Did you read the massive bear case cover story on China this weekend in Barron’s? Oh my god, you have no idea.
I know the steel and coal stocks are all “setting up” technically, and I don’t doubt they’re in for a bounce – but my god, this is not going to end well. The Barron’s piece, called Falling Star, is by Jonathan Laing and it looks at the fictitious finances, desperate demographics and incredible inefficiencies of the Asian nation. It’s paywalled but I’ll steal you a scrap or two in case you’re not a sub:
Start with a dollop of Chanos:
Chanos contends that China is headed for a hard landing of epic proportions because of its shaky financial system and an imminent collapse in its property market, which undergirds the entire economy. “I’m being conservative when I say that the coming bust in China’s real-estate market will be a thousand times that of Dubai,” he told Barron’s.
Then a bit of GMO:
“All I know is that China has all the earmarks of a classic mania that will end badly—a compelling growth story that seduces investors into ill-starred speculation, blind faith in the competence of Chinese authorities to manage through any cycle, and over-investment in fixed assets with inadequate returns facilitated by an explosion in credit.”
And a pinch of bull-turned-bear Prof William Overholt:
“I’ve been championing the China growth story in various academic papers and publications for 30 years,” he continues, “including a book called The Rise of China in 1993, but I don’t want to be a permabull when a great historic trend may or may not be changing.”
And those are just the quotes, here are some of the stats:
“last year residential construction accounted for 9.2% of Chinese GDP. Compare that with 6% in the U.S. at the peak of its housing boom in 2006”
“A falloff in demand for steel, cement, and copper would lead to heavy layoffs. He reckons that some 25% of all Chinese steel consumption goes into residential real estate.”
“20% of Beijing residents own two apartments or more in the city. Thus any precipitous slide in the property market would have a tremendous negative wealth-effect”
“Local governments typically raise 30% to 40% of their annual revenues from land sales”
“some 35% of all bank loans in China are exposed to the vagaries of the Chinese property market.”
There’s so much more. I started off the year talking about being more nervous over Chinese growth stalling than Europe figuring out their banking system. A casual glance at the now-finished first half for US stocks shows that I was right to be cautious – nearly anything that relies on Chinese consumption (materials, shipping) has been slaughtered. It should come as no surprise, for example, that the S&P energy sector ($XLE)is far and away the worst-performing one for Q2, down over 12%.
I expect this to continue, short-term relief rallies aside. I’ll not be chasing the coals and steels on this bounce – because I know the end users in the Chinese infrastructure and property development markets don’t need them just yet.
Oh yeah, while I was typing this we got hit with yet another weaker-than-expected Chinese PMI number, the seventh straight.