Goldman underestimates huge potential downside for Chinese stocks
Posted on 24 May 2011 with 7 comments from readers
Down by more than 10 per cent since recent highs Chinese stocks could drop by another five to 10 per cent in the view of Goldman Sachs, the firm which got the commodities sell-off right. But there is no consideration of a more extreme scenario that ArabianMoney considers more probable.
The immediate cause of further decline will be slowing GDP growth and higher inflation, the latter partly responsible for the former. However, there is considerable debate among analysts about the internal stability of the Chinese economy and its ability to withstand a slowdown.
Fundamentally solid
Those who say China is ‘fundamentally solid’ remind this correspondent of HSBC’s chairman John Bond who dismissed fears of the US economy in 2006 as ‘completely wrong’, while in the event it was Mr Bond who was completely wrong.
Could it be that the Chinese economy which injected the largest stimulus package in history after the global financial crisis is ‘fundamentally solid’? Can a country where more than half of GDP comes from construction and real estate be considered ‘fundamentally solid’ and not over-heating and over-leveraged?
Time will tell. So far the growth rates have been so impressive that the bears are easily silenced. Hedge fund manager Jim Chanos sees China as ‘Dubai 1,000′ in terms of a property bubble. His reckoning is that such a bubble has never unwound in history without a crash. In Dubai too we once argued it would never happen here!
Why then is Goldman so timid in its scenario for stocks? It is surely an over estimation of the omnipotence of the Chinese government. Thus far China has raised reserve requirements at the banks 11 times and upped interest rates four times to cool inflation now at 5.3 per cent.
Bounce back?
Strangely Goldman has property and banks as its top stock picks but is underweight on industrials, steel and aluminum. The US bank is expecting a rebound after this correction phase is done. What will drive it? QE3 does not exist. The Chinese stimulus is inflationary.
The bank does not even dare posit a more extreme scenario, the kind of ’sudden stop’ we saw in Dubai three years ago this October. Yet if you really step back and look at the long boom in China, and its over-extension into real estate and construction, then this just has to be the most probable conclusion.
It would mean a 50-80 per cent wipe out scenario for Chinese stocks, at least in relation to recent highs. This is hardly impossible. It happened in Hong Kong between 1997 and 2003, and then indeed there was a recovery. Dubai stocks are still 70 per cent down.
Consider the problem of the Chinese ‘ghost cities’:
7 Comments posted by readers:
There’s a very good reason for raising the false flag. The game being played is still in play, but do you play? watch? or leave the stadium?
http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html
I admire your courage, Ed., and hope it nets you more and more participants on your website.
Your courage is to say: “But there is no consideration (by GoldmanSachs) of a more extreme scenario that ArabianMoney considers more probable”;
“why then is GoldmanSaches so timid in its scenario for stocks”;
“the bank does not even dare posit a more extreme scenario, the kind of sudden stop we saw in Dubai three years ago”.
A 50-80% wipe-out for Chinese stocks! What a scenario! Truly an extreme one but I, for one, wouldn’t say it’s impossible from the data you’ve given in this turbulent world we live in.
Everyone talks their own book. Only someone not involved or on the short side would shout “the cr@p is about to hit the fan”.
Truth is somewhere between Chanos and Goldman. What would be the negative impact on Goldman if:
1) They highlighted the possible scenario?
2) The possible worse case scenario arrived?
They may say one thing but do another whilst extracting themselves from the market. Wonder what their exposure to China actually is?
Yeah, truly amazing video!
Looks like overcapacity to me. They appear to believe they can defy the laws of supply and demand. Building where people don’t want to live. A bit like Russia deciding how many loaves of bread to make and finding people want apples instead. Now they will just have to say to them you will live there even though you want to live elsewhere like Russia used to say you will have bread whether you want it or not. Perhaps they have learnt enough to create the right incentives to get people to move but not unless the homes are cheap, pay is good or they are forced which won’t be good for profits, inflation or social cohesion. Stupid! Stupid! Stupid!
I see that the Chinese competitor for S&P, Moodys and Fitch has downgraded UK sovereign credit to A+ from AA- with “a negative outlook for its solvency”.
Whilst its good to see Dagong as an alternative to the US rating agencies, one wonders whether they have seen ArabianMoney’s comments on the future of Chinese stock.
Goldman and another TBTF bank just raised their estimate on the oil price for next year to $130 – $140 a barrel. Goldman said that by the end of next year, OPEC’s spare capacity to meet the world’s demand for more oil will be GONE. If true, get ready for the bidding war to start in 2013. You can bet on another global recession if oil hits $150, and stays there for more than a few months.
I view all investment in China as speculation. Can you imagine the accounting they might be using. Who audits those companies? Trust a commie? Not me. What are you going to do if they just decide to take your money? Go over there and try to get it back. It ain’t Australia with the rule of law. (Where they just found even MORE natural gas in the Indian Ocean and South of Darwin.)
The next video (above) where Bill Gross said that a US default will lead to a LARGE fall in the value of the US dollar was interesting. That could pop gold a few hundred dollars in days. I still doubt that the USA will default.
Here is a story for you. Some crook in Atlanta brought a platinum coin into a business that buys gold & silver. The buyer told him it was a silver coin and paid him for it. The crook got involved in a fight with his girlfriend and they got arrested. She ratted on him, and the cops in Atlanta started investigating the the guy. They eventually found out that the coin buyer cheated the crook, and he got in trouble for paying silver prices for a platinum coin. They buyers have to photograph all the transactions in precious metals, probably to try and stop the drug dealers. And no, I don’t hang out with crooks. Someone I know works for the store owner, who didn’t personally buy the coin and cheat the crook. His employee did.
Some guy on David Faber’s noon (USA time) CNBC TV show is now saying that another sub prime banking crisis may happen because of the continued housing drop and increase in the number of defaulting homeowners. He says get ready for an echo of the credit crisis. Jeff Gundlach is his name if you want to watch him on the CNBC TV USA web site. He is some kind of bond expert. He says balancing the budget, now being discussed in Washington, would be REALLY NEGATIVE for economic growth. As is the ending of QE 2. He says a 0% GDP growth number is possible.
All those potential problems, and oil still sits at $99 a barrel. What does that tell you?
Jim Cramer said that Greece should default & get it over with. He is probably right.
Watch out for Spain.
And finally, ignore this dire warning at your peril. The same preacher who said that the rapture was to have happened last week, has just given another interview in which he said that he miscalculated. NO!
The rapture is now rescheduled for October 21, 2011. So you’ve done your last trick-or-treating. And I don’t even have a bible. I wonder if an electronic one will do, or do I need a hard copy. The Sun had a bunch of huge prominences on it yesterday. A sign of things to come?
Just saw Jim Chanos give an interview on Bloomberg earlier today. He mentioned how people have chided him for making such negative predictions about China, yet he has not actually physically visited China. In answer to these claims, he assured the interviewer that he has underlings aplenty who travel China for him and bring back their reports. He commented that these people who have visited China for him have come back and told him in all candor that he (Chanos) is not negative ENOUGH on China!
It sounds like a lot of what’s gone on in China, construction-wise, is a modern-day equivalent of the so-called “Potemkin Villages” of the old USSR – in other words, window dressing and false fronts for public and media consumption, not much else. But whatever the “real” situation in China, it does indeed bear close watching.