China and Real Estate

Both the Wall Street Journal and the New York Times this morning noted moves by the Chinese  Government to puncture that country’s real estate bubble. The moves, which include a 20 percent capital gains tax on real estate sold, had immediate (if perhaps only temporary) effects on property prices and the stock market, particularly the stocks of developers. China is also planning to make it more costly for people to buy second homes. Wider efforts, reported by the WSJ, aim at shifting growth from exports to internal consumption, which would require raising household incomes.

Perhaps it is already too late for China, but for the moment the center there still holds—meaning that government can act rapidly and decisively to protect the welfare of most of the population. I qualify this by using the word “perhaps” because the dissolving acids of the “free market” may already have penetrated the top communist elite enough for things to end badly. A while back I read a novel by a Chinese writer set in modern Shanghai; the book strongly suggested that a Commie-Capitalist Complex (as in the sense of a Military-Industrial Complex here) is already on the verge of grasping power. If so, look out.

The longer-term historical patterns in China suggest, however, a cycling between “virtuous” authoritarianism, the decay of the ruling element, the outbreak of civil war—the winner of which, under the Mandate of Heaven, once more takes charge and rules virtuously. Virtuous rule means that the government holds down the very forces that the free market releases. Another way to put this is that China is habituated to authoritarian rule over millennia. When that weakens, somebody is on the take. We shall see. What comes next? Another cultural revolution? Or will the twenty-first be the Chinese Century. If so, I feel for the ordinary Chinese. They will be ever more affluent but less and less content. And slouching toward China, as toward all other countries too, is the Rough Beast of the Post-Fossil Age. When it arrives, a cultural revolution in China is a dead certainty.

Short Selling in China

Coverage about “the whale,” read the JP Morgan Chase trader named Bruno Iksil, got me thinking about fundamental reforms that would once more turn financial trading into genuine investment and do away with Casino Wall Street. One such idea is to prohibit short sales of anything. If you sell something, you ought already to own it, and be ready to prove that you do. Then the thought occurred. I wonder if short selling is permissible in China.

The short answer is Yes, but the fuller answer is more interesting. It is legal there but only since 2009. And such activity is only permitted to be carried out by 11 brokerage firms. Such trading is now going on under a trial, under the auspices of the China Securities Regulatory Commission, and it may be stopped in the future. Same holds for trading on the margin.

Interesting. Before the capitalist monster eats a culture, it first sells it short. I am hoping for the nixing of this “trial” in China. If not, I confidently predict another Great Proletarian Cultural Revolution in the future. “Strike the enemy down on the floor and step on him with a foot!” Ah, the memories…

Steel: Numbers are Sometimes Deceptive

In the context of another project, I charted economic census data for the Iron and Steel industry (NAICS 331111). Hello! I said, looking at the numbers. I had charted a series on Value of Shipments for the 1997-2010 period. What these numbers showed was a gradual decline of the industry early in the period followed by a dramatic upturn beginning in 2003. But everything else I read about the industry seemed to indicate quite the opposite. No one in the industry was trumpeting the glories of a renascent steel industry. I don’t like growth trends unless I can explain them, so I went to work. What I understood before I started were a few big facts about this industry:

• It is maturing, shrinking, and consolidating in the West, thus in the developed world.
• It is booming in Asia, especially in China and India. China can’t get enough steel.
• Prices have been trending up, in part because of fierce Chinese demand, in part because of the rising costs of coke, the stuff you need to render iron ore into pig iron.

My efforts to explain that rise in U.S. steel performance eventually yielded this interesting graphic:

What I am showing here, using U.S. Geological Survey data (link), is that steel production in the United States, measured in metric tons, has been trending down, that the price of steel has been trending sharply up, and that domestic shipments have been echoing the price increase much more than reflecting the gradual erosion of physical output.

I’m showing production and price data as an index to keep the graphic readable. Domestic shipments are rendered in billions of dollars. The first two items come from the USGS and the series ends in 2009;  the shipment data come from the U.S. Bureau of the Census.

While I was engaged in this, I also discovered that U.S. exports of steel, while smaller than imports, have been rising much more rapidly than production for domestic use (both measured in dollars). Rising world prices affect domestic prices even when 83 percent of an industry’s shipments (as was the case here in 2010) are consumed locally—and the price increases are driven by Chinese demand. It’s a global market, isn’t it?

In most industries value of shipments data can be taken at face value. When a basic industry moves overseas for all practical purposes, and when other markets have the hammer hand, one has to be careful in assessing rising curves.

Desalting the Sea

Desalination has long been an interest of mine—entirely due to chance and personal history. My first assignment as an analyst at Midwest Research Institute, which actually marked my career as an analyst, was to write a report on that subject for a client. Back in those days half the people in the field still called it desalinization. The change in name had humorous aspects. It was the big joke at the first ever industry conference I attended. Yes, on this subject. Those were the days of Nikita Khrushchev—and a thaw in Russia. The name of the conference was changed at the last minute at the request of a Russian delegation; the Russians had requested it because the old word was too close to destalinization—which was too hot a topic in Russia. Or this is what the talk and snickers at the conference were all about…

Now today comes an interesting story in the New York Times. It’s about a $4 billion desalting plant built in Tianjin in China (quite near Beijing). The thrust of the story is that it costs the Chinese more to desalt the water than they receive for it—thus they are desalting at a loss. “In some places,” says the Times, “this would be economic lunacy. In China it is economic strategy.” This neatly summarizes the differences between worshippers of the Hidden Hand and users of the Human Hand. China subsidizes technologies with an eye on the future—while we bow heads praying to Adam Smith.

Some interesting factoids here. Some of these the Times includes. One is that the technology used by the Chinese is from Israel, entirely imported. It was just assembled in Tianjin. Another is that the project is owned and operated by a state-owned conglomerate called SDIC (State Development & Investment Corporation). What the Times omits is that SDIC is a rather sizeable venture with 2010 revenues of 64.6 billion renminbi ($10.3 billion). SDIC also achieved profits of RMB 6.8 ($1.07 billion). That’s a profit of 10.4 percent. Not bad, actually—and that includes whatever red ink the desalting operation spilled on SDIC’s books.

Someday third-world will come to mean countries that still hew to superstitions worship of old secular gods. If we don’t convert to the new secularism, we might become denizens of that third world ourselves.