AHI: United States » The fall of China Mae: Part 1, Choose any …
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
Stevenson-Yang at 3:00-28:15, 51:45-57:45, 1:08:30-1:10:45, 1:16:40-1:19:00
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
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.
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
Nothing to see here
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.
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
Sorry about the lack of highway
AHI posts on China s urbanization and capital
October 28, 2011: A little learning is a dangerous thing, 2 parts, hukou and schools14
AHI posts on global financial markets
June 30, 2006: Part 5, Smoothing earnings with financial tricks, Gaming earnings25
May 6, 2008: Catastrophe is a precondition to fundamental reform, 2 parts, US meltdown27
Rather than start this post where the Times did, its story, allow me to pluck out the conclusive anecdote:
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
Throughout this post, I ll use many screen shots from her PowerPoint deck, because they punch.
And like blog posts, they re free
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:
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:
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.
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.
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.
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?
For many nations, 4 % GDP growth would be great news for China, it s slower than slow
Continued tomorrow in Part 2.
- ^ David A.
- ^ Who s next? (affordablehousinginstitute.org)
- ^ YouTube video of CSIS February 2015 symposium (www.youtube.com)
- ^ The New York Times (3 November 2015; dark green font) (www.nytimes.com)
- ^ Wall Street Journal (January 28, 2016 (www.wsj.com)
- ^ The New York Times (25 February 2016) (www.nytimes.com)
- ^ Between observation and doctrine, report doctrine (affordablehousinginstitute.org)
- ^ Innumeracy precedes insolvency (affordablehousinginstitute.org)
- ^ The New York Times (www.nytimes.com)
- ^ that s just what Fannie Mae did (affordablehousinginstitute.org)
- ^ like Fannie Mae s earnings were (affordablehousinginstitute.org)
- ^ rise of the sudden Chinese billionaires (www.dailymail.co.uk)
- ^ August 23, 2010: Gleefully running up the debts (affordablehousinginstitute.org)
- ^ October 28, 2011: A little learning is a dangerous thing (affordablehousinginstitute.org)
- ^ July 29, 2012: I m shocked, shocked (affordablehousinginstitute.org)
- ^ August 23, 2012: China s cities and housing: Nothing outside China matters (affordablehousinginstitute.org)
- ^ August 25, 2012: China s cities and housing: Imperial economy is successful society (affordablehousinginstitute.org)
- ^ August 26, 2012: Suburb stuffing (affordablehousinginstitute.org)
- ^ September 17, 2012: China s cities and housing: Between observation and doctrine, report doctrine (affordablehousinginstitute.org)
- ^ July 22, 2013: China s runaway money train (affordablehousinginstitute.org)
- ^ December 16, 2013: Formula for an instant slum (affordablehousinginstitute.org)
- ^ September 19, 2014: Where the money goes, people will follow (affordablehousinginstitute.org)
- ^ February 1, 2016: Yuan to buy American housing? (affordablehousinginstitute.org)
- ^ June 26, 2006: Fannie Mae, the implied story (affordablehousinginstitute.org)
- ^ June 30, 2006: Part 5, Smoothing earnings with financial tricks (affordablehousinginstitute.org)
- ^ January 22, 2008: Who s next? (affordablehousinginstitute.org)
- ^ May 6, 2008: Catastrophe is a precondition to fundamental reform (affordablehousinginstitute.org)
- ^ December 4, 2012: Innumeracy precedes insolvency (affordablehousinginstitute.org)
- ^ October 7, 2013: The demise of deposit insurance (affordablehousinginstitute.org)
- ^ September 3, 2015: House and country (affordablehousinginstitute.org)
- ^ Anne Stevenson-Yang (www.jcapitalresearch.com)
- ^ J Capital Research (www.jcapitalresearch.com)
- ^ YouTube video of CSIS February 2015 symposium (www.youtube.com)
- ^ January data released last week (www.pbc.gov.cn)
- ^ hid (www.pbc.gov.cn)
- ^ one key number (www.pbc.gov.cn)
- ^ altered the parameters (www.pbc.gov.cn)
- ^ gave insight (www.pbc.gov.cn)
- ^ Christopher Balding (www.baldingsworld.com)
- ^ Peking University HSBC Business School (english.phbs.pku.edu.cn)