China’s Market Rout Is a Double Threat
nytimes.com
nytimes.com
When (not if) the china's stock market collapses, and the capital flight from China accelerates (estimated 600 Billion a year currently http://bit.ly/1NJQuIX), then China is going to be permanent decline for the next 10-20 years. It would be anyone's guess what China will do then, since it will inevitably suffer massive internal unrest, due to the fact that it's ruled by a bunch of dictators.
EDIT: China seems to be following the same path as Japan in 1990, except China has really screwed up their environment and rich people really want to leave the country.
That's why Japan is debasing the Yen, instead of performing a traditional default. They're unable to afford their debt, but if they just outright default, that will hammer their economy in one big hit - the creditors are the Japanese people. The Yen debasement hits them as well, and reduces the real value of the debt, but the premise is it's a gradual process they can adjust to over time (and the politicians get to lie about what's happening, another reason they all universally prefer inflationary schemes).
Some observations:
- The luxury goods that the rich in China are looking for are much cheaper here in US. The international students I know at school go on insane shopping sprees at the Apple/Sony/Microsoft stores since how "cheap" all the products are compared to the 1.5-2+X markups they have to pay back home. I've seen some classmates fill their suitcases with luxury brand clothing, Apple computers, iPads, Playstations, Xbox, to all bring home and share with their families.
- Assets in the US are much more appealing options in terms of investments, especially real estate/property. There's been a lot of stuff written up in NYT about this. I've seen the same things here in South Bay (Mountain View, Cupertino) where brand new townhouses get snatched up instantly by wealthy families from China that can commit that much $ in such a short amount of time. Being able to pay for your house in cash moves you towards the front of the line.
- Avoiding the whole "corrupted officials with lots of $ in bribes" anecdote (despite it being somewhat true from the crazy stories that I've heard from friends in China), it is much easier to spend the money here without worry of alerting the Chinese government. Especially if you're paying for a lot of your things in cash. Spending money in a lavish manner in China raises a lot of eyebrows.
- Not too knowledgable on this aspect, but apparently there's the loophole where if you bring aging parents in China over to live in America, they can qualify for senior benefits from the US government. They come, despite never having worked in the US, and get monthly checks to cash that are substantial enough to live on. Don't know enough about this to elaborate and I'm a little skeptical about this, but have heard a lot about this.
- America is so much more attractive than China. A lot of the wealthy international students I met in college had very tracked and relatively stress-free lives growing up. They never had to study for or take the gaokao, which is the infamous college entrance exam, since they knew from early on that they would be coming to the US for their college education. A lot of them do try and swing for jobs here after graduation as well, since the pay is substantially higher than in China. Heard this sentiment from a lot of Hong Kong residents.
Curious if anyone has heard/observed similar.
Or, who cares?
Interesting on limiting real estate to only citizens. Although I doubt homeowner(s) who are selling care about where the money comes from, especially if it's upfront and comes in cash. And if you look at some of the prices for these townhouses/homes in South Bay suburbs, I imagine it'd be hard to say no.
This is indeed thinly veiled nationalism/racism.
In a properly functioning society, you should have no real idea how the domestic money was obtained, either. It's none of your business as a seller.
I think the only reason why the bay area has become another Vancouver yet is because it has the huge tech industry surge to help support the prices somewhat. Also wide anti-NIMBY regulations could help a lot too.
The consequences of autocratic regimes and their capital flight is being felt around the world [2][3].
[0] http://saeidfard.com/post/113616107456/the-decline-of-vancou... [1] http://www.theguardian.com/uk-news/2015/jun/28/london-the-ci... [2] http://business.asiaone.com/news/chinese-become-biggest-fore... [3] http://www.nytimes.com/2015/02/08/nyregion/stream-of-foreign...
Lots of people only live in a place part of the year.
Look at this vancouver example when people want to live there only part time because it has become hip with the world's wealthy and retired: http://www.theglobeandmail.com/life/home-and-garden/real-est...
New york also suffers this to some extent with empty highrises owned by who know what.
In normal places where they aren't supply shocked I don't think it matters, but if your NIMBY enough a place where the price of a property doubles in 2-4 years, it can get pretty nuts.
And I'm not saying you cannot rent a place, just not own one unless your a full time resident XOR you have a high tax on long term unoccupied properties that encourages property owners to rent out their spaces. I would actually just prefer a long term unoccupied property tax. The key is unused empty properties, not who owns it. Increase supply, and remove perverse incentives to not just sit on supply.
Unfortunately we cannot just pick on SF's landlord unfriendly laws here, because the supply shock applies to the entire bay area. Removing those laws to encourage landlords to rent out their empty properties would be an improvement.
Not sure about the reasoning, some are well off countries, others middling to low achieving countries. Still, it's not out of the ordinary to have restrictions.[1]
Greece, Mexico, Taiwan, Thailand, China and others.
