Tear off the mask of Chinese foam economy

[crowjin]

Recently, I had been in Guangdong Province for more than one month. I
read as much as I could and I spoke out of my questions whenever I
found a person to answer them. Thus, I gained a lot in several aspects
and I have a deeper understanding of many things. So, I wrote my
feelings down to share with you all.

First, I want to talk about the economy.

As a bellwether of the economic development after the reform & opening
up to the outside world, Guangdong is apparently the best place to
view Chinese economy.

In the past few years, almost everybody was in fire of all kinds of
reviews. Some talked about the stock market, some talked about the
housing price, while the others speculated in gold and foreign
exchange.

Chinese economy is experiencing the unprecedented difficulties greater
than ever. Somebody said that the economy situation next year will
turn for better. However, some others said that, without five or six
years’ time, it’s impossible for China to climb out the economy
trough. But in my opinion, many of them don’t have a thorough thought
of the economy, and in that way, they came to a wrong conclusion. Now
I want to speak out some of my opinions, and I stand corrected.

I want to divide my idea into several parts at first and then combine
them together to get a final conclusion. Let’s commence our discussion
with the stock market.

The stock market has been in a declining situation since last year.
Many people including many experts altered their attitude every now
and then. You can compare the stock market review of some famous
pieces of newspapers in three periods: the crazy moment before the
decline, the moment when the decline began and now. It’s very
dramatic.

During the last ballooning of the stock market before the decline,
although many famous newspapers and experts admitted the A-share of
China produced lots of foams, they had an idea of trusting to luck——
Chinese economy is an amazing wonder in the world development, and
some of the world-famous economy theories aren’t applicable to it. So，
without considering about the serious foams, they still think China
will get a dividend rate five or six times bigger than that of the
developed countries. Obviously, it turns to be wrong. They forgot “the
balance of Yin&Yang theory” of our ancestors. As the saying goes in
the Book of changes，the dragon exceeds the proper limits and there
will be occasion for repentance. It shows the inevitable decline of
Chinese stock market. The try-your-luck mentality resulted to some
serious consequences of which the damaged reputation of some so-called
experts is actually the least important one. A number of people came
into the stock market in 2007, during which was already suffering
serious foams. After the horrible decline of the stock market, they
suffered heavy financial losses which they earned. But now, the cut-
throat competition of the stock market was shown, some people finally
came to realize that they seemed to live in the fools’ paradise in the
past. They also have to be responsible for their heavy losses.

Some people have a very incorrect idea, that is——the A-share of China
is a market backed by government policy. If China gives some support,
the A-share won’t have any sudden changes. Anyway, it is right in some
ways, but if it is absolutely wrong. Actually, stock market cannot
fluctuate under the influence of the nation in the long run. It can
only be affected by the nation in a short time. We can take a
seriously thinking of the market price of the A-share in China. We can
use thousand billion as a unit of measurement. What if the government
invests several hundred or thousand million RMB in the stock market?
What if it doesn’t work and how will the government deal with the
taxpayers?

But what if the country only sets forth some policies? The new
policies may make the stock market rise or decrease. Will it last
long? Absolutely not! We can turn back to see some policies which were
publicized at some key moments. First, let’s look at the situation on
May Holiday in 2007, the raised exchange tax was under a proper
control in order that it won’t rise so quickly. That’s fairly good.
However, the stock market rebounded with increasing momentum soon!

What about this year? Some policies are used to prevent the non-
tradable share and decrease the exchange tax. Surprisingly, the stock
market got increased by 10% the next day! How long did it last? Only
after a few days, it began to decrease again. So, nobody seems to be
able to benefit from what the government does to the stock market. The
main be-saved people are the ones who hold the reins of power and are
informed in advance. As for ordinary people, it doesn’t seem to work
at all. Someone always fancies that the country or the Securities
Regulatory Commission will take some measures to save the stock
market. How ridiculous! The government didn’t really do something to
save the stock market, which led to the unreasonably decrease.

Externally, we can see the decreasing price of the crude oil; we can
see the more stable situation of the exchange rate towards the US
dollar; we can see the steadier gold price recovery. It is good news
to both the companies and the government.

