Topcools Editorial, Mar 15, 2015.
Facing the global competitive devaluation of global currencies vs the increasing valuation of USD and Fed interest rate hiking, USD-tied RMB is increasing the degree of over-valuation while facing an extraordinary debt and M2 bubble and housing downturn. How this unwind will have profound implication for China and the world.
China’s condition is precarious:
1. Housing price is as high as US and EU even though China’s income is about 1/10 of that of USA. Thus significantly more percentage of future wealth/income were moved to the present to be consumed (by citizens, government and real-estate companies) than almost any other nation. Significantly damage the future purchase power of its citizen, corporate and government and leaving a gigantic debt hole on the major identities of China. One can think of total current and future purchase power as a water tank, China’s high-priced-house taken about 20~30 years of individual income from the tank; or about 2~3 times more than that for most countries. In addition, long duration of house appreciation without a break has most believe “house price will only appreciate” and cause a big burst of purchase and construction and industrial activities. These fat the wallet of government, real-estate companies, and house related industries, individuals and cause a huge boom and wealth effect, everyone is happy except that all are at the huge cost of future purchase power and unprofitable investments. Purchase power once exhausted by 30 years of housing-loan, people have no money to buy other commodities in the next 30 years, thus this type of GDP will shrink sharply.
2. Even though China’s manufacture industries have low profit margin, China cash printing investment account for more than 50% of new investment, mostly in low ROI road, bridge, airport, steel and real-estates……Fueled by real estate and shadow banking, China’s total debt
has quadrupled, rising from $7 trillion in 2007 to $28 trillion by mid-2014. At 282 percent of GDP, according to estimates from McKinsey. That is about 28 trillion USD of the future wealth are spent before those wealth are created by China. And Significant amount of these debt are borrowed by local government or its investment vehicles, and use land sales as collateral, which may drop to zero as housing slump.
3. China’s broad money supply (M2) already accounted for 52 percent of the world’s total in 2011. After prolonged upward undervalue, RMB now facing big over-valuation (about 2% more value in mainland Market vs Hongkong). and this gap will increase as USD’s rise while other exporters’ currency devaluing, as market believe China has to devalue its currency sooner or later. In addition, TopCools believe: Mr. Zhou Xiaochuan’s 2nd rate cut in 4 months, likely will hurt China fatally and irreversibly.
Higher than international average price of Chinese housing, stock market and currency together, are extremely dangerous and harmful to China: Capital is always chasing maximal return and will go abroad where assets are relatively cheaper, environment better and with more sound political policy. About 64% rich Chinese are moving or preparing to immigrated and causing massive wealth flow out. Chinese riches are buying house in cash in every affluence location around the world while land sales, housing sales, office sales in China gap down about 15% in Jan+Feb 2015. Chai Jing’s: “Under the Dome” will likely accelerate the exodus of wealth/rich. The accelerated bleeding of wealth out of China will likely be further boosted by the divergence of FED’s rate increase vs. others’ currency devaluation as continue rising of RMB with USD will damage not only export, but accelerated wealth exodus……. Due to China’s gigantic M2 and deteriorating economy, the devaluation of RMB will cause further panic rush to USD and likely cause RMB to plunge. China is bleeding heavily and is in a very, very difficult situation.
Home price in some big Chinese cities has down 20~50% from the peak already(Hangzhou, Wenzhou, Chongqing). Topcools thinks that the wealth exodus will likely trigger the burst of bubble of over-spending of future wealth in China in near future. If 1/13 of Chinese population rush to get USD at $50k (gov quota), that would need 5 Trillion USD, far more than $3.8 Trillion USD reserve that China has….so we think China’s current strong arm to pop RMB against market devaluation will fail miserably. No central bank is more powerful than market.
Without properties tax is the primary evil of high properties price and China is the only few countries that don’t have properties tax. High housing price causes more years of individual future wealth was taken away and even abroad in China’s case. Most western countries have forbidden government from owning media; while China gov owns most medias, which tilt voice for the special interest groups and powerful real-estate companies and ignore the interests of main-street folks. It is very common to see real-estate tycoons advocate and pop housing price on TVs in China. A recession that can quickly damp the high priced Chinese housing, stock market and currency together, to stop the bleeding, are the best interest of China. If the bubble and bleeding are allowed to continue, the consequence can be disastrous for China and countries around it.
Recession has the positive effect of killing low efficient firms. Every western countries has experienced many recessions, but they always come out stronger. China’s continue path to paint 7% nominal growth by printing (BTW: China is the only country with GDP 7% while manufacture PMI at 50 and overall PMI at 51), will destitute China via wealth out-flow, and increase the scale of the damage of inevitable recession. What is the benefit of big number GDP if most of your rich/wealth have left China and a potato cost 1000 RMB in the future? We think Mr. Zhou’s policy is harmful to China’s long-term future and long-term interests.
Here is some investment idea to play the China issue here. We are not interested in politics other than profit from political event.
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