Shorting China

At some point societies stop valuing things based on intrinsic value or what they are worth. Trade moves away from producing what is required to what is not for a variety of reasons often speculation and panic. It can be an attempt to dominate a particular industry such as solar panels.

Globalization has created imbalances because there is no one single set of rules that are followed for the entire world. Distortions by countries agreeing to one set of rules but governing themselves by another makes free trade impossible. Free marketeers always argue that in the grand scheme of things, all things work themselves out, which if you think about it, says absolutely nothing.

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Hedge funds bet China is a bubble close to bursting

The world is looking to China as a springboard out of recession - but some hedge funds are betting the country's credit and growth levels cannot be sustained.

TELEGRAPH By Louise Armitstead 8:30AM GMT 16 Jan 2011

For his first-ever speech as Britain’s new Minister of Trade & Industry last week, Lord Green faced a formidable audience of 400 Chinese and British business delegates.

The former chairman of HSBC declared that China’s economic growth figures over the past five years represented an “extraordinary historic event”.

Green didn’t need to go over Britain’s experience during the same period for most to agree that plugging into China’s blistering growth - predicted by the IMF to be 10.5pc this year - was of “vital importance” to the UK.

But even as he spoke a hedge fund manager in Mayfair was poring over spreadsheets of sovereign and corporate credit default swaps, interest rate and foreign exchange options with one aim: to “get short on China”.

The manager, who wanted to remain anonymous, said: “The Chinese delegation has said all week that there will be double-digit growth for years to come and the Brits have lapped it up. But the data doesn’t add up. We think we’ve experienced credit bubbles over the past few years, but China is the biggest. And yet the global economy is looking to China as not just a crutch but a springboard out of the recession. It’s crazy.”

He is not alone. Hugh Hendry, a former star of Odey Asset Management, has launched a distressed China fund at Eclectica Asset Management.

He follows Mark Hart of Corriente Advisors, the American hedge fund manager who made millions of dollars predicting both the subprime crisis and the European sovereign debt crisis, who started a fund based on the belief that rather than being the “key engine for global growth”, China is an “enormous tail-risk”.

There have been academics and analysts who have argued about the dangers of China’s economy overheating for some time. But for many, the fact that hedge funds, particularly those with track records on previous crises, are launching specific funds is the sign that the bubble is close to bursting.

One academic said: “Economists have contrarian views all the time. But these hedge funds have their shirts on the line and do their analysis carefully. The flurry of 'distress China’ funds is a sign to sit up.”

More analysts are becoming bearish too. Last week, Lombard Street Research put out a note warning of China’s “already dangerously home-grown inflation”.

The analysts said figures showing the continuing boom in China were far from welcome: “On the contrary, Chinese policymakers have to slam on the brakes.” The financiers are warning that rather than depending on China as the prop of the recovery plan, Britain needs to be braced for another shock.

A recent study by Fitch concluded that if China’s growth falls to 5pc this year rather than the expected 10pc, global commodity prices would plunge by as much as 20pc. China is the global price-setter for oil, coal and base metals.

According to Corriente Advisors: “We expect the economic fallout from a slowdown of China’s unsustainable levels of credit and growth to be as extraordinary as China’s economic outperformance over the past decade.”

The financiers’ arguments centre on the belief that China’s demand is not real but manufactured by the state.

The Mayfair hedge fund manager said he started work when he saw some news reports on China’s “ghost towns”. Last year Al Jazeera, the Middle Eastern television channel, aired a short report from Ordos Shi, a city in inner Mongolia built for one million people that is almost entirely empty. The report reveals empty streets, housing estates, shops and restaurants. The locals prefer the old town of Ordos and tell the cameras there’s no need to move to the new city.

According to Corriente, China has consumed just 65pc of the cement it has produced in five years, after exports. The country is outputting more steel than the world’s next seven largest producers combined. It has 200m tons of excess capacity.

In property, Corriente said it had found an excess of 3.3bn square metres of floor space in China – yet 200m square metres of new space is being constructed each year.

Despite the vast population, the property is generally out of the price range for most. House prices are around 22 times disposable income in Beijing. The IMF has said that house prices in eastern cities have become “increasingly disconnected from the fundamentals” but so far has said there is no nationwide bubble.

Professor Victor Shih of Northwestern University, Illinois, estimates that Chinese banks have lent $1.7 trillion (£1.1 trillion) to local state entities, many of which are not commercially viable and have used inflated land values as collateral.

Experts in China dismiss the hedge funds’ arguments as narrow and exaggerated. The Chinese government has implemented policy measures to curb credit and control inflation. Above all, they argue that China’s huge and modernizing population will fuel demand for years.

