- Japan's economy slumped at a larger-than-expected 3.3% in the October-December period from the previous quarter as the impact of the global financial crisis hit its exports hard, according to data released Monday. The steep fall reportedly represents the biggest drop since 1974. On an annualized basis, the gross economic product slumped 12.7% during the quarter.
First, a quick refresher of an Economics 101 lesson we laid out two months ago.
I'll spare you the economic formulas but if you are interested, click here. Right now we have a problem of money flow - both the amount of "money" in the system, and the velocity of said money. In the simplest terms, just think of velocity as the amount of times money changes over. The higher the better. About 4-5 months ago both these areas (amount and velocity) were lacking. Capital was being destroyed in an over levered system; much of it unregulated in a "shadow banking system". For every 1 "actual dollar" in the system, 10-20-30x was "lent". Much of it was based on the housing bubble. So as the 1 actual dollar is destroyed, the capacity to lend 10-20-30x of that dollar is also destroyed - and your velocity of money crumbles. As we've outlined the past few months, our money supply is now going off the charts - the Federal Reserve has made it clear they will create money at any cost. They are going to do everything and anything in their power to liquidate the system, assuming I suppose that a currency crisis is a better outcome (or predicting no currency crisis will happen) than a financial crisis. It is very sad how we lurch from emergency to emergency in this country - but it is what it is.
The Federal Reserve balance sheet which used to consist of staid Treasury Bills was at $800Billionish last year, it is now approaching $2.3 Trillion and much of that is now the junk, I'm sorry - "the undervalued assets that once the market returns to normalcy will return to their rightful value- which will be MUCH higher" - that banks want to get rid of. It is now to the point the Federal Reserve will take it said "undervalued assets" off the books of hedge funds so our shadow banking system can re-emerge (the one that got us here in the first place) They are desperate and they will do anything.
So that's half the picture; the other is the even more tricky question of velocity. We are handing the banks (and other parts of the financial system) dollars by the wheelbarrow, but if they do not get circulated within the economy there are useless to everyone but banks. So we have one half the equation being force fed by the Fed/Treasury - the money supply will be ballooning - no matter the potential cost to the currency, and the other half of the equation is based on the belief that at some point so much money will be provided to said financial institutions that even the most risk averse will lend a portion. And we can begin anew. I won't even touch the long term questions this brings since we only deal with one crisis at a time.
Before I write the rest of this entry don't take it as bashing the Chinese. In fact they are learning from the masters of manipulation - the United States. They are following the Greenspan playbook - to forestall a normal economic cycle flood the system with dollars... which creates new bubbles. Keep kicking the can down the road, until one day it all implodes (which is what we are enjoying now after 20 years of kicking). Did we learn from this? No... in fact the implicit policy of the Bernanke Fed is to do the same exact thing as I outlined above. The problem is the mechanisms to create "velocity" of money have been in many cases nearly destroyed (securitization) or impaired (think our banks). So Bernanke is no different than Uncle Al G. He just is hampered by lack of conduits that saved Uncle G's grits. And this is why the gold bugs are awaiting the "Great Inflation". But first we have to work through the capital destroying deflation we are enjoying... before the master government plan happens (again).
At it's basis this plan relies on a financially illiterate populace (check!) - because the massive infusion of money pumps up the "price" of all assets ... including stock returns (and houses). So if you devalue your currency by 30% (which is not as easily 'measured' by the financially illiterate) but pump up the value of homes and stock markets by 30% (which on the other hand IS very easily 'measured' by the financially illiterate) the powers that be can say "mission accomplished". Because the peon class is satisfied as the government has succeeded in pumping up asset values (easily measured) while destroying their purchasing power by an equal amount (hey, why does bread cost 30% more than a year ago??) So you can tell your neighbors and work mates this is what has been happening to them the past few decades, and this is what the government plan is now and in the future.
But now we see China is embarking on the same game plan - which in the long run will lead to bad outcomes, but in the short(er) run can goose values. (see United States of Leverage example above) Let's take a closer look at what is going on. (special thanks to reader Adam [Prudent Capitalism, Chinese style] for sending me an email to goose my brain into seeing the light)
AP: China's Bank Loans Double in January to $237 Billion
- Chinese banks extended a record 1.62 trillion yuan ($237 billion) in loans in January, more than double the year before, as lenders heeded government calls to loosen credit controls to help revive the economy. Facing an abrupt slowdown due to plunging demand for China's exports, regulators have sought to boost liquidity after years of trying to rein in lending. Banks made 771.8 billion yuan ($113 billion) in new loans in December, figures show, up nearly 15 fold over the same month a year before.
