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Canaries in Coalmine: China, Asia, not Participating in Euro Bailout Lovefest; Beginnings of China Credit, Real Estate Bust

Is China a canary in the coalmine of an impending global slowdown, or is China simply overloved as a beacon of growth as it was in 2008? I think it’s both.

China’s property and infrastructure bubbles are massive; that is for certain. Moreover, China’s biggest export trading partner is Europe, just as Europe is headed for numerous austerity programs.

While it’s doubtful the European austerity programs bring deficits down to where they are supposed to be, those programs will for a while cause a decline in European spending along with much social unrest.

Can China take a double whammy like this without overheating? I think not. And China will have to show things down, whether it wants to or not.

China Overheating, Tightening Coming

Please consider Hong Kong Stocks Fall as China Prices Prompt Tightening Concern

Hong Kong stocks fell as rising consumer inflation and housing prices in China stoked concern the country will act further to rein in its economy. The city’s developers pared losses after a government land sale.

“Domestic concerns are more important in terms of the policy measures coming out in China to cool things down,” said Binay Chandgothia, who oversees about $2.2 billion as chief investment officer at Principal Global Investors (Hong Kong). For Europe, “the question is the credibility of the billions of dollars of government debt that resides with European banks.”

“Domestic concerns are more important in terms of the policy measures coming out in China to cool things down,” said Binay Chandgothia, who oversees about $2.2 billion as chief investment officer at Principal Global Investors (Hong Kong). For Europe, “the question is the credibility of the billions of dollars of government debt that resides with European banks.”

“Price pressures have been building throughout the economy, strengthening the case for higher interest rates and a stronger yuan,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “China is at risk of overheating, with spot fires breaking out in various parts of the economy.”

Chinese policy makers should focus on preventing excessive gains in asset prices and liquidity as Europe’s rescue package makes another global slump less likely, central bank adviser Li Daokui said in an interview yesterday. The increase in property prices across 70 cities was the most since data began in 2005, defying a government crackdown on speculation that intensified last month.

Cockamamie Theory

Pray tell how is China supposed to “focus on preventing excessive gains in asset prices”?

The idea is ludicrous. In general, Central banks can provide liquidity, they cannot dictate where that money goes, or if indeed it goes anywhere at all.

It is slightly different in China in that when the Central Banks says “Lend”, that is a command, not a suggestion and thus banks lend. However, the only realistic place that money can be lent is more housing, more infrastructure, or more manufacturing, none of which China remotely needs at the moment.

China’s Subprime Real Estate Lending

Meanwhile bad loans are piling up, just as they did in the US with subprime.

The moment China’s property bubble collapses (and it will), the bad loans on the books of China’s banks will be exposed for what they are, in spite of the widespread fallacious belief China’s banks are protected because China’s borrowers are putting more money down.

Europe’s Move Makes Global Slump More Likely

Also note Li Daokui’s statement “Europe’s rescue package makes another global slump less likely”. Once again I beg to differ. The bailout imposes some fiscal restraints on many countries. More importantly, the loans come at the expense of productive portions of the European economy for the misguided notion that the unproductive European countries can be bailed out.

Such policies are never good for long-term growth. All they provide is an short-term illusion that something good is happening. As soon as the stimulus is taken away, more debt remains than before.

Beginnings of China Credit Bust

Please consider China analyst sees beginnings of unfolding credit bust

China’s economy is teetering on the edge of a major slowdown, though it’s not a shakeout in the property market that’s about to spark the distress, according to a noted China strategist.

David Roche, an economic and political analyst who manages the Hong Kong-based hedge fund Independent Strategy, says the world’s third-largest economy is now on the brink, faced with the inevitable reckoning that follows an extended bank-lending binge.

“We’ve got the beginnings of a credit-bubble collapse in China,” said Roche, predicting the economy will likely cool from its stellar double-digit growth rate to a 6% annual expansion as a result.

The emerging picture is one of a substantial contraction in credit growth and infrastructure expenditure, he says.

The shrinkage is grim news for an economy heavily dependent on such outlays. China managed to escape recession during the global crisis mainly because of bridges, railways and other infrastructure-project spending, estimated to have accounted for about 90% of economic growth last year, according to Roche.

