Monday, April 13, 2015

Will the Chinese RMB replace the USD as reserve Currency?

An excellent, though long post by Michael Pettis from his blog, where he begins to look at the new AIIB, and continues with a review of past challenges for reserve currency status.  Particularly the section from the following paragraph through to the end is an excellent review of history, and likely modern parallels. 

"There have been four times in the past 100 years, in other words, in which we were more or less certain (absolutely certain in the cases of the US in the 1920s and Japan in the 1980s, very certain about the USSR in the 1950s, and arguably certain about Germany in the 1930s) that a country would become the dominant economic and geopolitical power, and only once did this turn out to be true. Anyone old enough to remember the 1980s will remember that we were even more certain about Japan’s rise in the 1980s than we are about China’s rise today, but in the Japanese case, as in every other case, we were flabbergasted by how difficult the economic adjustment turned out to be, which suggests at the very least that we might want to wait to see how Beijing manages China’s rebalancing before we insist that this time is indeed different." (continues to the end of the blog).

The question is not whether China can force this to occur, or even when.  But there are serious challenges that they must face for quite some time before the RMB can even vie for equal footing with the USD.  The only time in history where reserve currency status actually changed, essentially took 40 years of USA economic leadership first, and 2 World Wars with the resulting economic decline of England.

It reminded me of a blogpost I made comparing Japan in their bubble years to the US.

Back then, claims were made of the Yen replacing the USD too.

Monday, April 6, 2015

China & Hong Kong - Property Bubbles and Euphoria.

Recently I noticed that a long established photography shop in Central HK had closed down, and within a week had been replaced with a fully functioning new……
shock horror…. real estate agency!  (I was not at all surprised).

This is in an area where there has to be at least one retail real estate agent every 60-70 metres along all the main roads of Midlevels, Central, Sai Ying Pun, Pokfulam, The Escalator, and Causeway Bay (well - all of the north of HK Island actually).

For those that live there, this is often so annoying as to draw comments along the lines of; “That could have been a nice coffee shop/martket/restaurant/creche/<insert a desirable alternative> instead.”

In fact, it seems that real estate agents are competing to rent the spaces that they should be trying to rent out to good shop tenants!

Is this the proof that there is a property bubble in HK/China?  Not necessarily I think.
Is this proof that there has been bubble like behaviour occurring with respect to property, and the marketing of property to as many people as possible?  Yes I believe so, and its been occurring for years.

Too many times discussing HK property with colleagues, I have heard the standard response of “HK property always goes up” / “It will stay up as long as the Mainlanders are buying, and have so much money,” etc.
But people have already forgotten (unless they were hurt), by the huge reduction of prices when SARS hit HK in 2003, and it took Ten Years for their equity to be regained.

Why?  Because SARS caused a surge of fear that was unheard of previously.  Were they scared of SARS destroying their property though?  I don’t think so - they were scared of the collapse of the property market that was occurring due to Fear becoming contagious in HK.  SARS after all is a respiratory illness that cannot hurt a property itself.

So can HK property collapse again as much as it did in SARS?  Sure, just add fear.  Fear of recession, fear of a hike in interest rates and loan servicing ability (we are pegged to the USD and their low rates in HK), fear of a pullout of money from Chinese Mainland investors, fear of job losses, fear of currency devaluation or depeg,  But one thing is for certain, there will be less real estate agents after that, and maybe a few good coffee shops finally.

I don’t know if it will happen or when, but its certainly interesting walking around HK, looking in agents windows, were a tiny unit can cost as much as several dozen acres in the USA, and where rent can easily outpace the actual full salary of a professional employee.

{My main road up the right hand side - 7-8 agents in three minutes walk}][img]

{$6-10 Million HKD for 830 square feet - any takers?}][img]

{Competition among agents for a rental placement is fierce}][img]