Deeper Into the “China: Boom or Bubble” Debate

by Addison Wiggin & Ian Mathias

  • “Be careful what you wish for”… so what if China revalues the yuan?

  • China coal demand up, steel demand down… making sense of conflicting signals

  • Mortgage demand collapses after homebuyer tax credit expires

  • Bernanke on the economy, gold… a reader deconstructs the Fed chief’s deficit warning… others comment on our “poop sheet”…


  A common thread runs through the morning’s headlines. And since we were still under the spell of Lady Justice, we have to thank Dave Gonigam, who himself escaped unscathed from her grasp earlier in the week, for sifting through them.

The thread, once again, loosely weaves its way around China:

  • China’s exports rose 48.5% from April to May, the biggest monthly jump in six years. Since that signals continued demand from American and European customers, the news propelled the major U.S. stock indexes up 1.7% on the open

  • China once again denied rumors that it plans to cut its euro-denominated forex holdings. That put a floor under the euro, for the moment anyway, at $1.207

  • Treasury Secretary Geithner is once again grousing to Congress about the dollar-yuan exchange rate.

Of course, you don’t read The 5 for a roundup of the headlines. Any damn fool can drudge those up. Let’s dig deeper for the real signals China is sending this week.

More and more, China is the country that moves markets everywhere. That’s why we were in Beijing evaluating business opportunities earlier this month. That’s why Chris Mayer came along… to see if the bubble in China is real and to look for real opportunities for readers to invest in.

Likewise, it’s why Morgan Stanley Asia Chairman Stephen Roach is cautioning Sec’y Geithner this morning to “be careful what you wish for.”

China is just one of 90 countries with which the United States runs a trade deficit, Roach points out. If China revalues the yuan, that just means China’s share of the shortfall becomes smaller.

“China is going to move to a consumer-led society,” Roach writes. “They are going to absorb more of their surplus savings and have less of that to send our way to fund our excess consumption and our deficits in the United States. Who is going to pick up the slack?”

Roach says when he raises this question, the usual comeback is, “What else are they going to do with their money?” The answer is they’ll invest in their own industries and infrastructure, and build more of that consumer-led society. They’ll invest in raw materials and resources around the globe and feed that beast on their own.

  Indeed, because of Chinese demand, coal is now a bigger player in the world’s energy mix than at any time since 1970.

The annual BP Statistical Review of World Energy says Chinese coal demand grew 10% last year (and India’s, 7%). As a result, coal now makes up 29% of world energy use.

The most remarkable part: The amount of coal burned worldwide during 2009 actually fell from the year before. It’s just that everything else — oil, natural gas, nuclear, hydro — fell even more.

For the first time since 1982, overall world energy demand fell. (The drop in natural gas use set a record.) But in China, consumption is up. Way up.

  “Consider that in 2000,” says Chris Mayer, “China used about as much coal as the U.S. Here we are 10 years later, and China consumes three times as much as coal as the U.S.”

“After being self-sufficient in coal for years, China has begun to import coal. This year, it will import 150 metric tons, which is double last year’s total. It may seem a molehill compared with what it burns, but that molehill is about 60% of Australia’s coal exports — and Australia is the world’s largest coal exporter — and growing.

“This means,” according to Richard Heinberg of the Post Carbon Institute, “if Chinese imports double again next year — not an unrealistic scenario — China will need to import more coal than Australia can currently provide. One more doubling of import demand and China will be wanting to import 600 million tons per year, about the total amount of coal exported by all exporting nations last year.”

Of course, it’s not just coal that China needs. It needs oil, natural gas, uranium, you name it. Now that Chris has had a couple of weeks to decompress from our China trip, he’s just assembled a special report for his premium service, Mayer’s Special Situations, packed with eight recommendations.

You can access this report today for just $1. Plus, you’ll get his newest China-driven recommendation when the new monthly issue comes out tomorrow. Here’s where to get yours.

  Of course, there are contrary signals too. China’s largest publicly traded steel maker has just cut prices for the first time in eight months. This is extraordinary when you consider the news we brought you two days ago — about how iron ore prices now sit 147% higher than during fiscal 2009.


"Some steel producers are already tottering on the brink of losses,” Zhang Lin, a Beijing-based steel analyst, tells China Daily. “They will have to make output cutbacks or resort to maintenance shutdowns, if the prices continue to fall."


So how does this square with China’s torrid demand for coal, which you need to make steel? It also belies the larger question of whether China is in a genuine boom or a bubble. 


When we were in China, we met with several former investment relations directors from one of China’s largest steel companies. We met with a financier who has helped raise capital for a host of Chinese businesses and arranged for a number of them to be listed on American exchanges. We met with a land developer, two leading economists, several of the nation’s largest publishers and a financial journalist who’s built a massive Rolodex from his years in China and now is presiding over his own investments in the Middle Kingdom.

We’re making arrangements for a conference call next week to help answer the question of “China, Boom or Bubble?” I will play host to my partner in crime Chris Mayer, and two of these China-based contacts. We’ll also be uncovering some of the best U.S.-listed companies you can invest in directly. The call is scheduled for next Thursday — a week from today — at 4 p.m. EDT. If you want to listen in, just drop us your e-mail address here.

  Meanwhile, back in the land of the, umn, free. So much for “prime” homebuying season. The Mortgage Bankers Association’s (MBA) weekly survey reveals that applications for both new purchases and refinances are down 35% from four weeks earlier… when the glow of the homebuyer tax credit faded for good.

The MBA purchase index stands at a 13-year low.

And that’s with a historic low 30-year fixed rate of 4.81%.

