Is China Suffering from a Financial Crisis?


TrimTabs’ Charles Biderman and Jim Bianco of Bianco Research discuss the current economic climate in China in Part II of a three-part series. Below is a transcript of the conversation:


Charles Biderman: “With me again is Jim Bianco, head of Bianco research and this is Part 2 of a three-part interview. Jim, in a recent Newsclips you had a fascinating list of articles about what’s going on China. And it looks as if China could be having a financial implosion sometime soon. Is that correct?”


Jim Bianco: “Yeah. They’re having all kinds of problems with their shadow banking system, and they’re having all kinds of problems with their traditional banking system. Short-term fund rates at Chinese banks have been rising. The reason for all of that is real estate lending.There are all these stories about the ghost cities in China – China has been building cities for more than a million or more people. These new cities, no one lives in them. Everyone owns all the properties in these cities, they trade them regularly back and fourth, but literally no one lives there. It’s been one of the biggest speculations we’ve seen ever in real estate. Financing all of that has been the shadow banking system and the banking system in China. And non-performing loans are starting to build. The pressure is building on the financial system which is why we’ve seen higher funding rates and it’s becoming a very serious problem. One other thing we had in that piece you mentioned is a chart of Japan and China in the five years since they peaked. Japan peaked in in 1989 and everybody recognizes that as one of the biggest bubbles ever and it exploded. China peaked in 2007 and it’s been struggling ever since. The sell-off in China since 2007, is larger than the first five years after the bubble exploded in Japan. The point of that is that the stock market is trying to tell you ‘We see this problem.’ Not only is this problem as big as Japan, according to the stock market, it’s bigger. It’s a bigger problem than Japan. So yeah, they’ve got some real problems right now.”


Charles: “In January 1990, when I started TrimTabs, one of my first recommendations shorting Japan. There was a Solomon-Nikkei put listed on the AMEX. It actually became a great trade. I went to Japan, visited a bunch of big banks, brokerage firms. Uniformly, all the biggest Japanese banks had more than three times their net worth in local real estate. So any kind of hit to the real estate market and those banks were broke. And they eventually all did go broke although they weren’t allowed to by the government. My guess is, if you added up all the real estate debt in China, it’s got to be more than three times the net work of all Chinese banks, don’t you think?”


Jim: “About Japan, there was the famous story about the emperor’s palace, which is about three-square miles in central Tokyo, which was worth more than all the California real estate combined. That’s how insane it got. You’re right, in China, you have to keep in mind if you look at the largest banks in the world, all with $2 or $3 trillion in assets, four of the six largest are Chinese banks. And they all have funded all of this China real estate right now and they’re holding on to it. No one really knows how much of it there is because the Chinese have notoriously been very secretive with their numbers. We just know that it’s a big number. We know that the non-performing numbers have been growing. The one transparent thing we know about China, just as I said before, is their stock prices, and their stock prices are down quite a bit right now from their 2007 high, showing their problems. So you’re right, there is a big real estate problem. And the fact that they hide it doesn’t help their situation, it worsens it because we all fear for the worst.”


Charles: “You don’t believe their numbers? US government numbers, while you and I both complain how horrible they are — they’re not real-time, they’re based on surveys. At least we believe, or I believe, that there’s some integrity behind it. They’re not going to create numbers just to make things look better. I really do believe that if they have, somebody would have found out. In China, however, I have no doubt that these numbers are all totally made up having nothing to do with reality. 7.5 percent? I think that’s the number they decided ahead of time. ‘Let’s create 7.5 percent’ and they added it up to make it work like that.”


