Chinese Bubble

Just a quick note.  Wanted to point to this presentation on the Chinese bubble: “China the Mother of All Black Swans“.   His conclusions on commodity prices and interest rates are right on the mark, stating:

  1. interest rates will go up
    Ok this is a no-brainer for a number of reasons, one being that US interest rates are about as low as they can go.  Also, given the large amount of new debt issue and increasing stockpiles in China, Japan, and elsewhere, would expect reduced appetite at current interest levels.   That said, in uncertain markets, where else should China or Japan park their $ inflows?
  2. commodity prices will revert
    Well, most commodity prices already reverted to historical levels in 2008 during the market crisis.    This can be seen in a number of commodity indices.    That said, there are specific commodities that are at premiums to historical levels (ones that China has been buying).

Here we can see that commodities, as a broad index, have fallen back to historical levels and stayed there since 2009, however industrial commodities have increased in price by 30%:

I’m going to ignore Gold at the moment, as I don’t believe China is the major driver behind its rise (that said, gold would appear to be ripe for a huge reset, similar to the buildup and reset in the 80s).   Copper on the other hand, has had a 50% rise since 2009 that can be attributed to demand from China:

Apparently China is buying copper not only for internal demand, but as a way to invest its huge inflow of $s as opposed to investing entirely in US treasuries.   So really we have to be looking at significantly less US consumption of Chinese products or a change in policy around stockpiling industrial commodities, before we see these commodities reverting to historic levels.



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4 responses to “Chinese Bubble

  1. quantivity

    Interesting re copper; curious whether you believe buy is for store of value (i.e. financial substitute for USD), commodity speculation, buying ahead of future internal demand (i.e. independent of any hedge value), or a different reason entirely?

  2. Les Misérables

    China is one of those places that tend to illicit a binomial black‐or‐white response from people. Either you think that China is on the expressway to superpower status with the occasional bathroom stop to fill up with petrol, or you think it is the biggest Ponzi‐scheme bubble in the history of mankind that is on the
    brink of collapse. Like most things in life, reality is generally not black‐or‐white but shades of grey, and the truth is always somewhere in between these two extremes.
    I would say that the reality of the last three decades of China’s development is closer to the “expressway to superpower” than that of “imminent collapse” and those that have predicted the latter have been consistently wrong.

    Going back to Mr Chanos’s claim that, “Bubbles are best identified by credit excesses, not valuation excesses, and there’s no bigger credit excess than in China.” If this is so, then according to his own logic, the relatively high prices of property in major Chinese cities cannot be seen as a great signal that there is a bubble. Moreover, as we all know, total credit growth in China during the 2001‐07 US property bubble was, if anything, below what would be normal for an economy growing as quickly as China was.

    As for 2009, the sharp jump in credit can be viewed as being excessive, but this is only one year. Bubbles, if they are to be worthy of that title, take much longer to form, and with mortgage lending still only accounting for 12% of all loans made, it is hard to say that in aggregate that credit has been as excessive as Mr Chanos claims.

    That is not to say that a bubble will not form if credit continues to expand at the pace that it did in 2009; just that even if we were to assume that there is a bubble in China, it is probably in its early stages.

    • tr8dr

      I agree with you on the general idea that things are not so simple in regard to China. The Indian market has been in over-inflated and deflated states over the past few years as well. China is still headed for #1 or 2 super-power regardless of the market resets along the way.

      The thing I am more focused and interested in is the impact of chinese $ flows and investments and how that impacts other markets …

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