Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus is America's "Pearl Harbour" Moment, There Will be a Reckoning With China - 6th Apr 20
Coronavirus Crisis Exposes Consequences of Fed Policy: Americans Have No Savings - 6th Apr 20
The Stock Market Is Not a Magic Money Machine - 6th Apr 20
Gold Stocks Crash, V-Bounce! - 6th Apr 20
How Can Writing Business Essay Help You In Business Analytics Skills - 6th Apr 20
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

China Risks and Investor Opportunities

Stock-Markets / China Economy Feb 25, 2011 - 03:56 AM GMT

By: Puru_Saxena

Stock-Markets

Best Financial Markets Analysis ArticleOpinion is currently divided on the world’s second largest economy.

On one hand of the spectrum, the bears believe that China is a train-wreck and that its economic growth is unsustainable. These sceptics love to highlight the property bubble in China and they never miss the opportunity to mention the fact that fixed asset investment accounts for a disproportionately large chunk of the Chinese economy.  According to the bearish camp, China’s economy is not real; rather, its breakneck economic growth is centrally planned by Beijing. Furthermore, the bears argue that China’s vast foreign exchange reserves are meaningless and that they will be used up in dealing with the aftermath of the Chinese real estate bust.


On the other side of the equation, the optimists believe that China is the next great nation in the world and its super power status is all but assured. These bulls point to China’s foreign exchange reserves, low debt levels, high savings rate, strong work ethic and growing domestic consumption.  According to these folk, China’s economy is amongst the strongest in the world and Beijing is in total control.

So, given such conflicting views, it is hardly surprising that investors are confused about China.  Furthermore, it goes without saying that over the past few months, we have spent a lot of time thinking about China’s prospects.  Therefore, we will now outline our views about the Chinese economy and its financial markets.

First and foremost, we want to make it clear that we are not bearish about the long-term prospects of the Chinese economy.  After all, the country has amassed the largest foreign exchange reserves in the world (US$2.85 trillion), it boasts a very high savings rate (37%), its household debt to GDP ratio is very low and its per-capita income is rising rapidly.  Therefore, at first glance, the Chinese economy appears to be in good health.

Unfortunately, China’s economy also has a soft underbelly; it’s out of control property market.  After reviewing heaps of data, it is clear to us that real-estate prices along the coastal cities in China are grossly over inflated and due for an abrupt adjustment.  When measured in terms of affordability (median home price to median household income), it is blatantly obvious that Chinese property is in a gigantic asset bubble.  Moreover, various other data points also confirm overvaluation and excesses in China’s property market.

According to some reports, billions of square feet of commercial real-estate is unoccupied in China.  Furthermore, we have also heard accounts from reliable sources that there is rampant speculation in China’s residential real-estate.  For example, the Chinese have been snapping up bare-shell apartments (no internal walls or fittings), for the sole purpose of flipping these properties for a quick profit.  It is interesting to note that these buyers are not the least bit interested in a rental yield, their only intention is to sell these properties to a ‘greater fool’.

Needless to say, China’s banks have been doing their part to fuel this speculative orgy. For instance, the South China Morning Post recently reported that in 2010, China’s banks originated CNY8 trillion in new ‘official’ loans and this amount exceeded Beijing’s loan target. However, the buck did not stop here and allegedly the Chinese banks loaned out an additional CNY3 trillion via ‘off the balance-sheet’ arrangements orchestrated through various Trust entities. 

Figure 1 captures the sharp increase in China’s Yuan-denominated loans.  According to China Daily, outstanding Yuan-denominated loans stood at CNY47 trillion at the end of October, which is an astronomical sum when you consider that China’s economy is worth only CNY37 trillion.  Unfortunately, this rampant credit growth is not slowing down and apparently, Chinese banks have already created new loans worth CNY1.5 trillion in 2011!

Figure 1: China’s new Yuan-denominated loans (October 2009-October 2010)

Source: China Daily

So, there you have it. All the conditions are now in place for a property bust – extreme overvaluation, abundant credit and massive oversupply.  The trillion dollar question though is whether the unavoidable bust in housing will impact China’s broader economy or will the damage be confined amongst the property speculators and developers?

Unfortunately, this is a very difficult question to answer but given the relatively low household debt in China, we are inclined to believe that the pain will be limited to the property developers, leveraged speculators and banks.  We have no doubt in our mind that China’s non-performing loans will escalate in the future, therefore we believe that an investment in Chinese banks is risky.

Furthermore, when the Chinese property boom turns sour, various asset markets and economies will be impacted. First and foremost, the prices of base metals may fall from their lofty levels and this will affect the earnings of the major mining companies.  Remember, China is the major importer of base metals and any slowdown in its real-estate construction will diminish demand for industrial raw materials. Accordingly, we have recently liquidated our investment positions in the base metals mining companies.

Moreover, any fallout from the Chinese real-estate bust will surely impact the economies of the commodity-producing nations such as Australia and Brazil.  Thus, investors should remain vigilant and perhaps reassess the risk/reward of their cyclical investments in these resource-rich nations. 

Now, this may sound strange but despite our near-term concern about China’s housing bubble and our bearish stance towards certain sectors, we remain optimistic about the nation’s long-term economic prospects.

In terms of the broader Chinese economy, we believe that a housing bust in China will cause some hiccups in its breakneck growth.  However, we suspect that this slowdown will be temporary because most Chinese households are not leveraged to their eyeballs (China’s household debt to GDP ratio is below 20%). 

Furthermore, it is notable that currently, China’s private domestic consumption accounts for only 34% of GDP (Figure 2) and in our view, this percentage will increase in the future. Remember, in its latest five year plan, Beijing has made it clear that it wants to increase private consumption and reduce China’s dependence on low-margin manufacturing and exports.

Figure 2: China’s domestic consumption set to increase?

Source: Trading Economics

It is our contention that China’s policymakers are serious about this issue and they have the necessary tools to encourage domestic consumption.  For instance, if Beijing allowed its currency to appreciate, such a move will undoubtedly increase the purchasing power of the Chinese, thereby increasing private consumption.

Despite the looming property bust, it is our contention that China’s stock market has already discounted the housing problem and this is why the Shanghai Composite Index is trading approximately 55% below its all-time high.  As far as valuations are concerned, it is notable that the index is trading at 17 times reported earnings, which is remarkably cheap when you consider the 12-year average price earnings ratio of 34.  Last but not least, if you factor in this year’s corporate earnings growth, the index is valued at just 13.1 times projected after-tax earnings.

In summary, given our long-term optimism towards the Chinese economy and the historically low valuations, we are maintaining our investment exposure to our preferred companies in China.  While we continue to avoid the property developers and banks, we have allocated capital to terrific Chinese companies which should benefit from an increase in China’s domestic demand. 

If our assessment is correct, the ongoing weakness in Chinese stock prices is a good buying opportunity for the patient investor.

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets.  In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com

Puru Saxena

Website – www.purusaxena.com

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients.  He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules