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Don’t Be Bearish: Your Perceptions of China are Warped

Demand doesn’t stop at goods and services – it solicits information as well.

There’s a trendy term gaining traction in public discourse of late – echo chamber. The sentiment being that many casual news consumers have blown past choosing headlines they agree with. They have evolved to a stage where they find entire platforms that only post headlines they agree with.  

Since the election, a barrage of articles have emerged lamenting Zuck and Facebook for creating political echo-chambers on users’ newsfeeds. And like most of the seemingly random things that populate themselves on your newsfeed – they’re not. By design Facebook gets more clicks and thus more revenue if you are shown a steady flow of articles recommended by your friends (the ones with similar political views and internet footprints).

But this isn’t limited to Facebook Friend-Reviewed articles. An anecdotal illustration from academia: My three roommates are post-docs at Stanford, all in STEM fields (Science, Technology, and Marketing, right?). They will often utter the phrase “publications are the currency of academia.” This is usually followed by “we are incentivized to salvage fruitless research with strong correlations – any strong correlation.” Point being – even peer-reviewed research gets nudged by the free hand.     

Now to China, the land of a thousand conflicting narratives. For 99% of Americans, there are three forces at play in the whittling and chiseling of Chinese Economic perceptions. For most Americans, the first two are known and usually negative, the third is unknown or misconstrued, and also negative. 

A.   U.S. Stock Market

B.   News about China

C.   China’s Currency policy

Here’s the typical equation: The forces of C effect A which influences B

And B is already inclined to favor negative stories about China (see below for examples and alternate explanations).   

Also, for the record, China’s government allows the currency to move +/- 2% day over day – i.e. market forces aren’t impeded until it breaches the 2% threshold. For reference, since 1999, month over month change for the EUR / USD has averaged 4.81%. I’ll bite my tongue on any further election related commentary about China’s currency – draw your own conclusions and witticisms. 

The Brookings Institute made this handy graph which explains why reactions to the expected slowing of China’s economy are amplified for US investors (9-year old’s on the monster coaster at Six Flags) and not for the Chinese themselves (43-year-old biking enthusiasts gradually rolling out of their cul-de-sac.).

The international spending by China’s corporations and government has decreased sharply since its 2011 peak. However, slowing is a natural function of China transitioning from an investment economy to a consumer-driven, services based economy. In other words, China might be buying less iron ore and oil but it is about to start buying more Levi’s and microbrews.

Now, let’s take a look at those tantalizing articles on China’s property market. Thanks to Andy Rothman, investment strategist for Matthews Asia and former head of macroeconomic research at the US Embassy in Beijing (see pic below) for compiling this information in his Sinology blog.

China: Where embassies look like art museums and art museums look like embassies. 

  Debunking Common Apocalyptic Headlines:

  • Ghost Cities––> Sub divisions on the edge of cities are built and bought before anyone moves in AND no one moves in until the public transit is built which often lags behind the finish date

  • Over-leveraged Housing Crisis ––> Cash upfront on home purchases in China isn’t 2% like it was in the US circa 06’ its 20-30%

  • Property speculation is out of control––> actually, it is limited to the China equivalents of NY and SF – the tier 1 cities, “Beishangguang” as it’s known in Mandarin (Beijing, Shanghai, Guangzhou)

  • Housing price increases are widespread––> in reality 64% of home sales occurred in T3 cities where prices only rose 4% between 2011 and 2016

  • Housing price increases are unsustainable––> Gross income is up 10% and housing costs are up 7% since 2011

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Apr 15, 2018


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