On a China Hard Landing?, and is Saturated Fat good for you?!

From: aditya rana
Date: Sat, Jun 7, 2014 at 2:06 PM
Subject: On a China Hard Landing?, and is Saturated Fat good for you?!


Fears about a bursting of the China housing bubble are widespread, and the China bears (some of whom have never been to China!) have been very vocal about expecting a "imminent hard landing" in China over the last few years. It is rare to find a balanced view on the subject and Gavyn Davies, Chairman of Fulcrum Asset management, provides such a view. To summarise:

– The Chinese real estate has been growing at a very rapid pace since 1998, when private property ownership was first permitted. Following the 2008 crash in US housing and its negative impact on the global economy, investors are worried that China may be following the same path.

-However, there are some key differences between the two situations – the US housing crash had a big impact due to excesses in the financial sector and the large adverse wealth effects on consumer spending. While China has also built up excesses in the shadow banking area, its impact on the economy is likely to be significantly smaller than in the US case.

-The Chinese real estate sector has been plagued by overbuilding – since 2011 the supply of new housing had initially failed to keep up with the demand for housing arising from China’s urbanization process. This resulted in a rapid rise in house prices and provided households with the best performing asset available. This in turn encouraged speculation, financed by the shadow banking system, which eventually resulted in a significant oversupply of housing in 30 of the largest 200 cities in china.

-Currently, housing supply continues to be greatly in excess of demand, particularly in Tier 2 cities and to a lesser extent in Tiers 3 and 4. In many such cities, the completed housing supply is about 3 times current sales, and including new housing under construction, the supply across the nation is more than 4 years of sales (see chart below).

-Constructions firms have responded to the excess in supply and the tightening of credit imposed by the government in 2013, with housing starts falling by 24.5% in the last 12 months, resulting in GDP falling from 7.9% in 2012Q4 to 7.4% currently.

– The excess supply has continued with construction of new floor space vastly in excess of sales, leading to a rise in inventory (see chart below).

-House price increases have slowed sharply, and expectations are that prices may decline by 2% in 2015, for the first time in modern China. This could prompt selling by speculators resulting in a crash in property prices which would have a serious negative impact on the economy. However, this is unlikely for several reasons:

-1) Demand for housing in China is driven by solid fundamental factors – a steady urbanisation rate of about 1.5% of the population (despite the changing demographics) and a continued rise of 10% in urban incomes. The demand for new housing, just from upgrading homes, is 5 – 6 million units which is half of all demand for houses.

-2) In a static labour market like in the US, the overbuilding of housing during the 2005-2008 period took years to resolve even as new building fell by half. With a more dynamic labour market in China, rising housing demand should resolve the over-supply more rapidly, with a smaller decline in new building.

-3) The government as responded to the slowdown in the housing market, with Premier Li Keqiang stating last week that housing policy will be fine-tuned as necessary. Reserve ratios for some banks were subsequently cut, and there is a lot of room for further cuts in reserve requirements and other fiscal and regulatory measures to support construction. The government has a strong incentive to avoid a hard landing, even if these measures slowdown the pace of rebalancing in the economy.

-The housing market and related sectors account for 16% of GDP and the impact on GDP from a slowdown in construction of several percentage point is likely to reduce GDP by a total of 0.5-1.0%. How much worse can this be? For example, if housing construction falls by 25% compared to the previous 3 year trend, then the total negative impact on GDP will be 4% which implies a 1.3% reduction in growth over 3 years.

-While the above estimate does not include the impact on consumer spending or on the financial sector, neither of these effects are likely to be very large. Unlike in the US, equity withdrawal from housing is not permitted in China which limited the boost to spending. In addition, buyers have to put up 30% equity for purchases, thereby limiting the likelihood of negative equity and bad debts.

-What about a collapse in the shadow banking system in China? The St. Louis Fed has recently estimated the worse case effects on GDP, by comparing it with the US example. The Chinese shadow banking system is less than half as large as the US, and even if the impact is as painful as it was in the US, the total negative impact on Chinese GDP will be "only" 4% and it will likely be spread out over several years.