About 85% of the funding for these projects was arranged by local government financing vehicles “borrowing money they can never repay” from state-owned banks, says Roche. Nearly 3 trillion yuan ($440 billion) of the 11 trillion yuan extended to these entities has been wasted or stolen, he estimated.

“What do you think a bunch of ex-Communist Party officials in Chinese banks … know about growing credit at 30% a year?” he said.

China’s Local Government Borrowing Problem

Hugo Restall at WSJ Interviews Victor Shih of Northwestern University regarding China’s Local Government Borrowing Problem

China’s Economy May Crash in Next 12 Months

Please consider Marc Faber on Bloomberg: China’s Economy May Crash in Next 12 Months

$SSEC – Shanghai Weekly

Finally, I leave you with the following charts I consider to be a canary in the coalmine.

Shanghai Daily

China did not participate in the Euro bailout at all.

Shanghai Weekly

Note that the Shanghai Index is down for the year, and the above chart is technically very bearish. The SSEC may have a date once again with 2,000 if not lower.

The “China Story” that most of the world is in love with is nothing more than excess credit finding a home in malinvestments just as happened in the US.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

China May ‘Crash’ in Next 9 to 12 Months, Faber Says

May 3 (Bloomberg) — Investor Marc Faber said China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst.

The Shanghai Composite Index has failed to regain its 2009 high while industrial commodities and shares of Australian resource exporters are acting “heavy,” Faber said. The opening of the World Expo in Shanghai last week is “not a particularly good omen,” he said, citing a property bust and depression that followed the 1873 World Exhibition in Vienna.

“The market is telling you that something is not quite right,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong today. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”

An index tracking Chinese stocks traded in Hong Kong dropped 1.8 percent today, the most in two weeks, after the central bank raised reserve requirements for the third time this year. The Shanghai Composite has slumped 12 percent this year, Asia’s worst performer, as policy makers seek to rein in a lending boom that’s spurred record gains in property prices. China’s markets are shut for a holiday today.

Copper touched a seven-week low and BHP Billiton Ltd., the world’s biggest mining company, fell the most since February on concern spending in the world’s third-largest economy will slow and after Australia boosted taxes on commodities producers. Rio Tinto Ltd., the third-largest, slid as much as 6 percent.

Chanos, Rogoff

Faber joins hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff in warning of a crash in China.

China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade.

The government has banned loans for third homes and raised mortgage rates and down-payment requirements for second-home purchases. Prices rose 11.7 percent across 70 cities in March from a year earlier, the most since data began in 2005.

The government has stopped short of raising interest rates to contain property prices. Within an hour of the central bank announcement on reserve ratios, Finance Minister Xie Xuren said that officials remained committed to expansionary policies to cement the nation’s recovery.

Stocks ‘Fully Priced’

The nation’s economy grew 11.9 percent in the first quarter, the fastest pace in almost three years. The government projects gross domestic product growth for the year of about 8 percent.

The clampdown on property speculation may prompt investors to turn to the nation’s stock market, Faber said. Still, shares are “fully priced” and Chinese investors may instead become “big buyers” of gold, he said.

BlackRock Inc. is among money managers reducing their holdings on Chinese stocks on expectations that economic growth has peaked. The BlackRock Emerging Markets Fund has widened its “underweight” position for China versus the MSCI Emerging Markets Index to about 7.5 percent from 4.6 percent at the end of March, the fund’s London-based co-manager Dan Tubbs said.

Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd, the nation’s three largest banks, are trading near their lowest valuations on record as rising profits are eclipsed by concern bad loans will increase.

Local Governments

Citigroup Inc. warned in March that in a “worst case scenario,” the non-performing loans of local-government investment vehicles, used to channel money to stimulus projects, could swell to 2.4 trillion yuan by 2011.

Housing prices nationwide may fall as much as 20 percent in the second half of the year on government measures to curb speculation, BNP Paribas said April 23. Under a stress test conducted by the Shanghai branch of the China Banking Regulatory Commission in February, local banks’ ratio of delinquent mortgages would triple should home prices in the country’s commercial center decline 10 percent.

