Monday, April 13, 2009

China - Some Good, Some Bad; Market Participants Focus on the Good

While I've been a proponent that emerging markets will actually lead this eventual global recovery, the evidence for recovery thus far is more or less all based around some slightly improved Chinese data. Since data from within that country is not so trustworthy a common sense approach would be to look at export data from most of the world's largest countries - say the U.S., Japan, and Germany. They have been dismal. But never let facts get in the way of green shoots.

Ah, the all important "2nd derivative improvement".... NYT: Chinese Exports Fall for 5th month, but More Slowly
  • Chinese exports fell for a fifth consecutive month in March and imports continued to decline despite government efforts to stimulate the nation’s economy, according to trade figures released Friday. (not so good) Exports, which make up about one-third of China’s economy, were 17.1 percent lower in March than a year earlier, the government said. That made a fifth consecutive month of declines as the world economy slowed to a crawl last year, sending demand for goods from China and other exporting countries sharply lower. Imports to China fell 25.1 percent from a year ago, a slide that was steeper than February’s drop and more than economists had expected.
  • Friday’s export figures showed an especially large drop in shipments to Europe — 20 percent. Exports to the United States were down 12.6 percent from a year earlier.
  • The figures painted a moderately encouraging picture, however, as the rate at which exports were falling appeared to be slowing. (needless to say - ignore the previous 2 bullet points... it's 2nd derivative time - green shoots)
  • At the same time, despite the nascent signs of a bottoming-out, economists caution that a full-fledged recovery remains a long way off. Many of China’s major trade partners, including the United States, have reported sharp declines in imports. On Thursday, the United States said that its imports had fallen 5 percent, to $152.7 billion, in February.
So while I don't take much credence in government reports in the U.S., and don't know enough about methodology in Japan or greater Europe to make an assessment let's put it this way; the global economy is so poor that even the United States trade deficit is improving! For non economists - that's sort of a joke. Our trade deficit is huge (we import far more than we export) but it's gotten to the point we are actually doing what many have urged for years - reducing that huge imbalance. Unfortunately, it is only because our imports are falling off a cliff faster than exports.

For a different view we can see this story in the Wall Street Journal - and yes I am in the camp that with a lot less bureauacracy (for better or worse) China's stimulus is far more effective & targeted... as opposed to our policy of (a) promising stimulus but mostly filling a bill with pork and (b) to offset this use the Federal Reserve as weapon of mass dollar construction to work around the failing of Congress. Remember, we've been outlining all the various "restocking" events from iron ore, to copper, to oil. The big debate is whether these are mustard seeds (green shoots) of the birth of a new era of global trade borne from China, or simply a country buying a lot of "stuff" at cheap prices.

The bulls favorite shipping index when it's moving in the right direction, the Baltic Dry Index, is in free fall. But yet again - when facts don't support your case... gloss over the data point. Each time I post this I need to repeat that a level of 3000 to 5000 was normal in pre commodity spike - so not only did we not reach the lower end of normal, after a spike which those in the industry attributed to nothing more than China restocking of iron ore [Feb 9: China and the Baltic Dry Index - What's Really Going On?], we promptly fell right back off in dramatic nature.

  • China's massive $585 billion government stimulus program appears to be kicking in, new data suggested Friday, raising the chances that the world's third-largest economy may be turning a corner.
  • Chinese demand for raw materials, hard hit in past months, is showing signs of recovery, with crude-oil imports hitting a one-year high in March, the government reported Friday. Steel mills in March imported record quantities of their key raw material, iron ore, in anticipation of a pickup in demand in coming months.
Again, great irony in claiming steel orders as a "green shoot" when we saw a story just a few weeks ago that Chinese rushed in doing orders and were premature. [Mar 16: WSJ - Some Steelmakers Jump the Gun in Response to Stimulus]

The next positive point is huge loan growth... indeed, China did learn one thing from the U.S. - how a central bank can blow up a bubble with easy money. [Feb 16 2009: Is China Pulling an Alan Greenspan?] As I wrote then

Some very interesting data out of China of late in terms of loan growth - in fact staggering data. 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. 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.

The data was as follows
  • 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.

