Weighing The Week Ahead: Time To Worry About China? [View article]
Diva you remind of Barry Rithotz who describes himself as a miserable long. From Barrons:
Barry, who terms himself “miserably long,” admits to spending a lot of time worrying about what can go wrong with the market. And he points out that, despite disappointing news from Europe and weakness in China, the market couldn’t even muster a 1% down day. He observes that “contemporaneous to the rally has been a surge of bearish commentary,” and confesses to being empathetic to the negative takes. However, he sighs, the bears “have been on the wrong side of the trend for a long time.”
Weighing The Week Ahead: Time To Worry About China? [View article]
China's immediate challenge are (1) a narrowing trade surplus, (2) a real estate bubble undergoing adjustment, (3) moderately slowing economic growth (4) a somewhat restrictive monetary policy put in place after a surge in producer and consumer prices that cannot be easily reversed out of fear of reflating the property bubble and (5) piles of bad debt accumulated by special local government entities created to develop land so that local government would benefit from the sale of the land.
Longer term issues include, among other things, the need to reduce the role of SOE's (state owned enterprises) and rebalance the economy by furthering consumption and reducing investment. Rebalancing and reducing the role of SOE's will prove to be the most challenging as both are fraught with political claims and interests. Wages must rise, profits of SOE's must fall, interest rates must rise (ending financial repression) and social safety nets must be put in place to give consumers confidence to spend.
Michael Pettis, who used to work on Wall Street and now teaches at Peking University, writes extensively on China while drawing upon the insights of those "on the ground" including political leaders. He is a recognized expert and recently he put to paper some predictions for the next decade and while I may not agree with the degree of his pessimism I agree with the tone and direction of his thinking. From Pettis:
>BRICS and other developing countries have not decoupled in any meaningful sense, and once the current liquidity-driven investment boom subsides the developing world will be hit hard by the global crisis.
>Over the next two years Chinese household consumption will continue declining as a share of GDP.
>Chinese debt levels will continue to rise quickly over the rest of this year and next.
>Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade.
>Any decline in GDP growth will disproportionately affect investment and so the demand for non-food commodities.
>If the PBoC resists interest rate cuts as inflation declines, China may even begin slowing in 2012.
>Much slower growth in China will not lead to social unrest if China meaningfully rebalances.
China's July PMI: Definite Economic Contraction Underway [View article]
The ISM PMI simply indicates an upward trend in inventories. But growth in survey respondent inventories suggests the potential of future production cutbacks to bring inventories into line with final demand.
China's July PMI: Definite Economic Contraction Underway [View article]
This appears to be part of a global trend of slowing growth and growing pricing pressures.
Euro area flash manufacturing PMI fell to 50.4 in June from 52.0 in May. Even more alarming manufacturing new orders fell to 47.6 from 49.8.
The US ISM PMI expanded to 55.3 but there were subsets indicating weakness, including growth of inventories, reduced trade and a reduction in order backlogs.
China is indeed facing a tangle of interwoven problems. Its export prowess is well known but in recent years something like 90% of China's growth has stemmed from a massive increase in investments, including real estate.
This level of investment is proving unsustainable and has created surplus manufacturing capacity, an excess supply of commercial office space and a landscape of empty residential neighborhoods. Investment must be reduced.
Funding this boom, as noted by the author, was a huge expansion in bank lending and 30% annual growth in the money supply. Thus two immediate risks to the Chinese economy are inflationary pressures, aggravated by higher commodity prices, and a realization that many state backed loans will eventually fall into default. Estimates of bad loans have recently risen from 5% to 10%.
In the intermediate term, China must reduce its reliance upon exports and investment and move towards a more balanced economy by expanding participation of the consumer sector through higher spending. In parallel with reducing its dependence upon exports, it must allow the Yuan to increase in value to expand purchasing power and appease international critics. Quite a balancing act.
Paradoxically, wages have increased and there is growth in the middle class but this has been partially offset by high rates of savings and the relocation of some factories to Vietnam and Pakistan where wages are lower. Thus China must migrate towards the manufacture of higher value added goods which will require it increase its ability to develop technology, rather than borrowing or stealing technology developed by others.
