Your revelations on China by the way, were early and right. I mean how frustrating was that relative to the received wisdom from the outer layer. It’s funny because we get chided a lot even today there, you know, well, you said China would be in smoking ruins by now, you know, it’s still going strong and mean while0 the China has been probably the best short you could have had for the last ten years. Because every other market has doubled and tripled and China’s been flat to. The FXI when we started looking at China was, I think, 41 and I think, it closed last night at 41 and that was late ’09 so it was 10 years ago but what really intrigued us about China was what we had seen in previous real estate bubbles. So, one of our big calls in late 80s at Kynikos was the commercial real estate bubble in the US
-All right. and the tax laws had changed people hadn’t figured out that the tax law had just put a torpedo into the ocean liner and we’re still building and still doing tax shelter deals and then everything collapsed and then we looked at things like Japan in 1989. We looked at Ireland and Spain in 2007 and what stunned us was the size of the residential real estate market and to this day it still stuns us in China. It is the biggest real estate bubble in history and still is 10 years into it. They’re still building a 1.8 billion square meters a year of residential, which is 20 million apartments. Because the average Chinese apartment is 90 square meters and we’ve long gone past “Wow build it and they will come” and the rural people will move into because these apartments aren’t affordable for people who are moving from rural to urban they are only being built at this point for speculation and it is about depending on how you want to figure out the ancillary real estate stuff. It’s anywhere from 20 to 25 percent of their GDP. Investment is still 45%-46% of China’s GDP and residential real estate is about half of that and it’s stunning, I mean, I always joke the world’s most important single asset class is Chinese flat prices.
-I mean, it’s… guys if you can show slide 31 in the current macro deck, where we… I arguably anchor on this because I think it’s what drove, you know, first of all CAT wouldn’t be back to where it’s gone to if this didn’t happen, but you know the Chinese stimulus yeah still
-I mean, this just didn’t stay up that’s the amazing they are still building this line is basically secondary industries I’m showing on this slide. Secondary industries in China which would include everything that you basically just said, which is heavy construction, partly empty cities, empty apartments, the most cement ever used in human history. I mean, so, if you just look at the rate of change of that line what’s interesting about that line to me Jim is that even if they’re making up the numbers the rate of change of that line
-Yeah continues to slow, slow and slow despite easing base effects, which means that you should be showing some even cyclical acceleration here right and the October numbers in China fully loaded even with shadow financing loans that they’re reporting are horrible. If you’re making up the numbers, make up less bad numbers.
-So, we’ve looked… the proxy for that is we try to get a check… because again the Chinese numbers… I always say it’s bad apples to bad apples So, we try to look at rate of change
-Okay But, one of our checks there’s also… We monitor all the publicly traded banks in China and look at both asset growth and loan growth. Loan growth because it’s loan growth and then
-Right asset growth because all kinds of other shadow banking stuff usually in China ends up on banking balance sheets in one way shape form or another. Receivables from other banks, investment products and so we try to look at that growth year over year and it was slowing. It’s interesting. It got down in spring of a year ago, first quarter of ’18. The year-over-year growth came all the way down to about nominal GDP in terms of the aggregates of all the banks. Got down to about eight, nine percent, seven, eight nine percent year-over-year, which was a sort of nominal GDP and these are nominal dollars and that’s when the deleveraging…
They stopped the deleveraging talk. I think they were beginning to worry that stall speed was going to hit and this has happened a couple times down in the ten years we’ve been following China. It happened in 2010-11 and then 14-15 and then more recently and now it’s running back up the aggregates I think are running back up around ten, eleven, twelve percent year-over-year, which is sort of twice nominal GDP.
-mm-hm I like to joke. When I started looking at China… Hainan, which is the little tropical the resort island in the South China Sea, had won International Airport. Shortly after we started following China they announced and have built a second International Airport and they’re about to announce a third International Airport. The first one was essential, the second one is a luxury, the third one I think is folly. Yeah. All right. So, did you just keep building it, keep building it and building it That’s the problem with any investment driven economic model. I’ve often said Look, if half of your GDP is investment, you know what your GDP is going to be that year on January 1 because you’re gonna set plans and you’re gonna… every time a building is finished you can put up another one, but are you really building wealth in your country if you’re doing it with credit you’re doing it on the back of your your people who are saving the same, you know You remember back from your macro class you know, S equals I and so they’ve got to save that much and is your banking system really, you know, what you say it is because no one ever writes off a loan and that’s the real
-mmm-hmm problem here. The debts there the assets don’t earn a lot of money and In fact, depreciate because they’re so real estate centric
-mmm-hmm well like you’ve said many times… I mean, no bubble or fraud is the same, but the patterns of behavior repeat. Do you think… Last question on China. Do you think that there are similarities to the early 90s and really today for Japan versus now China? When I see the beginning of the slowdown from the secular peak and I see everyone trying to defend it and now looking for a trade resolution they’re so short term about it, but is this the 1990s in Japan?
So, I give a talk a few times a year to Chinese bankers usually up at Yale and it’s funny. They ask to hear the lecture. I don’t know why. They must be masochist. But, they’re, uh no and they’re lovely people and then they’ve invited me back to People’s Republic, but as my mother said never go to a fight you’re invited to. So, I avoid that, but consistently the lovely people and I put up at the end of the lecture and it’s usually translated. At the end of the lecture, I put up “Who am I” and I put up a state driven economic, model heavily reliant on investment in real estate, protected currency, exporting capital to developing market countries as a way of diplomacy, managed exchange rate, capital controls blah blah blah blah blah and the Chinese bankers always laugh: I’m talking about China and then I put up the last slide which is the Rising Sun: I’m Japan of 1989 and there are similar… quite a bit of the similarities, other than democratically elected government. A lot of the similarities are there. If you look at it because even Japan back then had this state directed kind of quasi capitalist model where you had mini and MITI and these big government agencies directing the large conglomerates and you had, you know, a fiercely protected currency you had a real estate bubble. The parallels are interesting.
-Yeah. Very interesting. It’s also like, so, what tips it and the same thing applies I think when do you see the most amount of frauds when it first starts to slow from a cycle peak I mean when Japan first started to slow what happened USA got in a tariff war with Japan.
-Yeah. It’s an amazing thing if you look at the two side-by-side.
-I forgot that. It’s true. Onto the…
Well, one guy likes to do business in China maybe he’s going to just move his Auto operations there. He’s already done part of that…