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China Shanghai Composite Indexliveandlearn11 08-Apr-11  04:09 pm
         

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colin_twiggs
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quote:

China's property market is a massive bubble. The stock of residential properties, developers' inventories, and land that local governments have pledged to banks may exceed by three times the gross domestic product. Rental yields in most cities are too low to cover depreciation costs. In major cities, the price-to-income ratio, a measure of housing affordability, is routinely above 20, which means that it would take an average mainlander 20 years to buy the average property using their total income.




CIB: Andy Xie - No Room to Relax


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bib
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Thanks Colin good article. Any major problem in China will likely have serious ramifications here.
All in all though i am a little cynical of how Governments will tackle repaying stimulus debts. The easiest way is just to let the inflation Gini out of its bottle. We all know a decent bout of inflation makes our pre existing debts look smaller. Extra Tax revenue from wage and price hikes will greatly assist repay these stimulus debts.
If this happens then asset prices will rise.
For some reason voters seem to prefer inflation to massive tax hikes and spending cuts - inflation may be seen to be easier to live with?
It will be very tempting for Governments to take the easy option.







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bib
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Article from the Melbourne Age today:
Time to Act on China Bubble.
http://www.theage.com.au/business/time-to-act-on-china-bubble-20100414-scoa.html


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hailoh
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China Today english language TV in Shenzen earlier this week reported property within the 5th ringroad around Beijing as having increased in value by around 88% over the past year, and 11% in the last month (March).

Pretty slick with the statistics, but the accompanying report openly called the increases evidence of a bubble, and the latest monthly increase indicating one becoming unsustainable.

Shenzen by the way has increased in size within 30 years from a village of 30,000 to a city of 10 million (it shares a little river border with Hong Kong)so massive infrastructure and population movements are no strangers in China.


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hailoh
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The following article by Andy Xie has some interesting insights into the involvement of Government as a beneficiary of the property bubble in China.

April 26 (Bloomberg) -- “My maid just asked for leave,” a friend in Beijing told me recently. “She’s rushing home to buy property. I suggested she borrow 70 percent, so she could cap the loss.”

It wasn’t the first time I had heard such a story in China. Some friends in Shanghai have told me similar ones. It seems all the housemaids are rushing into the market at the same time.

There are benefits to housekeeping for fund managers. China’s housemaids may be Asia’s answer to the shoeshine boy whose stock tips prompted Joseph Kennedy to sell his shares before the Wall Street Crash of 1929.

Another friend recently vacationed in the southern island- resort city of Sanya in Hainan province and felt compelled to visit a development sales office. Everyone she knew had bought there already. It’s either buy or be unsocial.

“You should buy two,” the sharp sales girl suggested. “In three years, the price will have doubled. You could sell one and get one free.”

How could anyone resist an offer like that?

The evidence in official-corruption cases no longer involves cash stashed in refrigerators or starlet mistresses in Versace clothing. The evidence is now apartments. One mid-level official in Shanghai was caught with 24 of them.

China is in the throes of a vast property mania. First, let me make it perfectly clear that calling China’s real-estate market a “bubble” isn’t denying China’s development success. As optimism is an essential ingredient in a bubble, economic success is a necessary condition. Nor am I saying that prices will drop tomorrow. A bubble evolves and bursts in its own time. When it is about to burst, I’ll let you know.

Free Lunch

Expectations of a Chinese currency revaluation are, perhaps, the most important force inflating the bubble. First, it plays to the latent human desire for a free lunch. You just need to exchange your money for Chinese yuan. According to all the experts on Wall Street, you can only gain. The money has been gushing into China.

Second, the revaluation story has kept Chinese money inside the country. The dollar has always been the safe-haven asset for Chinese. This is why Chinese banks had a large dollar deposit base. Of course, anybody who was somebody had dollars offshore. Now all that money is back. More importantly, any income, legal or otherwise, now stays in China.

Flats Beat Cash

Why would corrupt officials keep apartments rather than cash? Well, according to Wall Street, the yuan is going to appreciate. So holding dollars is out of the question. And why hold Chinese cash when property prices are always going up? The corruption money can be turbocharged in the real-estate market. Only when they are caught do they understand the downside of holding fixed assets.

The massive liquidity waves have prompted Chinese banks to lend as much as possible. One Wall Street tradition adopted quickly in China was bonus recipients signing company checks to themselves. All you need is to report eye-popping quarterly earnings. It is an easier game than on Wall Street: The Chinese government keeps the lending spread wide by fixing both the deposit and lending rates. You just have to lend. The earnings will follow. Might the loans turn bad in three years? Well, I’m not going to give back my bonuses, right?

For a bubble to last you need a force to hold it together when it stumbles. Wall Street kept pumping out new natural or synthetic products to turn debt into demand for assets. Local governments play this role in China.

Future Profits Now

When it comes to interested parties, Chinese governments are knee-deep in the bubble. They get all the money from land sales. Land values have risen to half of the development cost. In hot spots, land costs more than the development -- the governments want to collect the future price gain immediately.

When properties are sold, transaction and profit taxes kick in. Developers pay more levies to the governments than they earn. When developers finally book their earnings, they must put it to work, as good Wall Street analysts would recommend, so they buy land. As land prices are much higher, their measly earnings aren’t enough, so they have to borrow. The governments get all their earnings and debt repayments. Can you blame them for boosting the market whenever it slips?

Land obsession is another force at work. China was a rural economy not so long ago. The most important asset was always land. “Be a government official and become rich” is a millennium-old Chinese saying. It didn’t explain where the money went. It always went into agricultural land. In cities, you only see buildings, not paddy fields. But the buildings sit on land.

