The death of Shanghai real estate vs. low market risk

Volatility in the Chinese stock market hit its lowest level this week since April 2007. Check out the graph below.  Seems investors are seeing less risk in Chinese stocks at this time.

Now, data out today shows that new mortgage loans in Shanghai dropped by an massive 98% in July… Yes 98% – that was not a typo.  In the past I’ve described the merits of an authoritarian input to the market – well here’s an example of the dark side of such authoritarian input.  A large decline was expected as the government continued to enact tightening policies this month, and transaction volumes are known to have declines.  However this is  huge and more than an indication that Chinese real estate is in for a hard landing.  Expect spill over, not least in the volatility chart above!

Oh – and check out China’s M2 – also ground to a halt in July. Not a positive sign!

Volatility in the Chinese stock market hit its lowest level this week since April 2007. Check out the graph below.  Seems investors are seeing less risk in Chinese stocks at this time.

Now, data out today shows that new mortgage loans in Shanghai dropped by an massive 98% in July… Yes 98% – that was not a typo.  In the past I’ve described the merits of an authoritarian input to the market – well here’s an example of the dark side of such authoritarian input.  A large decline was expected as the government continued to enact tightening policies this month, and transaction volumes are known to have declines.  However this is more than an indication that Chinese real estate is in for a hard landing.  Expect spill over, not least in the volatility chart above!

Off to the US. The reserve trap – What can the Chinese do?

Chinese Vice Premier Wang Qishan and State Councilor Dai Bingguo are off to Washington this week to meet primarily with Clinton and Geithner in a “Strategic and Economic Dialogue”.

In an op-ed in today’s Wall Street Journal Clinton and Geithner explain that “few global problems can be solved by the U.S. or China alone. And few can be solved without the U.S. and China together”.  The pair contend that addressing the global economic crisis and discussing sustained global growth will top their agenda, and outline the following points (amongst others):

FOR THE USA:
1. Rebuilding savings
2. Strengthening their financial system
3. Investing in energy, education and health care

FOR CHINA:
1. Continuing financial sector reform and development.
2. Spurring domestic demand growth and making the Chinese economy less reliant on exports.
3.  Raising personal incomes and strengthening the social safety

FOR BOTH NATIONS:
1. Avoid the temptation to close off their respective markets to trade and investment

There is a  Chinese saying: “When you are in a common boat, you need to cross the river peacefully together.” – so these talks  have the right idea.

Both economies are more tied than ever.  With its US$2 trillion in dollar denominated reserves the Chinese have been funding US consumption and growth for years.  Over that period talk between the two nations focused on what the US considers an artificially under valued Chinese remenbi.  With such staggering reserves I see the dialogue as likely to change, and expect the Chinese to start focusing US attention on its fiscal responsibility in a bid to ensure the value of those reserves.

The reserve trap? What can the Chinese do?
In my opinion the best thing the Chinese can do is to gradually and gently unwind a significant portion of its US reserves, and reinvest in ‘commodity’ producing assets, for example refiners and fuel sites,  and mines.  The fruits of these assets will ensure a long-term cash flow from ‘products’ the world cannot do without, and decouple the economy from such significant and direct influence of the greenback.  In addition, the Chinese will have greater control over the commodities required for its own domestic growth

Perhaps this is why the Chinese are so keen to invest in overseas mining, metal, and oil companies.

Capitalism with Chinese characteristics

I do believe that buying China in 2009 is like buying America in 1909.  So it was with some trepidation that I began reading Yasheng Huang’s Capitalism with Chinese Characteristics, expecting to have my bullish beliefs shattered.  Why did I expect as such? A number of fellow China enthusiasts had warned me off the book, claiming it would be nothing but anti-Sino propaganda.  As far as I was concerned their claim was like a red rag to a bull – I love having my assumptions challenged.  However,  Huang’s detractors were simply wrong!

If anything Professor Huang has provided a subtle, intelligent and nuanced account of Chinese growth since 1978.  The book’s subtitle says it all: “Entrepreneurship and the State”.  Throughout his work, Huang stresses the grass roots entrepreneurial spirit of the Chinese population as one of the main drivers of Chinese economic development.

The author dispels the myth that growth and entrepreneurship can be nurtured without protection of property (and body), and ease of access to capital. He highlights the 80s as the decade in which these characteristics persisted and allowed rural entrepreneurs to grow their businesses in China, as opposed to the commonly held myth that Chinese growth was primarily driven by the mass urbanization of the 90′s, and directed from above.  If anything, there is nothing ‘magical’ or unique about the framework surrounding China’s success – those years in which the state provided breathing space for individuals and their businesses together with ‘hints’ of legal protection were the most fruitful.

Huang considers China’s current leadership more likely than any since 1990 poised to foster policies and rhetoric likely to re-kindle the spirit of the 80′s grass root growth.    However only time will tell.

One more thought – as a professional equity research analyst I appreciated the imaginative, innovative, and non-dogmatic approach with which Huang approaches the data and subject of Chinese market reforms.  In addition, I believe one must question the impact the Government’s stimulus package is likely to have in the long-term if policies are not in place to capitalize on such spending at the grass roots.

Link to the book on amazon:

Capitalism with Chinese Characteristics: Entrepreneurship and the State