Why Jim Chanos is Wrong About China's "Ghost Cities"
China's "ghost cities" present the West with the shocking images of vast urban areas that sit nearly empty.
In a striking report, shown recently on CBS News' "60 Minutes,"there are rows of high-rise apartment buildings, tracts full of suburban American-sized detached homes and imposing government edifices in China's western desert that are empty and utterly devoid of any signs of life.
Their existence has raised more than a few red flags among investors.
Invest in the Chinese Yuan Before It Takes Over the Financial World
It's only a matter of time before the U.S. dollar loses its more than 50-year reign as the world's dominant reserve currency, and it will be replaced by the Chinese yuan.
From January 2012-January 2013, transactions in yuan grew 171% in value, moving the yuan ahead of the Russian ruble to 13th place in global currency payments, up from 20th last year.
And you can bet the yuan will soon crack the top 10. In March, yuan payments grew in value 32.7%, compared with a gain of only 5.1% across all currencies.
Part of the reason for the yuan's growth is that at least half of all trade with emerging markets could be settled in yuan by 2013- 2015, which would be up from just 3% in 2010, according to HSBC.
For Money Morning readers, the rise of the yuan shouldn't be a surprise.
Why China Is Tunneling a Mind-Boggling 800 Miles in 2 Years
Would it surprise you to discover that China is planning to add 800 miles to its subway system over the next two years?
That's the distance equivalent to building a network from Dallas to Chicago in less time than the U.S. Congress can resolve a budget!
In 2015, when the out is complete, China's subway track alone will be a mind-boggling 1,900 miles, according to JP Morgan.
The Asian giant has been in the midst of constructing the world's largest transportation system, laying mile after mile of high-speed rail and subway track.
According to the World Metro Database, Beijing and Shanghai currently have the longest metro and subway systems, with about 275 miles each. The city of Guangzhou in China also falls in the top 10, with 144 miles of rail, beating Paris' network length of 135 miles.
This ambitious program is part of the pragmatic solution to help 1.3 billion residents move around the country efficiently and reduce the increasing problem of air pollution due to car emissions in big cities including Beijing.
The circulating reports and photos of Beijing's smog have recently become a dark cloud hanging over the country's remarkable achievements, but it's not a new issue. In the winter, smog conditions can seem much worse. Pollutants tend to linger when the air is heavier and colder compared to lighter, warmer air during the summer. In addition, the city is located near the Gobi Desert and has always been subject to sand and dirt storms, even back in the days when it was called Peking.
China's Cyber Attacks on the United States Will Only Get Worse
Sometimes the truth is scarier than fiction, like in the case of China's cyber attacks on the United States.
In what reads more like a crime novel than a true story, a report released today (Tuesday) from Virginia-based cybersecurity firm Mandiant, a specific Chinese military unit is likely behind one of the largest cyber attacks aimed at American corporations and infrastructure.
China's Unit 61398, housed in a 12-story building in Shanghai with a headcount in the hundreds, is being accused of stealing "hundreds of terabytes of data from at least 141 organizations" since 2006. Some 115 targets in 20 different industrial sectors from energy and aerospace to transportation to financial institutions are said to have been violated.
The investigation tracked, for the first time, individual members of the savviest Chinese hacking group, dubbed "Comment Crew" and "Shanghai Group," directly to the military unit's headquarters. While Mandiant couldn't pinpoint the hackers' exact whereabouts inside the high-rise, the firm very convincingly makes the case that the building is where the attacks originated.
"Once [Unit 61398] has established access [to a target network], they periodically revisit the victim's network over several months or years and steal broad categories of intellectual property, including technology blueprints, proprietary manufacturing processes, test results, business plans, pricing documents, partnership agreements, and emails and contacts lists from victim organizations' leadership," the detailed 74-page report reads.
American officials also confirmed that digital forensic evidence presented by Mandiant leads to the Shanghai building as the prime source of the attacks, according to The New York Times, which first reported on Mandiant's findings Monday. Mandiant is the same firm The Times secured to investigate the cyber attacks that infiltrated their own systems in China last month.
The Chinese government adamantly denies the allegations. Chinese Foreign Ministry spokesperson Hong Lei said at a press conference the claims in the Mandiant report were unsupported.
"To make groundless accusations based on some rough material is neither responsible nor professional. Cyberattacks are anonymous and transnational, and it is hard to trace the origin of attacks, so I don't know how the findings of the report are credible," The Wall Street Journal reported.
