Stirring up a Chinese asset bubble
The runaway money supply in China may be creating a dangerous bubble, says this U.S. advisory, which is hanging on to its gold stocks.
What exactly is going on in China?
We know it’s growing rapidly. But in what ways is it growing and how far can it go? And how hot can it get before it boils over?
The announcement that caught everybody’s attention was last month’s declaration by the Chinese government that its domestic banks would cut back on lending in 2010.
“Apparently, Chinese policy makers had concluded that the entire country had consumed a gigantic portion of asset-bubble tea,” says Review & Outlook.
This advisory, which comes from a Boston money management firm, keeps a close eye on international events (it also has offices in Montreal and Zurich).
The authors of this report on China don’t think the general anxiety over that announcement was just a temporary flurry of nail biting.
“As our readers are undoubtedly aware, we have been warning about a variety of macroeconomic factors for a number of months and steadily raising cash in our managed accounts,” they write.
“Indeed, recent problems in the Mid-East and well-documented difficulties in North Asia have been in our consciousness since 2009.”
Before we examine that consciousness further, we will turn to an update on the four precious metals stocks this firm has been holding, two from Canada, one from Australia and one international giant.
Positive toward gold
There is continued evidence of Mid-East selling “in conjunction with a general liquidation of gold holdings, taken perhaps in a moment of over enthusiasm by many commodity traders last November,” notes the advisory.
Still, “while the overbought nature of the market has been troubling, we nevertheless feel very positive toward gold in the months and years to come.”
Its biggest holding is the world’s second largest gold mining firm, Newmont Mining (NYSE-NEM; TSX-NMC). The share price has moved up in February and now trades at $50.18 and yields a little less than 1 per cent on its dividend of $0.43.
The last time we checked in (see Daily Buy-Sell Adviser, January 25), the advisory had been a “net seller” of Canada’s IAMGOLD (TSX-IMG). But that has changed. “We have been a buyer of IAMGOLD during periods of market weakness, a process that has allowed us to buy back the stock a full 30% below where we sold it two months ago.” From its $21 peak in December, it has come down to $15.61 and yields 0.4 per cent on its small $0.06 dividend.
The advisory remains “happy” with two mid-cap producers. Canada’s Orvana Minerals Corp. (TSX-ORV) has held steady for several months and trades at $1.06. Australia’s Intrepid Mines (TSX/ASX-IAU) is trading at $0.24 after reaching a high of $0.43 last fall. Neither pays a dividend.
Not Asian flu
“Considering the fragility of world markets and the global recovery,” say the authors of the advisory’s China report, “and the increasing significance of China in them, it might be said that when China sneezes, the entire world catches a cold — and we are not referring to Asian flu.”
China is not simply an engine of economic growth, they add, it is also the “lone stable or reliable source of capital during a period of pronounced financial economic weakness in Europe, North America and Japan.”
But is China prepared to assume the burden of global leadership?
It has all kinds of growing pains, from an urban real estate bubble to falling exports to inflation in asset prices. Yet there is no getting around it — China is inextricably tied up with the global economy.
As Greece stumbled toward default on its debt, it turned to China for refinancing (and China refused, unwilling to replace one unsafe asset — U.S. treasuries — with a much more unsafe asset).
And that’s where the real problem may lie, with China’s role as the world’s banker.
Out of all proportion
It’s no secret that China is the single largest holder of U.S. treasury securities. But that’s just one part of the story. Because China pegs its currency, the renminbi (RMB), to the U.S. dollar at a fixed rate, its foreign exchange reserves are worth some 2.4 trillion American dollars.
The People’s Bank of China is a bidder of last resort in the RMB market, gobbling up foreign currency from Chinese and other banks. In return, it pumps renminbi into the Chinese banking system.
This creates what is called “monetary overhang.” Chinese lending has reached record highs as the banks poured renminbi into the economy.
“The result is a Chinese economy that is increasingly driven by real estate and the banking sector — its financial side — and where the financial assets have increased at a rate out of all proportion with economic growth,” say the authors of this report.
Property values in Shanghai grew by 30 per cent this past year, a nervous indicator if ever there was one. And Chinese stock markets have shown the same overheated growth at a time of falling exports.
China’s official GDP growth rate was 8.7 per cent for 2009. The fear is that inflation could run ahead of that already high GDP growth rate. And that the People’s Bank could start dipping into all those foreign currencies on its balance sheet to keep the money flowing.
Put that in your tea and it has all the appearance of an ominous bubble. And today a Chinese bubble is the world’s bubble.
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