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8/3/2019 CHuna hedgefundpresentation-111218175727-phpapp02

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Is China a Paper Tiger?


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What Everyone Thinks They Know

NPR (8/19/2010): This week, China inchedahead of Japan, becoming the world's secondlargest economy. It still lags behind the U.S., butprobably not for long. Economists estimate thatChina will be the largest economy on Earth in

perhaps as little as 20 years. Today, our PlanetMoney team asks: What will it be like for theU.S. to be number two?


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What Everyone Thinks They Know Agence France Press (7/8/2010): China's economy

will overtake that of the United States by 2035 and

be twice its size by midcentury, a study releasedTuesday by a US research organization concluded.The report by economist Albert Keidel of theCarnegie Endowment for International Peace saidChina's rapid growth is driven by domestic demandmore than exports, and will sustain high single-digitgrowth rates well into the 21st century.

"China's economic performance clearly is no flash inthe pan," Keidel writes.


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What Everyone Thinks They Know New York Times (01/12/10): And here is the other thing to keep in mind. Think about all

the hype, all the words, that have been written about Chinas economic development since1979. Its a lot, right? What if I told you this: It may be that we havent seen anything yet.

Why do I say that? All the long-term investments that China has made over the last two

decades are just blossoming and could really propel the Chinese economy into the 21st-century knowledge age, starting with its massive investment in infrastructure. Ten yearsago, China had a lot bridges and roads to nowhere. Well, many of them are now connected.It is also on a crash program of building subways in major cities and high-speed trains tointerconnect them. China also now has 400 million Internet users, and 200 million of themhave broadband. Check into a motel in any major city and youll have broadband access.

America has about 80 million broadband users. Now take all this infrastructure and mix it together with 27 million students in technical

colleges and universities the most in the world. With just the normal distribution of

brains, thats going to bring a lot of brainpower to the market, or, as Bill Gates once said tome: In China, when youre one-in-a-million, there are 1,300 other people just like you.


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China has destroyed American manufacturingand will continue to enjoy the fruits of cheaplabor with permanent trade surpluses

The Chinese citizenry boasts an enormouspersonal savings rate which can be tapped to

transform China into a consumption economy China has massive foreign currency reserves

which will allow them the ability to weather aneconomic hiccup


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The Chinese GDP growth rate, which hasaveraged three times that of the US over the past30 years, will continue at a torrid pace

The Yuan is massively undervalued

China is the cornerstone of the new emerging

market world order, dubbed the BRIC byGoldman Sachss Jim ONeill


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A Bipartisan Belief Reuters (11/17/10): The United States should use all

available tools, including labeling China a currency

manipulator, to put pressure on Beijing to raise thevalue of its yuan, a U.S. watchdog panel said onWednesday.

"China's deliberately undervalued (yuan) hasunfairly conferred substantial economic advantageson China to the detriment of major trading partners,principally the United States and Europe," the U.S.-China Economic and Security Review Commissionsaid in an annual report.


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A Bipartisan Belief Rueters (3/12/10): Senator Charles Schumer said on

Friday he plans to move forward soon on legislation

aimed at stopping China from "manipulating" itscurrency.

"Now more than ever, there is a consensus to finallyconfront China's currency manipulation," the NewYork Democrat said in a statement.

"It is the single biggest step we can take to promoteU.S. job creation, particularly in the manufacturingsector. We plan to move forward with revampedlegislation on this issue in the coming days," he said.


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A Bipartisan Belief


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What If The Consensus Is Wrong?

The 2000s represent fake growth for the Chinese

They funded our misbegotten adventure intosubprime mortgages by holding massiveamounts of Agency debt, the lifeblood of FannieMae and Freddie Mac

This led to a boom in prices and home equitywhich encouraged consumption of consumergoods, including a lot which came from China,above our means


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What If The Consensus Is Wrong? When Agency debt became worthless and Fannie

Mae and Freddie Mac plunged into conservatorship

the Chinese rushed from Agency debt, exchanging itfor US Treasuries

This is just shuffling paper though. On December24, 2009, the Treasury uncapped its support forFannie and Freddie

The taxpayers, and our bondholders, are now on thehook for potentially unlimited losses at the GSEs

Agency debt is treasury debt as long as Congressrefuses to act to resolve the problems at the GSEs


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What If The Consensus Is Wrong? It is official Chinese policy to reinflate the US

bubble, much like our own Federal Reserve

These policies are failing as home prices continue tofall and real estate activity remain at or near recordlows

Unemployment remains near postwar highs

Record numbers of Americans are on food stamps When you need assistance for necessities, how muchspending do you have for discretionary items?