- Money supply, as measured by M2, climbed 18.8% at the end of January from a year earlier, accelerating from the 17.8% rise at the end of December, according to the PBOC.
- The government has ordered them to make credit available to help battle the downturn which hit last fall. But with many industries facing overcapacity and demand slowing for many products, analyst warn the state-owned banks risk letting policy, rather than profitability, guide their lending decisions.
- Analysts said the structure of lending in January, with short-term financing accounting for two-thirds of the total, does not bode well for a sustained expansion. The trend suggests that demand for "attractive project finance is still insufficient to absorb excess bank liquidity, leaving banks to still pursue low risk, low return businesses in large scale," Citigroup Global Markets economist Ken Pang said in a report issued Thursday.
- Reuters has just announced that net new lending may have actually been and even more surprising RMB 1.6 trillion – twice the previous monthly record and an amazing one-third of credit growth in all of 2008. We will know by February 15 at the latest, when the PBoC publishes lending data, but if this is true (and the report was seen as highly credible by one of my friends at Reuters) it will probably goose the stock market up further while making people like me more worried then ever.
- Since for me much of the Chinese growth explosion of the past several years was caused by a badly allocated credit boom, the idea that the solution to a slowdown is to jack up the credit boom even further is very worrying. It is a little like the idea that the best way for the US to adjust to the decline in its debt-fueled household consumption binge is to replace it with a debt-fueled government consumption binge, although perhaps the US and China would choose very differently in the possible trade-off between long-term growth and short-term social stability. (Bingo)
So let's tie this puppy together... as we said at the top of the piece - if you throw enough money into a system the basic laws of supply and demand take over. There are limited amounts of stock certificates (supply) and a tsunami of new RMB (or US dollars when this happens in America) - so the basics of economics 101 take over. Fixed supply, huge demand = higher prices. And *magic* you have a rising stock market - which Cramer and associated pundits can scream about as "signs all is well". Boo Yah!
CBSMarkewatch: China's Banks Show How to Lend
- If you look at the numbers, the 1.62 trillion yuan ($237 billion) lent in January already amounts to 40% of the value of the stimulus plan promised last November. Still, the risk is that banks are churning out loans so fast proper controls will be forgotten, leading to surging bad debts down the road.
- There is already speculation this new lending is behind the recent up-tick in A share turnover. Last week daily turnover in Shanghai and Shenzhen exceeded 200 billion yuan, taking it back to levels last seen in 2007.
- Macquarie Research said in new note that corporate earnings numbers -- not GDP growth -- matter for a stock market recovery. It said it needs evidence that China is not merely growing but successfully "re-flating" and thus avoiding a late-1990s style margin collapse.
- Exports appear to have fallen off a cliff after a 17.5% year-on-year decline in January, while imports have slumped a massive 43.1%. Even taking into account that Chinese New Year came in January, the results were well below market forecasts. The imports figures do not indicate much strength in China's domestic consumption. Nor does January's 23% jump in yuan deposits -- suggesting consumers are still saving, not spending.
- China's benchmark stock index rose Monday to a 5 1/2-month high on investor enthusiasm about added liquidity amid rising bank lending, shrugging off declines in other Asian markets on news of Japan's economic contraction. The rise was driven not by economic fundamentals but by a surge in bank lending, which has sent money flowing into the market, analysts said. The government says lending hit a new monthly high in January, driven by a massive stimulus plan.
- "The economic fundamentals are not strong enough to support the market's rise," said Zhang Xiang, an analyst for Guodu Securities in Beijing. "The market is in an irrational state, which is not going to last long."
- The rise came despite a government announcement Monday that foreign investment in China fell 32.7 percent in January from a year earlier.
- Turnover in Shanghai A shares rose to a nine-month high of 177.5 billion yuan ($26.0 billion) -- near levels last seen in the stock market bubble of 2007 -- from Friday's 164.1 billion.
- There are many potential threats to stocks' bull run. Large amounts of shares will become tradable in coming weeks because of the expiry of lock-up periods for institutional investors, and this could add selling pressure to the market. Some analysts worry that the market's strength could prompt regulators to permit a resumption of large initial public offers of equity, which could add to supply pressure.
