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Kyle Bass Warns: Xi Has “Built The Chinese Economy On A Foundation Of Sand”
Kyle Bass Warns: Xi Has “Built The Chinese Economy On A Foundation Of Sand”
Earlier this week, Chinese leader Xi Jinping became the third ruler in the communist country’s history to have his named enshrined in its constitution – and the first to receive this honor while still alive. But as China celebrates its most popular, and most powerful, leader since at least Deng Xiaoping, Kyle Bass, hedge fund manager and noted China bear, told Bloomberg the Communist Party will one day regret standing idly by as Xi consolidated his power.
“Today Xi is celebrated in media reports, but when future historians look back, he will be blamed for recklessly building the Chinese economy on a foundation of sand,” Bass, founder of Hayman Capital Management, said in an email Wednesday.
“Xi desperately seeks credibility, but true developed economies do not impose severe capital controls or move short-term rates hundreds of basis points overnight in attempts to manipulate their own currency.”
Xi, who launched the twice-a-decade National Party Congress last week with a three-hour speech where he laid out his vision for “communism with Chinese characteristics in a new era,” the philosophy that was enshrined in the country’s constitution by a unanimous vote. In a move that seemingly confirms suspicions that Xi plans to break with precedent and seek a third term after his second ends in 22, Xi appointed five new members to the Politburo,
China’s most powerful body, all of whom are too old to be viewed as credible heirs. Typically, Chinese leaders have pointed to a successor or possible successors by the time they begin their second term, ensuring that there’s a clear path of leadership transition.
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China Cannot Let This Happen
China Cannot Let This Happen
After borrowing — and largely wasting — $15 trillion during the Great Recession, China now looks like a typical decadent developed-world country, complete with slow growth, anemic consumer spending and unstable financial markets.
But it’s not France, Canada or the US, where recessions happen and voters peacefully replace one major party with the other. China, within living memory, has seen civil unrest beget open rebellion beget multi-decade civil war.
Just as Germany is never going back to hyperinflation, China will not tolerate mass protests. Which means it somehow has to find jobs for the tens of millions of citizens who aspire to middle class life. This need for growth at any price explains the borrowing/infrastructure binge of the past five years. And soon it will explain a massive devaluation/QE program. From Monday’s Wall Street Journal:
China’s Workers Stumble as Factories Stall
XIGUOZHUANG, China—For decades, an army of migrant workers drove China’s boom times, flocking to its cities to sew T-shirts, assemble iPhones, or build apartment blocks and Olympic stadiums.
The arrangement helped millions of poor, rural Chinese join a new consumer class, though many also paid a heavy price.
Now, many migrant workers struggle to find their footing in a downshifting economy. As factories run out of money and construction projects turn idle across China, there has been a rise in the last thing Beijing wants to see: unrest.
In Xiguozhuang, a village among cornfields some 155 miles south of Beijing, it had been rare to see working-age men for much of the year. This year, however, many of the men are at home, sidelined by a fading property boom.
“Times are tough now,” said Wang Hongxing, a 39-year-old father of three who has worked at building sites across China’s northeast since his teens, but who has spent the past two months tending his farmland plot. “There are too many workers and wages are dropping.”
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Foreign buyers driving demand for luxury homes, Sotheby’s says
Luxury housing segment ($4M+) is hotter than the overall market in Vancouver, Toronto
International demand is expected to keep driving luxury real estate sales in Canadian cities for the rest of the year, according to a report from Sotheby’s International Realty.
A faltering Chinese economy and volatile global stock markets are likely to encourage an influx of foreign buyers, especially from mainland China, the company said in its fall outlook report.
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Sotheby’s notes the surge in luxury sales in the first half of the year, with sales of property in the $4-million range rising 71 per cent in Vancouver and 72 per cent in the Greater Toronto Area.
Toronto and Vancouver are Canada’s hottest housing markets where even modest detached houses are priced at over $1 million.
With interest rates low and stable employment in both cities, 2015 has seen huge demand for housing in both cities, with more buyers than homes on the market.
