Did Soros Just Predict a China Crash? – Bloomberg 01-08-14

Salient to Investors:

William Pesek writes:

George Soros believes the main risk facing the world is a Chinese debt disaster that is unfolding in plain sight. Soros said China’s restarting of the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years. Soros sees eerie resemblances with the US in the years preceding the crash of 2008, but with a significant difference. In the US, financial markets tend to dominate politics, but in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises, so how and when this contradiction will be resolved will have profound consequences for China and the world.

Michael Pettis at Peking University and Jim Chanos at Kynikos Associates have been warning of this for years. Patrick Chovanec at Silvercrest Asset Mgmt said the “shadow” Chinese balance sheet would worry policy makers around the globe but for China’s obsessive opacity concealing the problem. China’s shadow-banking entities is its answer to Enron.

JPMorgan Chase estimates shadow banking is 69 percent of China’s 2012 GDP and is a wildly conservative guess. China fudges trade and other run-of-the-mill data, so you can imagine the lengths it goes to hide the magnitude of its credit bubble.

Stephen Roach warns of China’s propensity for thinking that slogans are sufficient. China can either restructure its economy or grow rapidly, but not both. The higher China’s growth rate, the less retooling that is going on and the more debt the nation is amassing behind the scenes.

The way such regional leaders win Beijing’s attention is rapid growth, causing dozens of nascent super cities all borrowing like mad to deliver big GDP numbers.

Read the full article at http://www.bloomberg.com/news/2014-01-08/did-soros-just-predict-a-china-crash-.html

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China Beige Book Shows Slowdown, Opposite Official Data – Bloomberg 09-25-13

Salient to Investors:

Leland Miller and Craig Charney at China Beige Book Intl said China’s economy slowed this quarter and demonstrates that the conventional wisdom of a renewed, strong economic expansion is seriously flawed. Their data reveal weakening gains in profits, revenues, wages, employment and prices.

The official pickup spurred analysts from Citigroup to Deutsche Bank to raise expansion estimates, but Nomura is among banks skeptical that any rebound will be sustained in 2014.

Jim Chanos at Kynikos Associates is maintaining short bets on China’s banks and says China will have a “credit event” in 5 years as the country fails to keep the same pace of loan growth.

Jim O’Neill expects China’s economy will double in 5 years to $16 trillion and says China is deliberately slowing the economy and is capable of putting the housing market and lending under control.

HSBC and Markit Economics said manufacturing strengthened more than estimated in September.

Paul Gruenwald at S&P said China’s growth may range from 7 percent to 7.5 percent during 2013 and beyond, becoming the “new normal.”

Read the full article at  http://www.bloomberg.com/news/2013-09-24/china-beige-book-shows-slowdown-opposite-official-data.html

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China’s economy slowed this quarter as growth in manufacturing and transportation weakened in contrast with official signs of an expansion pickup, a private survey showed.

Increases in business-investment and real estate revenue also slowed, while service industries picked up and employees became tougher to find, the survey from New York-based China Beige Book International said yesterday. The report is based on responses from 2,000 people from Aug. 12 to Sept. 4 as well as 32 in-depth interviews conducted later in September.

The quarterly report, which began last year and is modeled on the U.S. Federal Reserve’s Beige Book business survey, diverges from government figures showing faster factory-output gains in July and August that have spurred analysts from Citigroup Inc. to Deutsche Bank AG to raise expansion estimates. Nomura Holdings Inc. is among banks skeptical that any rebound will be sustained next year.

The results “show the conventional wisdom of a renewed, strong economic expansion in China to be seriously flawed,” China Beige BookPresident Leland Miller and Craig Charney, research and polling director, said in a statement.

The data “reveal weakening gains in profits, revenues, wages, employment and prices, all showing slipping growth on-quarter — no disaster, but certainly not the powerful expansion suggested by the consensus narrative.”

The benchmark Shanghai Composite Index of stocks fell 0.4 percent at the close, while the MSCI Asia Pacific Index was down 0.2 percent at 4:50 p.m. in Tokyo.

Growth Measures

The report, like the Fed’s version, doesn’t give estimates of gross domestic product growth or other indicators beyond the survey results. The economy expanded 7.5 percent in the April-June period from a year earlier, slowing for a second quarter, according to China’s National Bureau of Statistics. The government has since introduced measures including faster railway spending and tax cuts to aid expansion.

Jim Chanos, the founder of Kynikos Associates Ltd., said he’s maintaining short bets on China’s banks and that the nation will have a “credit event” in five years as the country fails to keep the same pace of loan growth.

“My caution is related to the credit-driven model,” Chanos, who correctly bet in 2001 on the collapse of Enron Corp., said yesterday on a panel moderated by Tom Keene at the Bloomberg Markets 50 Summit in New York.