Investing in China: Out With the Dragon, In With the Snake
During this Chinese New Year, more than a billion people will be welcoming in the Year of the Black Water Snake, celebrating with family and friends all week long.
The previous Year of the Black Water Snake was in 1953, which was when China launched its first Five-Year Plan and the average annual income for a family in the U.S. was about $4,000.
As the Dragon took its last breath of the year, it exhaled plenty of fire into China: Looking at year-over-year data as of the end of January, new bank loans, passenger car sales and exports all rose while inflation was slightly lower. Imports of key commodities we track, crude oil, aluminum and copper, were also exceptional, with month-over-month increases of 6 percent, 4 percent and 3 percent, respectively.
China's Pyramid of Power
China celebrated another achievement last week, as Mo Yan became the first Chinese citizen to win a Nobel Prize for literature.
The selection of Mo was praised by a Chinese nationalist tabloid as a sign that mainstream China could "no longer be refused by the West for long."
Mo grew up in Shandong province in northeastern China, and during the Cultural Revolution, he left school to work in the fields, finishing his education in the army, according to The Guardian. The author draws upon his rural upbringing in his novels, mixing historical perspective with mythical elements.
His real name is Guan Moye, but he chose "Mo Yan" as a pen name meaning "don't speak," to reflect the culture in which he grew up.
The new Nobel laureate is of the same generation as the new leaders set to take over the Politburo Standing Committee next month after the convening of the 18th National Congress of the Communist Party of China.
This group of men (and one female contender) are "old enough to remember the suffering of the Cultural Revolution, but also young enough to fully experience how China has grown through Deng [Xiaoping]'s opening of the economy to market forces," says CLSA China Strategy research.
They've seen vast political reforms take place, transforming China "from a country ruled by the contradictory personal whims of Mao to one ruled through institutions and rules," says William H. Overholt in The Washington Quarterly.
During these decades, "freedoms blossomed, affecting everything from clothing to haircuts to job or marital choices to social and political speech," says Overholt.
As a result of these policies, they've been able to witness China's incredible growth, with GDP averaging 10 percent per year and more than 500 million people moving out of poverty over the past 30 years.
The Dangerous Standoff in the South China Sea is About to Boil Over
We've been telling you for months about the ongoing territory disputes in the South China Sea – and warning that it wouldn't take much to spark a major confrontation.
Now you see why.
Today, the anniversary of Japan's 1931 occupation of parts of mainland China, an already smoldering territorial dispute between China and Japan is threatening to boil over.
Major Japanese firms have ordered shutdowns of their Mainland China operations, and Japanese expatriates living in that country have been ordered to stay indoors as angry protests sparked by the territory disputes have kicked the anti-Japanese sentiment to its highest level in decades.
We've been telling you for months that this was inevitable.
Last week, Beijing dispatched patrol boats to the five East China Sea islands that are escalating the disagreement between the two Asian heavyweights. Beijing sent the boats to the Senkaku island region as an angry response to Tokyo's plan to buy the mostly barren islands from their private owners.
Over the weekend, well-known Japanese firms such as Honda and Toyota were the focus of demonstrations and violent attacks. And yesterday, a flotilla of around 1,000 Chinese fishing boats was sailing for the islands.
All of this was prompted by Japan's announced plan to purchase the five afore-mentioned islands from their private owners.
Chinese Foreign Ministry spokesman Hong Lei said the government would protect Japanese firms and citizens and called for protesters to obey the law.
"The gravely destructive consequences of Japan's illegal purchase of the … islands are steadily emerging, and the responsibility for this should be born by Japan," Chinese Foreign Ministry spokesman Hong Lei told reporters at a daily news briefing.
This follows last week's warning by China's Foreign Ministry that "if Japan insists on going its own way, it will bear all the serious consequences that follow."
Although the hottest part of this dispute currently centers upon China and Japan – which generated two-way trade of $345 billion last year – many more Pacific-Region nations are involved.
And, as we'll show you in a minute, there will also be consequences for this country, and for U.S. investors who take the time to understand what's at stake.
Q&A With Keith: The Real Answers in China Are Never That Simple
As you might imagine, I get a lot of questions about China – it's topical and it's very important to our future.
Most are really just reincarnations of concerns voiced since 1970 when China first began to open up. In that sense, they're really nothing new.
So rather than tackling the same old "they'll never succeed because they're not democratic" or "ghost cities" arguments that seem to incessantly make the rounds, let's frame them in terms of what's in the news lately and dig into the subtleties that escape most Westerners.
And, let's start with one of the questions I get the most.