Longer term, China must expand state sponsored social services, including healthcare and retirement plans, to provide consumers an incentive to lower savings levels and to expand spending which remains constrained in the absence of these safety nets. But to have a vibrant consumer sector, it must make the highly political decision to loosen its control over state owned enterprises. And lastly it must deal with an aging population and widespread geographical disparities in income.
How well China deal with these other challenges will determine if there will be a black swan and when it might appear.
New orders continued to climb, reaching 58.2 percent, 1.9 percentage points higher than the September figure. The sub-index slipped to nearly 50 percent and picked up in August and September. The October figure was almost on the same level as that of a year ago.
New export orders in October were weaker compared with September. Weak overseas demand, increasing protectionism and the rising value of the yuan combined to create an adverse environment for China's exports
From this we see that China's growth is coming from investment, which accounts for close to 50% of GDP and 90% of growth in GDP in 2009, and rising consumption. Declining exports is consitent with deteriorating growth in advanced economies.
With export growth slowing and the possibility of state sponsored investment being scaled back, it's easy to see a picture of slowing growth within China.
Rogoff Sees No Double-Dip but Beginning of China Property 'Collapse' [View article]
On the European bank stress tests, he says there are a lot of insolvent European banks. The question is whether we will see them. That’s my takeaway as well. ______________________...
Agreed. More theater with a working assumption of a 3% haircut on sovereign debt; those who deal with facts believe this to be absurd and believe European banks to be saddled with loan losses and will need to restructure balance sheets to accommodate needed wholesale funding requirements.
While I think there are serious solvency issues pervading the Chinese banking system, I believe the failed state auctions have more to do with the offered yield versus expectations for interest rate hikes in the coming year. The thing is, these are for the most part one-year bonds; thus if you buy the bonds, you aren't locking in your money for very long and if rates are increased at any point during the year, you can take part in the higher yields by simply rolling over the one year bonds. Plausibly, the failed auctions suggest Chinese investors expect a substantial hike in Chinese interest rates within a 1-year period.
Before we launch a trade war or further irritate our banker, we should consider the facts:
"Between July 2005 and July 2008, the renminbi appreciated by 21 percent against the dollar. The bilateral trade deficit increased from $202 billion in 2005 to $268 billion in 2008. U.S. exports to China did increase, as expected — and by a healthy $28.4 billion, or 69.3 percent. But the proportion of that increase ascribable to renminbi appreciation is very much debatable."
With stronger yuan, China can buy raw materials more cost effectively and can afford to pass these savings along to US consumer through price cuts matched to the effects of currency revaluation. The other problem inherent in a stronger yuan is that it will place pressure on US prices.
At the onset of the financial crisis, China made a conscious decision to offset reduced exports with massive increases in investment, including redundant capacity, needed infrastructure and real esatate deelopment.
All pose problems but the expansion of real estate investment poses the most risk. Local governments have realized large financial gains from land sales and the incentives are such that development is skewed towards high end projects which support higher values. And most land sales have been to SOE who have the contacts and access to bank funding to undertake and complete development.
The result of this is that entire cities have been built but which remain empty, exposing cities, banks and SOE's to non performing assets and mounting loan losses. As andy Xie has noted:
The biggest risk to China's economy is the desire to maintain past economic growth rates by maximizing investments in property -- an unproductive asset. It supports short-term growth by sacrificing long-term growth as capital's average productivity declines over time. Local government performance in China is measured according to GDP and fiscal revenue. Property development can achieve high numbers for both quickly. This is why property's share in China's capital allocation is rapidly rising as prices appreciate and volumes increase. This is a politically driven bubble -- and it's already massive. Unless the trend is reversed by reforming incentives for local governments, China's property bubble could mushroom in two years from what's now a dangerous level. The burst could happen in 2012, endangering social and political stability.
Is China Really Such a Great Investment? [View article]
All in all a good article.