Trade, read Chinese exports, remain well below2007 levels


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What If The Consensus Is Wrong? Daily Mail (12/23/10): China has said it is willing to

bail out debt-ridden countries in the euro zone using its$2.7trillion overseas investment fund.

In a fresh humiliation for Europe, Foreign Ministryspokesman Jiang Yu said it was one of the mostimportant areas for China's foreign exchangeinvestments.

The country has already approached struggling

European countries with financial aid, including offeringto buy Greece's debt in October and promising to buy$4billion of Portuguese government debt.

The solution for Europe, drowning in debt is more debt,to give the junkie a greater fix


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What If The Consensus Is Wrong? Chinese GDP growth is drastically overestimated. From everybodys favorite,Wikileaks:

4. (C) GDP figures are man-made and thereforeunreliable, Li said. When evaluating Liaoningseconomy, he focuses on three figures: 1) electricityconsumption, which was up 10 percent in Liaoning lastyear; 2) volume of rail cargo, which is fairly accuratebecause fees are charged for each unit of weight; and

3) amount of loans disbursed, which also tends to beaccurate given the interest fees charged. By looking atthese three figures, Li said he can measure withrelative accuracy the speed of economic growth. Allother figures, especially GDP statistics, are for

reference only, he said smiling.


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Gross Domestic Parody

Chinese GDP is computed based on recordedproduction activity

Comparatively US GDP is based on end userconsumption

We know the formula as C+I+G+(X-M)

Activity is much easier to manipulate thanconsumption

This affects data in many ways


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We have no way of knowing how many goodsproduced are actually sold

Burgeoning inventories are considered economicexpansion using Chinese data methods

China is a centrally planned economy with a

central political body deciding on how muchfunding will be provided in any given year


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The Central Party forces loans onto the state andlocal party leaders

In terms of GDP calculations, growth isrecorded when the funds are disbursed not whennew infrastructure projects have actually begun

As Im sure is becoming obvious, the CentralCommunist regime can make Chinese growthestimates a certainty through monetary policy


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Gross Domestic Parody In a global economy marred by a steep financial

panic and a tepid recovery export driven growth hasnot been the driver of the Chinese economy in thepast 24 months

Chinese growth has come solely through a massiveexpansion of credit

In 2009 and 2010 new bank lending was

approximately 7.5 trillion Renminbi (over $1.1trillion) These figures are drastically higher than pre-

Lehman numbers (really double anything we hadseen previously)


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Lots of New Loans

The question is how many of these loans aregood loans and the answer is very few

Chinas two largest customers are the EuropeanUnion and the United States

Europe is currently struggling to weather a

sovereign debt crisis that could explode withinmonths if Italy and Spain are forced to seekprotection from the bond market (with Greece andIreland already fallen and Portugal on the way thisis a distinct possibility


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Lots of New Loans United States economists are actively slashing

growth forecasts for 2011

The Federal Reserve now expects growth next yearof 3% to 3.6%

That is down from an initial forecast of 3.5% to4.2%

Blue Chip Economic Indicators survey expectsgrowth of just 2.5% for 2011

When Chinese stimulus loans were made wewere supposed to be in a rapid recovery by now

(the much heralded V shaped recovery)


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Life Under The Jack Boot

Will these loans be repaid?

