The document summarizes the thesis that China's level of infrastructure investment is unsustainable and will lead to lower investment and profits for short positions. It provides evidence that infrastructure investment accounts for an unprecedented 49% of China's GDP and has exceeded 40% since 2003. It also notes widespread evidence of excess investment through metrics like housing affordability and cement usage far exceeding historical bubbles. While the Chinese government recognizes the issues and is trying to reform, there are doubts about the success of their efforts given resistance from powerful interests. The thesis is that infrastructure investment will ultimately be forced to slow due to debt constraints, leading to profits for short positions, regardless of government actions.
Namrata choudhry bank lending and capital formationPrashant Kulkarni
The role of public investment in agricultural capital formation has declined even sharper. The fall would have been sharper but for the private investment which has filled the gap. This raises the question about the complementarities between private and public investment. Even more important is the determinants of the capital formation. Traditionally banks have played a role in capital formation. Interestingly the capital formation has alos happened through informal channels for which very little data is available. The paper examines the impact of bank lending on capital formation and consequent impact on the production. The correlation between the direct and indirect bank credit on the capital formation is 93% and coefficient of determination is 88%. Our studies show that there is an influence on bank lending on capital formation both public and private which consequently impacts the production patterns. Capital formation does lead to increase in production. There is a strong correlation between the public and private capital formation and agricultural production. The impact as measured by the coefficient of determination is less than 50%.
Namrata choudhry bank lending and capital formationPrashant Kulkarni
The role of public investment in agricultural capital formation has declined even sharper. The fall would have been sharper but for the private investment which has filled the gap. This raises the question about the complementarities between private and public investment. Even more important is the determinants of the capital formation. Traditionally banks have played a role in capital formation. Interestingly the capital formation has alos happened through informal channels for which very little data is available. The paper examines the impact of bank lending on capital formation and consequent impact on the production. The correlation between the direct and indirect bank credit on the capital formation is 93% and coefficient of determination is 88%. Our studies show that there is an influence on bank lending on capital formation both public and private which consequently impacts the production patterns. Capital formation does lead to increase in production. There is a strong correlation between the public and private capital formation and agricultural production. The impact as measured by the coefficient of determination is less than 50%.
FINANCIAL ANALYSIS - BOOK REVIEW - FAULT LINES - HOW HIDDEN FRACTURES STILL T...Mufaddal Nullwala
Contents:
Background
Challenges faced by U.S
Let Them Eat Credit
Exporting to Grow
Flighty foreign financing
Weak Safety Net
From Bubble to bubble
When money is the measure of all worth
Betting the bank
Reforming Finance
Broad Principles Of Reform
Eliminating “Too Systemic to Fail”
Resilience
Improving access to opportunity in America.
Multilateral institutions & their influence
Obtaining global influence
China and The World
Persuading China
What lies Ahead for INDIA
Passing a budget is just one step in financing the federal government. Specific decisions about government spending are made through an annual process called appropriations. Here are answers to key questions to better understand the process.
Foreign Aid and Domestic Tax: Multiple Sources, One Conclusion -Presentation by Paul Clist (U. East Anglia).
The relation between taxes and foreign aid in developing countries has been vastly investigated in the literature. Indeed, in the short term, aid inflows may be seen as a substitute for tax revenues in the eyes of recipient countries, thus lowering the incentive of the latter at increasing their revenues from taxation. However, in the long run, relying on foreign aid with no or marginal taxing of the people might affect governance of the countries, as it breaks the social contract between the citizen and the state. One common finding in the literature is the negative impact of grant type of aid on recipients’ government revenues. This paper therefore sought to replicate existing studies, adding new inputs in order to see whether this assertion would remain true.
The paper by Paul Clist failed at replicating Benedek et al. (2012), which concluded that there is a negative association between domestic tax mobilization and grants, though this relationship appears to have weakened as the original dataset exhibits some discrepancies. Clist and Morrissey (2009) extended Gupta et al. (2004) study over the period 1970-2005 (against 1970-2000). Although they found a significant negative impact of grant aid on government revenue, this effect happened to be driven by the period 1970-1985, when the IMF data was at its worst. When focusing on the period 1986-2005, results are reversed with a robust positive relationship between grant aid and tax revenues.