Shanghai is projecting as many as 70 million visitors to the $44 billion World Expo, more than 10 times the number who traveled to the 2008 Beijing Olympics. More than 433,000 people visited the 5.3 square-kilometer (3.3 square-mile) park on its first weekend.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net

Google To China: Up Yours

Posted by Karl Denninger

Goldman Says “Something Brewing” in China on Currency; What’s Really Brewing Is “Trouble”

With a lot of eyes focused on the PIIGS (Portugal, Ireland, Italy, Greece, Spain), especially Greece and Spain, please don’t forget about China. Goldman’s O’Neill Says ‘Something Brewing’ in China on Currency.

Goldman Sachs Group Inc. Chief Economist Jim O’Neill said China may be poised to let its currency strengthen as much as 5 percent to slow the world’s fastest growing major economy.

“I have a strong opinion that they’re close to moving the exchange rate,” O’Neill said in a telephone interview from London after China’s central bank told lenders on Feb. 12 to set aside larger reserves. “Something’s brewing. It could happen anytime.”

Chinese policy makers are seeking to restrain credit growth after their economy grew the fastest since 2007 in the fourth quarter. Banks extended 19 percent of this year’s 7.5 trillion yuan ($1.1 trillion) lending target in January as property prices climbed the most in 21 months.

O’Neill, who coined the term “BRICs” in 2001, anticipating the boom in the emerging economies of Brazil, Russia, India and China, said China may allow the yuan to rise as much as 5 percent in a one-off revaluation and to then trade within a bigger band or against a larger basket of currencies. That would help counter international pressure, he said.

Record lending last year and a 4 trillion yuan stimulus package helped China lead the recovery from the deepest global recession since World War II. Investors’ concern about investment bubbles in China, and what action the government may take to prevent or deflate them, has mounted this year.

Traffic Signal With No Red Light

In China, when the Central bank says “lend”, banks lend.

“Don’t lend” does not seem have the same effect. It’s as if the central bank traffic signal only has green and yellow lights, not red.

If China wants to make less money available then what is it doing with stimulus at 14% of GDP, the highest in the world?

And what pray tell will China do with vacant shopping centers, vacant office space, and even vacant cities?

50% Office Vacancy Rate In Beijing

Inquiring minds are reading Beijing Seen Vacant for 50% Commercial as Chanos Predicts Crash.

Beijing’s office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc., a real estate broker. Those figures don’t include many buildings about to open, such as the city’s tallest, the 6.6-billion yuan ($965 million) 74- story China World Tower 3.

Empty buildings are sprouting across China as companies with access to some of the $1.4 trillion in new loans last year build skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos say the country’s property market is in a bubble.

“There’s a monumental property bubble and fixed-asset investment bubble that China has underway right now,” Chanos said in a Jan. 25 Bloomberg Television interview. “And deflating that gently will be difficult at best.”

A glut of factories in China is “wreaking far-reaching damage on the global economy,” stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said in November.

The risks are so great that a decade of little or no growth, as Japan experienced in the 1990s, can’t be dismissed, said Patrick Chovanec, an associate professor in the School of Economics and Management at Beijing’s Tsinghua University, ranked China’s top university by the Times newspaper in London.

“You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land — not even desirable plots of land — in Beijing to astronomical rates,” Chovanec said. “At the same time you have 30 percent-plus vacancy rates and slumping rents in commercial property so it’s just a case of when you recognize the losses — or don’t.”

China’s lending surged to 1.39 trillion yuan in January, more than in the previous three months combined.

“The liquidity bubble last year went to the property market,” said Taizo Ishida, San Francisco-based lead manager for the $212-million Matthews Asia Pacific Fund, in a phone interview. “I was in Shanghai and Shenzhen three weeks ago and the prices were just eye-popping, just really amazing. Generally I’m not buying Chinese stocks.”

Chanos, founder of New York-based Kynikos Associates Ltd., predicted that China could be “Dubai times 100 or 1,000.” Real estate prices there have fallen almost 50 percent from their 2008 peak as the emirate struggles under at least $80 billion of debt. The economy may shrink 0.4 percent this year, Shuaa Capital, the biggest U.A.E. investment bank, says.

