The China Hole

“Wise man say, you do not invest in overcapacity”-Hugh Hendry

China is now in an export hole. Reuters reports flows are down. Exports fell in sequence 2% lower in each month in the 4Q. West Coast ports data comfirms the same trend (Calculated Risk along with charts) . If imports from China are down for the reasons I have always cited, it does stand to reason that a little marginal production might move back to the US.

This squares with my theory that the Chinese export sector began a severe contraction back in early part of 2011. A reread of my post on the Lewis Turning point is in order. The only thing that sustained exports in the first half were warehouses of inferior goods, which are now emptying. So at tremendous cost and because Chinese exports are hollowing, the US gets a minor uptick in production output, that could last all of about a quarter or two. Remember that the spin last year was that the BRICs would keep growing and support the global economy. Now it centers around this artificial and expensive pickup in US activity.

For anybody who is alert in the US, the quality of Chinese goods is way down. My girl friend is so in tune with this that she checks manufacturing tags. One aspect she has noted is that origin is now frequently omitted.

In the surprise, surprise Dept. it turns out that China is the epicenter in illicit financial flows, with over $2 trillion in illegal money moving in and out of China between 2000 and 2009, according to a new report from Global Financial Integrity. GFI defines illicit financial flows as “the cross-border movement of money that is illegally earned, transferred, or utilized.” And noting what I observed years ago, GFI cites trade mispricing as the major conduit for transferring illegal money in China.

Factoid front: every year since 2005, more than 20% of China’s GDP has consisted of construction-related spending versus 6% in the US. To put this in perspective, in 2010 China consumed 25 X the US consumption of concrete. China’s low hanging infrastructure build out fruit has been picked, and projects on the board are declining. China has built out equivalent to the entire EU housing stock in less than a decade. 60% of elevator delivery go to China. On a paved road per car basis, China is far ahead of it’s development curve. Chart taken from a Societe General report.

China is obviously in hard landing mode: Excavator sales in China tumbled 27% in October from the previous month, the sixth consecutive monthly decline. Cumulative sales volume through October were up only 16% year-on-year after surging 78% in the 12 months to last December. With property sales falling, developers are buying less land from local governments, which rely on land sales for around 70% of their revenue. The ratio of land acquisition expense to property revenue for leading developers is now as low as 21%, according to a report of Centaline Property Agency.

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