-In conclusion, the worse case impact on Chinese GDP of a housing collapse is likely to be a total of 4%, spread out over three years. While not negligible, it is not anywhere near the scale of the Great Financial Crash. And the likelihood is small given the clear intentions of the government to ease further.

An insightful piece which provides a more balanced view on the downside risks in China. While the problems in the housing market and shadow banking sector are serious, China has the governmental resolve, demand (through urbanization and income growth) and savings to mitigate and work out the problems over several years. While this is likely lead to (and already has to a large extent) lower growth, accommodative policies by the government will keep a floor on the growth rate to maintain job and income growth in the country.

In this context I provide below some excerpts from a fascinating report by the research firm 13D, who are long time observers of China, having made 65 trips there beginning in 1992, and were there recently for two weeks meeting hundreds of people – ranging from central bankers, industrialists, real estate developers, regulators, major Chinese investors, regulators, Chinese SOEs to government leaders.

– Western analysts and global fund managers are universally bearish on China – with over 50% of fund managers (up from 30% at the beginning of the year) now expecting a hard landing in China as per a recent survey. As the head of one Asian Central Bank described it – "While Western analysts and money managers are bearish, the companies on the ground in China are bullish and increasing their investments".

-While the reforms like the anti-corruption drive are creating great uncertainty and caution amongst top Chinese business and political leaders, China is getting no credit from dealing with its growing wealth divide (like everywhere else in the world) which could threaten social stability if not dealt with. China is a leader in this area, just as it was when it began to mandate a 20% rise in manufacturing wages in 2009. The history of reform around the world have shown that they are met with enormous scepticism at the outset, but should not be underestimated, particularly if they have teeth, as this reform in China does.

-They have been meeting with a senior official at the PBOC on their previous twelve trips who has been very prescient in his insights (for example, predicting the forthcoming massive stimulus in early October 2008, and the future growth of a housing bubble in June 2009 when the housing market was at its weakest). Some key points from their recent meeting:

-Growth will range between 7.0%-7.5% for 2014, and the government will add targeted stimulus once the 7.0% floor is at risk.

-Credit has been growing fast in China, even adjusted for the high GDP growth rates, following the four trillion yuan stimulus in 2008-09. The regulators have been aware of this and are now taking measures to get this under control by requiring banks to provide more disclosure on their off-balance sheets, sending auditing teams to local governments to make their debt disclosures more accurate, requiring more fiscal discipline by local governments and punishment of corrupt officials. The overall situations is now getting under control.

-The slow-down in the property market will negatively impact some provincial governments who have traditionally used land sales to fund the infrastructure development required for urbanization and modernization. This could lead to some defaults (or on related trust loans) which will not be bailed out by the central government, and local governments have significant assets which can be sold to fund repayments. The central bank has been sending audit teams to collect information on debt which will be made public soon. The central government has also made it clear that going forward, GDP growth targets for local governments will not be as important as in the past, allowing them to make a transition to a new role as a "property tax" collector.

-The property market in China will continue to be supported by the urbanization process which still has one or two more decades to run, and creates a huge demand for housing as rural populations move into cities. And urban populations want to upgrade their homes and improve their living conditions. China is at a different stage from the developed countries, and while there may be a price correction it will not be a crash.

-The Internet in China is revolutionizing the retail industry, the mobile phone industry, the banking industry and many others. The shopping malls are under pressure from online shopping, the mobile phone industry is losing market share to WeChat, a free social-networking app developed and operated by Tencent (who also developed QQ, the Chinese version of Facebook with 800 million users). The banking industry is facing competition from Internet banking, with the likes of Yu’e Bao, a fund-management platform under Alibaba, allowing people to pool their savings to get higher short-term savings rates than that offered by banks. Yu’e Bao now has over 80 million users and $80 billion of assets.

-The new leadership is totally different from the last one, which was more like a guardian of vested interest groups. The new leadership has a sense of urgency in pursuing reforms as a means to development and growth.

