The Valor Blog.
Investment News and Views, Direct from Our Team.

China’s rebound is not a good thing…

China appears to be rebounding from its lows mid last year. The problem with this rebound is that it is exactly what the economy doesn’t need.

Iron ore prices are back up and Twiggy must be counting his lucky stars. If he followed the common sense option, he would raise some capital whilst the going is good and reduce his debt. Unfortunately, I think he has ambitions of being the richest man in the world and diluting his shareholding would smash this dream.

There is a new dangerous build up of trusts and wealth management products to continue funding many of these non-productive assets. These alternate financing arrangements are the sub-prime of China and are growing very rapidly. How this ends is unknown, but it appears to be area of thin ice in the Chinese economy.

Up until now, the extremely low costs of financing empty offices, empty apartments, empty airports and empty shopping centres has meant that making no money on them doesn’t pose much of a problem. When you are stealing from the peoples bank accounts and only paying them less than 1% interest, you don’t have to make much money on your empty Lego buildings to do ok. With the higher interest rates of the trusts and wealth management products, actual thought needs to be put into what you build to make a greater return than your cost of capital. This is something the Chinese are yet to get a greasy grip on. This change in financing their growth is well sumarised in this article.

At some stage China needs to rebalance. They cant keep building for the sake of building forever. Whilst there are ridiculous propaganda reports coming out that China will overtake the US by 2019 and continue to grow at 8% for 20 years after that, we are firm believers that the one child policy (or the four grandparent policy as John Hempton likes to call it) and the unbalanced and overweight fixed asset bubble will mean this is highly unlikely.

They need to take their medicine and this medicine is not going to be pleasant. The new premier Xi Jinping has promised to continue reforms, but this rhetoric is not much different to Bob Hawke promising that there would be no child in poverty by the year 1990. The more they delay the rebalancing, the more pain they create for the future.