China (Korea) fact of the day

Producer prices deflated for a 37th consecutive month in March, falling 4.6 per cent, versus a 4.8 per cent fall in February.

That is the longest period of factory gate deflation in China on record.

“The current bout of goods deflation in China and South Korea is the longest in postwar East Asia outside of Japan in the 1990s,” said Rodney Jones, Beijing-based principal of Wigram Capital.

Producer prices in South Korea have also fallen for 39 consecutive months.

The producer price index, often regarded as a leading indicator for consumer prices, has been mired in deflation thanks to sliding domestic demand and chronic overcapacity in many sectors.

That is from McGee and Anderlini at the FT.

By the way, here is the FT citing Deutsche Bank:

Bubble watchers point out median earnings multiples for Chinese technology stocks are twice US peer valuations at their peak. More worrying perhaps is a health-goods-from-deer-antlers producer on 70 times, the seamless underwear manufacturer on 90 times or those school uniform and ketchup makers on 330 times!

Last week there were 1.67 million new brokerage accounts.


I feel great pride in beating Ray!

Regarding the valuations, according to Sumner, there is no such thing as a bubble, especially not in China!

Is there an exchange that trades put options on these companies?

Bubble watchers point out median earnings multiples for Chinese technology stocks are twice US peer valuations at their peak. More worrying perhaps is a health-goods-from-deer-antlers producer on 70 times, the seamless underwear manufacturer on 90 times or those school uniform and ketchup makers on 330 times!

Deer antler? Seamless underwear? School uniform makers? And ketchup?

Clearly the tech stock boom is because they are counting on the Japanese porn industry to save them. Seems quite reasonable actually.

Best. Comment. Ever.

While I do like to refer to deer antlers as "international symbol of gaydom", deer antler extract is a popular, if dubious, health product.

Depends on definition, it seems - a neighbor found its putative effect at least somewhat helpful in her marriage.

Unless you're a monkey throwing darts, I don't see the point of focusing on median forward pe. So there are a lot of speculative small cap Chinese stocks, but they only involve a small percentage of most portfolios. Large cap Chinese companies aren't that richly valued. Even the large tech stocks aren't that overvalued compared to American companies. For example, compare Tencent with Facebook. Chinese stocks are still well below their pre-crash highs.

"deflated for a 37th consecutive month in March, falling 4.6 per cent": really? That must surely have been annualised in some way.

It isn't annualised - it's year-ended growth (so year to March). In the month the producer price index fell only 0.1%. This is just more hyperventilating.

Depends which stocks you look at. China stocks are undervalued if you mean the ones listed in HK. Looks like investors are finally catching up to the fact that hong kong is cheap and shanghai expensive, and we are talking the exact same type of companies here, just listed on different exchanges.

MCHI iShares MSCI China ETF reports a PE ratio of 10.44. I keep seeing reports of a bubble, but it doesn't appear to be here unless the "E" isn't what it appears to be.

Indeed if theres a bubble, it is incorporated in the stock prices already.

For all the China's in a big bubble burst opinions, I say both sides are right. China is building a big bubble but it won't burst until ~2022. Overall the country is following the Japanese perfectly with dominance of high investment in basic manufacturing, high stock market and high housing prices. (All they need is a southern luxury boom for retirees like Florida and they can call bubble Bingo!) That said the country is still growing, a competent government, and lots of cheap labor so I suspect the bubble has some more years to grow bigger.

Well the Chinese market is set to keep rising as money flows from the overvalued US stock markets to China. Its much fun to call bubbles everywhere but if it doesnt lead to practical profitable investing its just a timepasser useless analysis. it doesnt matter if china is bubble the stock market is undervalued. valuation is all that matters.

I think you're being too optimistic.

Three solid years of producer price deflation, massive amounts of overcapacity in an economy that is less responsive to price signals due to centralized planning, personal debt growth that is outlier high by international standards, and immense amounts of bad business debt that is getting rolled over again and again, is fundamentally unstable.

In a closed economy, policy solutions can usually solve the problem of overcapacity, because increasing production increases the capacity to consume by a like amount and you just need to tweak the efficiency of the markets so that it makes the right stuff to meet the demand that is out there when the market fails.

In an open economy, overcapacity due to declining demand doesn't have to be due to market failure, so policy solutions often can't resolve it. Nothing that China's government policy makers can do, except lowing the prices they charge for goods that cost the same amount to produce (which makes China poorer) can address the fact that the rest of the world is no longer able to, or no longer wants to, purchase as many good exported from China.

Export driven economies like China's are supposed to have overcapacity relative to domestic demand, by definition. But, this becomes a problem when nobody wants to buy your stuff anymore for some reason.

This is the converse of the stagflation that the U.S. economy experienced in the early 1980s. The inflation that the U.S. was experiencing looked like ordinary money supply driven inflation, but was actually due to the fact that monetary inflation adjusted oil prices were going up, so more of the nation's aggregate production had to be shipped out to the sheiks to pay for oil, and less of the aggregate production was available for consumption in the U.S., therefore, we had a recession. Nothing U.S. economic policy makers could do would have any meaningful impact on global oil prices, so there was nothing they could do to stop it. But, because they thought the inflation they were seeing was monetary, they tried to use monetary tools to solve the problem and only made things worse. Since net use imports and exports tend to be pretty stable, the U.S. policymaking economists were used to making assumptions equivalent to assuming a closed economy, which ceases to work when the trade balance starts shifting wildly.

But the recent bad numbers are caused by the government itself, it is rebalancing, slowing the economy down on purpose. It shows how China, in contrast t othe USA has a highly effective political system, and the unfortunate fact that dictatorship can beats democracy when it comes to economics. The paradigm is Singapore, a highly successful export driven free market dictatorship.

Hang Seng PE ratio is hovering around 10 [1], Shanghai composite even lower[2], dot-com boom S&P 500 was ~60 [3]. So I'm voting that the FT's evidence is anecdotal and probably misleading.




I'd be interested in the delta between consumer and producer price indices. I have a suspicion that they are quite divergent and reflect accelerated productivity. I.e., goods prices are trending down, even in fully engaged economies (i.e., not the US/Europe). That is the saving grace for countries that are not rapidly growing and especially for those living on fixed incomes. It may even mean that once the developed world does get everybody back to work, that consumer prices may not face much upward pressure, especially not of goods.

"How bubbly are Chinese tech stocks?"

"Alibaba’s closest American equivalent is Amazon, which trades at 120 times earnings.

Considering that China’s e-commerce revenues are growing by 30% a year, and Alibaba has a dominant position in Chinese e-commerce, a valuation of 28 times earnings is not bubbly. The stock may do well or poorly–Asia Unhedged does not have an opinion on the merits of BABA US at today’s price–but the P/E ratio is not inherently unreasonable. In the U.S., where e-commerce revenues are growing only half as fast (by 15% a year), Amazon has a much more aggressive valuation."

Amazon P/E 120

Alibaba P/E 28

Government planning causes more problems than it solves.

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