Friday, July 31, 2009

Morning Links: The Asia Edition

This morning's links have an Asian theme. The first two articles are about China and the third is a piece by the Economist from 1990 that is very relevant now. I think the current situation in China, with the massive stimulus in place, is fascinating. What if the US just gave out billions of dollars to people to put into the stock market? Obviously, some of the Fed's money printing has indirectly led to investment in the stock market, but in China it is apparently much more explicit. If you are interested in learning more about the effects of the stimulus on China, I suggest reading the works of Andy Xie of He seems to have a very good perspective on where the money is going and does an admirable job in articulating his fears in an unbiased manner. If you are making any investments based on the idea that China can drive the world's economy and help pull the US out of this current mess, I suggest looking into Xie's material and reading the next 3 pieces.

1. Latest missive from The Prudent Bear: Some countries follow the economic principles of Adam Smith. Others, like the US, are enamored with Keynes. We know the USSR was devoted to Karl Marx. But what about China? According, to The Prudent Bear, China is (probably unknowingly) following the writings of 17th century mercantilist Thomas Mun. Mun believed that countries should limit imports, focus on increasing exports, and then use the proceeds from the exports to establish colonies in which Britain could exploit the existing natural resources. Sounds kind of like what China is doing with their $2B in reserves, right (well aside from the colonies part)? The problem, of course, is that if China is right and we are entering a period in which natural resources will be the increasingly less available, the world could turn into a pretty ugly place. The way to avoid this fate according to the author? Intergalactic travel or going back to only 1B people on the planet. Neither of which seems too likely.

2. Tim Swanson's Take on Chinese Stimulus: In this piece Swanson succincltly explains why the course that China has chosen in terms of flooding the system with money could end up in a bubble. Here are a few facts that he uses to support his thesis:

-According to the People's Bank of China, for the first six months of this year, new lending amounted to more than 7.3 trillion yuan (about $1.1 trillion) — which, according to the Royal Bank of Scotland, is equivalent to two years worth of credit
-Wei Jianing estimates that roughly 20% of the stimulus funds have ended up in the domestic stock bourses, creating a speculative bubble much akin to the previous dotcom and housing-heavy cousins. Another 30% of the funds are believed to have been shuffled into the ailing property markets
-Residential property rates in places like Beijing are once again climbing at a spectacular rate — 6.5% in one week alone
-Since 2006, roughly 152 million square meters of commercial office space has been built in Beijing — more than all of the office space in Manhattan — yet 30 million square meters is still vacant

Sound like all the makings of a nasty property and stock market bubble? I sure think so.

3. Predicting the Crash: Embedded below is an article that appeared in the Economist in 1990 that presents the case that the incredibly overvalued Japanese real estate market was due for a nasty fall despite many arguments to the contrary. It was sent to me by one of my readers named Roland Nelson. The timing of the article preceded the gigantic fall in property and land values that occurred, a drop Japan’s real estate market has never recovered from. The article attempted to debunk all of the reasons why the real estate market would not crash and evaluate the potential impact on the region’s banks. The reason why this is so interesting and pertinent now is that many of these same issues are being explored in New Zealand and Australia (and don't forget China) due to the recent run up in prices of residential real estate. As I have said before, people can always make the case for and against the popping of a bubble, but as the US has learned twice over the past 10 years the only really relevant question is when. For those who are long residential real estate in AU and NZ, I hope this time it is different.

1990 Economist Article on Japanese Real Estate