Now housemaids are in the market. Who else? Never underestimate 1.3 billion people. In China, they say you should take the shoeshine boy’s advice. Many would listen to him.

Welcome to China, the land of getting rich quick.

(Andy Xie is an independent economist based in Shanghai and was formerly Morgan Stanley’s chief economist for the Asia- Pacific region. The opinions expressed are his own.)


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colin_twiggs
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OECD composite leading indicators for March 2010 point to a slowdown in the pace of economic activity in China & Brazil.

OECD Composite Leading Indicators - News Release
Paris, 10 May 2010


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colin_twiggs
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quote:

David Rosenberg at Gluskin Sheff recently produced a fascinating chart (see chart 9), suggesting that there is indeed a strong link between Chinese stock market prices and commodity prices. The Shanghai index leads the CRB commodity index by four months with a 72% correlation (80% with oil prices).




Niels Jensen: The Commodities Con


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hailoh
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That's an interesting link Colin, but the correlation seems to be rather recent.

Shanghai Composite  and Goldman Sachs Commodity

I have used the GSCI for convenience and the lag correlation really dates from 2007 to present. What would be really interesting is the reason for this correlation appearing now, and the answer to that may also throw light on how long it could be dependable as a planning strategy.

A little like the correlation between gold and US dollar - just when you thought you had the inverse correlation tagged, it turned around and changed.


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hailoh
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Just taking this article a step further: in hindsight the interval between 2002 and 2006 was one of escalating commodity prices based on the growing economies of all BRIC communities.

It was only after 2006 that China emerged as the undisputed economic leader and consumer of raw materials. The correlation shown in the charts is a logical outcome.

If China emerges from the current downturn as leader of the pack then the correlation should continue.

Regardless of that surmise, I am tempted to believe that the correlation will last until the SSEC bottoms this time round, meaning that keeping cash on hand for resource stock buying a little after this event could be a useful strategy.


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colin_twiggs
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Thursday, May 20, 2010 - 08:41 am:Copy highlighted text to 'New Message' boxEdit Post Delete Post Print Post    View Post/Check IP (Moderator/Admin only) Ban Poster IP (Moderator/Admin only) Move Post (Moderator/Admin Only)



Hailoh,

Thank you for the insight. I agree it would be unwise to invest in commodities while the Shanghai Composite is in a primary down-trend -- and wise to invest to when it reverts to an up-trend.


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hailoh
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Here is an update on the GSCI and China (Shanghai)charts with the ASX thrown in for good measure.

GSCI, China and Australia

For shorter periods, the correlation between the commodity index and the ASX is very strong.

TMO relates to the GSCI. Past experience suggests that it has fallen to a critical level- around -11% to -12%.On most previous occasions the TWO has recovered, reflecting the recovering market. Should the TWO fall through this level then we could expect to experience a double dip market. For what it is worth, TWO relating to the Shanghai market is in the -14% to -16% range.

It is tempting to suggest that Shanghai is still leading the charge, with the GSCI and therefore the ASX following. Temptation however is a risky business.


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colin_twiggs
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quote:

Many Western analysts credited China's 8.7% GDP growth in 2009 to the magical power of the Beijing Consensus. The explanation is actually far simpler: a massive accrual of debt. Research by Northwestern University's Victor Shih shows that the true level of China's public debt is closer to 100% of GDP rather than the 22% figure estimated by the International Monetary Fund. This is not an accident. Years of wage suppression—now fueling labor unrest—have emaciated domestic consumption as a growth driver, leaving the government with no choice but to resort to debt-financed investments to counteract the recession in the West.




The Fallacy of the Beijing Consensus
China's debt-fuelled growth looks remarkably similar to the experience of Brazil in the late 1960s.


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colin_twiggs
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quote:

As growth slows, the demand for investment is sure to shrink. At growth of 7 per cent, the needed rate of investment could fall by up to 15 per cent of GDP. But the attempt to shift income to households could force a yet bigger decline. From being an growth engine, investment could become a source of stagnation.

The optimistic view is that China’s growth potential is so great that it can manage the planned transition with ease. The pessimistic view is that it is hard for a country investing half of GDP to decelerate smoothly. I expect the transition to slower economic growth and greater reliance on consumption to be quite bumpy.




How China could yet fail like Japan
By Martin Wolf, FT.com


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p3t3
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So what does the Shanghai Composite have to say? :



The recent move down, within the channel, has been particularly impulsive - bounces have been very weak and show no overlap.

Price action is now back into a zone where buyer support should normally be expected to turn up, but there is evidence of support down to the 2350 level. The lower boundary of the channel, and the horizontal support under 2600, do look likely to be tested in coming days/weeks.

Price action near support levels will be of interest....and not just in Shanghai. Resource producers should be firming up forward orders, and trying to ensure they will be honoured - unlike how things unfolded through 2008/2009. If demand starts to falter how firm would Resources Cap Ex books (project developments) be looking?

just my view
p3t3







It's not about how good you are....
it's about how bad you want it

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colin_twiggs
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quote:

When the global financial crisis impacted China's exports in 2008, Beijing ordered its banks to support a massive credit expansion to create jobs and stimulate growth. The banks eagerly went into action and in 2009 and 2010 made new loans amounting to a total of 20 trillion yuan ($3.1 trillion). Of these a significant amount went to local government borrowers. Estimates of how many of these loans would go bad range from 25% to 30%, which suggests a total figure of 8-9 trillion yuan.




China's Bank Reckoning Approaches
A large part of China's economic miracle was built on ill-considered lending and accounting sleight-of-hand.
By CARL E. WALTER & FRASER J.T. HOWIE, WSJ.com

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