Monday, May 3, 2010

One big China bet

We are experiencing a very fragile economic rebound and growth has been very unbalanced. If we were to examine this rebound from the bottom up, consider the recent financial results of heavy equipment supplier Caterpillar as Joe Weisenthal asked how can this be a recovery with Caterpillar sales like this? He observed that Asia has been the only engine of growth in a growth-starved world. Most of the growth comes from China.

EAME = Europe, Australia, Middle East
ROW = Rest of World

Mother of All Financial Bubbles
For the rest of the world, the risk is that China is currently blowing the Mother of All Financial Bubbles and that it may burst soon. Andy Xie reports that Chinese housemaids are now piling into the property market, which is a sure sign of a top for contrarians:

“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.
Xie also confirms my observation that the Chinese are using property as a store of wealth and real estate is just another form of money in China. Moreover, the expectations of the revaluation of the RMB is keeping funds in China, which serves to further inflate the bubble:

[T]he 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.
Everything seems to be linked to China these days. Econbrowser reports that Latin American financial markets are now becoming more correlated to China. Emerging market equities are now becoming one big China bet.

Shanghai Composite is breaking down
When all these excesses blow up is anyone’s guess. When housemaids are scrambling to get into the market, we are much closer to the end than the beginning. What's more, the technical behavior of the Shanghai Composite looks downright scary - and that was before the news of additional tightening measures.

I have no idea when all this house of cards topples on us. Even though the charts may may point to China undergoing a downdraft, it may not be the disaster that the bears assume because of another possible round of stimulus, which should serve to buoy markets. Nevertheless, when this bubble pops, it won’t be pretty, not only for China but for global financial markets as well.

Is this an indication to sell in May and go away?


Bobster747 said...

Great blog story - thanks for bringing it together.

Unknown said...

Great way of summing it up! Thanks for making it all make sense to me now! Some of the stuff I read isn't in the easiest terms, but what I get through, and what you say in your blogs is in understandable. Thanks, keep it up and I'll keep reading!