First, lets look at how political, rather thanmarket, economies create inefficiencies

In Soviet Russia, padding of official numberswas referred to as tukhta (or tufta depending on

who you are talking to) This concept is explained in depth by Solzhenitsyn

in the Gulag Archipelago


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Five Year Plans were completed only on paper

Roofs were redone at a fraction of what wasexpected and material was so scarce that thosewhich were redone had material which wasstretched beyond measure

The roof had noticeable holes which exposedthe rest of the building to the harsh Russianweather


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Life Under The Jack Boot Labor camps and canals always came in ahead of

schedule, usually omitting large planning periods

that were not officially included in the buildingschedule Resources were allocated on political whims rather

than by necessity

Theives and those of general dishonor were treatedbetter and their behavior excused while thehonorable and productive were forced to the bottomof the social structure


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Law became an arbitrary concept

Cases were decided before trial

You were not tried by your peers but by yoursuperiors

Evidence did not matter

Many defendants admitted guilt in court eventhough they had committed no such offense

They were sentenced to the hells of the Gulag orthe firing squad for their loyalty


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Life Under The Jack Boot Since Tianneman, the Chinese government has

maintained the traditions of Mao, dressed up

elaborately in capitalist garb Make no mistake, the hidden Gulag Archipelago

remains The Black Marias continue, every day and

every night, to disappear those inconvenient tothe State

The wreckers, freedom men


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Life Under The Jack Boot My name is Geng He () and I am the wife of political

prisoner and lawyer Gao Zhisheng (), who is currentlybeing persecuted in mainland China. On March 11 this year, I

arrived in the United States with my son and daughter forpolitical asylum. I write this letter to you in order to, first,express my gratitude towards the American government. At atime when our family was in danger, the Americangovernments humanitarian aid enabled my children and meto escape from brutal persecution. We are safe now, but my

husbands situation has become more perilous. Therefore, Ientreat you to go a step further in helping our family byputting an end to the Chinese governments persecution of myhusband, lawyer Gao Zhisheng.


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Life Under The Jack Boot My husband is an honest lawyer. Due to his professional capabilities our

family once had a good income and living standard. When my husbandbegan taking part in rights defense cases in 2003, he clashed frequentlywith the corrupt and criminalized elements of the Chinese government at all

levels. In 2004, he investigated and exposed the governments actionsagainst Falun Gong followers in the biggest political persecution case inmainland China and wrote letters to Chinese leaders three times requestingthem to stop their attacks on Falun Gong. Though his actions did not violateChinas laws, but rather, upheld them, he was still continuously threatenedby the government at all levels and his lawyers license was revoked. Theproblems he personally encountered made him realize that, without

changing the political system of China, there would be no way to lawfullyensure the safety, interests, and dignity of citizens. Therefore, time andagain, within the framework allowed by the Chinese Constitution and thelaw, he initiated peaceful citizen demonstrations and petitions to exposeand protest the problems of corruption in government and tyrannical rule.


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Life Under The Jack Boot My husbands righteous actions drew continuous

and escalating abuse by the Chinese government. OnAugust 15, 2006, they kidnapped my husband andformally arrested him on September 21. During thisperiod, the authorities tormented him in all sorts ofways and even kidnapped, harassed, and tormentedour children and me in order to break his will. OnDecember 21, 2006, after having deprived myhusband of the right to retain defense counsel, theauthorities convicted and sentenced him.


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Life Under The Jack Boot Soon afterwards, my husband revealed these problems to the

international community. The authorities were infuriated. Theykidnapped and tormented him many times. On the night of

September 21, 2007, my husband, with a black hood thrown over hishead, was kidnapped and brought to an unknown location. For 59days, many people tortured and ravaged him in all kinds of ways,including beating him with an electric prod, inserting bamboo sticksinto his reproductive organs, holding lit cigarettes close to his eyesand nose, etc., so that his eyes would burn and he would be forced toinhale smoke. My husband told me later that he was in such

unbearable pain at the time that his sweat, blood, and other bodilyfluids covered the floor. Among the reasons the authorities gave fortormenting my husband was that he had written to the UnitedStates Congress.