Jim: “I agree. 7.5 percent being their target for GDP. One thing you got to keep in mind about how China calculates their numbers: each province has a communist head – remember, it’s still a communist country – and then within each province each district has a communist head. All economic numbers originate at the district level. It would be like the city of San Francisco reporting to California that would report to Washington. And the city of San Francisco hires a statistician to calculate their numbers, hands them to the top communist politician, who then approves those numbers to send up the chain. He’s already been told what his targets are by the higher ups. ‘You need to get X,Y and Z as your target.’ That’s what he reports. So you’re right. All these numbers are completely made up. The system is designed to have them cheat. The system encourages them to have them cheat. To use a baseball metaphor, Wall Street thinks that they understand the high strike. The high strike being if you have a baseball umpire that calls a ball outside the strike zone a strike, ‘Well, we kind of understand that and we compensate for it.’ No, this is random. That’s why that baseball metaphor doesn’t really fit. It’s consistently wrong, it’s all over the place wrong. It’s very difficult to get any good numbers or any good feel to what’s been happening

in China.”


Charles: “You know the biggest enemy of the People’s Republic of China? It’s the possibility of mark-to-Market.”


Jim: “(Laughs), especially considering their stock markets are down by more than half. A lot of their real estate is down by more than half. One other quick anecdote about what’s happening in China. They were afraid that people were catching on that there may have been a real estate bubble going, so they stopped reporting national housing statistics. Now they just report individual province statistics and each individual province has a different methodology, so you can’t figure out a national housing number in China. So if you ask the basic question of how much housing prices depreciated in China, the answer is they stopped reporting it. It’s the old metaphor that when the room gets too hot take the thermostat out of the room and now it’s not hot any more. That’s kind of the Chinese approach to dealing with their housing problem.”


Charles: “As you know, I live in the world of flows, supply and demand of money for investment and stuff like that. Currently you look at all the emerging markets, not only China, they’re all on their butt. And the reason I say they’re on their butt is that if there’s less new money available for investment globally, the illiquid markets are the ones that are going to get hurt the most and which are the illiquid markets? The emerging markets. It used to be the small caps in the United State would get hurt more during a liquidity based downturn. But the small caps in the U.S. are big caps these days. The Russell 2000 is not necessarily a small-cap index. My point is that if China’s in trouble and the emerging markets are in trouble, then the emerging markets’ stocks are in big, big trouble. And that’s why I loaded up, went short the EDZ ETF, that’s the leveraged short on emerging markets. I even added some more late last week. I’m really concerned about emerging market stock prices.”


Jim: “Yeah, it is a concern too because there’s a saying that all of monetary stimulus is fungible. Newly created money kind of goes all around the world. And what seems to happen when we talk about pulling back on stimulus or this other stuff, the first place to blow up is the emerging market. Back in May, back in June, when Bernanke first started about the idea of tapering, what market took it the worst? The Indian stock market. The emerging stock market was the one that really took the news the worst. You’re right, these markets depend on flows, these emerging markets. The flows are streamed by monetary stimulus, that’s the genesis of the flows. When there’s talk, the monetary stimulus is going to get pulled back, these markets have all kinds of problems. When we dealt with India over the summer too. Yeah it makes perfect sense that in an era of tapering, or of tapering potentially coming, you’re looking at the emerging markets as the ones that are going to have the problems first.”



Charles: “Thank you, Jim. In the next segment, we’ll ask ‘how do you invest in this volatile world? Stocks, bonds, real estate, gold? Bitcoins?”



3 Responses to Is China Suffering from a Financial Crisis?

  1. Dave in Alberta, Canada. on January 24, 2014 at 3:07 am

    Charles and Jim, always nice to hear your views on the economies of the world. I look forward to the third and final video, as I’m sure all the viewers do as well.

    Have a prosperous 2014.

  2. alyce on January 24, 2014 at 4:20 pm

    The US is loaded with unfunded debt such as social security, student debt and also absurd government retirees receiving full pay and free medical for life. This is all unsustainable. And we have nothing to show for any of it. So China has lots of empty buildings, houses, malls and great transportation and roads. That’s what China wasted its money on. But at least china HAS something. What does the US have? Manufacturing? hardly. Our cities, roads and our dollar is deteriorating.

  3. Ed_B on February 13, 2014 at 12:24 am

    The term “shadow banking” keeps coming up in economic conversations. Just for once, would someone please define just what this is? In fact, how about a video that explains this in detail?

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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