Enzio's Clock

Background

1. Why the show must go on

Not few commentators gnash their teeth about the looming Chinese property bubble.  We are more relaxed about this.  First, because so much of it is being financed out of cash. Secondly, because the property bubble is nothing more than developmental economics  101: with increasing wealth fuelled by her industrialization, Chinese want to consume more (alias: shopping malls), work more in service jobs (alias: office buildings), and - most importantly - own their own homes (alias: residential properties). Thirdly, because property and infrastructure projects are decided at a local - and not at a national - level.  In China, too, local politicians want to curry favour (and bribes) by greasing the wheels of property...

These three trends will continue:

•  Cash will continue pouring into the economy, courtesy of ever-higher trade surpluses.  A new "trend" is that companies are shuttering particularly their U.S. operations, instead opting to produced in China. That increases China's trade surplus, resulting in ever-more cash swilling in the Chinese punch bowl;
• Urbanization will continue not only for developmental reasons mentioned above. On top of this, the Chinese government wants its citizens to "urbanize rural areas" i.e. to build cities at home. This "rural  urbanization" is a key reason why there is such a labour shortage in China's current industrial hubs, e.g. in Guangdong Province, and
• Local property and infrastructure projects must continue because this is what the local governments want. Indeed, in today's South China Morning Post we read on page A12 that "...the truth is, most local governments do not want to see a reversal of the property market because land sales are their chief source of revenue.  Any slowdown will thus affect their ability to finance infrastructure projects, leading to more bad debts."

 These are three structural reasons why China's property bubble must continue.

2. That seeming contradiction

So we are arguing an "and and" solution: China's property must continue prospering AND there will be a market dent that we saw through the month of this January, when the Shanghai market fell quite strongly. 

Having argued that the property bubble must continue, why is a market correction on the way? Because Beijing will keep seeking to re-assert her policy-powers, and the market will misinterpret their effectiveness at the local level.

What I mean is that in China, "the sky is high and the emperor is far away". This goes to say that the whole country is not governable from Beijing: provinces and localities exert enormous policy influence at their respective levels, as we saw just now when discussing local property and infrastructure projects in the third bullet point above. 

But when we do see knee jerk reactions from Beijing, most punters will assume that they are effective, i.e. they will sell the market. We would argue that the market, not knowing about the power of the provinces, will assess the effectiveness of Beijing's policy moves incorrectly. Provinces and localities will ensure that the property bubble continues despite knee jerk reactions from Beijing.

Expect such knee-jerk reactions to occur during the imminent National Peoples' Congress.Expect the market thus to fall - and the property bubble to continue its merry way.

3. How to Make Money Off This Idea

1. Always consult your financial advisor first.
2. Short the Chinese market by going with the ETF, FXP:US.  Most people outside of Hong Kong over-estimate the policy-power of Beijing when it comes to implementation at the provincial and local level...