  There will be a whole lot more inventory on the housing market soon, too. Bank repossessions set another record high in May, according to RealtyTrac. Banks took back 93,777 homes last month, up 1% from April’s record.

New foreclosure filings fell 3% month over month. That too is a continuation of a trend. Again, we expect it’s going to take a good eight years for all of this housing inventory to clear. And that’s being conservative.


  But never mind the housing market: The Federal Reserve’s Beige Book is back in full-on Lily White mode.

Economic activity improved during April and May in all 12 Fed districts, according to the report. Even those laggards in St. Louis who were still gloomy last time have gotten with the program this time.

Still, growth in many of the regions is characterized as “modest.” That should keep any pressure off the Fed to raise the fed funds rate anytime soon.

  In this same vein, "The economy… appears to be on track to continue to expand through this year and next,” Fed chief Ben Bernanke told Congress yesterday.

Of course, this is the same Ben Bernanke who said…

  • “It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis.” (July 2005)

  • “We see no serious broad spillover to banks or thrift institutions from the problems in the subprime market.” (May 2007)

  • "The Federal Reserve is not currently forecasting a recession.” (January 2008, a month after the recession began)

  • "Currently, we don’t think [the unemployment rate] will get to 10%." (May 2009, six months before it hit 10.2%).

  “I don’t fully understand the movements in the gold price,” Bernanke admitted in another segment of his testimony. “Gold is out there doing something different from the rest of the commodity group.”


It’s called “risk aversion.” Perversely, it’s the same reason the dollar’s been moving up in tandem with gold this year… a trend we spotted in early February and has been in play ever since.

Unlike tungsten or molybdenum, Gold is asserting a monetary role, something Bernanke perhaps knows, but doesn’t want to concede to in public.

  As it happens, this phenomenon works both ways. Risk appetite is back this morning, and the U.S. stock rally this morning is putting both gold and the dollar in the hurt locker.

Gold is down $30 from record territory earlier this week, to $1,220 today. The dollar index is likewise down a full percentage point, to 87.1.

  “Rather than the dolt most pundits consider him,” a reader writes regarding Bernanke’s warning yesterday about an “unsustainable” fiscal imbalance, “Bernanke is far cleverer than you can imagine; he is also an extreme ‘team player.’

“Once you realize that dangerous combination, you will realize that what he is really doing is setting the stage for the propaganda battle over raising taxes until ‘it hurts.’”

The 5: We wouldn’t put it past him.

  “Please don't take the least notice of these ravings!” writes a reader in response to the vitriol we’ve received about the fact we hold the Agora Financial Investment Symposium outside the United States.

“You do EXCELLENT work (forgive the capital letters), you produce a wonderful daily poop sheet and you have (or must have) endless patience and nerves of steel. I've never considered anything that you write to be less than well thought out and balanced. I wish you wouldn't depress the gold price by telling the world that gold gains might be taxed.

“But hey, if that's the truth (or at least the truth that you surmise might be the correct truth), you have every right, and indeed practically a duty, to publish it. And if someone wants to rant at you as a result, ignore them.

“Don't even print one-10th of their views. Their views are superfluous.”

The 5: Sometimes we just like to entertain ourselves.

  “This evening, I came home from work,” another reader writes, “and started reading the headlines of Yahoo Finance:


  • “Fed Survey Finds a Modest Recovery Is Spreading”

  • “More Employees Jump Ship as Economy Improves”

  • “Bernanke Says Recovery on Track Despite Head Winds”

  • “Optimistic Companies Promising Bigger Payouts”

  • “Full of Confidence, Corporate America Promising Shareholders Bigger Payouts”

“I could almost hear Rod Serling’s voice! Then I went to The 5 in my e-mail. A big difference! That’s when I knew I was still on Earth.”

The 5: It’s our privilege to navigate between the Twilight Zone and reality on your behalf. Often, the twain appear to meet.


Addison Wiggin

The 5 Min. Forecast

P.S. Living in a participatory democracy can be a tawdry, unseemly affair. Unfortunately, the civil justice system is the price we pay for our failure to be civil to one another.

“It’s the best system in the world,” one of the defense attorneys asserted as he thanked us for the 2½ days we sat in the jury box listening to a personal injury lawsuit against the Baltimore Convention Center and the company he represents, GES Entertainment, a company contracted to stage conventions and trade shows.

Maybe it is the best system in the world. Maybe it isn’t. But it’s sure open to abuse. You want to know why the U.S. has the most expensive health care system in the world? Sit in on a personal injury trial at your local courthouse. The incentives are clearly aligned for doctors and lawyers to pounce on what would ordinarily be deemed an accident by reasonable people.

We’ll bring you a play-by-play on the outcome tomorrow… should make for fun weekend reading

P.P.S. Never before have the producers of the CBS reality series Survivor shot two consecutive seasons in the same country… until now. Nicaragua will be the setting for installments Nos. 21 and 22. And the first, this fall, will be on the Pacific frontier at San Juan del Sur, just down the coast from Rancho Santana.

The Survivor episodes begin airing in September… which is sure to raise intense interest in the region and drive a bustling tourist trade. We encourage Reserve members to beat the rush and join us for our next “chill weekend” — Chill 2.0 — at Rancho Santana. You and a guest can enjoy four nights lodging, sightseeing, three daily meals and nightly cocktails with yours truly and a few select friends… for a price that basically covers our cost.

You must be a Reserve member to join us. And we’re asking, because spots are limited, to give those with an interest in investing in the project a priority. The dates for Rancho Santana Chill 2.0 are Aug. 11-15, 2010. Drop a line to Marc Brown to learn more.


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