Mark Mobius of the Franklin Templeton mutual fund firm spends a lot of time traveling around the world looking at companies and countries. Recently he visited China and took a look at the ghost cities and other evidence of a housing bubble discussed in the media. Here’s his report.
One of the reasons there are unoccupied apartments or homes in China is because many Chinese treat investing in property as a means of saving rather than putting money in the bank at low interest rates, or investing in the stock market, which many consider too risky. Property is something they can see and perhaps eventually use for themselves or their children. And given the very high savings rates in China, there are many who are able to pay cash for property investments and sit on empty apartments indefinitely.
More importantly, families across China need and demand affordable housing near work and school centers.
The conventional wisdom is that slower growth in China and India is responsible for much of the recent decline in commodity prices. Here’s another look. It considers the possibility that a new anti-corruption campaign in China is reducing demand for commodities. The theory is that local China officials now are afraid to spend on lavish parties and gifts that were used to bribe higher level officials and bureaucrats. That reduced spending reduces business for restaurants and other businesses, leading to lower economic growth and lower spending on luxuries. If true, it’s another example of unintended effects of government actions.
Global Post: – Since the end of last year, Xi has spearheaded a drive to curb officials’ notoriously lavish dinners and high-end gift-giving. At a Party meeting in December, he called for new regulations that require cadres to cut back on liquor, flowers and extravagant banquets. Some provinces even banned the use of red carpets to greet visiting officials.
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“Abalone, baby birds, sharks, big prawns, sea cucumbers and geoduck clams are just some of the creatures who can breathe easier, for a bit at least,” says Bill Bishop, a commentator in Beijing and author of the influential Sinocism newsletter. “But [food and beverage] businesses should expect more pain.”
World stock markets generally moved together since 2009. Since late 2012, however, emerging market stocks diverged from U.S. stocks. U.S. and other developed market stocks generally rose, while emerging market stocks declined.
One reason for that is China’s economy slowed, and some fear it will slow further. But there’s more, says Sober Look. The blog says there are at least five reasons emerging market equities are declining while others aren’t. Retirement Watch readers benefit from this decline, because we’ve been holding MainStay Marketfield which has been selling short emerging market stocks with part of its portfolio.
Bloomberg: – Emerging-market stocks dropped to the lowest level in almost five months as Apple Inc.’s Asian suppliers retreated on speculation sales are slowing and concern grew that the global economy is faltering.
LG Display Co. slid the most in four months in Seoul after audio-chipmaker Cirrus Logic Inc. reported an inventory glut that suggests slowing iPhone sales. Jiangxi Copper Co. sank 2.5 percent in Hong Kong, while Russia’s Micex Index reversed earlier gains, closing at the lowest level since June 25.
Brazil’s Bovespa index rebounded from a nine-month low, as Gol Linhas Aereas Inteligentes SA jumped 11 percent. The MSCI Emerging Markets Index fell 0.4 percent to 997.33 in New York, the lowest level since Nov. 28. Stocks joined losses in the U.S. equity market as data on leading economic indicators and Philadelphia-area manufacturing trailed estimates. Earlier this week, the International Monetary Fund trimmed its global growth forecast.
China’s stock market is well below its highs. One big reason is the real estate overdevelopment identified by the China bears. The bears identify not only empty buildings throughout China. They identify entire towns that were built and now largely are empty. They say the towns were built because the government made credit easy in order to boost the economy during the crisis. Now, there are empty buildings that aren’t generating income to pay off the loans.
But there’s another side. The China bulls, or at least the non-bears, say the number of empty buildings is exaggerated. The media regularly show pictures and video of the same buidlings and give the impression that there are a large number of them. The optimists also say that there continues to be a steady flow of people from rural areas to urban areas to fill the empty buildings and provide shoppers for the stores. They also say some of the towns deliberately were planned to be available for new residents that are expected within the next few years.
Even the optimists don’t argue that there aren’t problems in China. But they push back against those who say China has significant bubbles that will burst in a matter of time.
Considering that policymakers are focusing on urbanization as a key growth driver, housing demand in Chinese cities is expected to surge. China’s urbanization rate is up to 53 percent, from 39 percent in the past decade, and is expected to continue to rise to 65 percent in the next ten years.
And as the government relaxes its hukou (residency permit) policy, urban residents are also expected to move from dorms to homes.