Jim O’Neill, the former chief economist at Goldman Sachs Group Inc., expects that China’s economy will double in five years to $16 trillion, about the same size of the U.S. economy currently.

Deliberate Slowdown

China’s leadership is “deliberately” slowing the economy and is capable of putting the housing market and lending under control, O’Neill, a Bloomberg View columnist, said on the panel. “They are not shy or scared about meeting the scale of some of the challenges.”

The first China Beige Book, from the second quarter of 2012, said the economy was picking up, a few months ahead of official data indicating arebound. This year’s second-quarter report showed expansion slowing across the country and a decline in companies taking out loans.

The latest survey said 47 percent of manufacturers reported revenue gains, down 6 percentage points from the second-quarter survey. Growth in export orders was “stable” for the U.S. and Europe and “off a bit” in Asia and developing nations outside of Asia.

In transportation, including shippers, 51 percent of respondents said revenue rose, down 18 percentage points. Fifty-three percent of a broader sample of businesses said investment rose, a 4-point decline. Service revenue rose for 57 percent of respondents, up 3 points.

Borrowing Costs

The survey said bank-loan gains ebbed and borrowing costs declined while companies used non-bank channels more often. Forty-six percent of bankers said loans rose, down 14 percentage points from the prior survey, and there was a 20-point drop in the share expecting credit availability to ease in six months. The mean interest rate on all new loans fell 47 basis points to 6.63 percent, China Beige Book said.

So-called shadow lenders’ share of financing rose to 29 percent of loans in the third quarter, up 5 percentage points, the survey said.

Not all the China data showing a rebound have come from government sources. A report Sept. 23 from HSBC Holdings Plc and Markit Economics showed manufacturing strengthened more than estimated this month, mirroring an August increase in a similar government-produced index.

Asia Implications

Singapore Finance Minister Tharman Shanmugaratnam said in a speech today that while he doesn’t see a “hard landing” for China, a growth rate of less than 6.5 percent would have “major implications for the rest of the world, and especially for Asia.”

Paul Gruenwald, Standard & Poor’s chief Asia-Pacific economist, said in a report today that China’s growth may range from 7 percent to 7.5 percent during this year and beyond, a level that will become the “new normal.”

China’s statistics-bureau chief, Ma Jiantang, said earlier this month that the agency has “zero tolerance” for falsified data after it publicized cases of manipulated local numbers and the customs bureau cracked down on fraudulent export invoices. Li Keqiang, who became premier this year, said in 2007 that GDP figures were “man-made” and “for reference only,” according to a WikiLeaks cable.

Elsewhere in the world today, the Reserve Bank of Australia said banks must maintain loan standards as households take on more investment risk, according to the central bank’s semiannual financial stability review. New Zealand’s trade deficit widened to NZ$1.19 billion ($980 million) in August, the biggest shortfall since 2008, a report showed.

In the U.S., purchases of new homes probably rose in August from July, according to economists surveyed by Bloomberg News. Orders for durable goods probably fell a second month in August, another survey showed.

Chanos Undeterred by China Growth as O’Neill Bullish – Bloomberg 09-24-13

Salient to Investors:

Jim Chanos at Kynikos Associates said:

  • He is unconvinced by China’s improving economic growth and is maintaining bearish bets on the nation’s banks.
  • If you grow new credit by 30 percent to 40 percent of GDP a year, it is not difficult to reach the government’s expansion target, but China will have a “credit event” in 5 years as the country fails to keep the same pace of loan growth.
  • The mining industry will face difficulties.
  • A transition to focusing on consumption will be problematic for the credit cycle. Even as the central government acknowledges the needs to curb debt, it is difficult to keep local authorities from boosting borrowing and investing in new projects.

China Beige Book Intl said the China economy decelerated this quarter, contrasting with official data showing a pickup: increases in business investment and real estate revenue slowed, while service industries picked up and employees became tougher to find.

Jim O’Neill said:

  • China’s economy will double in 5 years to $16 trillion and said China is deliberately slowing growth and is capable of bringing the housing market and lending under control.
  • He is slightly surprised that China has allowed the yuan to appreciate this year, which shows their commitment to moving away from reliance on exports to spur growth.
  • The mining industry faces difficulties.
  • A new China focusing on consumption will lead to investment opportunities.

Read the full article at  http://www.bloomberg.com/news/2013-09-24/chanos-undeterred-by-china-as-o-neill-bullish-on-reforms.html

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U.S. Stocks Fall Amid Concern Over Stimulus Efforts – Bloomberg 09-25-12

Salient to Investors:

Malcolm Polley at Stewart Capital said things won’t improve as fast as people think, and Fed’s actions won’t lead to higher growth.

