Monday, February 15, 2010
Timing a China Bubble Collapse- Trade War is the Most Likely Cause. Currency Revaluation Higher Imminently
A over-watched bubble never bursts; at least not when you expect it.
*No question the massive increases in infrastructure and other spending in China is going to cause a bubble of some kind at some point in the future. The problem is, everyone expects it to burst any minute now. That makes me think we may be 2-3 years out. In the mean time, the government is working hard to engineer a soft landing with gradual reductions in real estate prices and inflation. If you examine recent speeches from leadership they seem to be preparing the population for "tough times" which suggests a state controlled contraction.
*In terms of combating inflation--the producer levels was a little high in the last report, but consumer inflation in China was tempered. However, to slow the economy it's logical to assume that there will be some kind of steps taken after the Chinese New Year to revalue the currency higher. That is probably at least a few percentage point revaluation of the rate higher against the dollar.
*Currency pressure is undermining Chinese influence with it's neighbors as many struggle to find an export market against a currency undervalued by as much as 40%. When the US was buying everything Asia could sell, this was not a problem for countries like Indonesia and other ASEAN states, but now it's causing severe pain.
*Tensions with the US and protectionist measures are the most likely cause of some sort of a crash in China. Trade tensions with the US and others could accelerate and be flamed by those inside China as well for a more assertive posture against the United States. For example, China always protests when the US meets the Dalai Lama, but in this instance, they have been particularly aggressive. The language has gone from "you will hurt our feelings" to "the Wrath of Khan--we will make you regret it if you do it".
*The Chinese New Year and the huge production levels in the early part of the year suggest the timing might be right for a rise in the exchange rate. Odds are probably 70/30.
*A lot of people believe that $2 trillion in reserves prevent China from facing any kind of crash. However, one has to look no further than the US experience in the Great Depression when it was a huge surplus country. Given it's export role, it was hit particularly hard. Further, look at Japan as a huge exporting country and corresponding crash in it's equity markets. Plenty of examples out of economic history. During the Great Depression, the US had tremendous amounts of reserves.
*It's time for China to even the playing field and protect foreign IP and investment inside the country. As someone who has invested in tech companies that have sold in China, there is a dangerous and prevailing attitude that the price of admission is all your IP belongs to China now. They steal it aggressively and blatantly and there is nothing you can do about it. Is it any wonder that the current account deficit with China is so horrible given our primary exports--ideas for technology, media and pharmaceuticals is stolen outright? We should put consistent and firm pressure to get these markets open and fair while doing everything possible to avert a trade war that will hurt both countries. Government procurement needs to open up too as part of their WTO accession. That was the original deal and they should honor it.
*In return, the US must cut government spending at the federal at state level dramatically.
*One possible scenario for an imminent bubble is the following sequence.
1) Debt crisis spreads to Portugal, Spain, Ireland, and United Kingdom.
2) Oil implodes and further debt markets cause problems in Eastern Europe. Crisis in gulf states, Russia, Venezuela, Nigeria exacerbates global instability.
3) US 10 + 30 year rates spike. Mortgage market begins to fail. --------> Chinese export crisis, domestic contraction, political unrest.
*I have written for some time that I am negative on China equities short term. No question that means I've missed out on a few day trades. I am a long term China bull though and I'll be looking for ways to get more exposure to the market post crash. The country will resume the place it held in the world 300 years ago as it emerges from a long technological and cultural slumber.
Timing a China Bubble Collapse- Trade War is the Most Likely Cause. Currency Revaluation Higher Imminently
A over-watched bubble never bursts; at least not when you expect it.
*No question the massive increases in infrastructure and other spending in China is going to cause a bubble of some kind at some point in the future. The problem is, everyone expects it to burst any minute now. That makes me think we may be 2-3 years out. In the mean time, the government is working hard to engineer a soft landing with gradual reductions in real estate prices and inflation. If you examine recent speeches from leadership they seem to be preparing the population for "tough times" which suggests a state controlled contraction.
*In terms of combating inflation--the producer levels was a little high in the last report, but consumer inflation in China was tempered. However, to slow the economy it's logical to assume that there will be some kind of steps taken after the Chinese New Year to revalue the currency higher. That is probably at least a few percentage point revaluation of the rate higher against the dollar.
*Currency pressure is undermining Chinese influence with it's neighbors as many struggle to find an export market against a currency undervalued by as much as 40%. When the US was buying everything Asia could sell, this was not a problem for countries like Indonesia and other ASEAN states, but now it's causing severe pain.
*Tensions with the US and protectionist measures are the most likely cause of some sort of a crash in China. Trade tensions with the US and others could accelerate and be flamed by those inside China as well for a more assertive posture against the United States. For example, China always protests when the US meets the Dalai Lama, but in this instance, they have been particularly aggressive. The language has gone from "you will hurt our feelings" to "the Wrath of Khan--we will make you regret it if you do it".
*The Chinese New Year and the huge production levels in the early part of the year suggest the timing might be right for a rise in the exchange rate. Odds are probably 70/30.
*A lot of people believe that $2 trillion in reserves prevent China from facing any kind of crash. However, one has to look no further than the US experience in the Great Depression when it was a huge surplus country. Given it's export role, it was hit particularly hard. Further, look at Japan as a huge exporting country and corresponding crash in it's equity markets. Plenty of examples out of economic history. During the Great Depression, the US had tremendous amounts of reserves.
*It's time for China to even the playing field and protect foreign IP and investment inside the country. As someone who has invested in tech companies that have sold in China, there is a dangerous and prevailing attitude that the price of admission is all your IP belongs to China now. They steal it aggressively and blatantly and there is nothing you can do about it. Is it any wonder that the current account deficit with China is so horrible given our primary exports--ideas for technology, media and pharmaceuticals is stolen outright? We should put consistent and firm pressure to get these markets open and fair while doing everything possible to avert a trade war that will hurt both countries. Government procurement needs to open up too as part of their WTO accession. That was the original deal and they should honor it.
*In return, the US must cut government spending at the federal at state level dramatically.
*One possible scenario for an imminent bubble is the following sequence.
1) Debt crisis spreads to Portugal, Spain, Ireland, and United Kingdom.
2) Oil implodes and further debt markets cause problems in Eastern Europe. Crisis in gulf states, Russia, Venezuela, Nigeria exacerbates global instability.
3) US 10 + 30 year rates spike. Mortgage market begins to fail. --------> Chinese export crisis, domestic contraction, political unrest.
*I have written for some time that I am negative on China equities short term. No question that means I've missed out on a few day trades. I am a long term China bull though and I'll be looking for ways to get more exposure to the market post crash. The country will resume the place it held in the world 300 years ago as it emerges from a long technological and cultural slumber.