The missing piece of the puzzle is internal spending or consumer spending; expanded consumer spending is the only possible offset to contracting exports. China fully realizes it must cultivate internal growth to compensate for flagging exports.
China watchers believe more of the stimulus program should have been focused upon areas essential to increasing consumer spending such as healthcare, unemployment benefits and retirement insurance. In addition to having ingrained tendencies to save, the Chinese enjoy few social safety nets which exacerbates the normal inclination to save.
The road to a consumption driven economy will be anything but smooth because of ingrained habits to save and the need for China to balance the social tensions between the prosperous coastal areas of the south with the poorer agricultural areas that make up much of the inland interior. As an aside, some China observers believe retail sales numbers are being fudged to make them look better than what they really are.
U.S. vs. China: Has Trade War Begun? [View article]
The view of economists: pretty stupid.
Economists and others react to President Obama’s decision to impose a tariff on imports of certain Chinese tires.
-“It certainly does not look good. [P]rotectionism is driven by the desire to protect jobs. Unemployment has not peaked in the US, and some analysts suggest that China’s job losses are far worse than the 20 million often bandied about, more on the order of 30 to 50 million. So political pressure is set to intensify.” –Yves Smith
-“A victory for the protectionists. Disappointing news”. –N. Gregory Mankiw
-“Barack Obama does something really stupid: tire tariffs. [..] The Trade Act, Section 421, gives the U.S. the right to impose tariffs in response to a surge. It doesn’t make the surge a crime, or a violation. And it doesn’t require the U.S. to impose tariffs–especially if imposing them would be a really bad idea for U.S. consumers.” –J. Bradford DeLong
-The “macroeconomic impact is not enough to warrant an escalation of such a trade dispute to such levels that would threaten the strategic relationship between the two countries,” Wang Qing, chief Asia economist for Morgan Stanley in Hong Kong told Bloomberg News.
-“While there’s friction, I suspect that the two nations will keep any disputes under control,” David Cohen, an economist at Action Economics in Singapore, also told Bloomberg. “They understand that they’re increasingly dependent as trading partners.”
-“I think within the next 60 days you’ll see some pretty significant price increases,” Jim Mayfield, president of Del-Nat Tire Corp. of Memphis, Tenn., a large importer and distributor of Chinese tires told the WSJ’s Timothy Aeppel. He estimates prices for “entry-level” tires could increase 20% to 30%.
-The timing of the tensions is unfortunate, James Brander of the Sauder School of Business at the University of British Columbia told the Globe & Mail. “It’s a fragile time,” he said. “It looks like most economies in the world are just turning the corner.”
“In an environment where it looks like global trade will not recover to the levels we saw before the crisis for quite some time, the last thing we need is any sort of inkling of protectionism,” Glenn Maguire, chief Asia economist with Societe General in Hong Kong, told Reuters.
-”Over 7 days right before and after the Smoot-Hawley act was passed in mid June 1930, the DJIA fell 15% but got most of the decline back by late July before falling more than 30% into year end. Let’s hope the just announced tire tariff on China and their possible response is just a one off spat but global stocks are down as a result.” –Peter Boockvar, writing for The Big Picture.
-“In 1930, the Republican controlled House of Rep, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the…Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act which, anyone? anyone? Raised or lowered?… Raised tariffs, in an effort to collect more revenue for the federal gov’t. Did it work? Anyone? Anyone know the effects? It did not work, and the US sank deeper into the Great Depression.” – Ben Stein, in Ferris Bueller’s Day Off (via The Big Picture)
U.S. vs. China: Has Trade War Begun? [View article]
This decision was based upon the 2012 elections; not economics. Hostage to the interests of organized labor, Obama seriously miscalculated and made an issue out of a non issue, exposing a smoldering tinderbox to a flash point and the escalation of a trade war.
The timing could not have been worse: our borrowing needs are high and our dependence upon China is well established and, secondly, with a depreciating currency expanding exports is an increasingly viable platform for growth if the world's economy gains traction. There are growing protectionist sentiments across the world; this could easily be something larger than a spat between two giants.
