Faber: China May Crash in 9-12 Months

May 4, 2010 · Posted in Global Economics · Comment 

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

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.

I think it is clear. The Chinese reflation bubble has been over since August 2009. Since then Chinese stocks have lost quite some ground, even inspite of a mini rally inbetween. As I said last year in September, Rally in Chinese Stocks – Time to Kiss it Goodbye and Cash Out.

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Rally in Chinese Stocks – Time to Kiss it Goodbye and Cash Out

September 2, 2009 · Posted in Global Economics · Comment 

The Chinese stock market has staged a remarkable 100% rally from October 2008 through the end of July 2009. August 09, however, hasn’t been good for Chinese stocks. Since August 4th, Chinese stocks have now fallen by more than 20%.

The Shanghai Composite Index:
chinese-stocks
Click on image to enlarge.

EWI writes China’s Stocks Crash: Is The United States Next?:

In the past three weeks alone, China’s formerly sizzling stock market has gone from bull market leader to bear market letdown. On August 30, the Shanghai Composite Index plummeted 6.7%, its largest one-day drop of 2009 so far. And, of the 89 global markets tracked by Bloomberg, the Shanghai index came in last place.

As for what caused the freefall, mainstream experts point their collective finger at one main factor: Growing fears that China’s monetary officials will turn off their easy-money spigot. Here, this August 31 BusinessWeek stands in:
“Investors began selling on concerns that banks will cut back on lavish lending that had helped push shares up by more than 80% since that start of the year.”
Here’s the thing: the drunken lending habits of China’s banks have been on the global Concern-O-Meter for quite some time now. And last I checked, its needle reading jumped from “Don’t worry be happy” — to — “Be Afraid, Be Very Afraid” many months ago. To wit:
  • May 2009: China’s deputy central bank governor seriously questions the “sustainability of the rapid growth in credit and its possible adverse impact,” and a Wall Street Journal piece warns that China’s stimulus spree is “pillaging bank balance sheets” as the quantity of loans vastly outweighs their quality.
  • June 2009: “China’s Banks Are Warned About Loans” (WSJ). China Bank Regulatory Commission issues an internal directive to commercial banks to “tighten supervision of loans” and ensure those loans serve the needs of the “real economy” and not “financial speculation.”
  • July 2009:“China Aims To Rein In Lending.” (Associated Press) China’s two largest lenders reveal they will “sharply slow credit growth.”
Yet during that time, the mounting anti-lending rhetoric failed to take the wind out of the Shanghai Composite Index’s sails. Prices rallied without resistance to new yearly highs until early August.
So if the “fundamental” shoe doesn’t fit, what’s the real story here? Well, I’ll make it really simple: the Shanghai Composite Index has plunged more than 20% from its 2009 high on August 4. And, in the days leading up to the market’s reversal, China landed on the radar of several of EWI’s subscription-based publications. For our analysts, the time had come to stage a full frontal attack and warn of a major turn in China’s fortunes.
Here, the following catalogue of previous publications fills in the blanks:
August 2009 Elliott Wave Financial Forecast observes the unsustainable nature of China’s latest stock market rise and writes: “China’s debt bubble will succumb.”

August 14 Asian Short Term Update: “All eyes continue to be on China as we ascertain whther or not an intermediate-term-top is in place.“

August 14 Short Term Update: Presented the following close-up of China’s main stock market and wrote: “A break of the trendline will be the next important tip” that a larger decline is underway.

August 14 European Short Term Update: “Though not under our normal purview for ESTU, China has been the central source of liquidity…China’s sharp decline may be a case of the pin meeting the balloon.”

And how about the fundamentals of the oh so vibrant, dynamic, unbreakable, sound, and decoupling economy? Some facts Mish posted today about China’s unsustainable stimulus and property bubble:

A 4-Minute Tour of the China Property Bubble

What is China doing with all that printing? Please take a A 4-Minute Tour of the China Property Bubble to find out.

World’s Largest Shopping Mall Sits Vacant

The world’s largest shopping mall, South China Mall in Guangzhou, China, is almost entirely empty. Click on the link to see a fascinating video.

If you thought Minnesota’s Mall of America was the world’s biggest shopping center, think again. South China Mall is a Vegas-like spectacle built in 2005 that now sits almost entirely empty. In the current economic climate, could this be a symbol of things to come?

The entire mall sits empty save 10-12 small shops.

Malinvestments and Commodity Prices

Think about all the concrete, steel, copper, and energy it took to build that mall. This is not an isolated case either as the previous 4-minute video shows.

Let’s not confuse a renewed crack-up boom in China with a sustainable recovery. And let’s not pretend much of this building is anything other than malinvestment.

The truth is: There is no decoupling. The Chinese economic miracle is a mirage, a very popular one to be sure. If it is China the world is banking on to lead a recovery, then the world is royally screwed.

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