Forensic Asia Updates China Bubble Thesis

September 30, 2011

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Over a year ago, I mentioned Forensic Asia’s excellent bottom’s up research in the original “The Emperor Wears No Clothes.”

ForensicAsia takes a picture of the fiscal health of non financial companies on whole, then uses as a baseline the composite fiscal health of companies prior to past crises, such as Scandinavia in 1990, Mexico in 1993, and Thailand in 1996. “Gearing exceeded 100% of shareholders equity and returns on equity were around 10% or below on the eve of crises,” says ForensicAsia. The composite score also takes into account working capital, quality of earnings, and balance sheet governance.  The threshold is typically 25% of companies showing signs of weak financials.  Chinese companies on whole are showing signs of excess leverage, low returns on equity, and a heavy reliance on equity offerings and debt issuance. 

He was interviewed by FT.

  • Money is fleeing China, also see “Insiders Exiting China.”
  • Artificially low interest rates by the government has created a bubble.
  • Money Supply is larger than the US
  • During the Thai housing bubble, banks didn’t even report mortgages because they were small. The debt was within the corporate sector.
  • To sustain a bubble, you need ever more increasing amounts of credit. Credit is still increasing, just wait until it contracts.

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