been saying same China crashing shit for 30 years now, it just hasn't happened for the past 30 years, what makes you think it will happen now?

Yes, there are bubbles or problems here and there, but China today is in much better shape than it ever has been...certainly better than it was just 10 years ago.

Plus: some of the things you said are simply not true

"*Low rates: cheap credit has allowed people to buy way more than they could afford; their credit to GDP ratio is at 140% as of 2009. A conservative number some even say."

China has one of the highest saving rates in the world, if not the highest. If anything, China doesn't consume enough.
Chinese people buy way more than they could afford? where did you get that idea from?

Real Estate is certainly a bubble. I agree with you that some of their investments are waste of money.
However, since there is not much leverage in the system, I don't see how it can become a melt down.
Very little mortgage + no property tax = very low carry cost => no wave of foreclosure.

I personally think their investment problem is more or less due to their sky high saving rates than anything else, eventually you run out of places to invest.
I just don't see how it can lead to a finanial crisis.

Nov 8, 2010
tsong:

China has one of the highest saving rates in the world, if not the highest. If anything, China doesn't consume enough.
Chinese people buy way more than they could afford? where did you get that idea from?

Sorry, meant for that to tie in with the RE bubble. Nevertheless I still stand by the fact that there's a lot of debt moving around due to their loose lending these past years.

I agree with you on their consumption, if they actually did so their economy would be in so much better shape for sure.

shorttheworld:

markets will remain irrational longer than you can remain solvent. just remember that ;)

Haha, So true

Any China bulls here on WSO? Really interested in what they have to say.

EDIT: Found this interesting read.

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People like Coldplay and voted for the Nazis, you can't trust people Jeremy

Nov 8, 2010

markets will remain irrational longer than you can remain solvent. just remember that ;)

Nov 8, 2010

China also has huge personal savings rates which could drop a little to fuel massive consumer spending. China is not going to bust for a long time.

Nov 8, 2010

I believe it's not safe to short China.

Low rates: Can't say much about this, but Chinese tend to save money than spending them. The new generation is different, though.

Their real estate bubble: Local goverments involve deeply into this business. It won't burst until they are taken care of.

QE2: Nothing to say.

In general, do not underestimate the will of the Politburo. If something does hurt their standing, they will crash any opposition with just a finger.

What I would suggest is to follow the trend.

Nov 8, 2010

If the market wants China to move up, you can't fight it. Right now, the market wants China to move up.

Nov 9, 2010

There are so many things wrong with the Chinese economy I don't even know where to start, Jorge covered some nicely though. Mark my words though, they WILL pay sooner or later for their undervaluing of the Yuan and they WILL pay sooner or later for their attempts at a government controlled free-market, there are way too any inefficiencies.

Nov 9, 2010

Definitely interesting.

Can't trust those Chinese economic numbers though.

I think it all depends on where you short in China. Shorting RE in China prob makes more sense than shorting exporting companies.

Nov 9, 2010

That GMO white paper is pretty interesting, I urge you guys to take a look. Also, how likely is it that their growth rates are being exaggerated by the gov't?

Nov 8, 2010
econ:

That GMO white paper is pretty interesting, I urge you guys to take a look. Also, how likely is it that their growth rates are being exaggerated by the gov't?

That GMO white paper is pretty useless, dude has no idea what he is talking about. Many of his so-called red flags just don't make any sense.
1 How can you measure the economic impact of a nation wide high-speed rail network purely on its investment return? Interstate highway system is free, I guess it must mean it is a total waste of money?
2 There is no such thing as "natural" interest rate, if a country has a high saving rate and a closed capital account, simple supply/demand tells us that they should have a low interest rate. It's just common sense.

China's growth rate is actually understated. Much of their recent growth has come from the private sector, and many of these firms, especially the smaller ones, simply operate on cash and never report anything to the government. That's why following the 2004 economic census, the GDP was adjusted upward by 17%. I expect the similar adjustment after the next census.

Nov 9, 2010

I am a huge bull on China, I have to say... that is not to say that I don't think there are some problems with the Chinese economy... but generally I am a huge bull. I don't really have time to explain my perspective in great detail at the moment (I'd need to write a full length hardcover for that), but I'll say this: I believe the Chinese economy will grow at a minimum of 5% (and much higher for the next decade or so) every year for at least the next 20 years.

If you do want to bet against high RE prices in China (which could be an okay idea if executed correctly), be sure that you focus on those developers who have large exposure (with inventory coming online within the next year) to the super-luxury residential markets in Beijing, Shanghai and Shenzhen, or the class A office sector in Shanghai or Beijing... Hangzhou is another place where you don't want to be holding a lot of stock, particularly if you've got outstanding loans and you paid a fair price for the land (you bought it within the last year or so). I personally still wouldn't bet against these guys though, because I think there's a good chance the bubbles even in these areas won't break for another few years, but if I was going to bet against someone, I'd bet against them.

Side note: I'm currently at a hotel in a "small" chinese city right now I had never even heard of until recently... this place is roughly the size of atlanta and similarly developed / affluent. I'm here underwriting a huge-scale mixed-use development project...

Nov 9, 2010

Long-term real GDP growth prospects in the United States: 3% per year
Long-term real GDP growth prospects in China: 10% per year
Conclusion: Over the next 30 years investment returns in China will surpass investment returns in the United States.

Men are so simple and so much inclined to obey immediate needs that a deceiver will never lack victims for his deceptions.

-Niccolo Machiavelli

Nov 8, 2010

30 years is alot of time you generally have a wipe out recession every 12 years

Nov 9, 2010

I know that it is unpopular to say this while everyone is still suffering from the aftermath of the Great Recession, but recessions and bubbles bursting is part of the business cycle. Economic expansions have a long history of surpassing the damage done by economic contractions.

Men are so simple and so much inclined to obey immediate needs that a deceiver will never lack victims for his deceptions.

-Niccolo Machiavelli

Nov 10, 2010