Q – Is China going to have a "hard" or "soft" landing?
A – This one stumps me. Where have the people asking this question been? China's had a soft landing for the last four years. They are already there – the economy is slowing, debt is rising, and the urban migration may be closer to an end than people think.
The fact is that nobody can define what a Chinese soft or hard landing actually is because Western metrics don't apply. It's just a catch phrase that gets bandied about in the media.
That's why I believe this question is really a matter of perspective. For example, there is no question China faces huge challenges, but those challenges are no different than many we've faced here in our own past.
During the last century we experienced two world wars, multiple recessions, a depression, and a presidential assassination — and still the Dow rose more than 20,000%.
China will, too. The genie is not going back in the bottle.
As I recall, many people in England thought that America was a pretty silly venture at one time. And don't forget that the world thought Japan was good for nothing more than cheap tin toys following WWII.
Looking at China through Western lenses is a mistake.
Q – The Chinese copy everything. Companies can't make money there, especially lately.
A – That's simply not true. Domestic Chinese companies have made plenty of money. So have foreign companies like McDonalds, ABB, Coke, and even GM, which have been fabulously successful there because they've taken the time to localize their products.
Not many people know this, but the ultimate sign of executive status is a jet black Buick minivan in Beijing at the moment. How's that for a contradiction?!
Winning the Race for Resources
The world watched in awe as American swimmer Michael Phelps became the most decorated Olympian of all time.
I've read he's been training in the pool for an average of 6 hours a day, 6 days per week, which equates to about 30,000 hours since age 13 and about 10,000 calories burned during a training day. It's inspiring to see the incredible results of his tremendous sacrifice and commitment.
Investing in global markets requires the same sort of stamina, especially at times like this week, when the month's reading on the manufacturing industry was not encouraging. The J.P. Morgan Global Manufacturing PMI of 48.4 for July was the lowest since June 2009.
However, I believe there are encouraging pockets of strength to energize and inspire investors.
For example, we're coming up on the anniversary of the first stimulus move that kicked off the global easing cycle.
On August 31, 2011, Brazil unexpectedly cut rates by 50 basis points, and since then, ISI says 228 stimulative monetary and fiscal policy moves have been initiated across several countries, including the Philippines, China, France, and Colombia.
In June and July alone, there were nearly 70 moves-the most since the world began this massive easing.
Generally, by the time central banks make a fiscal or monetary easing move, economic deterioration has already occurred.
Even with these moves, it still takes several months for the stimulative measures to take effect and work their way through.
China Makes Its Move
But while the world wades in the shallow end of the pool waiting for the economy to warm up, Asia has taken a deep dive into the energy space as they've recently announced acquisitions of Canadian resources companies.
We're Not Saber Rattling, We're Simply Connecting the Dots
I love it when our readers take the time to drop us a note. It's tells me they're not only reading but actually care enough to be engaged.
A Money Morning subscriber named Peter M. is one of those folks.
Peter was so struck by what I had to say about the escalating controversy in the South China Sea he decided to leave the following comment:
"Seems like Money Morning is saber rattling. Not a word about the heat & drought in the Midwest and Great Plains? Seems some discussion about our rapidly changing climate might be a better discussion."
First, let me say that Peter's note was well received. But I'd be remiss if I didn't take the time to delve into what Peter viewed as "saber rattling" because I just don't see it that way. As always, my goal is to simply connect the dots.
The thing is, the South China Sea is just one of them.
Here's my response…
Thanks for the taking the time to comment. We've found that folks like you who take the time to post a comment — and who actually contribute some thoughts of their own to the posting – tend to be very well informed folks.
And believe me when I tell you that we like and respect that a lot.
I zeroed in on your comment in particular because I agree with part of it – the part about the importance of the drought. I've written a number of columns about that issue in Private Briefing over the last month or so, including one in back in June that that warned readers that the crop numbers were going to be a lot worse than the government was saying.
In recent weeks, that's just what's happened. (Fortunately, we also showed readers how to protect themselves).
So, again, you and I are on the same page when it comes to the drought.
Now, as far as this business about our South China Sea coverage being "saber rattling," I have to say that I very much disagree.
Part of the problem is that this escalating disagreement isn't getting much coverage in the mainstream U.S. media (and I spent more than 20 years as a mainstream media journalist, and spent time abroad, so I understand this very well).
What's happening in the South China Sea is a tinderbox just waiting for the right spark. And believe me when I tell you that this scares the hell out of our government. We could very well end up being caught in the middle.