The China Hot Money Scam
There is something that is not quite adding up. Despite the 56% plunge in China’s stock market, that country continues to be the receptacle of the world’s hot money. The FT.com article makes this mention.
Logan Wright at Stone & McCarthy analysts in Beijing estimates that hot money entering in the first five months could be as high as $150bn-$170bn. Government officials also believe that illegal transfers are taking place – through foreign companies declaring that funds are for direct investment and then putting the money in the bank and exporters exaggerating the value of overseas revenues in order to bring in extra funds. (As an aside, economists point out that if fraudulent export receipts really are widely used to bring in hot money, China’s politically troublesome trade surplus would actually be much lower than thought.)
Couple points to be made. Confirming the surplus picture at least in US trade we see that containers shipped into Los Angeles are down 5.7% year to date. Containers into Long Beach are down 10.9%. Deustche Bank estimates that 20% of China’s low end exporters will fail this year. The rest of Asia is every bit as bleak.
If China’s trade surplus is more and more a mirage than that suggests that the value of the Yuan as a hot currency play is also a mirage. Plus what the article doesn’t mention is that there are other ways of conducting this hot money scam. That would be to borrow in US Dollars and then use that to buy “commodities” and input goods to import into China for hoarding purposes. “Investing” in real estate is a manifestation of the same behavior.
July 3 – China Knowledge: “The average price of new houses hit a record RMB 16,988 (US$2,498) per square meter in Shanghai last month, up 21.9%, while sales volume remained almost the same as the previous month, according to Shanghai Youwin Real Estate Information Service Co.”
This is extreme Wil E Coyote behavior that is no different than banks aggressively making loans in late 2007 to Joe Ultra Light Sixpack right up to the edge of the cliff. I believe that in part is why shipping rates are sky high. However, given the complete lack real fundamentals supporting this behavior it may be just a matter of time before we see a Bust. In fact, the bloom has already come off the rose. In this article, Jacques Saade the head of French shipping giant CMA CMG suggests that a major downturn is well underway, and that the oil spike is a scam.
There is a lot of fear right now in the markets. Mostly I attribute it to a serious inflationary squeeze that affects almost anybody who produces or consumes, which is pretty universal. Given that I believe a chunk of the latest rally in oil and commodities is basically a scam, what might rebound or benefit if there was finally an oil break? In looking for candidates it is important to consider that the American consumer is dead regardless, so one must be extremely discerning. I would also focus where there is some transparency and some decent ethical behavior. For instance in my mind that would be India over the US, China and Japan. Readers please weigh in, but the Ministry of Truth there seems underfunded. They have been open about the impacts of the Mad max economy, while as China hides it. I believe that short of a large oil and gasoline drop, American auto makers are for all practical purposes going under, as they simply don’t have the product offerings for how the world has changed. However, the world is not going back to buggies and whips, vehicular transportation globally will just look different. Call it creative destruction with new big winners.
I think creative destruction will look much like what Tata Motors of India (TTM) is starting to offer. One car is aptly called the “people’s car” (gente) or nano-car, priced at about $2,500. They are also coming up with a short distance auto (City Cat) that runs on compressed air. I find this incredibly innovative and timely. Only 1% of Indians own a vehicle, and I would not at be surprised to see these (or something like them) in the US at some point. Like almost all energy and material impacted companies, the stock price of this one has been whacked hard. I think it might be worth a buy and put away punt, and average down later if we get into more market routs. Tata has had to increase prices, but still May-June sales (a massacre for auto makers elsewhere) were up an impressive 8%. Any cheap stock that can do that in this environment is worth consideration.
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