The commercial property space under construction in China at the end of November was the equivalent of 6,800 Burj Khalifas — the 160-story Dubai skyscraper that’s the world’s tallest.

Overcapacity may be looming in manufacturing as well. China’s investments in new factories and properties surged 67 percent last year to 15.2 trillion yuan, more than Russia’s gross domestic product. Excess steel capacity may have reached about 132 million tons in 2009, more than the 87.5 million tons from Japan, the world’s second-biggest producer. The Beijing- based EU Chamber of Commerce report said a “looming deluge” of extra cement capacity is being built.

That is a lengthy snip but there is still a lot more in the article. Bloomberg columnist Michael Forsythe did an excellent job piecing that information together.

Currency Inflows and Outflows

Assuming China does peg the Renmimbi 5% higher as O’Neill thinks, will that slow speculative currency inflows or increase them?

If the carry trade crowd is convinced more upward revaluations will occur, then speculative inflows would increase. That influx of money would make it harder for the central bank to restrain lending via hikes in reserve requirements alone.

On the other hand, if existing carry-trade players think 5% is all they get, perhaps they take their money and run right after a revaluation. By the way, one reason China needs to keep all those US dollar reserves is there will be capital flight by speculators at some point down the road.

China could drain money from the system to slow down lending, but that would put more upward pressure on interest rates and upward pressure on the Renminbi as well (at least temporarily). Draining money supply would also be contrary to its need for stimulus measures.

A-Tisket A-Tasket You Can’t Peg To A Basket

O’Neill offered the opinion “China may allow the yuan to trade against a larger basket of currencies.”

If he means peg to multiple currencies simultaneously, it cannot be done.

A country can peg its currency to at most one currency, otherwise there will be a guaranteed arbitrage play somewhere. If China pegs to the US dollar, all moves against any other currency will move in exact relation to how the US dollar moves against those other currencies.

The way to let a currency trade against multiple currencies is to let it float.

Given China’s rampant speculation, unsound bank lending practices, and enormous property bubble, if China was so bold as to float the Renminbi right now, it might collapse, perhaps after an initial move higher.

Faber On Chinese Economy

Marc Faber says China Economy Will Slow, Hurt Commodities.

China’s economy will slow down “meaningfully” and may even be at risk of a “crash” because of the nation’s excess capacity and as loan growth slows, investor Marc Faber said.

China’s fragile economy may undermine industrial commodities in the “near term,” the publisher of the Gloom, Boom and Doom report said. Faber added that he’s pessimistic on the euro as a possible bailout of Greece by other European countries increases deficits in the region.

“The economy, for sure, will slow down meaningfully this year,” Faber said in an interview with Bloomberg Television in Hong Kong. “It has the potential to crash because of the overcapacities that have developed, and when loan growth slows down, we don’t know how the economy will react.”

A possible crash in China’s economy will be “disastrous” for raw materials used in industrial production, Faber said. He instead favors commodities including wheat, corn and soya beans and also said he doesn’t see a “huge downside risk” for gold.

Something Brewing

Pressures mount as China attempts to walk a fine line between overheating and an economic bust accompanied by massive social unrest.

Elsewhere, central bankers assume the global economy is in recovery. In reality, the global economy is in another speculative binge fueled by reckless global stimulus, with China at the head of the pack.

Meanwhile, global imbalances grow with most eyes on Greece and Spain. Let’s not forget the massive property bubbles in Australia and Canada, and massive speculation in China. In the US, cities and states are on the verge of bankruptcy.

Something is brewing alright. That something is “trouble”, and not just for China.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

The Gods Are Laughing

Lately, the opening quote that adorns the pages of The Automatic Earth is from John Kenneth Galbraith. It says:“In economics, the majority is always wrong”. And, well, since everybody talks about the same thing these days, namely Greece, perhaps it’s time we should take Galbraith to heart. Perhaps when everyone is looking in the same direction, the smart thing to do is to look where they don’t. Nonetheless, the whole thing certainly takes the herded blindness of the investor crowd and puts it in a bleak light, in the same way that Hugh Hendry exposed Joe Stiglitz.