Internally, the dividend rate of Chinese stock market is back to
normal level. Besides, much information shows that it is good for the
whole market. However, the Securities Regulatory Commission publicized
some new documents in view of the existing non-tradable share lately.
What’s odd was that it seems that the market completely doesn't take
it seriously. The whole market still operates at a low speed.

This is a reflection which the government prefers not to save the
market. We’ll talk about the reason later.

Then let’s see the housing market. Also, after a crazy, constant
increase in a few years’ time, the housing market began to shrink
since last year without any possibilities to stop.

Besides, the drop in the housing market corresponds with the drop in
the stock market.

When Guangzhou, which played a leading role in the housing market’s
increase began to have a tremendous decline in the trading volume, the
housing price in medium-sized cities and small cities also decreased
as a response. We’re certain that the decline of the housing price is
an inexorable trend.

During this year, the average housing price of Guangdong fell to about
5,000 RMB per square meter. In some prime locations, the housing price
has fallen below 10,000 RMB per square meter.

It is nearly the same case in Shanghai. One commercial building in
Shanghai had made adjustments in the housing price. It’s 7,000 RMB per
square meter.

Although it is the case, I think I can only use one sentence to
describe the circumstances of the housing market：The ones who can
afford the price don’t hurry to move into the new houses while the
ones who are eager to find a place to live in can hardly afford it.

Then, I want to compare the housing price in Nanchang and Huizhou.

In Nanchang, the housing price in downtown had just increased to about
10,000 RMB per square meter last year, but it’s only about 6,000 to
7,000 now. Some houses have 30 or 40 square meters, while some others
have 40 or 60 square meters. In this way, if you want to buy a flat in
the downtown of Nanchang, you will have to pay 180,000 to 420,000 RMB
for it.

However, it was said that the price of some villas in the suburbs of
Huizhou had decreased from 7,600 RMB per square meter to 6,000 per
square meter. It was true that the price had fallen by a big margin.
Recently people all hold identical views that October is the key
moment when the real estate developers’ fate hangs in the balance-
critical juncture. If the developers can go through it, they will have
another nourishing year, if not, their companies may go bankrupt. In
this way, it is not strange to see the sudden decline of housing
price, the rising number of trading volume and some people’s partly
clear off of their load in the bank. Thus, the decline of housing
price is not only normal, but also necessary; it is a period which the
housing price will have a decline all together from now till October.
After the period, the real estate developers won’t make such big
adjustments in a short time. Maybe, the price will hold its balance
with some declines by a small margin. At this time next year, they may
eliminate another batch of houses. So, my suggestion is—— those who
are eager to buy houses might not as well buy them in October or so.
If you are not in such a hurry, you might wait till the next year. On
my view, the housing price of Nanchang may fall to about 4,000 or
5,000 RMB per square meter because the downtown housing price in other
cities of Jiangxi Province are around 4,000. So the downtown housing
price of Nanchang may not be over 5,000.

But the housing price in Huizhou may probably have a small decline
before October this year. After that period, maybe the real estate
developers will only choose to use some favorable conditions to
attract the buyers by offering some services or goodies instead of
giving customers a discount.

Whatever, the housing price in Huizhou won’t raise high above it in
Nanchang. It’s estimated that you can buy a villa in the suburbs with
the price of 5,500 RMB per square meter this year without any doubt.

At this time next year, it might be the same situation. The housing
price may not have a decline by a discounted price. They may use other
means like waiving the property management fees or offering a QQ car
instead.

However，maybe the way of operating the whole macro economy will
change, and it is too early to talk about it .

Next, let’s go on analysis with the appreciation problem of RMB.

If we view the appreciation problem of RMB in the surface, we may
consider the pressure that the US gave us as the main reason. As a
matter of fact, it is far more difficult than that. It seems that the
appreciation problem of RMB can only do some good to the Americans and
the ones who speculate on foreign currencies for marginal profit while
having nothing to do with the others. On the contrary, it is exactly
wrong. On the surface of it, the appreciation problem of RMB resulted
to a serious problem: many enterprises in the southeast coast go
bankrupt and some others are on the edge of bankruptcy. Besides, the
price advantage of China’s foreign trade is disappearing because of
the price inflation all over China and improvement of the exchange
rate level.