Is Saturated fat good for you?:

Last week’s Economist carried a review of the book "The Big Fat Surprise: Why Butter, Meat and Cheese Belong in a Healthy Diet." written by a journalist Nina Teicholz which tries to make the case why saturated fat should be part of healthy diet. Given the plethora of dietary fads out there, my suggestions is to largely stick with traditional diets (unless you have a medical condition which requires a specific diet) followed even today in the "Blue Zones" (the 5 areas around the world which have the highest longevity ratios and which I have covered in previous newsletters) and not be swayed by changing trends based on dubious science. To respond to this book , it’s best to follow the advice of one of the world’s foremost nutrition scientists – Dr. David Katz, Director and founder of the Yale Prevention Research Centre, and author of numerous books and articles on nutrition (some of which I will be covering in future letters).

Huffpost Health Blog. Posted: 05/05/2014

-A column entitled "The Questionable Link Between Saturated Fat and Heart Disease" appeared in the Wall Street Journal on Saturday, May 3. To spare you any guessing about where this is headed, I’ll tell you right away: The column itself was pretty darn questionable.

-The article starts off very dubiously when the author, Nina Teicholz, tells us that a now somewhat infamous study published in the Annals of Internal Medicine in March concluded, quote, that "saturated fat does not cause heart disease." I have read the paper in its entirety, and could not recall any such assertion. So file this one, folks, in the "don’t believe everything you read" drawer.

-The plot then quickly thickens, for we learn that Ms. Teicholz has a book due out next week, entitled The Big Fat Surprise: Why Butter, Meat and Cheese Belong in a Healthy Diet. So whatever else the recent Annals paper is or isn’t, it was clearly a nice marketing opportunity for Ms. Teicholz and her publisher.

-The recent Annals paper did not show that saturated fat is harmless, and it certainly didn’t show that it is beneficial. It did not even suggest the latter. Is lack of harm really the new standard in healthful eating? I thought we might actually be interested in food that was genuinely good for us. In any event, if you want to know what the study actually did show, I lay that out in detail, here.

-Second, neither the Annals paper nor any other recent research on the topic suggests there is health benefit derived from adding butter, meat, or cheese to our diets. The weight of evidence is very much to the contrary. I know, because I reviewed it recently at the request of a peer-reviewed journal.

-Third, Ancel Keys was not wrong — he was exploited by the collusion of Big Food, and our prevailing gullibility. Keys compared diets natively rich in plant foods and diets natively rich in meat, butter and cheese — and recommendations resulted from the differences in health he observed. He never suggested that we should start eating Snackwell cookies — but that is how our culture interpreted advice to eat less fat. Of course health doesn’t improve when you replace one way of eating fairly badly with another way of eating at least as badly. If you don’t get healthy by replacing Coca-Cola with Pepsi, it doesn’t prove that Coca-Cola was good for us all along, does it?

-Fourth, and finally, Ms. Teicholz seems inclined to play the iconoclast card. It’s getting old, frankly, but it generally does work to sell books. So she may well wind up rolling her eyes at this column on the way to cash her royalty checks.

-But no, folks — more meat, butter and cheese will not promote your health. Neither will nonsense — no matter where it’s published.

-I know that those of you inclined to believe Ms. Teicholz, either because you truly believe bacon cheeseburgers are good for you or because you just wish they were, are rolling your eyes at me now.

-But then, inevitably, in a world where diets are embraced with religious zeal and we can’t seem to manage a separation of church and plate, there’s a group that lets disagreement veer off into disparagement, turning differing opinions into excuses for ad hominem attacks.

-Anticipating that, I think it’s important to note that whatever my character, the fact is: I am trained to do what I do. That matters in just the same way that it matters whether or not the captain has been trained to fly the plane. It doesn’t make you a good person or a bad person. It just means you have training and expertise in a particular area.

-I am a trained clinical researcher who conducts and publishes studies, and analyzes the work of others routinely for the peer-reviewed literature. I actually teach and study nutrition, and have written textbooks on the subject that have had to run the gauntlet of diverse expert peers.

-And — I don’t have a diet to sell. In fact, I am on record as asserting that no single diet is best


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