We've recently been dedicating these pages to covering the massive – and growing – problems in the U.S. and Europe. Today, while we won't completely neglect the aforementioned nations, we'll focus on another world power plagued with issues... China. China is an export economy. And weakness from the U.S. and Europe will destroy the country's GDP. Plus, the country is growing and consuming resources at an unsustainable rate. We discussed the topic in detail in the June 17 Digest...
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[The Chinese boom] has all been fueled by debt and fixed-asset investments (land, buildings, equipment, and machinery). Consider just a few of these facts... |
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Fixed-asset investment remains greater than 50% of GDP in China, for the 12th year in a row. No other country has ever had more than nine years of this kind of sustained fixed-asset investment. |
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In the first five months of 2011, fixed-asset investment grew by 25.8% according to China's National Bureau of Statistics. That's $1.39 trillion worth of investment. |
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Jim Chanos, the famed short seller, says China is currently building 30 billion square feet of commercial real estate. That is enough to provide every person in China with a five-square-foot cubicle. |
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Jeremy Grantham, one of the world's most astute investors, points out that China has been purchasing gigantic quantities of raw materials. The scale of these purchases makes them impossible to sustain. China makes up 9.4% of the world's economy, but it is currently consuming 53% of the world's cement, 47% of the world's iron ore, and 46.9% of its coal. |
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A massive increase in China's domestic debt fueled this investment. In 2010, for example, Chinese banks extended $55 billion in loans – up 95% from the year before. Now, banking regulators are increasing reserve requirements, greatly reducing the amount of available credit. In May, lending was down 25% versus last year. |
Today, a survey of Chinese purchasing managers, the HSBC China Manufacturing Purchasing Managers Index, showed the second-straight month of weak manufacturing activity in the world's No. 2 economy. The PMI read 49.8, up from 49.3 in July (a 28-month low). Anything below 50 indicates an economic contraction.
The Financial Times' iPad app had a different take on the Chinese PMI drop. It said, "China manufacturing data boost developers." FT.com said the PMI "proved better than expected," a standard financial press line for lousy results.
Also today, Vice Commerce Minister Jiang Yaoping said in a statement that the country's foreign trade is slowing due to external demand and pressure from higher costs (inflation?)...
"We will closely follow changes in the external market and keep the continuity and consistency of foreign trade policies, while making them more relevant and flexible," Yaoping said. Yaoping also said weaker exports and stronger imports due to surging domestic demand would hurt China's trade surplus (which was $31.5 billion in July).
In the June 17 Digest, we also discussed the rampant fraud in Chinese companies:
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China's boom since 2009 was fueled by massive domestic debt issuance, which was unsustainable and is reversing. In addition, one Chinese company after another is being revealed as a fraud – and then crashing. These are not isolated events. I have studied Chinese companies for more than a decade. Out of all the stocks I've analyzed closely, I've only seen a handful I didn't believe were fraudulent. |
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So far, none of the major Chinese banks have come under serious scrutiny. But I believe they will... and I believe major fraud will be discovered. Take the recent weakness in the shares of China Life Insurance (LFC), for example. This isn't a minor company. It's a $90 billion life insurance company. As fraud allegations spread into major Chinese financials, the entire underpinning of the Chinese boom will fall apart. |
Today, China Life Insurance announced earnings for the first half of the year fell 28% from a year earlier to 12.96 billion yuan ($2.03 billion). Analysts expected 17.6 billion yuan. The company's solvency ratio – its ability to meet long-term obligations – fell to 164% from 212% at the end of 2010 (though the ratio is still healthy). Shares fell over 1% on the news, approaching a 52-week low.
Ever since downgrading the U.S. debt rating earlier this month, Standard & Poor's has been public enemy No. 1. We won't go into the many hypocrisies again. But the situation is absurd. Today, S&P announced its president, Deven Sharma, is stepping down. Sharma will "pursue other opportunities." And his departure has nothing to do with the S&P downgrade. Hmm...
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New 52-week highs (as of 8/22/11): Eldorado Gold (EGO), Royal Gold (RGLD), SPDR Gold Trust (GLD).
One reader is enjoying his gold stock in today's mailbag. Tell us what you think at feedback@stansberryresearch.com.
"I just wanted to share with you that my shares of Royal Gold (RGLD) hit a all time high for me yesterday ! $73.00 per share . I t was only $40 when you 1st recommended it . Very glad I listened .
Thanks for all you do ." – Paid-up subscriber Dave
"Dr. Eifrig, just want to compliment you on how you explain option trading. Thanks for explaining so clearly and concisely." – Paid-up subscriber Dennis
Regards,
Sean Goldsmith and Dan Ferris
Baltimore, Maryland and Medford, Oregon
August 23, 2011
China's boom... Chinese PMI down... Tale of the tape: LFC... S&P president ousted (we think)...