I don't think it's racism. I do think it has to do with nationalism. Perhaps misguided. In some cases it's ideological (China, Vietnam, for example.)
It is true that it creates jobs and and local fees but ultimately the local populace should be able to afford houses. This situation becomes worse in areas where there is no new housing being built.
Going to dig into if there are any loopholes for this. I think it's fascinating how so many people in China suddenly became self-made millionaires/billionaires + can spend that money so extravagantly in the US without much consequence.
There was a classmate from China last semester who came to class every day in a new custom sports car. Mondays was Lambourghinis, Tuesdays was R8, Wednesday was McLauren, Thursday was wrapped Panamera turbo, etc. And this kind of spending/demographic is pretty noticeable in Boston/Allston.
Best option seems like if I was still back at school and just asked some international students.
And the shanghai stock market is not "close to retracing back to 2000." This graph shows, it's well above that: http://www.tradingeconomics.com/charts/china-stock-market.pn...
You're assuming both a continued free-fall at the same rates and also that p/e ratios in China mean the same thing as they did for .com companies in 2000 in USA. Any market newbie will tell you that what a "normal" p/e ratio is will differ greatly by sector even within the same economy. China's may be out of whack, but it's not fair to make an arbitrary comparison.
I'm no China apologist, but making predictions of 10-20 years of decline with an authoritative tone is wrong given the facts you presented.
I'm thinking not. Instead I the Chinese central bank will inject liquidity again, much to the horror of the WSJ Editorial board who will again sternly warn that such actions, mark their words! come to an bad end!
snort
I mean a stopped clock will still be correct at least twice a day so I'm sure the naysayers will be correct eventually too.
Anyway, I doubt China will suffer massive internal unrest, because those dictators aren't as dictatorial as you might believe and because most of the Chinese population generally support their government, at least in principle, and see instances of abuse and corruption as 'bad apples' spoiling the bunch rather than any sort of problem with the system or government itself.
Any non-superficial analysis of what that entails and means should show you this is - while not entirely irrelevant - mostly meaningless as an indicator of economic health.
Well, you have to know at what interest rate the country borrows, and have an idea about the country's deficit and rate of GDP growth to know how sustainable the debt is, I suppose, but it's a pretty important number nevertheless...
This assertiveness on something so complex is not productive and helpful.
China's stockmarket is sufficiently weird to defy most normal analysis though: there are heavy restrictions on who can list and who can invest, plus China in general has lots of money sloshing around looking for a decent place to invest, because the usual mainstays like bank deposits have zero to negative returns. So the bubbles and pops there (and this is far from the first) don't have a lot of correlation to the health of the overall economy.
Umm... this is the situation everywhere right now. This is one of the reasons that big money from hedge funds etc. has started moving to riskier bets in venture capital territory.
... which means the crash will be even faster and more brutal.
Remember, short positions close by buying the shorted security. This means that in a healthy (albeit declining) market there is always buying at every level down as shorts cover.
Limiting short selling is a misguided feel-good move ... a PR stunt that only serves to make the pain worse.
Calling the top of a market is difficult, and to be fair, the Economist hasn't done too badly here. However, you've got to call the bottom too. Will the Economist be able to say if the current market price is now 'correct' or not? Has the bubble burst or is there more to go?
[1] http://finance.yahoo.com/echarts?s=000001.SS+Interactive#{"r...
The underlying causes of the 08 crash in America were never addressed (consumer debt, real growth), and the Fed's interest rate games and QE only served to force investors into riskier and riskier assets, which only hurt productive real investment. All the valuation and volatility metrics have been screaming louder and louder for a long time now.
Talking about it being 'to be expected' is a nonsense. If the market is so predictable, kindly enlighten us about what happens next, rather than being wise in hindsight.
No market is predictable. That is why you don't try to do it. Invest regularly, i.e. dollar cost averaging. The couple who invested their entire savings in one shot during an obvious run-up made an all to common emotional mistake.
OC I haven't studied the situation there in any depth.
Whether it's a week, a month, or a year, their market is going a lot lower yet. It'll retrace back to where it was, no matter what the central government does today. Trillions of dollars in real wealth will be lost in the debacle, as the event sets off dominoes.
As of now, if you invested the index four months ago, you haven't lost a penny.
Corrections are not the same as crashes that wipe out 20 or 30 years of gains. The index is still up for the year. It is very disturbing that the govt. rushes in to attack short sellers and prop up the market artifically, funneling money into it. They show no enthusiasm to attempt to curb the bubble as its growing as the mkt is on the way up. In that way they are the same as the western world.
Even by your extreme measures of what a crash is, you have to realise that they don't happen instantly... who knows how long the market might sink for... Or rebound?
http://www.reuters.com/article/2015/07/06/us-china-markets-i...
