Why China Is Calling for Trouble

china investments - infrastructure investment

If you have been following the news lately, China’s struggling growth it should be no surprise. The strong growth that used to come out from China is no longer taken for granted by investors.

An economic slow down by itself is never harmful, but it becomes dangerous once authorities are not soft land the economy, but to sustain it with anemic monetary policy. Mix this policy stimulus with speculative flows and you get the stage set for a developing bubble.

We are not trying to be fatalists and calling for a bubble, not in the slightest, but there are certain hints that something is rotten in China.

Firstly, the global demand for commodities, or to be more accurate the lack of it is due to China’s lack of demand as a consequence of overproduction by state-run companies. Often, overproduction occurs by poor management or by unmet expectations of demand for their products. Either way, excess inventory due to overproduction is always a bad indicator and investors are not very happy to see it.

The Economist points that growth is harder to maintain by policy makers. Growth that for the last two years fueled a booming real estate sector that became the most important sector of the economy.

Do you remember in US when the real estate sector was the most important in the economy? Wasn’t it in 2005 – 2007… any flashbacks?

Also, the spectacular rise in new home prices in Shenzhen by 62.5% and in Shanghai by 30.5% year on year (exactly, for the last 12 months to April 2016) offer an indication that there are still a lot of speculative flows poring into China.

Although, speculative flows offer a certain benefit of adding liquidity to an economy; excessive speculative flows tends to have a negative effect by pumping liquidity into certain economic sectors where are expected high returns. And at the same time drying other economic sectors where the returns are not so spectacular, but which offer a more stable and sustainable growth.

Some argue that there is nothing wrong with speculative flows into Chinese real estate, because it still promotes growth. Indeed, it promotes growth, but to a certain level. It becomes worrying when, during the duration of only one economic cycle, Chinese real estate turned from a secondary sector into the main engine of growth. Now that is something not to worry about, but at least to be aware of.

And when the decision makers are trying to sustain the current state of affairs with policy and not tackling it and promoting real reforms, then ‘Houston we have a problem!

As mentioned earlier, we are not trying to call for a Chinese bubble in real estate. We cannot predict the future policy moves of [Chinese] officials, but we have noticed certain clues that before didn’t offer bright results.

All content on DraculaCapital.com is for information purposes only. Do not use this content as investment recommendation. Every type of investment involves the risk off losing investment principal. Frontier Markets presents higher risks than mature markets.

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