AHI: United States » The fall of China Mae: Part 1, Choose any …

By: David A. Smith1

When they start lying about economic data, short them.

Smith s Rule of Emerging-Market Investment

(Written March, 2016, backdated to June, 2007)

In January, 2008, I wrote a two-part blog post, Who s next?, suggesting that Fannie Mae was overextended and due for a market correction. Though I believed my own prophecy, I never acted on it, because it was (at the time) not merely contrarian but virtually unthinkable.2

Sources used in this post

YouTube video of CSIS February 2015 symposium3

Ms.

Stevenson-Yang at 3:00-28:15, 51:45-57:45, 1:08:30-1:10:45, 1:16:40-1:19:00

The New York Times (3 November 2015; dark green font)4

Wall Street Journal (January 28, 2016; orange font)5

The New York Times (25 February 2016)6

In September, 2012, after four or five years of intermittently posting on China, I concluded a six-part on China s urbanization and housing with the penultimate installment Between observation and doctrine, report doctrine .7

AHI: United States » The Fall Of China Mae: Part 1, Choose Any ...

Three premises that re braking down (published September, 2012)

In December, 2012, when San Bernardino filed for bankruptcy, I posted that Innumeracy precedes insolvency, because in my experience dating back to my earliest investor services days in 1976, when they cannot produce financial reports, the money they re not counting is disappearing faster than they can imagine.8

The Chinese stock market is a roach motel for capital.

Anne Stevenson-Yang, The New York Times, September 9, 20159

When the ultimate faithful reader, Matthew Healy, pointed me at a recent New York Times article, the headline alone set off alarm bells:

As China s Economic Picture Turns Uglier, Beijing Applies Airbrush

AHI: United States » The Fall Of China Mae: Part 1, Choose Any ...

Nothing to see here

And I thought, that s just what Fannie Mae did, and we know where that wound up.10

Economists have long cast some doubt on Chinese official figures, which show a huge economy that somehow manages to avoid the peaks and valleys that other countries regularly report.

If it s too smooth, it s been Botoxed like Fannie Mae s earnings were.11

AHI: United States » The Fall Of China Mae: Part 1, Choose Any ...

Smooth and flawless

Now, China can t collapse the way Fannie Mae did, because it s not levered the way Fannie Mae was, but China can collapse socio-politically if the money machine that has sustained the rapid (how rapid? does anybody really know?) expansion of China s economy and rise of the sudden Chinese billionaires suddenly stopped.12

sudden_stop

Sorry about the lack of highway

AHI posts on China s urbanization and capital

August 23, 2010: Gleefully running up the debts, 2 parts, SOEs and development13

October 28, 2011: A little learning is a dangerous thing, 2 parts, hukou and schools14

July 29, 2012: I m shocked, shocked, kickbacks in property development15

August 23, 2012: China s cities and housing: Nothing outside China matters 16

August 25, 2012: China s cities and housing: Imperial economy is successful society 17

August 26, 2012: Suburb stuffing, 2 parts, new ghost high-rise townks18

September 17, 2012: China s cities and housing: Between observation and doctrine, report doctrine 19

July 22, 2013: China s runaway money train, 4 parts20

December 16, 2013: Formula for an instant slum, 5 parts21

September 19, 2014: Where the money goes, people will follow, 3 parts22

February 1, 2016: Yuan to buy American housing?, 4 parts23

AHI posts on global financial markets

June 26, 2006: Fannie Mae, the implied story, 7 parts, HUD OFA report24

June 30, 2006: Part 5, Smoothing earnings with financial tricks, Gaming earnings25

January 22, 2008: Who s next?, 2 parts, Fannie Mae s thin capital ratios26

May 6, 2008: Catastrophe is a precondition to fundamental reform, 2 parts, US meltdown27

December 4, 2012: Innumeracy precedes insolvency, 4 parts, San Bernardino bankrupt28

October 7, 2013: The demise of deposit insurance, Russia investing in Cyprus29

September 3, 2015: House and country, 9 parts, Russian oligarchs buying London30

Rather than start this post where the Times did, its story, allow me to pluck out the conclusive anecdote:

AHI: United States » The Fall Of China Mae: Part 1, Choose Any ...

This is a good place to start

Anne Stevenson-Yang, of J Capital Research, said a colleague had once called a Chinese cement factory to ask for production data, and a factory employee had thought the researcher was calling from a government-affiliated research association. The employee told the researcher that the factory had already changed its numbers twice and would rather not do it again, so the researcher could choose any number that fit.3132

As the post will make clear, Ms. Stevenson-Yang is my newest heroine, for her February, 2015 talk (YouTube video of CSIS February 2015 symposium) on China at the Center for Strategic and International; Studies (CSIS) is riveting.33

AHI: United States » The Fall Of China Mae: Part 1, Choose Any ...

Throughout this post, I ll use many screen shots from her PowerPoint deck, because they punch.

AHI: United States » The Fall Of China Mae: Part 1, Choose Any ...

And like blog posts, they re free

Ms.

Steven-Yang s thesis, as backed up by her impressive command on facts gathered directly from China, comes in five parts that agree with my amateur sleuthing:

AHI: United States » The Fall Of China Mae: Part 1, Choose Any ...

What do you think of my puzzle?

1. Chinese statistics should be treated as unreliable propaganda

While it had not been proven that every Chinese government statistic is a lie, virtually every such statistics that anyone can verify has been shown to be such:

AHI: United States » The Fall Of China Mae: Part 1, Choose Any ...

Chance of sun today?

BEIJING China, the world s leading emitter of greenhouse gases from coal, has been burning up to 17% more coal a year than the government previously disclosed, according to newly released data. The finding could complicate the already difficult efforts to limit global warming.

