I am a big believer in China as an investment destination. I have not gotten carried away with how much I have but do think it is an important theme. Part of managing a portfolio has to be seeking out the other side of your trades to either strengthen your conviction or make you realize when you are wrong.
Yesterday on European Closing Bell, analyst Diana Choyleva from Lombard Street Research came on and said that China is in for a very hard landing later this year. She says that China's rate hike is too late and that they will have to be very aggressive with rate hikes to slow down the 9% (or higher) GDP growth. She said profitability has already been destroyed by over-investment. She also sees a consumer lead slowdown in the US later this year that will domino to negatively impact China too.
She went on to say that the investment community has too much faith in the Chinese authorities to engineer a soft landing of any sort. Booms and busts are more typical for China than anything else. She sees no way out for China. She sees growth slowing to 5% which she calls a meltdown because it is so far below current growth rates. This, by extension, will be bad for all commodity prices except, perhaps, for oil.
So, is she right? I'm not sure how well I am conveying her negativity but I doubt she can be right in terms of magnitude this year, which is her time line. For the last two year the Shanghai Composite is down from 1600 to 1400. In the last twelve months it is up 40%. I don't think a good year can result in a true meltdown caused by excess returns. That is not to say it can't go down but it would be tough for a decline to be truly ruinous.
I also think that all of the catalysts moving China are still in place and likely to be in place for a while to come. None of this has to mean I am right but I have a small position, as I have all along, in case I am wrong. A 3%-5% can help a portfolio but not cause a wipe out if Ms. Choyleva turns out to be correct.
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5 comments:
Back in '04 Krassimir Petrov and Marc Faber predicted Chinese Great Depression would happen around 2008-09, triggered by one or more of the following events: (1) a worldwide currency, banking, or derivatives crisis, (2) a U.S. recession, (3) the containment of runaway inflation, (4) the disappearance of Chinese trade surpluses, and (5) an oil supply crisis.
#4 seems a bit in the future, but the others are real near-term possibilities. Investing in China should definitely be approached with caution. Taiwan seems like a safer way to capture the China effect.
The article I mentioned can be found on Marc Faber's site at:
http://www.gloomboomdoom.com/marketcoms/040901.htm
great info, thank you.
the time line seems more reasonable. I have to say I doubt a US recession could domino into a great depression in China.
Like you said, the Shanghai composite completed an ABC down from 2001 to end in a double bottom at 1000 last year. It has gained 40% since that point. Why is there so little doubt of the "Greenspan (now Bernanke) put" when US has a 6% current account deficit and a negative savings rate, compared with so much negativity about China which has almost 1 trillion in reserves and a 40% savings rate? If the Fed actions are politically motivated, I can assure you the political motivations for China to open the money spigot if need be is 100 times greater. Do I really have to show people pictures of heads rolling on the ground to prove that point?
Of the five points made by Petrov/Faber, 3 and 4 are very questionable, while the US is sure to be worse off in the other 3.
The real problem facing China is its internal political strife and the friction caused by unequal development, as well as the problem with Taiwan. In other words, I believe if there is a crisis in China, it's most likely precipitated by something other than an economic event.
"investment community has too much faith in the Chinese authorities to engineer a soft landing of any sort."
Given their deft handling of the economy so far, that faith seems justified.
More in my post on FXI
Diana Choyleva was also predicting a Chinese hard landing in 2004, 2005, and now 2006 - eventually she will be right
As for Faber, he makes a lot of predictions and sometimes he is right - given that hedge fund fees have never been higher and capital raising, especially for Asia, has never been easier, you can figure out for yourself why he writes a newsletter for a living.
China has a political imperative to maintain growth. Profitability is low because there is no incentive to retain profits - the system rewards scale, which is synonymous with political clout. At present, China is a poor investment destination on most counts. An arbitrary legal system, poor managerial talent, a non-convertible currency, and perverse incentives do not augur well for equity investors. Even if you could obtain a QFII to invest directly, the Shanghai stock exchange trades for about 18x earnings. You can get indirect exposure through peripheral countries, which have comparatively better legal protections. Finally, if China does implode one day, the real winners will be Wal-Mart, Dell, IKEA, etc. who will see their import prices plummet as Chinese companies try and cut prices to keep their volumes up.
nice homework on Choyleva, I did not know. thank you
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