China’s “Terminal Phase” of Credit Bubble Excess
Courtesy of Mish Doug Noland writes a great "Credit Bubble Bulletin" column every week. In case you missed it, please read Noland’s Credit Bubble Year In Review. It’s a gem. Here is a nice snip but there is much more in the article.
To an extent never before imagined, economies around the globe could partake in aggressive fiscal and monetary stimulus, rapidly expand Credit, reflate markets and economies – and have little worry about currency vulnerability or an outflow of speculative finance (a far cry from the ‘90s). The world had changed, and global asset prices were revalued based on a backdrop of expected ongoing dollar devaluation and newfound resiliencies in Credit systems and financial flows to (“undollar”) “Periphery” economies and non-dollar asset classes.
Chinese equities (Shanghai Composite) ended the year with a gain of 80.0%. While impressive, Chinese stocks finished last in the “bric” sweepstakes. Russian (RTS Index) stocks surged 128.6% in 2009, followed by Brazil’s (Bovespa) 82.7% and India’s (Sensex) 81.0% advances.
But it is China that resides at the very epicenter of global reflationary forces. A $600bn stimulus package and an incredible $1.0 TN first-half expansion of bank lending propelled a remarkable economic turnabout. After slowing modestly to 6.1% annualized in Q1, GDP jumped back to almost 9% by the third quarter. Some are now forecasting a return to double-digit growth in 2010. For the first time, 2009 saw Chinese vehicle sales surpass those of the U.S. Record Credit growth also stoked the reemergence of real estate inflation and rampant asset speculation.
It’s my view that 2009 marked the onset of China’s “terminal phase” of Credit Bubble excess. The China Bubble is enormous and it is historic. It’s poised to make Japan’s late-eighties Bubble era appear rather petite – and to perhaps even rival the scope of the U.S. Credit Bubble. Importantly, “terminal” phases of excess notoriously create acute financial and economic fragilities. They tend to foment perilous asset market distortions; distribute wealth poorly/inequitably; foster systemic malinvestment and structural impairment; and create a financial/economic structure dependent upon unrelenting Credit expansion and speculation. Only determined policymaking – with a willingness to pierce Bubbles and live with the consequences – can stem what evolves into powerful Bubble momentum and an expanding constituency supporting uninterrupted monetary accommodation.
Chinese foreign reserve holdings jumped almost 20% this year to a staggering $2.273 TN. Overall, total global official foreign reserves inflated almost $900bn during 2009 to a record $7.732 TN (5-year gain of 90%!). The Chinese, in particular, rummaged the world in search of commodities and resource assets. Global reflationary forces certainly fueled a spectacular 2009 for the traded commodities markets. The Goldman Sachs Commodities Index surged 50.3%. Gold jumped 24.2% and silver surged 49.4%. Crude oil jumped about 78% and gasoline surged around 93%. Copper gained 137%. The so-called “commodity currencies” posted big gains this year. The Brazilian real gained 32.7%, the South African rand 28.5%, the Australian dollar 27.6%, the New Zealand dollar 25.1%, the Norwegian krone 20.0%, and the Canadian dollar 15.9%.
Here at home, the Fed’s zero interest-rate policy coerced U.S. savers out of money market funds, CDs and Treasuries and stoked a spectacular return to risk markets. Stocks excelled and the riskiest stocks really excelled; junk excelled; collateralized debt obligations excelled; leveraged loans excelled; virtually everything excelled. It was a year of record flows into the emerging markets. It was a record year of junk bond issuance. After trading as high as 1300 bps, junk debt spreads ended the year at a 2009 low of 536 bps. Investment-grade spreads dropped from 290 bps in March to end the year at 123 bps.
A stock market revival emboldened bullish analysis. Many speak of sound U.S. corporate balance sheets, disregarding the reality that this “strength” is a direct consequence of the massive expansion of household and, more recently, public sector debt. Many optimistically talk of de-leveraging, while the government borrowing binge pushes total system debt further into uncharted territory. With bank lending stagnant at best, U.S. reflation is being fueled by massive issuance of Treasury, corporate and municipal marketable debt securities.
With the U.S. system stabilized, an over-liquefied global financial “system” then rushed feverishly back to asset markets. Synchronized U.S. and global market intervention rejuvenated the hedge funds and, more generally, the “leveraged speculating community.” Indeed, 2009 was a historic year of global, government-induced synchronized reflation and speculation in virtually all markets, everywhere. The greater the financial and economic fragilities, the more speculators could bank on an extended period of ultra-loose financial conditions.
Economic Crash in China
Inquiring minds are reading Contrarian Investor Sees Economic Crash in China
James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true.
Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.
"Bubbles are best identified by credit excesses, not valuation excesses," he said in a recent appearance on CNBC. "And there’s no bigger credit excess than in China."
In addition to predicting Enron’s demise, he also spotted the looming problems of Tyco International, the Boston Market restaurant chain and, more recently, home builders and some of the world’s biggest banks — his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored.
"I find it interesting that people who couldn’t spell China 10 years ago are now experts on China," said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. "China is not in a bubble."
"In China, he seems to see the excesses, to the third and fourth power, that he’s been tilting against all these decades," said Jim Grant, a longtime friend and the editor of Grant’s Interest Rate Observer, who is also bearish on China. "He homes in on the excesses of the markets and profits from them. That’s been his stock and trade."
"His record is impressive," said Byron R. Wien, vice chairman of Blackstone Advisory Services. "He’s no fly-by-night charlatan. And I’m bullish on China."
I will easily take the side of Noland and James S. Chanos vs. Jim Rogers and Byron R. Wien. Please see China Faces Crash Scenario for more details.