In terms of limitation, one of the main issues stem from the fact that most of the previous studies were conducted using data from different sources, where key variables had different definitions. Endogeneity is also a major concern as poor tax collection performance and increased aid grant can simultaneously respond to the same shock such as natural disasters.
Four strategies to cope with those problems are established in the paper, including one year and two year lagged aid variables, multiple indicators with multiple causes (MIMIC) models and the use of the new ICTD GRD. In most of the cases, the statement that aid grant has a negative impact on tax revenue is rejected and, as the new data shows, there is no negative effect of aid grants on tax revenue at all.
The conclusion that can be drawn from this is that the negative relationship between tax revenue and grants is driven by bad quality data, making the ICTD GRD not only better, but also much needed.
FINANCIAL ANALYSIS - BOOK REVIEW - FAULT LINES - HOW HIDDEN FRACTURES STILL T...Mufaddal Nullwala
Contents:
Background
Challenges faced by U.S
Let Them Eat Credit
Exporting to Grow
Flighty foreign financing
Weak Safety Net
From Bubble to bubble
When money is the measure of all worth
Betting the bank
Reforming Finance
Broad Principles Of Reform
Eliminating “Too Systemic to Fail”
Resilience
Improving access to opportunity in America.
Multilateral institutions & their influence
Obtaining global influence
China and The World
Persuading China
What lies Ahead for INDIA
Passing a budget is just one step in financing the federal government. Specific decisions about government spending are made through an annual process called appropriations. Here are answers to key questions to better understand the process.
Foreign Aid and Domestic Tax: Multiple Sources, One Conclusion -Presentation by Paul Clist (U. East Anglia).
The relation between taxes and foreign aid in developing countries has been vastly investigated in the literature. Indeed, in the short term, aid inflows may be seen as a substitute for tax revenues in the eyes of recipient countries, thus lowering the incentive of the latter at increasing their revenues from taxation. However, in the long run, relying on foreign aid with no or marginal taxing of the people might affect governance of the countries, as it breaks the social contract between the citizen and the state. One common finding in the literature is the negative impact of grant type of aid on recipients’ government revenues. This paper therefore sought to replicate existing studies, adding new inputs in order to see whether this assertion would remain true.
The paper by Paul Clist failed at replicating Benedek et al. (2012), which concluded that there is a negative association between domestic tax mobilization and grants, though this relationship appears to have weakened as the original dataset exhibits some discrepancies. Clist and Morrissey (2009) extended Gupta et al. (2004) study over the period 1970-2005 (against 1970-2000). Although they found a significant negative impact of grant aid on government revenue, this effect happened to be driven by the period 1970-1985, when the IMF data was at its worst. When focusing on the period 1986-2005, results are reversed with a robust positive relationship between grant aid and tax revenues.
In terms of limitation, one of the main issues stem from the fact that most of the previous studies were conducted using data from different sources, where key variables had different definitions. Endogeneity is also a major concern as poor tax collection performance and increased aid grant can simultaneously respond to the same shock such as natural disasters.
Four strategies to cope with those problems are established in the paper, including one year and two year lagged aid variables, multiple indicators with multiple causes (MIMIC) models and the use of the new ICTD GRD. In most of the cases, the statement that aid grant has a negative impact on tax revenue is rejected and, as the new data shows, there is no negative effect of aid grants on tax revenue at all.
The conclusion that can be drawn from this is that the negative relationship between tax revenue and grants is driven by bad quality data, making the ICTD GRD not only better, but also much needed.
What will be the likely impact of the growing economic power of China and India on individuals, national and multinational firms in the 21st century?
Implications of their population size, economic growth and export rates, increased purchasing power and foreign investment, predicted economic power compared with US and EU, barriers to market entry, trade opportunities for UK firms, differences between China and India, for example state ownership of firms.