FRB of Philadelphia President Charles Plosser said this months new bond buying by the Fed won’t boost growth or hiring and may jeopardize Fed credibility.

The Dow is 5.3 percent from its record high, S&P 500 is 8.6 percent from its record high.

Burt White at LPL Financial said economic numbers are decent, with housing healing a real boost to confidence.

Jim Chanos at Kynikos Associates said Apple stock is too high, prefers Microsoft as a hedge against shorting Hewlett-Packard .

Tanya Jakusconek at Scotia Capital on September 20 said gold-mining stocks should start to outperform bullion as capital-spending cutbacks lead to greater cash flow for many producers.

Read the full article at http://www.bloomberg.com/news/2012-09-25/u-s-stock-futures-little-changed-before-sentiment-report.html

Chanos Sees No Shortage of Overpriced Stocks in U.S. Bull Market – Bloomberg 09-19-12

Salient to Investors:

Jim Chanos at Kynikos Associates says:

  • He expects declines in companies that may be inexpensive compared with earnings, like in natural gas, which have enormous cash needs, and iron-ore producers, where industry capacity will expand globally even as demand stalls because of China’s slowdown
  • A number of high-profile natural gas companies may be in financial difficulty as early as next year.
  • In tech, it’s very difficult to prosper again when you have been leapfrogged.
  • The US economy and banking system is in better shape than others
  • The surprises will be on the positive side in the U.S. market
  • Questions being asked about the Chinese banking system are getting more granular

Read the full article at http://www.bloomberg.com/news/2012-09-19/chanos-sees-no-shortage-of-overpriced-stocks-in-u-s-bull-market.html

Stocks Show Americans Better Off With S&P 500 Cheap to World – Bloomberg 09-17-12

Salient to Investors:

The S&P 500 Index is up 82 percent since Obama took office, closer to its all-time high than any other stock markets, and at 14.9 times reported earnings, the biggest discount to MSCI’s global measure since March 2010, and 9.1 percent below the five-decade mean – the last two times the ratio was this low versus global stocks, in 2003 and 2009, gains in the S&P 500 lasted for at least three years. The S&P 500 has never stayed above 1,400 when the unemployment rate was this high.

Abby Joseph Cohen at Goldman Sachs says its most thoughtful clients are more confident, and America is dramatically better off than we were.

Jim Chanos at Kynikos Associates says the American economy and banking system are in better shape than others, and expects surprises will be on the positive side in the U.S. market. Chanos says recovery in U.S. housing and improving auto sales point to a strengthening economy.

Chris Hyzy at U.S. Trust expects growth in the US and the world will better than expected next year, and is bullish over the next three years.

Ryan Larson at RBC Global Asset Management (U.S.) said on Sept. 12 that these multi-year highs have come largely from stimulus accommodation from central banks.

Fidelity report the average 401(k) balance rose to $72,800 in Q2 from $62,400 in 2008.

Jeffrey Gundlach at DoubleLine Capital said last week that stocks won’t repeat the poor performance of 2000 to 2010.

Read the full article at http://www.bloomberg.com/news/2012-09-16/stocks-showing-americans-better-off-with-s-p-500-cheap-to-world.html

Grantham Sees 25% Chance That China May ‘Stumble’ by Next Year – Bloomberg 04-27-11

Salient to Investors:

Jeremy Grantham at Grantham Mayo Van Otterloo said:

  • There is a 25 percent chance that China will stumble by 2013 over imbalances such as too much capital spending, an overheating real estate market, or accelerating inflation. China may slow to considerably less than the 9.7 percent pace in Q1 2012.
  • China has the ability to get everybody to change the game on a dime.
  • If the Chinese housing market takes a break, you will have a lot of banking losses because many loans look incredibly suspicious.
  • A decline in China’s economy would hurt the commodity markets, and if accompanied by better-than-expected weather globally, would break the commodity markets en masse.
  • Global demand for energy, metals and crops is outpacing supply, creating brilliant long-term prospects for commodities.

In January, Grantham said the US stock market rally is living on borrowed time, driven by low interest rates and unprecedented Fed stimulus, that the S&P 500 is worth 920. and that when the Fed eventually runs out of money, the US stock market will fall.

Edward Chancellor at Grantham Mayo Van Otterloo has said since last year that China has displayed symptoms of a great speculative mania. Jim Chanos said in March that the property bubble in China is as big as or bigger than what we saw in the West when compared with the size of the economy.

Read the full article at http://www.bloomberg.com/news/2011-04-28/grantham-sees-25-chance-that-china-may-stumble-by-next-year.html

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