The G20 leaders made nice at a recent weekend and said they weren’t pursuing currency wars. A currency war is when a country deliberately reduces the value of its currency relative to one or more other currencies. The country debasing its currency hopes that the lower currency value will make its goods and services more attractive to consumers in other countries, increasing sales and boosting the economy.
Most countries that have control over their monetary policies are engaged in some form of quantitative easing, and all that extra money tends to drive down a currency’s value relative to that of a country that isn’t engage in QE or is less engaged in it. John Makin of AEI believes this is a bad path. Small countries can pursue successful currency devaluation, because they aren’t major factors in the world economy. But when countries making up 50% of global GDP pursue the same policy, the result is a downward spiral. Global growth is less than it should be, and the need for QE increases. Makin says the deleveraging countries need to reform taxes to increase growth, reform entitles to reduce them over decades, and pursue moderate QE.
China and the rest of non-Japan Asia, especially South Korea and Taiwan, are placed in an uncomfortable position by Japan’s EMEF. Weaker stock markets that have emerged in much of Asia are signals of stress in a world of weaker global demand. Even China’s usually buoyant Shenzhen Index, up about 12 percent over the past year, is down 1 percent over the past month, perhaps a sign of skepticism among global investors as to whether China has successfully navigated its transition to new leadership and away from its massive 2008–09 14-percent-of-GDP fiscal stimulus. The weaker Chinese stock market, even with the Hong Kong currency pegged to the dollar, is especially galling to the Chinese in view of the more than 25 percent rise in Japan’s stock market since early November 2012.
China’s currency has been appreciating moderately since mid–2012, but as its external surplus disappears and growth fails to accelerate, the pressure for a weaker Chinese yuan will rise sharply. The same is even more true in South Korea. South Korea’s normally buoyant KOSPI Stock Index has been down by over 2 percent over the past year while the country’s stronger currency has harmed its export growth.
China’s economy slowed in 2011 and most of 2012, largely because of deliberate policy moves. Other policy moves increased growth and ignited a lot of positive feelings about both China’s economy and those of its trading partners. But the question with a closed country such as China always is: How do we know if the data is real. Tyler Cowen of Marginal Revolution blog is a skeptic. But he does a good job of collecting different views on the state of China’s economy. You can decide if you want to make a big bet on continued China growth in your portfolio.
Total new financing in January reached Rmb2.5tn ($400bn) – up more than 50 per cent from December and more than double the figure a year ago – eclipsing even the start of 2009 when China unleashed stimulus spending to battle the global financial crisis.
…The big increase in credit issuance stems from last year when China slouched to 7.8 per cent growth, its weakest in more than a decade. To revive the economy, the government stepped up the pace of infrastructure investment and gave a green light to banks to provide more funding, including through off-balance-sheet channels.
This succeeded in fuelling a recovery in the final quarter of 2012 and the momentum of that upturn has continued through into the start of this year.
After Greece’s debt was restructured, European leaders indicated that bondholders wouldn’t have to take haircuts or losses on any other European sovereign bonds. That doesn’t appear to be the case any longer. Felix Salomon of Reuters reports that Cyprus is likely going to default with full knowledge and approval of the EU authorities. This is typical of the European sovereign debt crisis. Each time it appears that a plan is agreed to and being implemented, there are one or more steps backward. Perhaps Cyprus is so small that this doesn’t matter. But it’s another level of uncertainty for investors to deal with when they want to conclude that a major Lehman Brothers type event isn’t likely.
In a country like Cyprus (or Iceland, or Switzerland), where the banking sector is many multiples of national GDP, there’s very little distinction between rescuing the banks and rescuing the country. And if the asset side of the banks’ balance sheet is full of Greek sovereign debt, the liability side is equally dodgy: Cyprus is a notorious center of dodgy offshore banking, especially for Russians. If Cyprus is going to restructure its liabilities, it’s going to have to face one huge question: will those restructured liabilities include Russian and other foreign deposits?
If there’s any hint that Cyprus might force foreign depositors to take some kind of haircut, of course, there will be a massive run for the exits, and Cyprus’s current solvency problem will become a much more serious and immediate liquidity problem. The last thing that Cyprus or any other country needs is a bank run, which will leave the national balance sheet in the classic pinch where “on the left, nothing’s right, and on the right, nothing’s left”. What’s more, in many ways the precedent of forcing depositors to take a haircut would be even more damaging than the precedent of imposing a haircut on Greek bondholders: at that point there would be really no reason at all to have deposits in any Mediterranean country.
