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SOVEREIGN MAN

“This time it’s different”– the four most expensive words in the English language

June 28, 2011
Hong Kong

For at least a decade now, the world has marveled at China’s amazing economic transformation.

Hundreds of millions of people have been lifted out of medieval peasantry and brought into the modern world. Living standards have improved dramatically. China has become the manufacturing hub of the world.

And, today, China boasts world-class infrastructure on a truly impressive scale.  Beijing, Shenzhen, and especially Shanghai, have all become modern metropolises with facilities on par with any in the world.

Every taxi driver from Melbourne to Manitoba, and every money manager from London to L.A., recite the same mantra: insatiable demand from China (and India) will guarantee decades of prosperity for countries such as Australia and Canada which are blessed with the raw materials that billions of Chinese and Indian consumers require to emulate western lifestyles.

So the story goes…

Thing is, once anything has become mainstream knowledge in financial markets, it’s usually a sign we’re nearing the END of the boom. Or, at the very least, that all the positive news is already baked in the price.  That’s where we are today with China.

The Australian press is constantly running economic puff pieces, declaring endless rosy times for the country due to its commodity exports to China. This sort of thing borders on propaganda.

They claim that “this time it’s different,” suggesting that the resource boom in Australia which got underway in the 1990s is not going to bust this time around (as has happened so often in the past).

It’s been said that, “this time it’s different” are the four most expensive words in the English language. They have an uncanny knack of showing up at the top of EVERY boom, just before the bubble bursts.

I’ve been around in the financial markets long enough, and lived through enough spectacular booms and busts, to know the telltale signs of a bursting bubble when I see them.

China today fits the bill…  and that’s most likely going to be very bad news for industrial commodity prices and the economies of the countries that supply them. China accounts for less than 10% of global economic activity. Yet, the country is consuming nearly half of all the steel, cement, and copper used in the world.

You’ve seen the videos– vast, empty ghost cities in China with thick forests of empty apartment towers, 8-lane highways with no cars on them, and brand new government buildings and public infrastructure all sitting idle.

I’ve read estimates from well-respected, independent (i.e. not invested in seeing a continuance of the Chinese gravy train) analysts who suggest that there are up to 64 million empty apartment buildings in China. This is a misallocation of capital on an unimaginable scale.

To be sure, any time you have a government-directed boom that lasts for 3-decades and is fueled by cheap credit, you are going to get massive economic distortions. Construction and fixed capital formation in China has accounted for more than 60% of GDP for more than 10 years in a row now. This is simply not sustainable.

These empty cities, bridges to nowhere, airports with only three or four flights per week, brand new bullet trains with hardly any passengers (because they can’t afford the fares), and millions of empty apartments are NOT indicators of a healthy economy at all.

True, China’s economy is quite a bit of cloak and dagger… they don’t let you see what’s going on behind the curtain.  But there is enough objective and empirical at hand to suggest major problems in the country, and we should take measures to protect ourselves from the consequences.

I’m in Hong Kong right now and will be heading over to the mainland in a few days to put some boots on the ground myself (concurrent to Simon’s PIIGS tour in Europe). Naturally, you’ll be the first to hear about our findings, right here, in Notes from the Field.  Stay tuned.

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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  • http://www.silver-investor-gold-investor.com SilverInvestor

    Here’s a different view of the “ghost” cities, etc.

    The Myth of China’s Ghost Cities

    Jeff

    • http://www.animalsdinosaursandbugs.com/The-Future.htm Peter Legrove

      Thanks Jeff
      The Myth of China’s Ghost Cities about sums up what is happening with the housing market in the middle kingdom. If anything a lot of people are waiting for the price to come down so they can buy cheaper. The government has already said they want the price to come down. I live in Guangzhou and there are many apartment buildings in the outer suburbs waiting to be sold. And they will be sold as a lot of the apartments closer to the city have already been sold. They just keep moving out. I thought because of over supply the price would come down but not so. Anyway the price near where i live is around 10,000RMB a square meter. Not so long ago it was 5,000RMB a square meter. I don’t know what the price is in the outer suburbs.
      Peter

  • http://www.silver-investor-gold-investor.com SilverInvestor
  • Diogenes_

     Great article. The ‘sky scraper over building index’ has been noted in past regional bubbles that popped, such as in the US. Over investment in long term capital projects is the classic Austrian economics sign of central banking induced malinvestment.

     I think what the world needs are new businesses that give risk ratings to countries,regions and fiat currencies, similar to the bond rating agencies.  Too many people around the world have been propagandized into thinking that massive credit/debt created by a nations central bank doesn’t count as an economic risk. Governments and their fiat debt money are massive con man theft operations.

     Finally, I’m pretty sure Tim meant to write ’64 million apartments’ instead of ’64 million apartment buildings.’

    • Porageater

      Actually I believe it may be based on a published statistic showing that 64M electricity meters are registering zero usage.

  • Aryannomad

    So if commodity-based economies like Australia are prospering off a Chinese bubble soon to pop than where is it safe to put our money?  

  • http://www.facebook.com/frank.dobner Frank Dobner

    China is an economy built on infrastructure projects. See the article link below on China rebuilding the San Francisco Bay Bridge (east segment) in the June 26, 2011 New York Times. China is manufacturing sections of the bridge and shipping them over on container ships. China is still price competitive with U.S. suppliers, even though China has no natural resources for the steel. It says that workers are working 10 and 11 hour days for now up to $12 per day (beyond the prevailing $9 per day prior).  It is not sustainable to have people working for those type of wages….there will be no consumer economy that will grow at that level.

    http://www.nytimes.com/2011/06/26/business/global/26bridge.html?_r=1&scp=1&sq=china%20san%20francisco%20bay%20bridge&st=cse

  • http://voyagner.com Dan Haneveer

    Great to see something from an Australian/Canadian perspective, still there is so little coverage from this point of view I can’t really make up my mind on where it is we are really heading.