Hendry showed us all a painful truth, that economic policies are crafted by a clueless ensemble of theorists who will swear on their mothers’ graves that their theories should work. And in theory they will. Just like in theory Greece could go bankrupt soon. The money managers of the planet are all anxiously waiting for a salvation signal to come from Germany and France, a signal neither is in any hurry to provide. In the past year, German and French export industries have been hammered not only by a weakening market, but even more by a rising Euro. The commotion surrounding Greece is a gift from heaven for them, and they’ll use it for all they’re worth, only to say the word at the very last minute.

Meantime, while everyone’s focused elsewhere, in the American part of the real world Elizabeth Warren warns that $1.4 trillion in commercial real estate loans that need to be rolled over by 2014 will endanger 3000 smaller US banks. Half the loans are underwater, while the government has hardly any idea how healthy these banks are. Also in an adjacent corner of the field, Fannie Mae and Freddie Mac have announced they will buy up delinquent mortgage loans they have written securities on, to the tune of at first glance $200 billion. Which is in turn of course only the first batch they’ll purchase, since it’s not exactly as if the rest of their portfolios are seeing better days .

You know, just in case you were wondering why they needed that Christmas Eve blank cheque from the Treasury. Remember, their loan portfolio’s are north of $5 trillion, and the latest Case/Shiller prediction calls for another 20-odd percent drop in home prices just this year, so get yourselves ready, party hat and all, to become the proud owners of a $1 trillion or so “worth” heap of failed junk, with more, much more, on the way. Don’t forget that mortgage debt valuations have come down much less than home prices, and while they may never arrive at par, the former has a long way down to go just to catch up.

Oh, and that of course still leaves open the question of the manner in, and the extent to, which Fannie and Freddie (plus Ginnie Mae, FHA and FHLB) are exposed to securities written on the failed and failing loans. An indication could possible come from the fact that the Federal Reserve has approved the backstopping of $25 trillion worth of derivatives, another grab-bag of garbage that may soon need to be expanded if and as conditions continue to deteriorate. In short, matters are rapidly getting worse back home while the gazes of the masses linger on the Acropolis. How convenient.

On another continent still, questions about China are persistent and growing in number and loudness. The same Hugh Hendry who needed to explain economics to the Stiglitz who got that Fauxbel prize for his mastery of the field, sketches Beijing’s (and the world’s) core issues in a few lines today:

China has become the world’s biggest creditor, after amassing nearly $2.3 trillion of foreign exchange claims on us. However, the spectre of a creditor nation running persistent trade surpluses has ominous historical portents. It has happened only twice before, with the US economy in the Twenties and with the Japanese economy in the Eighties.

Economics is a cruel master and in both of the previous examples a failure to allow exchange rates to adjust to the new reality created a large speculative pool of credit that, in turn, led to overvalued domestic assets and, eventually, an economic crisis. Never forget that in economics, first can become last.[..]

A country that represents just 7% of global GDP is now responsible for 30% of global aluminum consumption, 47% of global steel consumption and 40% of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment.

Sometime down the line, and it could come soon, China’s lending binge will need to slow; indeed, banks are already being ordered to rethink their ways. But that will slow growth as well, and it will hit global commodities markets square on the nose, as among others Marc Faber notices. The Chinese can keep doing what they do until they don’t.

The overall drift of what Hendry’s saying, of course, is that China is not producing wealth, it’s merely producing numbers. Just like the Obama administration in its report on unemployment, which contains predictions as far out as 2020, something Washington can foresee maybe, just maybe, as accurately as Punxsutawney Phil can tell the weather 6 weeks out. Not. Have they nothing better to do? Sort of like Nero and Rome, as the country burns, the commander in chief and his staff engage in folklore.

In the skies over the Acropolis, the gods are laughing.

PS : If you have time and stamina left after all this, I would urge you read the following over at ZeroHedge:

Just How Ugly Is The Sovereign Default Truth? How Self Delusions Prevent Recognition Of Reality

China Says “Risky Assets” Are Too Risky

Posted by Karl Denninger