Furthermore, most of the tires imported by China are what the industry refer to as third tier replacement tires; US manufacturers, based here and in China, have no interest whatsoever in producing these low margin tires. Accordingly, US manufacturers do not support the tariff.
This craven and intellectually stunted decision will, in addition to risking a trade war, simply transfer production of these tires to another low cost producer; raise replacement tire costs; hurt those in the business of distributing and retailing replacement tires; hurt consumers; and NOT produce more jobs in the industry.
The decision is impossibly stupid, inspired only by a desire to placate organized labor and fails to take into account risks and our broader national interests. Once again, special interests trump national interests.
Weighing The Week Ahead: Time To Worry About China? [View article]
Barry, who terms himself “miserably long,” admits to spending a lot of time worrying about what can go wrong with the market. And he points out that, despite disappointing news from Europe and weakness in China, the market couldn’t even muster a 1% down day. He observes that “contemporaneous to the rally has been a surge of bearish commentary,” and confesses to being empathetic to the negative takes. However, he sighs, the bears “have been on the wrong side of the trend for a long time.”
Weighing The Week Ahead: Time To Worry About China? [View article]
Longer term issues include, among other things, the need to reduce the role of SOE's (state owned enterprises) and rebalance the economy by furthering consumption and reducing investment. Rebalancing and reducing the role of SOE's will prove to be the most challenging as both are fraught with political claims and interests. Wages must rise, profits of SOE's must fall, interest rates must rise (ending financial repression) and social safety nets must be put in place to give consumers confidence to spend.
Michael Pettis, who used to work on Wall Street and now teaches at Peking University, writes extensively on China while drawing upon the insights of those "on the ground" including political leaders. He is a recognized expert and recently he put to paper some predictions for the next decade and while I may not agree with the degree of his pessimism I agree with the tone and direction of his thinking. From Pettis:
>BRICS and other developing countries have not decoupled in any meaningful sense, and once the current liquidity-driven investment boom subsides the developing world will be hit hard by the global crisis.
>Over the next two years Chinese household consumption will continue declining as a share of GDP.
>Chinese debt levels will continue to rise quickly over the rest of this year and next.
>Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade.
>Any decline in GDP growth will disproportionately affect investment and so the demand for non-food commodities.
>If the PBoC resists interest rate cuts as inflation declines, China may even begin slowing in 2012.
>Much slower growth in China will not lead to social unrest if China meaningfully rebalances.
China's July PMI: Definite Economic Contraction Underway [View article]
China's July PMI: Definite Economic Contraction Underway [View article]
Euro area flash manufacturing PMI fell to 50.4 in June from 52.0 in May. Even more alarming manufacturing new orders fell to 47.6 from 49.8.
The US ISM PMI expanded to 55.3 but there were subsets indicating weakness, including growth of inventories, reduced trade and a reduction in order backlogs.
The Coming Chinese Black Swan [View article]
This level of investment is proving unsustainable and has created surplus manufacturing capacity, an excess supply of commercial office space and a landscape of empty residential neighborhoods. Investment must be reduced.
Funding this boom, as noted by the author, was a huge expansion in bank lending and 30% annual growth in the money supply. Thus two immediate risks to the Chinese economy are inflationary pressures, aggravated by higher commodity prices, and a realization that many state backed loans will eventually fall into default. Estimates of bad loans have recently risen from 5% to 10%.
In the intermediate term, China must reduce its reliance upon exports and investment and move towards a more balanced economy by expanding participation of the consumer sector through higher spending. In parallel with reducing its dependence upon exports, it must allow the Yuan to increase in value to expand purchasing power and appease international critics. Quite a balancing act.
Paradoxically, wages have increased and there is growth in the middle class but this has been partially offset by high rates of savings and the relocation of some factories to Vietnam and Pakistan where wages are lower. Thus China must migrate towards the manufacture of higher value added goods which will require it increase its ability to develop technology, rather than borrowing or stealing technology developed by others.