Even the hedge funds concede that their timing might not be perfect. Corriente warns that investors, who are required to put in a minimum of $1m each, should brace themselves for an estimated burn-rate of 20pc a year until the theory pays off. But it’s a risk that plenty seem willing to take

Sick of the Chinese Yet? These People Are Not Our Friends...

Here the Chinese Communists at it One Year Ago

Report: Chinese company 'hijacked' U.S. web traffic
From Dugald McConnell, CNN


November 18, 2010 3:19 a.m. EST

Washingtom (CNN) -- Internet traffic from several U.S. government agency sites was briefly diverted through servers in China in April, congressional investigators reported Wednesday.

For 18 minutes, about 15 percent of all web traffic was redirected through China, including traffic to and from the sites of the U.S. Army, Navy, Marine Corps, Air Force, the office of the Secretary of Defense, the Senate and NASA, according to a report delivered to Congress by the U.S.-China Economic and Security Review Commission.

Investigators say the web traffic was diverted by China Telecom, a state-owned enterprise.

They do not know whether the diversion was intentional, whether the government of China played any role, or whether any sensitive data was compromised.

The report says that the irregular routing could have allowed the surveillance of users or sites, the disruption or diversion of communications and the compromising of supposedly secure encrypted sessions.
Cyber warfare, corporate espionage

Pentagon spokeswoman Lt. Col. April Cunningham said the Defense Department "is concerned about any Internet traffic being intentionally rerouted outside of the usual operations." But, she said, "the security of Department of Defense information is not affected by misdirection of internet traffic." The Pentagon had no information to confirm whether the incident occurred, she said.

The Pentagon is in the process of establishing procedures "to address any potential current and future vulnerability," Cunningham told CNN.

Larry Wortzel, a member of the commission, said that given access to a stream of military traffic for 18 minutes, it might be possible "with really good computers" to get "a little information."

But another risk, he said, was that it could create an opening for spyware infiltration. "If you were a pretty knowledgeable intelligence service, you would get the internet addresses of everybody that communicated. And then you could essentially engineer a fake e-mail," he said, "and if someone opened an attachment, you would then insert a virus into the whole system."

The report alleges that the diversion was caused when China Telecom briefly offered a false electronic notification to internet traffic on the web, causing some traffic to mistakenly conclude that the quickest way to reach its destination was to travel through the company's servers in China.

A spokesman for the Chinese embassy in Washington rejected the claim.

"The commission's specious and unwarranted allegations against China and its enterprises are irresponsible," said Wang Baodong. "China will never do anything to harm other countries' national security, either in real or virtual worlds."

He also pointed out that China Telecom, in a statement to Reuters, has denied any hijacking of internet traffic.

China taking steps to get rid of US Dollars

China has looked at what the Obamanation is doing to the dollar and is doing what any rational player would and should do; get out of the currency and into hard assets.

Once major holders start fleeing a currency, interest rates for debt denominated in that currency will rise. The US Government will quickly have to increase interest rates, choking private investment, reducing tax revenues and increasing deficits.

That seems to be our short term fate under "O-shit!"

Obama is an economic illiterate waddling down a path to national ruin, gosling Democrats in tow, some tighter to his ass than others.

It is not any one program, it is all of them, all based on a premise of infantile hope and heading towards disastrous change.

The next election cycle cannot come fast enough.

Hopefully by then Michael Jackson will be buried and there will still be some public buildings and roads not named after the Lion of the Senate.

With a little luck, the hapless Republicans, peckers stowed, will have rehabilitated themselves and some moderation can be restored.




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Aug 26, 2009, 11:19 p.m. EST
China wealth-fund chief tips buying spree

LOS ANGELES (MarketWatch) -- The president of China's well-financed sovereign wealth fund said his group plans a massive, ten-fold expansion of its overseas investment this year, according to reported comments from an interview Thursday.

China Investment Corp. President Gao Xiqing said the fund's foreign holdings will go from $4.8 billion last year to "several tens of billion dollars," Reuters reported, citing Gao's interview with Japan's Asahi newspaper.

Gao was quoted as saying CIC held about 90% of its management funds in cash or similarly liquid forms at the end of last year, but that this will change now that financial markets are no longer in a state of crisis.

Among possible new investments under consideration are Japanese companies and property, given prospects for a recovery in that country's economy, Gao said.

Reuters also cited unnamed sources from an earlier report as saying CIC plans to invest up to $2 billion in U.S. mortgages.

The Wall Street Journal has also reported recently that CIC has selected Morgan Stanley (MS 29.46, -0.07, -0.24%) and Blackstone Group LP (BX 13.21, +0.11, +0.84%) to oversee hundreds of millions of dollars in new investments.