But the luxury segment is even hotter than the overall housing market in Toronto and Vancouver, Sotheby’s said.
It predicts demand for condos over $1 million – considered a luxury price for a condo — will remain strong in both markets, especially near the downtown core. But the strongest percentage sales increases will be seen among detached homes in the $4-million range, it forecasts.
In Vancouver, demand for traditional luxury neighbourhoods will push high-end buyers east and south with neighbourhoods in Vancouver East and South Vancouver emerging as new options, Sotheby’s said.
Montreal also saw a period of heightened interest in its luxury properties in the fall of 2015 after the election of a Liberal government, Sotheby’s said. A luxury price in Montreal is in the $1.5-million range. The market is now more balanced, but foreign demand is picking up, it said.
Is China’s “Black Box” Economy About to Come Apart?
Is China’s “Black Box” Economy About to Come Apart?
After 30 years of torrid expansion, perhaps the single most consequential factor in China’s economy is how much of it is a “black box”: a system with visible inputs and outputs whose internal workings are opaque.
There are number of reasons for this lack of transparency:
- Official statistics reflect what officials want to project, not the unfiltered data.
- Policy decisions are made behind closed doors by a handful of leaders.
- There is little institutional history of transparency.
- Many important statistics are self-reported and prone to distortion.
- Large sectors of the economy are informal and difficult if not impossible to measure accurately.
- Endemic corruption distorts critical economic yardsticks.
- There is little historical precedent to guide policy makers and individual investors.
None of these is unique to China, of course, with the possible exception of #7: few nations in history (if any) have experienced an equivalent boom in infrastructure, credit, housing and wealth in such a short span of time.
Saving Face By Editing Data
As anyone who has lived and worked in Asia can attest, public perception (i.e. “face”) is of paramount concern. There is tremendous pressure to put a positive spin on everything in the public sphere. Negative publicity causes not just the individual to lose face, but his boss, agency, company and family may also be tarnished.
For this reason, reporting potentially negative numbers accurately may put careers and hopes for advancement at risk.
This accretion of fear of reprisal/disapproval builds as it moves up the pyramid of command. This process can lead to tragic absurdities being taken as truth. In one famous example in Mao-era China, officials ordered rice planted in thick abundance along a particular stretch of road, so that when Chairman Mao was driven along this roadway, he would see evidence of a spectacular rice harvest.
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The Unnerving Thing Global Automakers Just Said About China’s Economy
The Unnerving Thing Global Automakers Just Said About China’s Economy
Global automakers, still intoxicated with their own optimism after years of white-hot growth that transformed China’s auto market from a backwater to the largest market in the world, have an increasingly chilling message.
The auto industry is a huge force in driving economic growth in China. Most vehicles sold in China are manufactured in China. The component industry has been booming. The distribution and dealer network has been growing in leaps and bounds. Every new plant and dealership means more construction, more equipment, more jobs. Then there’s finance and insurance and all the other elements that make up the car business. But now there’s a slowdown.
Today it was BMW. China has been BMW’s largest, most promising, nirvana-like market. Not that BMW’s results for Q2 were that bad. The euro’s swoon produced a year-over-year sales gain of 20%. Yet, due to soaring costs, despite the weak euro, net profit fell 1.1%.
The problem: China’s market is “normalizing” and “becoming increasingly competitive,” BMW said in a statement. “In the medium and long term, we remain utterly convinced of China’s potential for growth,” it said. But it warned, “If conditions on the Chinese market become more challenging, we cannot rule out a possible effect on the BMW group’s outlook.”
China’s contribution to BMWs operating profit dropped 23% in Q2, echoing Volkswagen’s report last week. BMW has cut production in China by 16,000 vehicles this year, CFO Friedrich Eichiner explained. He blamed the stock market. As it crashed, it kept customers from making large purchases; others demanded hefty discounts.
“Normalization” means the Chinese market is in the transition from Nirvana to a rough-and-tumble saturated market where brands have to fight each other for market share to get any sales increases. But no problem: “In the medium and long term, however, we remain utterly convinced of its potential for growth…” he said.
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