[note: This post as well as the next 2 below, are unedited. Since I’m in a hurry, sorry for the absence of quotes for my usual Sunday headings.]
For this week, profit taking enveloped equity markets of most of Asia.
Despite the cyclical correction, Asian equity markets remain mostly on the upside led by China and major ASEAN bourses as seen from December 28th of 2010.
The outperformance of China’s Shanghai index comes amidst her governments repeated attempts to quell her internal demons-a brewing bubble cycle.
Proof of this bubble cycle has been the 64 million vacant apartments[1] as a result of centrally planned building of 10 new cities every year just to attain statistical economic growth.
China recently even imposed price controls[2] as panacea to contain this bubble. This would only add to the distortions brought about by these myriad policies.
US credit rating agency Fitch Rating threatened to cut China’s debt rating for the first time in 12 years with the prospects of a deterioration of loans “compounded by growth in off-balance-sheet credit[3]”
In realization of homebound restraints, Chinese companies have embarked on an unprecedented scale of borrowing, more than five times the amount last year, from the international bond markets, which as the Financial Times reports, represents “a trend driven by property developers starved of credit by state-owned banks”[4].
Chart courtesy of Bloomberg.com
The Shanghai index, despite a sluggish 2010, appears poised to make a substantial breakout from what appears to be 2-year consolidation period.
The blue channel lines reveal of a chart formation called a Pennant, a trend continuing pattern. Since the Shanghai appears to be testing the resistance level, the 2 years+ chart seems to suggest that the momentum for the breakout is imminent.
Bubble cycles represent an unsustainable political process.
64 million homes do not automatically mean a bubble bust. Imbalances may continue for as long as China’s government continues to inflate, and for as long as, rising price levels have not reached the critical point which undermines the feasibility of most of these existing projects.
Chart courtesy of US Global Funds[5]
As one would note, given the administrative controls applied by the Chinese government, which has partly affected official statistics (as shown above), Chinese companies appear to circumvent these by tapping the international bond markets.
And such process is likely to get magnified by the requirement where Chinese banks would need to raise 860 billion yuan ($131 billion) of supplementary capital over the next years just to comply with stricter regulations[6].
And further proof of this inflationism is that the China has now accumulated more than $3 trillion of foreign exchange reserves[7]. This implies that if China refuses to appreciate her currency then this huge stash of excess reserves would only translate to an acceleration of domestic inflation process.
As you can see, no amount of policy controls will impede the law of economics from revealing the state of acquired imbalances. Eventually, quasi booms will end up in devastating busts.
The bottom line is that the “whack a mole” strategy employed by the Chinese government is most likely to fail and that China’s Shanghai Index could be manifesting signs of leakages from the ongoing boom in circulation credit in China and in the international realm.
All these represent parts of the jigsaw puzzles falling into place which we know as the bubble cycle.
[1] See China' Potemkin Cities and Malls, April 11, 2011
[2] See War on Economics: China Imposes Price Controls! April 16, 2011
[3] Bloomberg.com China’s Record Bank Lending May Spur Fitch Rating Downgrade, April 13, 2011
[4] Financial Times Chinese companies go on global bond spree, April 12, 2011
[5] Holmes, Frank Will China's Economy Overheat?, US Global Investors April 15, 2011
[6] Bloomberg.com, China Banks Said to Need $131 Billion in Stock Over 6 Years April 14, 2011
[7] Bloomberg.com China Reserves Exceed $3 Trillion as Wen Resists Yuan Pressure, April 15, 2011
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