What will be interesting (and I doubt we will ever know) is how all these loans turn out in a few years. But nevermind that - the WSJ story about the strength in the Chinese economy lauds the new loans, certainly a "sign of strength". (even though there is a deflating real estate bubble combined with lack of demand for exports - but just build something, anything)
  • Banks have extended 2.7 trillion yuan, or nearly $400 billion, of new loans in the first two months of the year, and early signs indicate the boost continued into March
So the real trick is to get Chinese, notoriously thrifty to turn more like their American counterparts. The Chinese economy, so dependent on exports needs these folks to start spending so the balance between internal consumption and growth via levering US (and European) consumers is more balanced. Now, over time I do believe this will happen - but many years. However, in the magical world of green shoots we can expect people brought up on generations of experience to change behavior in 1 quarter.
  • While its aggressive spending plan reflects the power of its state-dominated economy, there are signs that its thrify consumers are starting to spend more. Car sales hit a monthly record in March, according to figures issued Thursday, marking the third consecutive monthly rise. Housing sales in major cities have also picked up, with lower prices attracting buyers.
  • Overall, it appears that the state's push has helped keep China from slipping into a downward spiral where poor economic conditions and declining confidence feed off each other. The impressive size of China's stimulus, announced in November, gets some credit for that.
Now while this next portion might be considered heresay for those who believe in the (near) perfection of corporate American socialism.... I'm sorry! American capitalism....

.... but while not always the most efficient allocators of capital, the "central command" certainly can push out a ton of stimulus all in the same direction.... much more effectively than our policy of "turn on fire hydrant - spray in all directions"
  • But the vestiges of China's command economy have also proved useful. "China is unusual in that it has this incredible capacity to mobilize all its institutions," said Vikram Nehru, the World Bank's chief economist for Asia. The government's ability to direct bank lending and investment spending has meant its stimulus efforts have worked faster than many initially expected. "There is now a growing degree of confidence that the stimulus package is having an impact," he added.
Now it's not all rosy
  • The global slump in demand has battered Chinese exporters, leading to millions of lost jobs.
  • China needs support from demand in the rest of the world to sustain a recovery. Without that, it is still unclear that China's economic engine, having been jump-started by massive government investment, can keep running at a higher gear.
  • Export manufacturing remains the primary employer of China's 140 million rural migrant workers. About 20 million of them are unemployed, and if the export crunch continues for several more months, that could exhaust their families' meager savings.
And this next section pretty much summarizes why I believe the U.S. shall enjoy a "paper prosperity" derived from tossing money in every direction, which will simply inflate prices (and economic reports) over where they should be - rather than some other, more responsible countries. I stated back then it was ludicrous to imagine a country facing the twin threats of a mangled financial system AND recession would rebound before countries only facing recession. But I guess we won't see if I am correct for a year or two - remember, all the talk a year ago was FIFO! The narcissistic view that "We are U.S.; we shall lead" - First In, First Out! With that said, I never expected (at that time) THIS level of Federal Reserve paper creation.
  • But the government is pushing cash through the economy, and the state investment program is driving hundreds of new infrastructure projects. The funds budgeted for investments that started in the first two months of 2009 surged 88% from a year earlier, the highest increase on record.
  • Like China, the U.S. government also has launched a significant fiscal stimulus, of $787 billion, the impact of which is only now beginning to show up in the economy as tax cuts swell worker paychecks. U.S. consumers -- their retirement accounts and home values depressed -- are showing a reluctance to spend as readily as they usually do. Car sales in the U.S., in contrast to the records being set in China, are extremely low. Spending on infrastructure is taking a while to kick in, despite all the talk of "shovel ready projects." Weaknesses in U.S. banks and, even more, the near paralysis of the important market for securitized credit, remain major impediments to renewed economic growth.
Now clearly the Wall Street Journal is a very liberal elite newspaper, trying to show that indeed communism is the way to go! (another inside joke for those who know the typical political stance of the WSJ) Or perhaps the WSJ is simply implying a hybrid version of capitalism could be more effective; as shown to us by perhaps the best capitalists on Earth right now. (perish the thought that weakly regulated free markets run by politically connected "haves" is not the most efficient allocator of capital or production!) Anyhow, I will join in any boycott readers would like to start against such a liberal stance by the Wall Street Journal...

To finish off
  • "I think it's fair to say the economy has bottomed. But bottoming is not recovery," said Ben Simpfendorfer, an economist at Royal Bank of Scotland.
Ah Mr. Simpfendorfer - clearly you are not a stock market participant. Nor a consumer of green shoots.

With all that said, and with a global audience waiting on it (along with quite a few 10s of millions of migrant workers) I am sure the "un-massaged" internal economic data will continue to skew upward from here in China... providing green shoots galore (just please ignore that silly Baltic Dry Index - unless it starts rising again, then we can trumpet it again!)

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