Thursday May 26, 2005 - 11:16:13 GMT
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Black Swan Capital - www.blackswantrading.com
Revaluation - Not all animals are created equal!
“Comrades,“ he said, “I trust that every animal here appreciates the sacrifice that Comrade Napoleon has made in taking this extra labour upon himself. Do not imagine, comrades, that leadership is a pleasure! On the contrary, it is a deep and heavy responsibility. No one believes more firmly than Comrade Napoleon that all animals are created equal. He would be only too happy to let you make your decisions for yourselves. But sometimes you would make the wrong decisions, comrades, and then where should we be?”
George Orwell, Animal Farm
“Banks are another worry. Even though mortgages have been around only since 1998, the government is worried banks could be saddled with more bad loans if speculative bubbles burst. Property-related loans were the fastest-growing portion of new bank borrowing last year. More than half of existing loans are collateralized with real estate,” the Journal said in its story about the slowdown in Chinese proper sales this morning.
After funneling out $338 billion in Chinese property loans last year, according to Andy Xie of Morgan Stanley—why should Chinese banks be a worry? As funding conduits for the central government, there hasn’t been much concerned about risk in their portfolios in the past. Heck, property loans, no matter how speculative, look downright solid compared to lending to a Chinese State Owned Enterprise.
The reason to worry now is because Chinese property—especially in Shanghai—has become internationalized. Not only has it been a speculative frenzy in its own right, but Chinese property has been an excellent vehicle to speculate on any yuan revaluation.
So, if property prices break before the much anticipated revaluation, the banks will have their hands full—of bad loans to deal with. Unlike past loans in morbid Chinese communist enterprise gone bad, market pricing in real estate will be felt and understood immediately. And we know above all, Chinese policy makers tend to prefer stability.
And stability is what China has witnessed since it fixed the yuan to the dollar. The chart below is comes from Andy Smith at Mitsui Global Precious Metals:
“If the rationale for revaluing is weak, the pay off for Chinese authorities is zero. Like Taoist sages, central bankers might be said to harbour no ambitions, therefore can never fail. Imagine, you are that PBOC governor who revalued and risked the nirvana [purple patch in chart] that a fixed exchange rate has brought in the last decade; low, western rates of inflation and predictably-consistent high-growth. Might you not peak at the impact of currency revaluation on so-called stable democracies, like Euroland? And wonder if, for every German steel worker or Italian shoe maker politely protesting loss of market share, there’d be a million impolite Chinese widget makers revisiting Tiananmen Square? In other words, would you bet the house that Deng built? [Those, like this morning’s FT editorial (13 May ’05), arguing there’s a ‘third way’, that China could just peg to, say, a currency basket with a euro weighting, might note that this year this basket would have required the renminbi to depreciate. Brilliant. ]”
If real estate breaks—revaluation will almost certainly be on hold, no matter how much the US administration and it’s hand and glove friends in “private” industry and “think” tanks attempt to urge China to revalue for “their” own good. That could mean a lot of money rushing out of China and back into the US. If so, it would probably be good for the buck.
Let’s also keep an eye on any revelations on the dollar from Mr. Buffet. He has plenty of Chinese investments in his own right, and a large dollar short position to boot.
Black Swan Capital
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