However, it is observed that the bankrupt factories as well as the
closing-bankruptcy ones don't belong to the “sunrise industry”.

It’s a rule of market competition: Survival of the fittest. Their
bankruptcy is not a big deal to the whole industry. Maybe we can’t
accept it in a short time, but in the long run, it is the only road to
the economic development.

The US dollar is now used as the international settlement currency, as
the RMB appreciate the US dollar, we can buy more things with the same
amount of money compared with the past. It also stifles the over
speeding increase of the commodity price.

This is the positive effect of the appreciation. To be sure, it isn’t
an unlimited appreciation, our government will be in charge of the
maximum range of the appreciation. What’s more, it has to guarantee
not to collapse the entire economy.

There are also a lot to say in other aspects, but I don’t think it is
necessary to list all of them.

So, let’s come to the point.

In my point of view, all I have listed in previous paragraphs are
under the control of the macro adjustment and control. We are all
familiar with normal macro control by knowing that the government set
forth some policies according to some economic or social problems.

But the macro economy I am talking about is not the very one in common
sense. The similarity is they are all decided by the government, and
the difference is that the one I mentioned does much better in both
breadth and depth.

Since 2005, the Chinese economy has become overheated: the overheated
stock market, the rising housing price, the overheated real estate
market and the rapid increase of the export. The policies which the
government set forth didn’t seem to affect. Actually, the trap of the
macro control was fixed. Can’t control the stock market? OK, take it
easy. The government will take it for granted at first as the rising
situation in the stock market begins. The higher it rises, the weaker
it accumulates. That is to say——the higher you climbs, the more tragic
the result will be after your falling later.

It is not easy to control when it is in a low level. However, when it
rises to a certain place, even one little change of the government
policy will set off a domino effect to shock the market. Some smart
people may make a fortune during the round, while the normal people
have a loss. Then the people with deep insight become richer, while
the normal ones lose a few years’ savings and back to the starting
line.

Although the situation changes, life goes on. By this time maybe the
smart people get the first bucket of gold in his life and come into
his kingdom ever since then, which may lead them to exert more energy
to the rapid development of China’s economy.

As for a normal person, even you give him a large amount of money he
will soon squander it over instead of trying to expand the investment.
What about the housing market? What will happen by seeing the rising
of the housing market? How can we address the supply and demand
contradiction? What shall we do if the local government complies in
public but oppose in private to central government. It doesn’t matter;
we can just ignore it at first. We can just wait and see the rising of
the housing market, the rising of the income, the rising of the stock,
and the rising of the purchasing power. If we pull down the pillar——
the stock market, what will happen to the housing market?

As for the small factories and the sunset industries, what should we
do if they just don’t obey the nation’s control?

The simplest way is——we made the RMB have a lasting appreciation. When
it is unable for the small factories to bear, they will go bankrupt.
At last, as the famous saying said that: “Big fish eat small fish;
small fish eat the small shrimp.” It will lead to the restructuring of
the whole industry. Thus, the internal waste of the whole industry
will decrease.

Now let’s organize our idea and come to a conclusion.

It doesn’t matter if the stock market is overheated, and it doesn’t
matter if we can’t control it. We can just wait till we find a right
time to push it, then the empty high large cap will fall like bean-
dregs project. It is the same with the housing market.

As for the constant internal conflicts between the small firms, we can
just appreciate the RMB to the level that they can’t bear. Then the
small firms go into bankruptcy, acquired by large firms immediately,
in that case, the internal fighting will stop and the resources will
be integrated. As a result, it accelerates the speed of economic
transition. After an entire round, the smart ones made some money but
the poor ones are still poor. By using the money they earned, the
smart people can advance a larger business to promote our country’s
economic development while the poor remain the same; they work hard to
feed the family.

And then after a few years, some others will join in this game
again…


zidan

translate：Icy
http://blog.sina.com.cn/zooloor