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SOVEREIGN MAN

One alarming indicator from China

[Editor's note: Sovereign Man's Chief Investment Strategist Tim Staermose is filling in today while Simon spends a few days with designers and engineers at the farm in Chile. More on those developments soon.]

For a few decades now, the Communist Party in China has had an implicit social and political contract with the Chinese populous for decades, which goes something like:

“We will deliver economic growth and improvements in your material living standards.  You will meekly do as you are told, refrain from dissent, work hard, save a huge percentage of your money, and ignore obvious corruption.”

While nearly everyone in China has benefited to some degree under this current “system,” the wheels are definitely starting to come off. Official GDP numbers are now slowing, real estate prices are falling, and inflation is quickening.

Now, I’ve made no secret that I’m decidedly bearish on China’s medium-term prospects.  After my trip there back in June to conduct some good old-fashioned “boots on the ground” research, I wrote extensively about the massive overbuilding of apartments, office blocks, and all manner of infrastructure on an almost unimaginable scale.

Put simply, every year since 2005, more than 50% of China’s GDP has consisted of construction-related spending.  The law of diminishing marginal returns says this simply cannot continue.

It represents a misallocation of the household sector’s hard-earned savings on a colossal scale, and I believe it will end badly.  Not a day goes by that there aren’t riots and protests somewhere in China (including cyberspace) as the downtrodden man in the street reaches his froggy boiling point.

Increasingly in China, though, those who see the writing on the wall can see that the days of system stability are numbered.  And they’re not hanging around.

For a number of years, mainland Chinese buyers have accounted for nearly all new apartment sales in Melbourne and Sydney.  On numbers I’ve seen, they have been investing between A$2 billion and $3 billion a year.

An increasing number of mainland Chinese are establishing permanent residency and sending their child(ren) to school and university in Australia. And Simon recently reported that from an offshore strategies conference in Shanghai that the room was packed full of Chinese people learning how to diversify abroad.

They all want to have their options open when China’s economy and political system hits turbulence.

Judging by the poor economic numbers coming out of China, this day of reckoning is drawing ever closer.  One alarming indicator is that the Chinese renminbi has traded down to the lower limit of its strictly controlled trading band for SEVEN TRADING SESSIONS IN A ROW.

This suggests that there is more money leaving China than being earned from overseas trade or invested there. The exchange rate may be only one simple indicator, but it’s a great barometer for what is going on: China is not going to be the savior of the global economy, but rather another casualty.

If you have stashed some money in a Yuan-denominated bank account for the long haul, you’ll probably still be fine relative to other paper currencies.  But, I would caution against expecting it to be a smooth, one-way ride to the top.

Personally, I’d rather have the bulk of my savings in real wealth:  things like gold and silver bullion, productive real estate, and strong cash-generative businesses.

And for the cash that I do hold, it’s virtually all employed trading my 4th Pillar investment system earning superior risk-adjusted returns with minimal volatility.

 

[Editor's note: Tim's 4th Pillar investment system has delivered consistent gains throughout this year's massive market turmoil.  Members following his trades have enjoyed a nearly 90% success rate. Next week, enrollment in the 4th Pillar will be opened once again for a very limited time, stay tuned for more.]

About the author: Born to a Danish father and British mother, in Dar Es Salaam, Tanzania, Tim Staermose has led an international life since the day he was born. Growing up, he also lived in Egypt, Denmark, and Singapore, before eventually settling in Australia, where he completed his education and took out citizenship. Since then he has also lived and worked in Hong Kong, and Manila, Philippines, in the field of equity research — both for a bulge-bracket Wall Street investment bank, and for an independent investment research firm. Today, when not traveling the globe looking for investment and business opportunities for the Sovereign Man community and catching up with his diverse, multinational group of friends, he divides his time between Hong Kong, and the Philippines.

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Comments on this entry are closed.

  • disqus_TLcMqwnySr

    “Personally, I’d rather have the bulk of my savings in real wealth:  things like gold and silver bullion, productive real estate, and strong cash-generative businesses.”

    Isn’t this exactly what China has been accumulating?

    Precious metals have been flowing into the nation for years now.

    Real estate depends on existing structures – it probably won’t be long until the prices collapse and the ghost cities become affordable. It would be folly for China to nationalize, as that would scare off investors, so it’s better to let the investors whose eyes were glazed over with greed take their losses. This is the receding financial water level before the population tsunami comes crashing in.

    Strong cash-generative businesses like Foxconn Electronics, Jinshan Mining and Sinopec Petrochem?

    Looks to me like China has a long-term view based on residual income. The financial war going on now may leave China to rule the roost just as the US had a modern, undamaged infrastructure post-WWII.

    • amerikanka

      A friend of mine who has been reporting from Afghanistan for years tells me that while the US is spending who knows what on who knows what, China has been buying up all the rights to mine Afghan copper. 

  • Contrarianism

    This is the same case Jim Chanos has been making for over a year now. I think both you and Chanos are correct about the outcome, but nobody can be correct about the timing, that is unless you are lucky.

    The China real-estate bubble might continue expanding unabated for months, or even
    years, who knows? You can’t tell by looking at a bubble when it is going to reach its maximum elasticity, you only know
    it’s stretched too far the day AFTER it’s blown. But when that day of reckoning comes, not even your “real wealth” is going to be immune.

    If we get inflation, yes, Gold, Silver, commodities, real hard assets  -  all those real things you own will go up, but have you considered that we might not get inflation? Have you considered that that precious metals are also in full blown bubble mode? Gold is trading at $1800 an ounce, up from $250 an ounce just ten years ago.

    If we see the world de-lever (as I predict it will) the gold bubble will pop along with Chinese real-estate, the Euro, and the US market, everything will collapse.

    Everyone assumes we are in store for years of hyper-inflation, but if history has taught us anything, it has taught us to be contrarian and expect the opposite from the consensus. The opposite is deflation, and in a deflationary environment everything goes down… including precious metals.

    As counter intuitive as it may appear to be, especially in light of the 24/7 money printing and debasing of our currencies, the US dollar (yes, that fiat currency) just might be the safest asset to have and to hold.

    http://www.contrarianism.net

  • Mat Newton

    Wanna post a credible source for your 50% of GDP claim?

    It defies all logic.

  • cksingapore

    It definitely seems like China is headed for a downturn along with much of the world, but it will be interesting to see who comes out with the most accurate prediction.  Jim Chanos and Burt Dohmen seem to think that China will basically lead us into the global economic downturn for some of the reasons mentioned above.  However, Jim Rogers, who’s incredible knowledgeable in regards to many things, but especially China, thinks that China will fare better than much of the rest of the world.  Rogers thinks that Chinese banks aren’t as shaky as Western banks.  We shall see in the coming years….

  • Amissiontomars

    «An increasing number of mainland Chinese are establishing permanent
    residency and sending their child(ren) to school and university in
    Australia.» Mainly because of this http://www.chinahush.com/2009/10/21/amazing-pictures-pollution-in-china/

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