China economy

Why Jim Chanos is Wrong About China's "Ghost Cities"

city-building

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.

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These Mining Companies Will Profit from China's Good News

China announced industrial production data for October today (Friday), showing industrial value-added up 9.6% year-on-year, up from 9.2% in September and 8.9% in August.

This is great news for mining companies.

"Data out today provides convincing evidence that the modest macro recovery we've been anticipating is well underway," wrote Shanghai-based Andy Rothman, China Macro Strategist for CLSA Asia-Pacific Markets. "Industrial value-added, power generation, retail sales and new home sales all improved in October, while inflation remains so low that it is not a policy factor."

Infrastructure investment in October was up 24.9% year-on-year, continuing the rebound begun in September.

Rothman explained, "...this infrastructure rebound is the result of the government fixing approval and financing bottlenecks for projects originally scheduled to be built this year, not due to a stimulus."

Looking at prices, industrial input prices fell by 1.7% year-on-year in October, an improvement from the 4.1% decline seen in September.

"We are starting to see a bit of a bump up in both input and output prices, which is consistent with our view that the growth rate of industrial inventory levels has slowed and a modest macro recovery is underway," Rothman concluded.

This has led some economists to believe that this increase in industrial production in China will be positive for commodity prices, including Li-Gang Liu and Hao Zhou who work for Australian bank ANZ.

If this is the case, it'll benefit the global "mega miners" that have seen their share prices tumble since the slowdown in China began back in 2011.

Mining Companies That Benefit from China Demand

BHP Billiton (NYSE: BHP), based in Australia, is the world's largest mining company and sells iron ore, base metals, potash, aluminum, metallurgical coal, thermal coal, manganese and oil products to China.

BHP is China's third-largest supplier of iron ore where growing stockpiles in China due to sluggish production had undermined pricing.

But this is starting to change.

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Will President Obama Be Able to Stand Up To China?

While U.S. Presidential headlines dominate the airwaves this week, there is another "election" under way thousands of miles from our own shores that may be even more important when it comes to your money.

The 18th National Party Congress is now underway in Beijing. Attendees are girding for a week of symbolic posturing and speeches, the culmination of which will be a new set of Chinese leaders and a new Chinese President for the next 10 years.

While this is a complicated process when things are running smoothly, this particular Congress is really critical. China is a mess. Recent economic challenges and corruption on a scale that has boggled even the most jaded of insiders are at the top of the "fix it" list.

Outgoing Chinese President Hu Jintao's replacement and China's presumptive new leader looks to be a man named Xi Jinping.

At 59 years old, he's a power player with close ties to the People's Liberation Army (PLA).

While he's not a military man per se, as the son of a revolutionary general he currently holds several significant offices that give him wide-ranging and very significant exposure to both the State and Communist Party.

What's significant about this is that there are three parallel strands in Chinese government structure: the Communist Party, State, and Military.

The Party and State are deeply intertwined, but the military is less so, except at the top levels of leadership. Consequently, China's new leader is intimately familiar with the Chinese military and also the likely new head of China's Central Military Commission.

I'm not so sure we've ever seen this exact combination before and I think it's going to challenge President Barack Obama in ways that he hasn't thought through yet.



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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.

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You Asked, He Answered: Shah Gilani on China, Ben Bernanke, the Fed and Much More…

Thanks for flooding my email inbox. I asked for it… Let's start off with some comments and questions about Ben Bernanke and the Fed…. Q: I see no distinguishable difference in the relationship that government has with the Fed/Banking Systemand some individual getting involved with a ruthless loan shark. ~ James M. A: The Fed […]

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The Real China Story: It's What Premier Wen Didn't Say That Matters

According to Premier Wen Jiabao on Monday, China is only going to grow at 7.5% this year.

But this isn't the bombshell most Western analysts think it is-even though the markets sold off on the day and may continue their temper tantrum later this week.

It's actually what Premier Wen didn't say that really matters. As is so often the case in China, it's what goes on behind the scene that is far more interesting - and actionable.

In that sense, Premier Wen's comments aren't really news at all, but rather recognition of the symbolic priorities attached to Chinese growth.

As I have talked about at length in the past, China needs to do three things this year: 1) keep growth in line, 2) promote monetary stability and 3) be flexible with regard to inflation.

What makes Wen's 7.5% GDP figure significant is that in dropping it by half a percent, Premier Wen is not saying, but, in fact, telegraphing two things:

  • China's domestic growth priorities have now trumped growth through exports and manufacturing in terms of relative importance; and,
  • The Communist Party expects to shift spending to lower brow projects like ordinary train lines, rural roads, education and technical infrastructure.
Having spent more than 20 years doing business in Asia, I've learned that Chinese leaders almost never say anything in public they haven't already baked into the cake.

This stands in stark contrast to our own politicians who frequently write checks with their mouths that they can't possibly cash.

Understanding the China Story

No. China's leaders are acutely aware of "face" and the risks of losing it. So it's what hasn't been said that's actually far more important here.

The real message is that China expects to maintain growth above 6%, the internal Party Elite's real target, and continue to develop employment opportunities that will keep its 1.3 billion people fed, clothed and housed - so they don't revolt.

Never mind Iran's "Red Line." This is the one that matters.

Understand the importance of 6% and you will understand China in a way that Washington doesn't.

Exports, imports, the yuan, the ghost cities, and hard landings...

None of these things hold a candle to what Beijing considers its most important issue--ensuring China's own survival.



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The Heart of a China Bull Still Beats Strong


My debate with Gordon Chang on China's future at the Vancouver Resource Investment Conference was a stimulating, intellectual exercise.

A healthy market needs a compromise between the bid and ask, and discussions between people who strongly disagree is a great way to promote critical thinking.

Critical thinking is vital to our investment process as a means to ensure that we question assumptions.

A lack of critical thinking sometimes leads to bubbles, such as the one taking place in the parabolic rise in the number of articles foretelling China will experience a "hard landing."

Last fall, more than 1,000 articles questioned the possibility of a "China crash," according to data from BCA Research. This is twice as high as the number in 2004, when fear articles reached 500.

Gordon's bearish pronouncements only added to the extremely negative groupthink surrounding China's economy.

Money Morning Chief Investment Strategist Keith Fitz-Gerald, a long-time friend of mine, wrote an excellent article comparing today's doomsday sentiment of China to the naysayers who forecast the demise of the U.S. during the market bottom of March 2009.

Throughout the past century, U.S. stocks went through many secular bear markets.

Keith points to the 1929-1932 period when the Dow Jones Industrial Average declined by nearly 90%, along with pointing out the Dow's loss of more than 52% from 1937 to 1942.

Also, in 1901, 1906, 1916 and 1973, there were four "40-plus% declines," says Keith.

Americans have also endured two world wars, the Great Depression, presidential assassinations and the deadliest terrorist attack ever seen on U.S. soil. What's important for investors to remember was that each significant market decline presented a "great buying opportunity" with U.S. stocks rising double-, or in some cases, triple-digits, writes Keith.

And, over the past 100 years, the Dow gained an outstanding 24,000%.


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