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Life Under The Jack Boot Because we could no longer endure the Chinese

governments thuggish and barbaric harassment andpersecution, on January 9, 2009, I took my childrenon the treacherous journey of escaping China. OnFebruary 4, my husband disappeared again from hishometown in Shaanxi and has not been heard fromsince. I have no doubt that this kidnapping was theChinese governments retaliation for our escape. Inview of his horrific experiences in the past, Imextremely worried about my husbands safety.


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Life Under The Jack Boot Honorable members of the U.S. Congress, as a wife I am terribly

distressed and doubt our decision to leave China. Though I had beenmentally prepared to face adversities alongside my husband, ourchildren, ages 16 and five, have already been unable to go to schooldue to the kidnapping, intimidation, and beatings by the authorities.My daughter even ran away from home. Our relatives and friendsare worried that she will become mentally disturbed from her fear.If we had not left that horrific country, their whole lives would havebeen ruined. However, that my husband was prepared to betortured for the sake of our escape is like a knife in my heart. My

children ask me every day, wheres dad? Im alone and isolated hereand can only appeal to you to pressure the Chinese government tostop persecuting my husband and tell the world his whereaboutsand condition.


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Fraud

The root evils of the system still remain

With export growth tabled, the credit surge

mandated by Chinas central party is runninginto speculation and outright fraud


33/71

Fraud Muddy Waters LLC has initiated coverage on RINO

International Corp. (RINO)with a Strong Sell

rating and a $2.45 price target. RINO claims to be the leader in sellingdesulfurization (FGD) and other environmentalequipment to Chinese steel mills. It reported 2009revenue of $193 million. In reality its revenue isunder $15 million, and its management has divertedtens of millions of dollars for its own use.We valueRINO based on the cash we believe remainsin the company after the most recent raise.


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Fraud


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Fraud Hedge fund manager John Paulson is most famous

for betting against subprime mortgages by being

long synthetically engineered CDOs. He hand picked mortgage pools he thought would gobust and used investment banks to createinstruments whose payoffs mirrored thosemortgages and marketed those investments to otherbanks (this made national news in the GoldmanSachs hearings on Abacus and Timberwolf).

The largest loss his fund has ever incurred ishappening today.


36/71

Fraud Paulson was the premier investor in Sino-Forest The company is a Chinese timber producer and has been

exposed as nothing but paper The company claimed to had purchased a sizeableportion of land outside Lincang City in the YunnanProvince.

This purchase never happened, the records verified by

the city itself Its profits, as reported, and audited, are impossible

because those profits are based on timber productionthat isnt happening on land it doesnt own.

Sino-Forest is traded on the Toronto exchange.


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Fraud There are only approximately 3,000 companies

which list on the New York Stock Exchange

The NYSE holds itself up as the premier stockexchange in the world with rigorous listingstandards

Less than 100 of those companies come fromAsia, with just a fraction coming from China


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Fraud A fraction of one percent of the companies listed on the

NYSE are Chinese. These companies are supposed to bethe best companies in that country.

And several of those companies (RINO, CCME, etc.)have just been nailed as a fraudulent ponzi schemewhose internal financials were so poor that a two manresearch outfit could issue a report so damning that thestock price has plummeted over 50% in less than a

month No one is even appearing to do due diligence on Chinaanymore

Much like the subprime boom in the US, no one caresuntil it all blows up


39/71

Boom Times Chinas November car sales hit a one-month record.

Total cars and light vehicles shipped to dealersreached 1.34 million, up 29% from the same month

last year. Sales for the first eleven months of the yearwere 12.45 million, up 35%.

Car sales in China have now outstripped the US forthree straight years, despite an economy that is afourth of the size

Many sales are done with extravagant governmentincentives

This is similar to mid-decade US auto sales based on0% financing and employee pricing


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Hookers In Macau The latest report from PricewaterhouseCoopers

LLP (PwC) on Casino Gaming estimates that

revenues in Macau will grow at a compoundannual growth rate (CAGR) of 24.7 percent,reaching USD 45.1 billion (MOP 360 billion) in2014.

PwCs outlook for the global casino marketforecasts that Asias and Australias fast-growinggaming industries will account for nearly asmuch of the world market as the United States in

four-years time.


