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.
Will China Implode and Bring the U.S. Down With It? [View article]
There seems to be an emerging consensus among investors that China is "decoupling" from the West and is developing its own domestic markets to the point where it needs no longer to rely on export growth to the U.S. for its economic strength. ______________________...
Your historical perspective is most interesting but I think it would be premature to declare that China's recent growth binge will end as a debacle. Everyone, including the Chinese, agree that real estate is a serious problem; what is debated is the proportions of the problem and the dimensions of the financial fall out.
Much of the debt has been taken on by entities created at the local level and state owned enterprises to jointly develop real estate projects. Local governments have been using real estate sales to special purpose vehicles to cover shortfalls in tax receipts.
Together with investment in plant and equipment, total investment in real estate and manufacturing capacity surged approximately 60% last year.........leading to glut of capacity, office buildings and wild speculation in housing. The latter has received the most attention because of yoy price increases but empty commercial space and unused industrial capacity may pose the gravest risk to the economy and banking sysytem.
Reliance upon exports and a glut of capacity geared towards exportsI suggests that the decoupling you refer to is not actually taking place; it may be a goal but this is different from saying it is taking place. Moreover, to develop domestic market will require development of social safety nets, financial reform and higher rates of interest on savings, higher wages and reduced national savings. Chinese consumers need greater incomes and the security to spend freely; these conditions are not in place.
In the meantime China will continue to export whatever it can and deal with speculation in homes, rising land prices, gluts of both commercail real estate and manufacturing capacity and various attempt to curb risky lending. I believe all of this, along with a very challenging global economic landscape, is seen in the FXI and EEM.
Those who think China will lead us out of the great recession might want to rethink this belief along with the idea that that the US can decouple from either China or the great wasteland of Europe. And don't bet on continued strength in the US either as first quarter growth was only 3.2% with the assistance of stimulus; when the fiscal goo is withdrawn, things could slow down particularly with a pricey dollar that will sharply limit export growth.
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.
Will China Implode and Bring the U.S. Down With It? [View article]
______________________...
Your historical perspective is most interesting but I think it would be premature to declare that China's recent growth binge will end as a debacle. Everyone, including the Chinese, agree that real estate is a serious problem; what is debated is the proportions of the problem and the dimensions of the financial fall out.
Much of the debt has been taken on by entities created at the local level and state owned enterprises to jointly develop real estate projects. Local governments have been using real estate sales to special purpose vehicles to cover shortfalls in tax receipts.
Together with investment in plant and equipment, total investment in real estate and manufacturing capacity surged approximately 60% last year.........leading to glut of capacity, office buildings and wild speculation in housing. The latter has received the most attention because of yoy price increases but empty commercial space and unused industrial capacity may pose the gravest risk to the economy and banking sysytem.
Reliance upon exports and a glut of capacity geared towards exportsI suggests that the decoupling you refer to is not actually taking place; it may be a goal but this is different from saying it is taking place. Moreover, to develop domestic market will require development of social safety nets, financial reform and higher rates of interest on savings, higher wages and reduced national savings. Chinese consumers need greater incomes and the security to spend freely; these conditions are not in place.
In the meantime China will continue to export whatever it can and deal with speculation in homes, rising land prices, gluts of both commercail real estate and manufacturing capacity and various attempt to curb risky lending. I believe all of this, along with a very challenging global economic landscape, is seen in the FXI and EEM.
Those who think China will lead us out of the great recession might want to rethink this belief along with the idea that that the US can decouple from either China or the great wasteland of Europe. And don't bet on continued strength in the US either as first quarter growth was only 3.2% with the assistance of stimulus; when the fiscal goo is withdrawn, things could slow down particularly with a pricey dollar that will sharply limit export growth.