[ISSUE 49] - Interesting Things...

@GSElevator – #1: Happy Chinese New Year, or as we will all be saying in 20 years... Happy New Year.

1. Quote Of The Week / 2. Economic Risks Of China's Reverse Migration / 3. FANG Is So 2015… BARF In 2016 / 4. Interesting Links / 5. Joke Of The Week

1. QUOTE OF THE WEEK

Kyle Bass speaks with some guy from CNBC on China:

“The IMF says they [China] need $2.7 trillion in FX reserves to operate the economy. They’ll hit that number in the next five months. Those who think they can burn it to zero and they have a few years ahead of them, they really only have a few months ahead of them.”

“[….and] when they lose money in their banks they’re going to have to recapitalise. They’ll have to expand the PBOC balance sheet by trillions and trillions of dollars.”

“A Chinese devaluation of 10% is a pipe dream. It will be 30-40% by the end.”

“If 4% of the population takes out their $50,000 quota, the FX reserves are gone. We lose ourselves in the numbers. $3.3 trillion is a big number, but the reserves to bank assets number is one of the worst in the world.”

Link to video here.

2. ECONOMIC RISKS OF CHINA’S REVERSE MIGRATION

The National Bureau of Statistics (NBS) reported that China’s migrant population fell by 5.68 million in 2015—the first annual decline in the migrant worker population in at least three decades.

There are anecdotal reports of migrant workers being told to go home early for the Chinese New Year, but some of them might not return to work after the holiday because many factory owners are either closing or downsizing their facilities. There have also been reports of workers not being paid or having their wages in arrears just before the holiday. These are significant trends because the migration from rural to urban areas has not only been one of the key pillars of China’s economic growth over the past three decades, but also a major driver of its urbanization process. A potential reversal of this secular trend (called reverse migration) could have huge economic implications in China and abroad.

The decline in migrants to urban areas as both is demand-side and supply-side problem. On the demand-side, higher wages have forced some low value-added producers either to shut down or substitute labor with industrial robots, resulting in less demand for migrant workers, particularly in the manufacturing sector. On the supply-side, China’s previous One Child Policy has led to a smaller labor supply from rural areas. The population of the youth cohort (aged between 16 and 19) in rural areas peaked in 2014, and the total population of this cohort is expected to decline going forward.

Not only have migrant workers become increasingly scarce, but they are also aging rapidly. The following chart, from the IMF’s working paper entitled China’s Labor Market in the “New Normal” (July 2015), indicates that the percentage of migrant workers aged 50 and over has nearly doubled from 2008 to 2014. In addition, the percentage of migrant workers aged 41 to 50 has also increased significantly from 2008 to 2014, suggesting that the supply of future migrant workers may be tighter than in the past.

According to data cited by China Daily , 169 million rural residents left their hometowns to seek jobs in cities in 2015, up just 0.4% from 2014. After hovering above 4% between 2005 and 2010, since 2010, the yearly growth rate has declined steadily, from 5.5% in 2010 to only 1.3% in 2014 and less than 0.5% in 2015 (see the following chart). The trend in the annual growth rate of rural migrant workers seeking jobs outside of their hometowns is largely consistent with the latest annual decline in the total migrant population.

During the past three-plus decades, total factor productivity (TFP) has been an important contributor to China’s overall economic growth. In 2009, for example, TFP contributed 17% of the nation’s economic growth rate, and out of that 17%, almost half (or 8%) was derived from the redistribution of labor from the agriculture sector into non-agriculture sectors (i.e., manufacturing and services). In the past, about 25% of China’s urbanization could be attributed to migration. If the secular trend of labor migration from agriculture into non-agriculture sectors has come to a halt or goes into reverse, it could cut TFP’s contribution to total GDP growth almost in half. Moreover, given that this is a demographic issue, it risks turning into a secular, rather than just a cyclical problem, which implies a structurally-lower rate of long-term GDP growth than currently anticipated.

Additionally, given that migrant workers staying at home would have less consumption power than those working at cities, any shrinkage of this population could hinder Beijing’s efforts t transition the economy away from investment and toward domestic consumption. It is worth noting that some local governments have reportedly turned to migrant workers as potential buyers for unsold homes, even though migrants would probably not be able to afford those homes under normal circumstances.

Making matters worse, China’s total working-age population—defined as individuals between the ages of 16 and 60 (both urban and rural) —fell by 4.87 million in 2015, the largest annual decline in the working-age population ever recorded. Since 2011, China’s workforce has been declining steadily, losing some 30 million from its 2011 peak, as shown in the following chart. The demographic tailwind that China once enjoyed has now turned into demographic headwind, unless a major improvement takes place in labor quality and productivity.

In late-2008, as Chinese manufacturing export orders evaporated in the wake of the Global Financial Crisis, the potential for millions of migrant worker layoffs convinced former Chinese Premier, Wen Jiabao, to announce a four-trillion-yuan stimulus plan. Could a similar situation play out in the short term? Will the millions of excess workers staying in rural areas force Beijing to stimulate the economy again? Beijing may have to strike a balance between introducing stimulus to ameliorate the reverse migration problem while also pushing-through its most important reforms in three decades. At a meeting of the Central Leading Group for Financial and Economic Affairs l ast week, President Xi reportedly said that China should eliminate excess industrial capacity while also “moderately” boosting demand. President Xi appears to be suggesting that local governments and SOEs should not count on a large-scale stimulus like the package introduced in 2008, but that some sort of plan could be in the offing.

The solution to China’s demographic problem should involve offering more incentives to attract migrants into the cities. These might include providing urban citizenship registration, pension funds, healthcare, education, and training to migrants. However, these are all significant reforms that would require considerable time to deliver. For Beijing, the policy priority for thenear- and medium-term should include some type of boost to domestic demand, which would hopefully delay the reverse migration, even if only on a temporary basis. China’s economic future is heavily dependent on solving this demographic issue.

3. FANG IS SO 2015… BARF IN 2016

The world has been enamored by Facebook, Amazon, Netflix, and Google(Alphabet) – represented by the acronym, “FANG.” The four stocks gained an average of 82% in 2015 and collectively created more than $449 billion in equity value. These companies generated a combined $186 billion in revenue over the last 12 months.

It’s time for a new acronym, “BARF.” These are huge, or they were huge mining houses: BHP Billiton Ltd, Anglo American plc, Rio Tinto, and Freeport-McMoRan. The four stocks declined an average of 51% and lost $101 billion in equity value in 2015. The four companies generated a combined $130 billion in revenue over the last 12 months. YTD for 2016, these stocks have dropped another 6.6% on average.

The diaspora between FANG and BARF highlights what the market is paying for…

4. INTERESTING LINKS

10th largest US frac fleet sold for 38c on the dollar [Oil Pro]; Never bid round numbers when negotiating [HBS]; ‘P’onzi -2-‘P’onzi in China [Zero Hedge]; MIT to build hyperloop prototype [Valuewalk]; Graham and Doddsville Winter ‘16 letter [Columbia]; Larry Fink’s letter to S&P 500 CEOs [BlackRock]; Jeremy Grantham’s 4Q15 Letter[GMO]; Bruce Berkowitz annual letter [Fairholme Capital]; Ackman 2015 letter [Pershing Square]; Dividends and cash balances [Aswath Damadoran]; Economic of pawn [Price Economics].

5. JOKE OF THE WEEK