Earlier this month, Chinese state media reported the CIC's first-ever annual financial statement, which showed a 2.1% loss for its global investment portfolio.

China makes and takes.

The real world pirates are the Chinese.

The West used to know how to treat Chinese pirates.

The New York Times headline is somewhat different from what I chose for them. Read the article about intellectual theft and technological piracy. China deserves a special tariff to compensate the west for their brazen thievery, 125% is about right for my taste. The article is intellectual spit.

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April 28, 2009
In China, Knockoff Cellphones Are a Hit

By DAVID BARBOZA NY Times

SHENZHEN, China — The phone’s sleek lines and touch-screen keyboard are unmistakably familiar. So is the logo on the back. But a sales clerk at a sprawling electronic goods market in this Chinese coastal city admits what is clear upon closer inspection: this is not the Apple iPhone; this is the Hi-Phone.

“But it’s just as good,” the clerk says.

Nearby, dozens of other vendors are selling counterfeit Nokia, Motorola and Samsung phones — as well as cheap look-alikes that make no bones about being knockoffs.

“Five years ago, there were no counterfeit phones,” says Xiong Ting, a sales manager at Triquint Semiconductor, a maker of mobile phone parts, while visiting Shenzhen. “You needed a design house. You needed software guys. You needed hardware design. But now, a company with five guys can do it. Within 100 miles of here, you can find all your suppliers.”

Technological advances have allowed hundreds of small Chinese companies, some with as few as 10 employees, to churn out what are known here as shanzhai, or black market, cellphones, often for as little as $20 apiece.

And just as Chinese companies are trying to move up the value chain of manufacturing, from producing toys and garments to making computers and electric cars, so too are counterfeiters. After years of making fake luxury bags and cheap DVDs, they are capturing market share from the world’s biggest mobile phone makers.

Although shanzhai phones have only been around a few years, they already account for more than 20 percent of sales in China, which is the world’s biggest mobile phone market, according to the research firm Gartner.

They are also being illegally exported to Russia, India, the Middle East, Europe, even the United States. “The shanzhai phone market is expanding crazily,” says Wang Jiping, a senior analyst at IDC, which tracks technology trends. “They copy Apple, Nokia, whatever they like, and they respond to the market swiftly.”

Alarmed by the rapid growth of counterfeits and no-name knockoffs, global brands are pressing the Chinese government to crack down on their proliferation, and are warning consumers about potential health hazards, like cheap batteries that can explode.

Nokia, the world’s biggest cellphone maker, says it is working with Beijing to fight counterfeiting. Motorola says much the same. Apple Inc. declined to comment.

Even Chinese mobile phone producers are losing market share to underground companies, which have a built-in cost advantage because they evade taxes, regulatory fees and safety checks.

“We’re being severely hurt by shanzhai phones,” says Chen Zhao, a sales director at Konka, a Chinese cellphone maker. “Legal cellphone makers should pay 17 percent of their revenue as value-added tax, but shanzhai makers, of course, won’t pay it.”

So far, however, China has done little to stop the proliferation of fake mobile phones, which are even advertised on late-night television infomercials with pitches like “one-fifth the price, but the same function and look,” or patriotic appeals like “Buy shanzhai to show your love of our country.”

Last month, the Ministry of Industry and Information Technology did warn consumers about the hazards of shanzhai phones, saying “their radiation usually exceeds the limit.” China’s consumer protection agency says faulty mobile phones were the No. 1 consumer complaint last year.

A few weeks ago, a 45-year-old man in south China was severely burned after his cellphone exploded in his shirt pocket, according to state-run news media.

But that hasn’t seemed to affect sales of black market phones, which typically sell at retail for $100 to $150. In the spirit of what is called “shanzhai” — which suggests rebels or bandits and which applies to counterfeit products of all kinds — many consumers are willing to take a risk on a cheap item that looks stylish.

“I saw iPhone pictures on the Web; it’s so cool. But it costs over $500 — too expensive,” says Yang Guibin, 30, an office worker from Chongqing. “So I decided to buy a shanzhai iPhone. I bought it in a digital market here; it looked exactly like the iPhone.”

Some experts say they believe the shanzhai phenomena is about being creative, Chinese style.

“Chinese grass-roots companies are actually very innovative,” says Yu Zhou, a professor at Vassar College. “It’s not so much technology as how they form supply chains and how rapidly they react to new trends.”

While the phones may look like famous brands, companies actually add special features like bigger screens, dual-mode SIM cards (which allow two phone numbers) and even a telescopic lens attachment for the phone’s camera.

Since it is the SIM card that makes a phone run in China, as in most places other than the United States, all you have to do is insert a valid SIM card into a shanzhai phone and it works.