Presentation by Toshiya Tsugami, President of Tsugami Workshop, Ltd., at the IAI conference "Xi Jinping’s China: Are Japan and Europe on the same page?" organised in cooperation with the Japanese Embassy in Rome
• The true picture of China’s outbound investment is quite different from many people’s impression.
• Investments in Africa are also in their early stages.
• Investments in Belt & Road countries remained small and slowed in the past year.
• Mining is no longer a primary target of China’s acquisition.
• The reduced foreign exchange reserve is not hard constraint to the outbound investment.
Getting more bang for your public investment buck - Richard Hugues, IMFOECD Governance
This presentation was made by Richard Hugues, IMF, at the 8th Meeting of Senior Public-Private Partnerships and Infrastructure Officials held in Paris on 23-24 March 2015.
The Perfect Storm with Chinese Characteristics: A downside Scenario for China...Team Finland Future Watch
A Downside Scenario for China’s Economy.
- Scenario analysis is not use to generate predictions, but rather to generate plausible futures in order to understand how they might come about in order to support planning and strategy formulation. An economic collapse scenario for China’s economy is not the consensus view.
- The scenario described in this document is not a prediction, but rather one plausible future given the current state of China and the world.
A presentation given by ISS Director Anthony Holmes at our Doha launch. Over fifty senior officials from government, business and academic circles in the Gulf and the UK joined the Mayor of London and the Qatar Financial Center Authority (QFC) at the event. Chaired by the British Ambassador to Qatar, Michael O’Neill, it featured lively contributions from the Mayor, Boris Johnson, the CEO of the QFC, Shashank Srivastava, and ISS Director Ian Kennedy.
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Although discipline is not a one-size-fits-all approach, it can help create a work environment that encourages personal growth and accountability rather than solely relying on punitive measures.
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Implicitly or explicitly all competing businesses employ a strategy to select a mix
of marketing resources. Formulating such competitive strategies fundamentally
involves recognizing relationships between elements of the marketing mix (e.g.,
price and product quality), as well as assessing competitive and market conditions
(i.e., industry structure in the language of economics).
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2. China Infrastructure Short – Thesis outline
1) The level of infrastructure investment in China is clearly unsustainable
2) The Chinese government (and every serious economist) explicitly recognizes this fact
and is undertaking efforts to lower the economy’s dependence on infrastructure
3) If these efforts are successful, infrastructure investment will be lower and our short
position will be profitable
4) If these efforts are unsuccessful, China will eventually be unable to support the debt
created by unprofitable infrastructure. This will result in lower credit availability and
less infrastructure build
5) In ether scenario our short positions will profit
2
3. China’s Infrastructure Investment is Clearly Unsustainable
• Infrastructure investment now accounts for 49% of China’s GDP and has exceeded 40% since 2003
• This level of investment is without historical precedent
• Past instances where investment exceeded 40% of GDP for a meaningful period resulted in credit crisis and
recessions
Historical Context of China’s Investment Level
3
4. Evidence of Excess Investment
There is widespread evidence of excess investment in China. A few areas of note are:
- Affordability: As shown below, globally Chinese real estate is now the least affordable by a wide margin
- Investment-to-GDP ratios: Not only is China’s total investment well in excess of historical bubbles, but
residential housing investment is also reaching a level only seen during previous bubbles
- ‘Common Sense’ evidence: Failed projects such as ‘ghost cities’ and empty malls have been widely reported.
This excess appears degrees of magnitude worse than even the largest infrastructure bubbles to date
4
5. Evidence of Excess Investment
• Cement is a key component of virtually all infrastructure and as such, cement usage tends to closely track
infrastructure investment
• Cumulatively since 1900, China has consumed 19mt of cement per person vs. 18mt in the United States. This is
despite having a per capita GDP only 12% of the US and an urbanization rate of 52% vs. 83% in the US
• China now accounts for 56% of global cement demand
• As shown below, China’s per capita cement usage well exceeds historical infrastructure bubbles
China’s per capita
cement usage is far
above prior bubbles
despite being a much
poorer country
5
6. Debt is the Result Excess Investment
• Excess investment invariably leads to excess debt as projects are funded that do not earn their cost of capital
• This is exactly what happened with Japan in the 1990’s, the US and Europe in 2007/2008 and is happening today in
China
6
7. China 2014 vs. US 2007
• By almost any metric, China today appears significantly worse off than the US on the eve of the 2007 financial crisis
USA 2007
vs.