Longer term, China must expand state sponsored social services, including healthcare and retirement plans, to provide consumers an incentive to lower savings levels and to expand spending which remains constrained in the absence of these safety nets. But to have a vibrant consumer sector, it must make the highly political decision to loosen its control over state owned enterprises. And lastly it must deal with an aging population and widespread geographical disparities in income.
How well China deal with these other challenges will determine if there will be a black swan and when it might appear.
China PMI Surges Past Expectations [View article]
New orders continued to climb, reaching 58.2 percent, 1.9 percentage points higher than the September figure. The sub-index slipped to nearly 50 percent and picked up in August and September. The October figure was almost on the same level as that of a year ago.
New export orders in October were weaker compared with September. Weak overseas demand, increasing protectionism and the rising value of the yuan combined to create an adverse environment for China's exports
From this we see that China's growth is coming from investment, which accounts for close to 50% of GDP and 90% of growth in GDP in 2009, and rising consumption. Declining exports is consitent with deteriorating growth in advanced economies.
With export growth slowing and the possibility of state sponsored investment being scaled back, it's easy to see a picture of slowing growth within China.
Rogoff Sees No Double-Dip but Beginning of China Property 'Collapse' [View article]
______________________...
Agreed. More theater with a working assumption of a 3% haircut on sovereign debt; those who deal with facts believe this to be absurd and believe European banks to be saddled with loan losses and will need to restructure balance sheets to accommodate needed wholesale funding requirements.
Bank Liquidity Strains in China? [View article]
The Looming Trade War With China [View article]
"Between July 2005 and July 2008, the renminbi appreciated by 21 percent against the dollar. The bilateral trade deficit increased from $202 billion in 2005 to $268 billion in 2008. U.S. exports to China did increase, as expected — and by a healthy $28.4 billion, or 69.3 percent. But the proportion of that increase ascribable to renminbi appreciation is very much debatable."
With stronger yuan, China can buy raw materials more cost effectively and can afford to pass these savings along to US consumer through price cuts matched to the effects of currency revaluation. The other problem inherent in a stronger yuan is that it will place pressure on US prices.
Is China About to Lead Us Into a Double Dip? [View article]
China's Big Fat Growth Facade [View article]
All pose problems but the expansion of real estate investment poses the most risk. Local governments have realized large financial gains from land sales and the incentives are such that development is skewed towards high end projects which support higher values. And most land sales have been to SOE who have the contacts and access to bank funding to undertake and complete development.
The result of this is that entire cities have been built but which remain empty, exposing cities, banks and SOE's to non performing assets and mounting loan losses. As andy Xie has noted:
The biggest risk to China's economy is the desire to maintain past economic growth rates by maximizing investments in property -- an unproductive asset. It supports short-term growth by sacrificing long-term growth as capital's average productivity declines over time.
Local government performance in China is measured according to GDP and fiscal revenue. Property development can achieve high numbers for both quickly. This is why property's share in China's capital allocation is rapidly rising as prices appreciate and volumes increase. This is a politically driven bubble -- and it's already massive. Unless the trend is reversed by reforming incentives for local governments, China's property bubble could mushroom in two years from what's now a dangerous level. The burst could happen in 2012, endangering social and political stability.
Is China Really Such a Great Investment? [View article]
The missing piece of the puzzle is internal spending or consumer spending; expanded consumer spending is the only possible offset to contracting exports. China fully realizes it must cultivate internal growth to compensate for flagging exports.
China watchers believe more of the stimulus program should have been focused upon areas essential to increasing consumer spending such as healthcare, unemployment benefits and retirement insurance. In addition to having ingrained tendencies to save, the Chinese enjoy few social safety nets which exacerbates the normal inclination to save.
The road to a consumption driven economy will be anything but smooth because of ingrained habits to save and the need for China to balance the social tensions between the prosperous coastal areas of the south with the poorer agricultural areas that make up much of the inland interior. As an aside, some China observers believe retail sales numbers are being fudged to make them look better than what they really are.