All this innovation comes from an industry that only took off in 2005, after Mediatek, a semiconductor design company from Taiwan, helped significantly reduce the cost and complexity of producing a mobile phone.

Using what experts call a turnkey solution, Mediatek developed a circuit board that could inexpensively integrate the functions of multiple chips, offering start-ups a platform to produce a low-cost mobile phone.

The industry got another boost in 2007, when regulators said companies no longer needed a license to manufacture a cellphone.

That set off a scramble by entrepreneurs in this electronics manufacturing center. Counterfeiting and off-brand knockoffs flourished. Tiny companies would buy a Mediatek chip loaded with software, source other components and ask a factory to assemble them.

Marketing strategies were simple: steal. Designs and brand names were copied identically or simply mimicked. (Sumsung for Samsung or Nckia for Nokia.)

Tapping into the supply chains of big brands is easy, producers say. “It’s really common for factories to do a night shift for other companies,” says Zhang Haizhen, who recently ran a shanzhai company here. “No one will refuse an order if it is over 5,000 mobile phones.”

The people who make fake iPhones admit it’s a shady business.

“We are a kind of illegal producer,” says Zhang Feiyang, whose company, Yuanyang, makes an iPhone clone. “In Shenzhen there are many small mills, hidden. Basically, we can make any type of cellphone.”

The competition is already forcing global brands to lower prices, analysts say. And new Chinese brands are emerging, like Meizu, a would-be Apple that has opened stylish stores here.

“Our phone is even better than the iPhone,” says Liu Zeyu, a Meizu salesman in Shenzhen. “Our goal is to create a phone that makes Chinese proud.”

Chen Yang contributed research.

Another example of why the US should re-industrialize in the Americas

The American appetite for artificially cheap goods made in China has proven to have some very expensive consequences. Simply stated the Chinese national strategy of flooding the US with manufacturing goods has caused a lopsided investment in US housing, decimated basic US manufacturing, imperiled pension funds, military spending and technology transfers adverse to US interests, increased Chinese influence on a global scale, distorted trade patterns, exasperated environmental conditions, and has assisted the Chinese to establish a grip on natural resources.

The US and other western countries were seduced into the China trade with the assumption that they would come out ahead by exporting more high value added products to China. They did not anticipate that the Chinese would ignore intellectual rights, deconstruct their products and then send them right back at them. The Chinese have only just begun. There are responses that should be made, but sooner rather than later.

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A 'Copper Standard' for the world's currency system?

Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.

By Ambrose Evans-Pritchard Telegraph
Last Updated: 2:41PM BST 16 Apr 2009

China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.

Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."

"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.

The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.

John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."

Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.

The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.

If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.

Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March.

While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc.

One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.

This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.

The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.

Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".

Chairman Obama should look at business friendly China

This is not Detroit

China IPO rule for small firms to help boost growth
By V. Phani Kumar, MarketWatch
Last update: 11:19 p.m. EDT March 31, 2009

HONG KONG (MarketWatch) -- China is planning to make it easier for small and medium-sized companies to go public, setting up a new trading platform with looser listing rules, and also winning praise from investors and analysts.
The move will further the development of its equity markets and give young private enterprises an additional source of funds, said analysts.

The China Securities Regulatory Commission issued the new rules Tuesday governing initial public offerings on the new trading board, to be created on the Shenzhen Stock Exchange.

Under the terms, companies seeking to raise funds via an IPO must have been profitable for two years with accumulated profits of 10 million yuan ($1.46 million).

Those requirements are significant easing from current rules, calling for a profitable record of three years with at least 30 million yuan in profits.

The new rules take effect May 1, clearing the path for the introduction of the much-awaited trading platform, to be known as the Growth Enterprise Market.

"We take the launch of a second board as a long-term positive to the economy, as it provides a much-needed exit mechanism for investors in high growth, small and medium enterprises, and should thus encourage further investments in the SME sector," Deutsche Bank wrote in a report.

The announcement boosted shares of Chinese brokerages Tuesday on hopes it will expand the number of traded securities and improve trading volumes.

Wednesday saw the brokerages trading on a more subdued note, with China Everbright (HK:165: news , chart , profile ) rising 4.5% in Hong Kong, and Guoyuan Securities up 0.3% in Shenzhen, but Haitong Securities down 0.2%, and Citic Securities 0.6% lower in Shanghai.

"We believe this also demonstrates [Chinese regulators'] commitment to continued capital market development/reform, which should help investor sentiment on China brokers," Goldman Sachs wrote in a report. "We believe second-tier brokers such as Everbright and Haitong could benefit more from the launch of the [trading platform]."