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Hookers in Macau No city in America benefitted more from the

subprime debt boom than Las Vegas, Nevada

In fact, the largest annual convention for thesubprime industry took place in Las Vegas

Ask Steve Eisman about casino girls who owned

5 homes and stories of tables being three deep Easy money goes hand in hand with gambling


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Hookers in Macau Las Vegas Sands Macau revenue for Q3 of 2010:

$1,097,750,000

Compared to 2009: $850,055,000

30% growth YoY in revenues and a 125% growth

in net income Las Vegas, NV properties accounted for just$290,600,000


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Hookers in Macau

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

2005 2006 2007 2008 2009 2010

3Q Revenue (In Thousands)

3Q Revenue (In Thousands)


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Hookers in Macau Throngs swarmed the gaming hall, lining tables

two to three deep. Near riots greeted the opening

of a series of other new casinos in this gambling-crazed city.

Sands doles them out free to high-rollers,mainly new-moneyed Chinese drivingMacaus renaissance.


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Boom Times


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Boom Times

The empty city ofOrdos during morningrush hour. Ordos has

the second highest percapita income in thecountry, behindShanghai and ahead of

Beijing. Hardly anyonelives there


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Boom Times New development projects in the interior of China

are accelerating

The Communist government wants to crack downon migration of youth to the cities of Shanghai,Hong Kong and Beijing

They must create jobs for the youth in thebackwards west

Those jobs are in construction. Building cities,apartments, and factories which serve no purpose

China must create 25 million jobs a year or risk civilunrest, the price of totalitarianism


48/71

Boom Times According to Pivot Capital:

Excess cement capacity is greater than the

combined consumption of the US, Japan andIndia!

Idle Chinese steel factories total more than thetotal steel production of Japan and South Korea


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Boom Times One clear clue (regarding the rising real estate

prices in China) is that the average price-to-incomeratio in Beijing has reached 27:1, five times theworld average, according to data from the Bureau ofStatistics of the Beijing Municipality. In addition,the average price-to-rent ratio neared 500:1 in thecity, far above the international alarm threshold of300:1, which sends out a clear signal that the

foundation of the real estate boom is losingstability.

Shanghai, Shenzen, Beijing, Guazhong (see slide26)

Southern California, Florida, Arizona, Las Vegas


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Boom Times Massive amounts of third mortgages, given with

low interest rates and little down payments

Sound familiar? To keep the bubble blowing, the government has

to continue to press hard on the gas


51/71

Atlas Shrugged Imagine standing with your arms outstretched

and a weight in each hand

It starts out as being easy but eventuallybecomes excruciatingly painful

The hand weights now feel like stones

Your arms burn as lactic acid builds up quickly


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Atlas Shrugged Adrenaline pumps through your system

To drop the weights, all that is necessary is for

your arms to give ground Once they begin to drop, only supports can stop

the free fall

What looked like calm, stability, strength hasdisappeared in an instant


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Atlas Shrugged What happens on an economy wide scale? Assets become liabilities, factories idle, money dries

up. The boom goes bust. All that is left is the pain. Borrowing rates skyrocket The currency collapses as money flees In a speculative boom, the catalyst for economic

destruction is simply a drop in the growth rate In statistical terms, reversion to the mean Romans designed executions around the

crucifixition In short, gravity always wins


54/71

Currency Devaluation China has pegged the Yuan to the Dollar for

many years

It attempted to placate critics by instituting afloating rate policy recently but this new policy ismore lip service than actual substance

Many believe that this peg has caused the Yuanto be severely undervalued to what it wouldtrade at if there was a free market price allowed


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Currency Devaluation Rarely has this been the case over history though

Pegged currency, stability lull markets into a

false sense of security, causes the market tooverlook threats

Pegged currencies tend to exhibit sharp

devaluations during crises This has happened recently in Asia


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Currency Devaluation In 1997, the world caught Asian Flu

Thailand

South Korea Indonesia

Malaysia

Philipines

All pegged to the US Dollar


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Causes Easy money creates inflation