  • ozzieaustin

    Simon,
    This is an interesting article no doubt. I am an Australian resident and trader and I understand what you are saying about the “shell be alrite, we got China” attitude. 

    However, remember that this Chinese bubble popped in 2007. China does not fit the bill of “this time it is different” today, but in 2007! The Chinese stock market has been hammered and is a shade of its former self unlike most other markets which have regained ground. The points you illustrate in China are not new although very real. Thus, I don’t think your point of “this time is different” makes sense- i.e. it is not as if everyone is rampantly bullish this market. If anything, everyone is bearish or concerned with China globally given inflation concerns, given funding pressures, given the housing market etc

    Australia certainly is leveraged to the China story to a v.risky degree. However, I genuniely do not perceive a collective sentiment of “this time is different”. If anything, our market and public is very aware of our 2 speed economy

    Thanks
    Austin

  • http://www.rarelist.co.uk Rare Books

    My Chinese friend went back to China a couple of years ago and the most notable thing was the smog. I’m wondering what kind of health problems China will be experiencing in the coming years

  • http://www.animalsdinosaursandbugs.com/The-Future.htm Peter Legrove

    Well Tim welcome to the next superpower, it’s an amazing place. Check out the medium speed train from Shenzhen to Guangzhou, takes 1 hour 6 mins. By the time it gets to GZ there are people standing in the carriages. In GZ have a look for the apartment buildings waiting to be sold. There are some around but you will have to take the subway to the outer suburbs to find them. And no one seems to be too worried about them not selling because they know they will sell sometime. Anyway why look for empty apartment buildings there are better things to see. Don’t go shopping in the supermarket on the weekends unless it is raining or you like standing in a line at the checkout. Before I go in I always check to see how many people are waiting at the checkouts. If I can’t get out in a hurry I don’t go in. If you want a pizza get there early so you don’t have to pick a number to wait for a table. This place is humming. Enjoy it.

  • http://www.animalsdinosaursandbugs.com/The-Future.htm Peter Legrove
  • ThousandMileMargin

    Back in 1996, China was building 10 million apartments per year. In 2010 they built 1.8 billion sqm of apartments, which is equal to 30 million apartments of 60sqm each. At the current rate of construction, they will build 90 million apartments over the next 3 years. So instead of 64 million empty apartments, there will be about 150 million empty apartments. These apartments could house 400 million people, which is equivalent to all the people expected to move from the country to the city between now and 2030.
    So 3 years from now China will have built enough apartments to complete the whole urbanization process. If they keep building at this rate until 2015, they will have more floor space per capita than Germany or the UK.
     
    The same is true for airports, highways, stadiums and railways. Within 4 years they will have built all the infrastructure they need to catch up with Europe or the USA. Their highway system is already as large as the USA, and they have far fewer cars. See the SocGen report on China’s Construction Bubble.
     
    I expect they’ll keep it up for another 2-3 years, but when the boom ends we can expect base metal prices to plunge.
    Dubai times 1000 indeed.

    • http://www.facebook.com/people/Brian-Lopez-Dc/547584253 Brian Lopez Dc

      i wrote my post before i read yours. thanks for the answer. so what exactly does this mean for the global economy. cause china will slow down? therefor will some place like India be the next place?

      • ThousandMileMargin

        What makes you think there will be a “next place”?
        The USA can expect a decade of decline. Europe can expect a decade of decline. Japan can expect another decade of decline. China will boom until it doesn’t then there will be a long slump when the crash comes. All the countries that are getting rich exporting to China will slump too – this affects Australia, Brazil, Africa. I doubt India will grow strongly when everyone else tanks.

  • http://www.facebook.com/people/Brian-Lopez-Dc/547584253 Brian Lopez Dc

    I have heard a lot of talk about how bad the empty cities are. but has anyone given thought to what effect the three gorges dam might have on those empty cities? could it be possible that those cities where/are meant to house those who have and continue to be effected by the dam. by creating a place for those people to move to when certain locations get over crowded? just a thought, i havent heard anyone talk about the possibility of this. so im either mistaken, im clever or im smoking dope. help please??

    • http://www.animalsdinosaursandbugs.com/The-Future.htm Peter Legrove

      I think you are on the right track. I would say some of the
      photos of empty cities are from the cities that have been built in Sichuan after the earthquake, to house the people who lost everything. Usually in China the whole construction project will be finished before anybody is allowed in. You can walk around and have a look at the place but you can’t move in until after the opening ceremony. The opening ceremony is the cutting of the red ribbon and then people just stream in. This year is the 90th anniversary of the Chinese Communist Party and on Chinese TV they show achievements that the party has done over the years. And they show the beautiful cities that have
      been built to re-house the Sichuan earthquake survivors. I mean some of these cities are cities I’d be proud to live in. They interview people showing how they lived before the earthquake and how they live now in the beautiful new
      city. They always remember the people who didn’t make it through the earthquake. Welcome to the next superpower.

  • LibertyTreeBud

    If China has the same gambling banksters and global elite manipulators that are twisting the rest of the world into knots then they are in the same boat, maybe not on the same ‘deck’ as the rest of us, but still at the beck and call of their owners.

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