China 2014
Residential construction % of GDP
6%
12%
Total investment % of GDP
23%
49%
Prior 5 year debt growth (% of GDP)
25%
55%
Home ownership (% of population)
71%
80%
6x
22x
Affordability of largest city
(multiple of avg wage)
GDP Per Capita
$
49,956
$
6,091
Empty housing developments, empty
strip malls
Empty cities, office towers and large
retail developments
Institutions
Robust, transparent legal and
financial institutions
Opaque system with limited history
and questionable rule of law
Government
World's oldest democracy with
independent central bank
Volatile 60 year history of one-party
rule
Evidence of over-capacity
7
8. The Chinese Government is Fully Aware of This
• The Chinese government is acutely aware of these issues and is taking steps to change the country’s growth model to
become less dependent on infrastructure investment
“China's leaders have said they want to remake the
economy so it relies less on heavy investment in real
estate, infrastructure and capital-intensive industries
and exports abroad. They have outlined proposals to
boost domestic consumption by giving peasants more
rights to land and liberalizing the financial sector so
more lending is directed to small businesses. There
has been little movement so far on those fronts.”
- Wall Street Journal, 1/20/2014
“China’s government recently announced ambitious
plans that could make the Chinese economy more
market driven, consumer driven, transparent, and
prone to profitable investing. Implementation remains
a significant challenge, but it is crucial to rectifying
the country’s currently unbalanced system”
- Deloitte Global Economic Outlook, 1/14/2014
► If these efforts are successful, then infrastructure investment will fall and our shorts will work
8
9. The Chinese Government is Fully Aware of This
There are several reasons to doubt that the government’s efforts will be successful:
• The current growth model has benefited many members of China’s elite and thus efforts to change are
likely to encounter resistance from powerful interests
• The transition to a consumer-focused growth model could be painful for certain sectors of the
economy and thus could be unpopular
• The historical record for similar situations gives little reason for optimism
With or without government action, unprofitable investment cannot continue forever as there is a limit to amount of
bad debt an economy can absorb. Thus infrastructure build will ultimately be forced to stop due to debt constraints
“What prevents China from pursuing these reforms is a combination of opposition from powerful
entrenched interest groups – state-owned enterprises, local governments, the economic-policy
bureaucracy, and family members of political elites and well-connected businessmen – and flawed
political institutions. Unless Xi and his colleagues demonstrate their resolve to overcome such opposition
and launch comprehensive reforms, their chances of success are not high”
-Minxin Pei, 11/7/2013
► If the party’s efforts are unsuccessful, then infrastructure investment will eventually fall due
to a lack of available credit and our shorts will work
9
10. Risks / Considerations
The main risks to this position are:
1) Extreme rebalancing: It is theoretically possible that China is able to grow consumption rapidly enough such
that the economy rebalances even if infrastructure grows in absolute terms (albeit much more slowly than
consumption). In this case infrastructure investment would only slow, not contract.
→ However, the stocks we are short appear to be pricing in some growth, so its not clear this would cause
a loss.
→ Given how high the absolute level of infrastructure build is currently, I view scenario this as highly
unlikely...
2) Company / industry specific risks: Even if our thesis plays out, it is possible that it the impact of lower
infrastructure spending is outweighed by positive company-specific events such as successful development
projects, cost rationalizations, etc.
→ Given the likely magnitude of the downside if our thesis plays out, I believe its unlikely that any
company-specific news would be enough to offset the impact of lower infrastructure spending
3) Cost of carry: Between dividends / borrow the cost to carry this position is about 4% per year
► Some combination of 1+2+3 could cause a loss. However as noted above, I believe this is unlikely
10