Diary of a Financier

China: The Day the Music Died

In Politics on Tue 13 Sep 2011 at 17:50

The music has stopped playing at the Chinese real estate ball. Bloomberg ran an important story on Monday. It drew upon the experiences of Vincent Lo, a billionaire Chinese developer:

The government is pushing banks to hold back lending to property firms as it attempts to cool the housing market, said Lo, chairman of Shui On Land Ltd. The developer received a Chinese bank’s approval for a loan, which was withdrawn as the lender had a policy change, he said in an interview…

The Shanghai-based developer has found a foreign bank for the loan for one of its projects in China, Lo said, declining to identify the development or the bank. Such cancelations are “happening quite frequently”to other real estate developers in the country[.]

Of course Mr. Lo adds the obligatory, “We believe maybe the market is going to go through a tough time for another 12 to 18 months, and then I think it’s a good time to go and buy something.”

The only way for China to end this on a slow dance was to have never started going footloose in the first place. When you have [real estate] growth dependent in multiplicitous credit expansion–not merely extension–there altogether lacks any air of stability. What ever happened to retained/reinvested earnings? That’s the good ol’ fashioned means of growth; I guess it’s too slow for this generation of economic planners, who prefer the route of leveraged blowups.

(I’d be amiss to not acknowledge the emerging America of yesteryear, whence George Peabody had to repeatedly vouch for his stateside compatriots in attaining the confidence of London’s financiers. Having financed everything from the American Civil War to the railroads to steamboats, many Europeans lost their shirts throughout the development of the USA.)

There’s no shortcut to prosperity; currency pegs always end in tears; eventually, you have to earn earnings and stop borrowing them; and other cliches. What’s the real macro importance of this, beyond the demise of China’s parabolic rise?

Modern economies don’t operate in vacuums. Back in March, I opined:

The aim of the latest government stimuli could have been to inflate away our federal debt, help mortgagees, mend banks, stimulate domestic borrowing, and/or shake China off its US Dollar peg. Yet, if ever interrogated for the waste they lay upon the globe, Tim Geithner & Ben Bernanke will always cite their favorite parlay: China [and other emerging markets] had the autonomy to fight inflation by breaking its USD peg. It’s like double jeopardy, “Autrefois acquit,” and they’re relieved of their sins.

I also spotted the Chinese Yuan (CNY) just before it resumed its appreciation against USD. The Chinese have plainly been shaken loose of their USD peg. Great success for Washington.

I guess I’m implicating that this marks the figurative ‘signing of a backdoor Plaza Accord.’ Japan acquiesced to the original Plaza Accord of 1985, whereas the US took to the Street in achieving USDCNY devaluation today. While the US has extracted the leech, I need to note China’s renewed focus on its exchange rate with Europe. China seems intent to capitalize on a Eurozone in need. Italy needs a buyer of its debt en masse, and China will entertain a deal, since cooperation would encourage Chinese exports vis a vis a strengthening EURCNY. 1980s Japan never had that leg to stand on, that massive trade partner with which to keep break-dancing. Perhaps China can keep its groove? This gives renewed importance to the USDCNY FX spot, with both constituents courting the business of major European importers.

I sincerely fear the ramifications of both China & the US courting the same girl. This stuff usually ends with fist fights in the cafeteria.We’ll have to see if China negotiates terms with Europe publicly–if for nothing else but to gauge China’s perception of its own world standing. Will China play lender of last resort or ruthless profiteer? Will it demand a pound of flesh?

I’m skeptical of China’s condensed rise to prosperity, yet I’ve never been a Sino-phile (still not). I’m the first to criticize Washington’s bullies, but at least America doesn’t [explicitly] extract terms. China has already invested in the Eurocrisis, and now it may throw good money after bad. Those facts afford Wen Jiabao the latitude to name his price if Italy has come begging. Beyond interest rates, what if China demands political subservience? I shudder at the geopolitical potential were China to make Europe, well, its bitch.

–Romeo

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  1. […] talked a lot about the pendulum swing occurring in China, and I’ve successfully traded it too, via $CREE, […]

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