It s not the finding that complicates the efforts, but the indisputable proof that China has no intention of limiting its emissions, and is simply bilking the west out of however much guilt money the European nations are willing to part with.

Ed.

AHI: United States » The Fall Of China Mae: Part 1, Choose Any ...

And that s after carbon-credit incentives

The increase alone is greater than the whole German economy emits annually from fossil fuels.

We also know that China s industrial production figures are questionable, and that its housing production bears no relation to any semblance of market demand.

AHI: United States » The Fall Of China Mae: Part 1, Choose Any ...

What s an error factor 58x the US overhang among friends?

Is it any surprise that the financial statistics are likewise fiddled?

In recent years, China made efforts to improve that data by releasing more information more frequently, among other measures.

It also gave its financial media greater freedom, even as censors kept a tight leash on political discourse.

Actually, before the fiddle becomes the embarrassing omission:

This month, Chinese banking officials omitted currency data from closely watched economic reports.

When in doubt, squelch bad news.

AHI: United States » The Fall Of China Mae: Part 1, Choose Any ...

It s for your own good

In January data released last week, the Chinese central bank omitted or hid one key number and altered the parameters of another that gave insight into what the central and commercial banks were doing to prop up the country s currency.3435363738

Or at least, postpone it to a later news cycle, when there might be something good to report.

Before that, officials pressed two companies to stop releasing early results from a survey of Chinese factories that often moved markets.

In China, speaking truth to power can get you indicted, fined, and in some cases jailed.

Just weeks earlier, Chinese regulators fined a journalist $23,000 for reposting a message that said a big securities firm had told elite clients to sell stock.

Truth is what the party wants it to be.

China s central bank and national statistics bureau are constantly changing, redefining, introducing and excluding statistics, and I don t think it is by accident, said Christopher Balding, an associate professor at Peking University HSBC Business School.3940

And we know nobody s hiding good news, which invites the question: just how bad is it?

AHI: United States » The Fall Of China Mae: Part 1, Choose Any ...

For many nations, 4 % GDP growth would be great news for China, it s slower than slow

Continued tomorrow in Part 2.

References

  1. ^ David A.

    Smith (www.affordablehousinginstitute.org)

  2. ^ Who s next? (affordablehousinginstitute.org)
  3. ^ YouTube video of CSIS February 2015 symposium (www.youtube.com)
  4. ^ The New York Times (3 November 2015; dark green font) (www.nytimes.com)
  5. ^ Wall Street Journal (January 28, 2016 (www.wsj.com)
  6. ^ The New York Times (25 February 2016) (www.nytimes.com)
  7. ^ Between observation and doctrine, report doctrine (affordablehousinginstitute.org)
  8. ^ Innumeracy precedes insolvency (affordablehousinginstitute.org)
  9. ^ The New York Times (www.nytimes.com)
  10. ^ that s just what Fannie Mae did (affordablehousinginstitute.org)
  11. ^ like Fannie Mae s earnings were (affordablehousinginstitute.org)
  12. ^ rise of the sudden Chinese billionaires (www.dailymail.co.uk)
  13. ^ August 23, 2010: Gleefully running up the debts (affordablehousinginstitute.org)
  14. ^ October 28, 2011: A little learning is a dangerous thing (affordablehousinginstitute.org)
  15. ^ July 29, 2012: I m shocked, shocked (affordablehousinginstitute.org)
  16. ^ August 23, 2012: China s cities and housing: Nothing outside China matters (affordablehousinginstitute.org)
  17. ^ August 25, 2012: China s cities and housing: Imperial economy is successful society (affordablehousinginstitute.org)
  18. ^ August 26, 2012: Suburb stuffing (affordablehousinginstitute.org)
  19. ^ September 17, 2012: China s cities and housing: Between observation and doctrine, report doctrine (affordablehousinginstitute.org)
  20. ^ July 22, 2013: China s runaway money train (affordablehousinginstitute.org)
  21. ^ December 16, 2013: Formula for an instant slum (affordablehousinginstitute.org)
  22. ^ September 19, 2014: Where the money goes, people will follow (affordablehousinginstitute.org)
  23. ^ February 1, 2016: Yuan to buy American housing? (affordablehousinginstitute.org)
  24. ^ June 26, 2006: Fannie Mae, the implied story (affordablehousinginstitute.org)
  25. ^ June 30, 2006: Part 5, Smoothing earnings with financial tricks (affordablehousinginstitute.org)
  26. ^ January 22, 2008: Who s next? (affordablehousinginstitute.org)
  27. ^ May 6, 2008: Catastrophe is a precondition to fundamental reform (affordablehousinginstitute.org)
  28. ^ December 4, 2012: Innumeracy precedes insolvency (affordablehousinginstitute.org)
  29. ^ October 7, 2013: The demise of deposit insurance (affordablehousinginstitute.org)
  30. ^ September 3, 2015: House and country (affordablehousinginstitute.org)
  31. ^ Anne Stevenson-Yang (www.jcapitalresearch.com)
  32. ^ J Capital Research (www.jcapitalresearch.com)
  33. ^ YouTube video of CSIS February 2015 symposium (www.youtube.com)
  34. ^ January data released last week (www.pbc.gov.cn)
  35. ^ hid (www.pbc.gov.cn)
  36. ^ one key number (www.pbc.gov.cn)
  37. ^ altered the parameters (www.pbc.gov.cn)
  38. ^ gave insight (www.pbc.gov.cn)
  39. ^ Christopher Balding (www.baldingsworld.com)
  40. ^ Peking University HSBC Business School (english.phbs.pku.edu.cn)

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