U.S. vs. China: Has Trade War Begun? [View article]
Economists and others react to President Obama’s decision to impose a tariff on imports of certain Chinese tires.
-“It certainly does not look good. [P]rotectionism is driven by the desire to protect jobs. Unemployment has not peaked in the US, and some analysts suggest that China’s job losses are far worse than the 20 million often bandied about, more on the order of 30 to 50 million. So political pressure is set to intensify.” –Yves Smith
-“A victory for the protectionists. Disappointing news”. –N. Gregory Mankiw
-“Barack Obama does something really stupid: tire tariffs. [..] The Trade Act, Section 421, gives the U.S. the right to impose tariffs in response to a surge. It doesn’t make the surge a crime, or a violation. And it doesn’t require the U.S. to impose tariffs–especially if imposing them would be a really bad idea for U.S. consumers.” –J. Bradford DeLong
-The “macroeconomic impact is not enough to warrant an escalation of such a trade dispute to such levels that would threaten the strategic relationship between the two countries,” Wang Qing, chief Asia economist for Morgan Stanley in Hong Kong told Bloomberg News.
-“While there’s friction, I suspect that the two nations will keep any disputes under control,” David Cohen, an economist at Action Economics in Singapore, also told Bloomberg. “They understand that they’re increasingly dependent as trading partners.”
-“I think within the next 60 days you’ll see some pretty significant price increases,” Jim Mayfield, president of Del-Nat Tire Corp. of Memphis, Tenn., a large importer and distributor of Chinese tires told the WSJ’s Timothy Aeppel. He estimates prices for “entry-level” tires could increase 20% to 30%.
-The timing of the tensions is unfortunate, James Brander of the Sauder School of Business at the University of British Columbia told the Globe & Mail. “It’s a fragile time,” he said. “It looks like most economies in the world are just turning the corner.”
“In an environment where it looks like global trade will not recover to the levels we saw before the crisis for quite some time, the last thing we need is any sort of inkling of protectionism,” Glenn Maguire, chief Asia economist with Societe General in Hong Kong, told Reuters.
-”Over 7 days right before and after the Smoot-Hawley act was passed in mid June 1930, the DJIA fell 15% but got most of the decline back by late July before falling more than 30% into year end. Let’s hope the just announced tire tariff on China and their possible response is just a one off spat but global stocks are down as a result.” –Peter Boockvar, writing for The Big Picture.
-“In 1930, the Republican controlled House of Rep, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the…Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act which, anyone? anyone? Raised or lowered?… Raised tariffs, in an effort to collect more revenue for the federal gov’t. Did it work? Anyone? Anyone know the effects? It did not work, and the US sank deeper into the Great Depression.” – Ben Stein, in Ferris Bueller’s Day Off (via The Big Picture)
U.S. vs. China: Has Trade War Begun? [View article]
The timing could not have been worse: our borrowing needs are high and our dependence upon China is well established and, secondly, with a depreciating currency expanding exports is an increasingly viable platform for growth if the world's economy gains traction. There are growing protectionist sentiments across the world; this could easily be something larger than a spat between two giants.
Furthermore, most of the tires imported by China are what the industry refer to as third tier replacement tires; US manufacturers, based here and in China, have no interest whatsoever in producing these low margin tires. Accordingly, US manufacturers do not support the tariff.
This craven and intellectually stunted decision will, in addition to risking a trade war, simply transfer production of these tires to another low cost producer; raise replacement tire costs; hurt those in the business of distributing and retailing replacement tires; hurt consumers; and NOT produce more jobs in the industry.
The decision is impossibly stupid, inspired only by a desire to placate organized labor and fails to take into account risks and our broader national interests. Once again, special interests trump national interests.
Can China Convert Itself into a Consumer-Based Economy? [View article]
Frugal by nature, the savings rate is close to 40%; changing ingrained habits will take time and additional social services.
If the Chinese are to spend, they must be assured that they will have health insurance, unemployment insurance and retirement assisitance.
Steps are being taken on all of these safety nets but much remains to be done.