- The average premium of A shares over Hong Kong-listed H shares in the same companies rose as high as 63 percent on Monday, its highest level since mid-November; such premiums may not be sustainable in the long run.
- But the market has so much momentum that its uptrend may continue for a while, analysts said. "The trend of money pouring into the market because the market offers profit opportunities is unchanged, which could easily boost the index further," said Zhang Qi, analyst at Haitong Securities.
16 comments:
I read something somewhere, mentioning that because chinese new year fell in Jan this year, its artificially down. If that's the case, then Feb will be artificually up. But I do agree with the overall premise that the chinese domestic wont be able to match the decline in US imports. Once the US stabilizes, China will run which is the thesis. Sooner or later that will happen so I view it as a trading environment with a bullish bias. Buy the dips, sell the rips type trading - but not investing. "Yet" - that is...
Great piece, Mark. It's important to also mention that the flow of liquidity into the securities markets is a normal part of the economic recovery process for modern fiat economies. During the early stages of a recovery industrial companies are still laying off staff, and end-user demand is still ambiguous. However, easy access to capital is put to work by entrepreneurs and 'first movers' in sectors that lead the way out of recovery. Capex in those sectors drives the economic indicators higher, which in turn supports consumer confidence and the stock market.
Also, the excess liquidity that banks take on is first put to work in trading accounts until industrial lending demand picks up. This supports stock prices.
It's the excess liquidity in trading accounts that is driving the Chinese markets at the moment.
The Chinese banking sector is a direct extension of its central bank. For this reason, loan growth is not necessarily related to constructive economics for the lending institutions. Instead, it is driven by the macro objectives of the politboro.
Eventually, the nationalization of domestic U.S. and european will allow western governments to achieve the same objectives. Until then, the velocity of money will remain stagnant, economic growth will falter, and asset prices will continue their decline.
Jeff, you read it just above
"Even taking into account that Chinese New Year came in January, the results were well below market forecasts."
Sorry you CANNOT explain a 43% YEAR OVER YEAR drop by "a holiday"
that is like the retailers using an excuse that weather was bad or they had 2 less days between Thanksgiving and Christmas than the year before.
Is there an effect at the margin? Certainly. Is it predominant? No.
Let's see what the excuses are in Feb, Mar, and Apr.
TM
Since China imports a huge amount of raw commodities,(grains,coal, fertilizer)and we have seen a severe drop in those values, how much does that contribute to the 40%+ drop in imports?
kb, good question and I don't know how much to be frank. But I'd be wary of explaining away things by drop in value of commodities - much like when retail sales drop in US people then run in and say "well that's due to the drop in gasoline prices".
I never hear the opposite arguement on the way up - i.e. higher prices of commodities goosed up prices (or imports) etc.
A lot of this stuff is marginal (on the edge) although obviously in China with their voracious sucking up of commodities its more important than say gas prices in the U.S.
But a good question.
Even though the analysis is reasonable, the assumption that China consumers will not make the gap is questionable. They have huge savings; many do not have as much as the western world yet. Just a little bit more spending, as encouraged by the government, will make a difference. Chinese know how to enjoy life. It is from their culture.
Hi Garng,
First I could always be wrong
Second, there is a reason for savings (a) cultural and (b) lack of safety nets. If you knew if you got sick you'd have to pay out of pocket you'd have a different incentive.
Also there are multiple China's - are we talking the 100M middle class or the 800M extremely poor rural? etc.
I think humans have a tendency to pullback, no matter the country in times of trouble - the Japanese have not been spending despite high savings rates for a few decades.
But we'll see; I just don't buy the arguement you transform your economy from export led to domestic in a span of 6 months, or 16 months or 60 months. It took us a good 25 years of bad practices to get rid of much of our productive assets and turn into a nation of shoppers.
Well, Japanese are different. They are always stingy. You can find out from the Japanese food. They are educated that way. Chinese are more fun oriented; in certain situation even worse than US. They can spend for leisure and fun. Look how they enjoy their restaurants and foods. The huge market there is hard to imagine.
The consumer spending rate cannot be reflected by import numbers. The number is down due to the collapse of the commodity prices. That means people there can start enjoying more and more consumptions will follow.