The article notes, "Oliver Barron, China policy research analyst at NSBO, said it wasn't just faith in the markets at stake.
"'After the market continued to fall despite myriad support measures, the government reached peak panic mode and must have worried that investors would not only lose confidence in the markets, but in the government itself,' he said." This is the new issue in China, that now any weakening in the market is seen as a vote of no confidence in the central government. We'll see how the next week or so of trading goes.
Chinese households are the only sector with a healthy balance sheet. Their corporations are carrying epic amounts of debt in relation to GDP. The premise was to transfer wealth from households to corporations, to improve the corporate balance sheets (via share issuance).
In the USA, we will probably have a major market corection to current "bubble-ism" soon, and in my opinion a 20 to 25% drop in prices would deflate bubbles and probably make things more stable. A good thing in the long term, I think.
The other good thing about the current problems like we see in China, Greece, etc. is that it will hopefully slow down the trend of the elites making massive amounts of money with financial transactions instead of BUILDING THINGS and other productive activities. When the elites make money by pulling it from the lower classes that is a bad thing; they need to go back to building infrastructure and becoming more decent world citizens who care about the world that their children and grandchildren will be living in.
The problems that China is facing are bad, but they do have high savings rates and an increasingly better educated population in their favor.
It will be really interesting to see how things shake out in the next few years. I am fairly optimistic, but we will see what happens.
The Chinese already do this, but many of the projects are white elephants, or infrastructure that isn't useful (as opposed to useful infrastructure, which it still needs in many areas). How many steel plants do you need?
What China really needs is to get consumers consuming. People have to save lots of money to buy an overpriced house or to prepare for health emergencies, they can't afford to buy many things beyond that.
Here are ALL the headlines (contains the word "China" ) from Yahoo News in the last 3 days. 12 out of 13 have negative words in the headline:
-------------------
Xi Jinping has run into the one thing in China he __can’t control__
China's Boom Has World Bank __Worried__
The South China Sea is now a 'core interest' of Beijing — and that's a __problem__ for its neighbors
China’s __aggressive__ posture toward the South China Sea has been __stirring tensions__ in the...
China hunts for "manipulators" as stocks __tumble__
Is ‘China in Africa’ something to __fear__?
China __angered__ by new U.S. military strategy report
China says tourists __attacked__ in Turkey during __anti-China protests__
China Has World’s Fastest Trains, U.S. Lags
China’s __insatiable appetite__ for power
Zeroing in on __empty homes__, China throws developers a lifeline
S. Korean official falls to __death__ in China
China's __Unsettling Stock Market __Collapse__
-------------------
I wanted to record the headlines for a month, produce a fancy chart and demonstrate how extreme and rampant the bias is, but I keep forgetting about doing it. Besides, it's probably well known that most media outlets from any country (including the USA) are shit, so why beat a dead horse? Before you shout "foul", I agree we can debate all day on whether a particular word really has negative connotation. Oh, China's media outlets are shit too, even shittier.
As long as we get information from as many diverse sources as possible, we should be fine. The problem is majority of folks has been fed biased information since childhood, and once a system of beliefs and images is established it's nearly impossible to shake it off.
News headlines tend toward the negative in general, because it's not newsworthy when things work like everyone expects them to.
But based on my years of experience in consumption of news from major media outlets in the world, the relative rates of negativity towards China is in the vicinity of 12/13, i.e., extremely high and very much an outlier. Of course it's just my guesstimate and gut feeling.
Every pseudo-economist-nerve of mine tells me that one day China inevitably will crash and when it happens it will hurt us all.
But please, enough with the nitpicking in search of ideology affirmation.
Why this is not the crash everybody's waiting for? It's a stock market that is about to crash-out it's volume that was gathered just months prior. Not enough time for most of the worlds shareholders to incorporate Chinese prices into their portfolios.
The Chinese stockmarket's prior boom was mainly driven by the HK-SH stock-market link, allowing foreign investors to buy Chinese stock. Combine that with
- the assumption of risk-takers that the world would flock in gazillions to buy Chinese stock
- and the lack of investment options the ordinary Chinese people have to put their savings in
and you got your self a little bubble going.
But that bust (which is not close to eliminate the prior gains yet, btw) is not the bust we're rightly fearing. Not every economic accomplishment of China can be discredited just by the immorality of its leadership.
Definitely agree with your first statement; maybe you should look towards Australia as an example country that over the past 5 years has been increasingly following Chinese financial markets (Commodities and now property).
But this is hardly the concerning part, what is apparent is a loss of market trust in the system from the public and abroad. If China is to become a superpower, it cannot play by it's own rules.
A superpower by definition is it plays by its own rule.
Yes in that a superpower does bend the rules to suit themselves.
No in that a superpower is suddenly held to a higher standard than the rest of the world. You'd need to resort to expansionism if you wanted to continue the way that China is right now.