CPI is officially up to 5.1%

Property prices are up around 10% YoY, muchhigher in certain areas

Food inflation is near 7.5% YoY

Michael Pettis has estimated CPI at over 7%


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Causes Copper, cotton, silver prices are skyrocketing

Oil is at $93 a barrel

Costs are exploding

This is disastrous for the Chinese people, manystill live in poverty (per capita GDP is 102nd in

the world) It also hurts Chinese factories; textiles, toys,many of the factories which we associate withChina have margins of 5% or less


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Causes China so far has taken only half measures to

corral these price shocks

The required reserve ratio has been raised threetimes

This policy doesnt even combat the effects of theFederal Reserves quantitative easing policy letalone counteract the effects of Chinas stimuluspolicies


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Causes The true answer to Chinas inflation woes would

be to curtail new bank lending

This cannot happen though because it woulddeprive the asset bubble fire the oxygen it needsto keep burning

In a country that rules over its citizens, severe

inflation would be enough to change governmentpolicy Nothing scares Beijing more than an unhappy

populous


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Causes Many talk about an exploding Chinese middle

class and a new consumer culture on the rise

We hear about China carrying the worldeconomy going forward

Missing from this analysis is any mention ofdemographics and the effects of governmentpolicy on the aging of the Chinese population


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Causes The One Child Policy has been in force since

1978

It is estimated that a woman is forced to have anabortion under the law every 2.4 seconds

That amounts to 35,000 a day New York City is aborted in nine months

Overall, it is estimated that 400 million childrenhave been killed since the policys inception


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Causes There are other effects besides the staggering

loss of life

Boys are preferred over girls. Many firstchildren are killed if they are daughters

This has led to a gender inbalance withinChinese society further deteriorating the birth

rate within the country What does this mean for the domestic

marketplace?


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Causes It will shrink drastically

The working age population will begin to

decrease within the next few years China has no social security program

The burden of caring for the elderly falls to the

children We are seeing a classic pyramid trap occurring


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Causes Two parents care for four parents At any one time we can expect only two Chinese

workers to be responsible for one retiredpensioner

That is worse than the ratio in the United States The fiscal responsibilities for carrying on our

entitlement programs has caused the release ofthe Simpson-Bowles recommendations


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Causes We are also seeing the fiscal effects that result from

demographic changes in Europe and Japan

These countries are rightfully identified as slowgrowth nations Big government is crashing, retirement ages are

being raised and benefits cut Yet the largest government is viewed as immune to

this trend? Why?


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The False Comfort of Foreign Currency

Reserves Many cite the huge foreign currency reserves

that China possesses

At $2.7 trillion it is approximately 100% of theireconomy

The last time countries boasted similar tradesurpluses was Japan in 1989 and the UnitedStates in 1929, immediately preceding massivecrashes


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The False Comfort of Foreign Currency

Reserves From 1929 to 1933 the Dow Jones would lose

90% of its value

The Nikkei average today is currently around10,500

It was at 38,000 in 1989, a 75% decline in valueover two decades

In real terms it is approximately 12% of its 1989value

Creditor nations are hurt excessively duringglobal slowdowns


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In Conclusion Adam Smith wrote about China: China has been long one of the richest, that is,

one of the most fertile, best cultivated, mostindustrious, and most populous countries in theworld. It seems, however, to have been longstationary. Marco Polo, who visited it more than

five hundred years ago, describes its cultivation,industry and populousness, almost in the sameterms in which they are described by travellersin the present times.


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In Conclusion All travellers agree with the low wages of labour,

and in the difficulty which a labourer finds in

bringing up a family in China. If by digging theground a whole day he can get what willpurchase a small quantity of rice in the evening,he is contented.

The poverty of the lower ranks of people inChina far surpasses that of the most beggarlynations in Europe.


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In Conclusion Any carrion, the carcass of a dead dog or cat, for

example, though half putrid and stinking, is as

welcome to them as the most wholesome food to thepeople of other countries Marriage is encouraged in China, not by the

profitableness of children, but by the liberty ofdestroying them. In all great towns several are every

night exposed in the street, or drowned like puppiesin the water

This was written in 1776. It could easily be writtentoday

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