Just read today that the Chinese have already spent 25% of their 'Stimulus Package'. based on the last few days of Baltic Dry dropping and miscellaneous articles referring to mine closures, price drops in commodities, etc, I'd say that their stimulus isn't helping the world economy much.
jegan
"Just read today that the Chinese have already spent 25% of their 'Stimulus Package'. based on the last few days of Baltic Dry dropping and miscellaneous articles referring to mine closures, price drops in commodities, etc, I'd say that their stimulus isn't helping the world economy much."
They are helping the world by helping themselves. Otherwise the unrest will spread to the whole world. Look at EAST EUROPE! It may toppe the whole Europe!
Garng, Re: "They are helping the world by helping themselves. "...
My concern is that the Chinese have stated quite clearly that they are only interested in saving China. They have further stated that this worldwide collapse is an American problem and we should fix it.
My readings and viewing of the Baltic Dry, copper, iron, coal etc., lead me to believe that there is no real 'pin action' from the Chinese. I feel that resting our hopes on a Chinese revival are misdirected. And in fact, the issues you pointed out indicate to me that as a world, we are not out of the woods yet. I think things will only get worse.
And you are correct. Aside from TM's mentions of riots in many countries, we only have to look at Iceland, Ireland, England and Switzerland's banking problems to get a feel for what's hiding around the corner (No. It isn't a Bernie Madoff bobblehead..) The Russians have just managed to save their hide by working a 12 year deal with the Chinese, which in essence bolsters their currency for awhile (Don't those Chinese ever learn?), the Swiss are leveraged much more than our banks were and holding Eastern European notes. Amazing considering that everyone has always considered the Swiss to be the epitome of good banking. The Brits, Spaniards and now the Italians all have real estate problems that might easily dwarf our own.
You are so right. These are big problems. Possibly insurmountable. I just don;t see the Chinese on a white horse with guns blazing, coming to our rescue.
jegan
Hi, Jegan:
Does US intend to be a white horse in the past or current situations? Not to my memory. But US did become a locomotive to pull up the world economy unintentionally in the past while we enjoy the cheap goods form emerging economy. Similar dynamics may happen here also to China.
To me, China has little choice. It is too risky to hold too much US treasury notes. They have to diversify the risk. They got into commodity from Russia, Australia, etc. to diversify. They invest heavily to their own infrastructure to improve efficiency and to diversify the risk.
What else can they do? They need to do more, not less. They may need to diversify into gold mines also.
Just my two cents.
Garng : re China needs to do more. What a country should do and what it does are two different things. Just look at the mess we've gotten ourselves into. I've done a lot of reading on China ("Be your own China Guru" and "Oracle Bones" are two excellent perspectives. I can also suggest "Interfax" for a nuts and bolts daily on Chinese business and Michael Pettis' excellent blog "China Financial Markets" for a weekly insiders look at banking and government.) and my opinion is that China still resides behind the walls of the Forbidden Kingdom. They are inwardly focused and do act immediately to solve their own problems without seeming to be aware of the general ramnifications of their actions. A very interesting country. I'm very eager to visit.
jegan
Hi Garng,
You make a good point - I call it the symbiotic relationship. They need the US to at least tread water for now, as they grow and transform their economy to be more internal consumption. As quick as China has evolved in past 20 years, it still will take time.
I did see today China in return for cash bought some large oil stakes in Russia. In the end, those with cash will win. CHina is doing a very interesting strategy in Africa for natural resources that very few here are aware of - instead of being a "dominant" like Western countries... they are a partner. Help the African country in return for access to natural resources.
I just dont think China is yet big enough to be a weight on the entire global economy - on commodities or specific niches yes... but with 3% of the people US is 25%? 30%? (I don't recall off top of my head) the GDP.
Give it a decade and we'll be talking a whole different story.
Exactly because China has a much smaller GDP than US, it is much easier to stimulated their growth using similar amount of money.
On top of it, they have much less political struggle than here to pass anything, all decisions will be based more on economics than anything else. Of course, some will be lost through corruptions; after seeing the financial system's "contributions" and self-rewarding salaries, I am not sure our corruption is less anymore!
Garng.... Clearly we have our own corruption here. Look at the crooks that keep popping up lately as the SEC gets busy. Look at the the corrupt relationship between business and our government (HAL, BAC and etc.) Apparently corruption is human nature. If it wasn't, we wouldn't need laws.
I certainly hope China pulls this cart out of the mud.
jegan
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