China led the world out of the financial crisis in 2008 and 2009, and it’s been a key source of revenues and profits for many global companies. There was a slowdown in China in 2011 and 2012. Recently, the country finished its transition to a new government and growth levels increased. Growth still isn’t back to the old 10% annual rate and probably won’t return there. But is China’s slow down behind us, or are there more problems to come?
Societe Generale issued a thoughtful piece on the potential for a hard landing including how it might occur, how the government would respond, and how bad things could get. It’s a good piece, because it’s not written from the point of either a bull or a short seller. Instead, it’s a logical exercise exploring a potential scenario, which is how investors should be thinking when building portfolios and setting up strategies. There’s a followup piece on how a hard landing in China might affect the rest of the world.
Whatever the catalyst, the excess capacity in the manufacturing sector – estimated at 40% in 2011 by the IMF – would be exacerbated by a sharp growth slowdown. This would cut corporate margins sharply, making profits plunge, and triggering a downward spiral in domestic demand. Bankruptcies and unemployment would occur on a large scale, endangering financial and social stability. One factor that could accelerate the downward spiral is the high leverage of China’s corporate sector, which exceeded 120% of GDP at end-2011 and has kept rising throughout 2012. As the crisis progressed, non-performing loans would undoubtedly rise beyond the capacity of local governments to contain them, as their fiscal resources dwindled. Even in China’s (semi-) controlled system, banks could choose to freeze lending as a knee-jerk reaction, while the authorities rushed to draft a decisive response. The rapid development of the non-bank credit market in the last few years, especially shadow banking activities, has created a new vector through which a systemic liquidity crunch could take place. Capital outflow would likely ensue, stretching domestic liquidity conditions further.
The commodities bull market has rolled on for a while, and some former bulls now are saying the super-cycle is over. They believe commodities have a fairly fixed cycle, and this one has run its course.
Pushing back against that view, among others, is Ambrose Evans-Pritchard of the London Telegraph. You should read the whole piece, but Evans-Pritchard’s main arguments are that growth from China and the U.S. will continue. We’re in a pause, especially for China, but growth will resume. Even if it isn’t as vigorous as before, there still will be growth in the use of commodities. Another important factor is easy monetary policy around the globe.
Standing back, you might argue that commodities have held up remarkably well this year given that Europe has crashed back into double-dip slump, that the US slowed to stall-speed over the early summer, and that China itself has been through a quasi-recession with falling electricity use and rail freight, and a collapse in steel output.
For Brent crude to trade at $111 a barrel in such a bleak world suggests that Asia’s industrial revolutions have pushed oil prices to a structurally higher plateau. Energy costs may well punch higher once the next cycle of growth is under way.
No doubt the Malthusian narrative – peak this, peak that – at the top of the commodity boom four years ago was overblown. The US energy revival has shown how quickly human ingenuity can sweep away assumptions.
Stocks opened lower the day after the election, but it didn’t have anything to do with the election results. Instead, news is coming out of Europe, and it’s worrying investors. The major news this morning is a forecast from the European Commission on the continent’s economy. Overall, it forecasts the economy as a whole barely will grow. The southern part of Europe will continue to be a disaster, in a deep recession or depression. Germany, formerly the only healthy economy on the continent, will slow sharply because its exports to the rest of Europe will decline. Germany could be heading for a recession.
This could blow up any hope for a deal that saves the euro and the continent’s economy. Germany hasn’t been willing yet to support easy money and a plan for healthy economy’s to pay off the debts of the indebted countries. It probably will favor easier money as its economy slows, but it will be less likely to help pay or absorb the debts of others.
Next year’s near-stagnation across Europe masks a north- south divide, in which the economy ekes out positive numbers along an arc from Finland through the Low Countries to France, and contraction grips Greece, Cyprus, Slovenia, Italy, Spain and Portugal.
North-south tensions over the debt crisis will bubble up on Nov. 12, when finance ministers judge whether Greece has made enough budget cuts and economic reforms to deserve the next installment of 240 billion euros ($308 billion) in aid offered since 2010.
Dilemmas facing Greece and its creditors were highlighted by a commission forecast that Greek debt will rise to 188.4 percent of gross domestic product in 2013, higher than the 168 percent predicted in May. Euro governments are aiming to wrestle it down to 120 percent by 2020.
Germany is becoming less resistant to the economic woes of southern Europe just as Chancellor Angela Merkel, the dominant figure in the handling of the debt crisis, embarks on a campaign for a third term in elections in late 2013.
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