China Fact or Fiction?

Jim Brown
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There are so many stories coming out of China that it is tough to know which are correct. Even the government economic numbers are very suspicious and many analysts believe they are cooking the books. China's real estate boom looks a lot like Dubai only worse. Almost weekly we get a mind-boggling number from China on some sector that provides a lift to U.S. markets. What if China was a massive smoke and mirrors scam? Data from China last weekend was credited with helping push oil prices to nearly $84 on Monday along with the falling dollar. The data showed that China's crude oil imports surged nearly 25% to more than 21.26 million tons in December. If China is really seeing 25% per month gains in import levels then oil prices are going a lot higher very soon. However, there are some who believe these numbers along with others are a misdirection attempt by the Chinese government.

China's economics are fuzzy at best. One day they claim they are going to reign in lending to prevent growth from becoming too rapid. A week later they proudly announce new lending programs and record borrowings of 600 billion yuan ($88 billion) in the first week of 2010.

Exports surged +17.7% in December and well above the +4% analysts were expecting. Imports surged 55.9% and well above the 31% expectations. It does not sound like a country where the government is trying to reign in anything.

An economist at Guotai Junan Securities said based on the trade data he estimated the industrial output in December grew more than 25% and GDP more than +11%. Crude imports hit a monthly record, iron ore shipments were the second highest ever and copper imports crushed expectations. It does not sound like a country where the government is concerned about overheated growth.

Auto sales hit 10.3 million units in 2009, a +52.9% increase. In December alone sales were up +88%.

Inflation is already headed for 4% over the next few months and odds are good it won't stop there. Still the yuan is expected to appreciate by 3.3% to 4.0% in 2010. The 4 trillion yuan stimulus package in 2008 was far more effective than the U.S. stimulus and appears to have rocketed China back to growth.

James S Chanos, a wealth hedge fund investor, is warning that China is headed for a major crash. He is not the only one afraid China is going to implode. He claims the easy access to government backed lending has created a real estate bubble that is 1,000 times worse than Dubai.

Real estate prices doubled in four years and then doubled again in only two years. The demand for housing is very strong and fueled by prospective buyers rushing to pay far too much money to buy now because they are afraid they will be shut out by too high prices in the future. Many young families pay up to 50% of their income for their mortgage. They theorize their salaries will rise but their mortgage payments are locked.

Property sells for $162 per foot for a 900 square foot apartment in Beijing. If you move up the pricing ladder the better properties go for $350 to $400 per foot. New condo apartments double in price before they are completed. Buyers rush to contract for a unit when the building is announced. Sound familiar? Sounds like the U.S. about three years ago.

China is trying to slow buying by forcing new purchasers to put down 40% on a second property but most buyers borrow from friends and family to make the down payment and promise them part of the equity when they sell.

In an economy where two million people give up the agrarian life style and move to the city every year there is always a shortage of space and jobs. Analysts worry that the rash of out of control building and prices doubling every couple years is setting China up for a monster crash once the price inflation stalls and speculators can no longer flip their properties. Everyone is living on monster mortgages compared to disposable income and the slightest bit of decline in property prices will knock the support from under the sector and the economy.

Some say China inflates their economic projections because they can't afford to let people know how bad it really is. Many of the high-rises built ahead of the Olympics are still vacant. The government forced builders to add outside walls and lighting so they appear to be occupied to keep up the appearance of a thriving economy.

Today, as evidenced by the surge in crude imports there is a recovery in progress but then China never did weaken as much as the rest of the world. At lease not in the numbers we are allowed to see. If China is really rebounding at an 11% GDP in Q4 then there is a risk of overheating on a monumental scale. Once the bubble does pop it could produce a serious global wave.

We are depending on China and to a lesser extent India to fuel the current global recovery. Today it appears to be working but there are growing warning signs that 24 months from now we could be looking at a totally different China. How that will impact oil consumption just as peak oil is expected is unknown. What will $150 oil do to the China bubble? Can it continue to grow on $150 oil? Time will tell.

Jim Brown