Upsurge in China's housing market boosts its economy

There is a remarkable article in this morning's WSJ on A10, "China Housing Warms as Debt Clock Ticks," In the January to through April period, housing sales increase 61.4% yoy, property investment rose 7.2%, construction starts rose 21.4%.

This is after a multi-year contraction in housing/GDP. In 2013 housing contributed 22% to China GDP, which is about the same as in Spain and Ireland in 2007. This dropped to 19.8% in 2014 and to 15.1% in 2015. (Maybe 6% is something to aim at as a longer-term healthier number?)

This recent surge reminds me of what happened in Singapore, where we happened to be living during the Great Recession. The stock market went down and housing prices went up. The Chinese, who think multi-generationally, regard property as an investment and stocks markets as speculation. When they become leery of stocks, they buy property. In normal times Singaporeans speculate on stocks during the week and gamble on mahjong during the weekend. (In the local convenience stores the thick weekly books of stock charts are hot sellers.)

Here is a quote from the article: "'Leaving my money in the bank is meaningless and it will only devalue,' said Wang Hong, a 35-year-old office administrator who is looking to buy a second home in Nanjing." Holding fiat currencies is not considered a safe investment in Asia, where they do not benefit from the US dollar's strict stewardship.

Freudian slip? In decrying high debt levels in China, the Economist points out US and Europe are in worse shape

In a bit of possibly unconscious revelation, the Economist in its "Special Report" on finance in China, provided the graphic image below:

On the right you will note that debt levels have been rising rapidly in China and are now about the same as in the US and the euro area.  Everyone's debt level is too high, but the fact is that high debt levels are manageable in fast-growing economies like China's and a real problem in low growth areas like the US and Europe.  We all have a problem, then, but ours is worse.

I am reminded of this pretty smart passage from the Bible:

Matthew 7:3-5New International Version (NIV)

3 “Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye? 4 How can you say to your brother, ‘Let me take the speck out of your eye,’ when all the time there is a plank in your own eye? 5 You hypocrite, first take the plank out of your own eye, and then you will see clearly to remove the speck from your brother’s eye."

What China yuans, China gets; my humble and beneficent exchange rate forecast

Mr. Kyle Bass of Hayman Capital Management has, according to the Wall Street Journal, a multibillion-dollar bet against the Chinese yuan (money), the renminbi. In an eleven-page letter to investors that was cited in the Journal, Bass reported that his fund had sold off the bulk of its other investments to concentrate on shorting Asian currencies. What caught my attention, and the attention of many other investors, was the following quote from Mr. Bass: “The view that China has years of reserves to burn through is misinformed. China’s back is completely up against the wall today. . .” Bass justified his view with the fact that China’s liquid reserves were “only” $2.2 trillion at the end of January compared to its total reserves of $3.23 trillion.

The use of the words “only $2.2 trillion” is interesting in light of the facts that the total reserves including gold of the UK are only $107 billion, of the US only $434 billion (almost all illiquid gold), of Germany only $193 billion, and so on. (This is from the latest World Bank data at http://data.worldbank.org/indicator/FI.RES.TOTL.CD .) China’s liquid reserves of “only” $2.2 trillion are huge in comparison. Of course, Bass can be excused for a bit of hyperbole since it reflects his investment position and thus may be of near term benefit to his investors.

Bass will probably make a lot of money on his short because his investment strategy is not at odds with the policy of the People’s Bank of China (PBOC). Between the Asia crisis of the 1990s, when the renminbi was devalued, and 2005, China tied the renminbi to the US dollar, much to its benefit. Then, until 2005, it followed a policy of gradually increasing the value of its currency relative to the dollar. This policy has had bad consequences for China because the US dollar has been strengthening, dragging the renminbi up with it to a very overvalued position. The negative consequences were aggravated by the large devaluations of the currencies of China’s main trading partners other than the US, which has left China with an even greater overvaluation than the US.

So in December 2015 China announced it would no longer track only the dollar but rather a trade-weighted basket. China can be expected to adjust gradually its currency valuation again this basket to bring the renminbi back in line with other currencies.

The BIS has created trade-weighted indices of many currencies based on each country’s individual trade relationships. The graph of the US dollar, the renminbi, the euro (based on Germany’s trade), and the yen shows that the renminbi has risen considerably against all them since 2010. (About twice as much against its basket as the US dollar against its.) (This is not to say whether or not the renminbi is overvalued in some absolute sense, but only relative to where it was five years ago.)

Were it to regress to the mean, the renminbi would depreciate about 30% on a trade-weighted basis. So here is a crude forecast: Both the US dollar and the renminbi will likely depreciate on a trade-weighted basis, China by 30% and the US by 15%, so China will depreciate 15% in dollar terms. The renminbi/dollar is now 6.53 yuan/dollar; in this scenario our guess is that that rate will be about 7.50 at some point. This is a big move, but I am guessing that this is in the ballpark of what the PBOC is targeting. They will, of course, proceed by baby-steps, like the mincing gait of the women with bound feet in the old imperial court. But proceed they will. In the words of Lao Tzu, “The journey of a thousand miles begins with a single step.”