Tag Archives: HSBC

Don’t Say I Didn’t Warn You!

1 Dec

So we wake up this morning with the news that the official PMI data shows a contraction in Chinese manufacturing activity for the first time since February 2009. This follows the HSBC survey published a couple of weeks ago which similarly illustrated a contraction. In this context it’s easier to understand the reduction in RRR yesterday afternoon. That reduction added some $63bn of liquidity to the Chinese economy.

Clearly the Government sees that the economy is not in for an easy ride. I mean after steadily raising the RRR in 12 steps since January 2010 from 15.5% to 21% (a record), and then leaving them since June 2011, this is a watershed moment. While commentators yesterday lauded the move as the PBOC’s attempt to steer the economy to a soft landing I would prefer to describe the move as follows: A long running policy of loose monetary conditions led to an influx of speculative capital. The change in direction (i.e. to tightening in Jan 2010) combined with a huge acceleration in housing construction has killed the boom, created distress and the PBOC is now waking up.

Initial loosening is generally greeted with joy (note markets were buoyed somewhat way before the announcement of combined central bank activity yesterday to put a band aid on the Euro crisis). However, within time the market will see that the damage that precipitated the change in monetary policy is too big for a gentle loosening. As such I expect Chinese economic conditions to continue worsening (today’s PMI data is one example), and the PBOC to take more agressive moves to loosen credit conditions. This will heighten the impact on those assets that were tied to the prior boom. In this case I would expect damage to significant parts of the EM equities, fixed income, and commodity complex, in addition to pain in the domestic real estate market. Don’t say I didn’t warn you.

Also note – there’s a chance this could spill over to the banking system.

PS – some additional color on the PMI data. New orders 47.8. Export orders 45.6. Note that the export sector’s value added accounts for only 10% of GDP (yes – only 10%). As such, domestic weakness is most likely to be the driver of GDP deceleration in the coming months. Index of finished goods inventory rose to a record high. Tobacco, transport equipment and petrol were above 54. Below 43 were textiles, chemical fiber and plastics, and ferrous metal. The biggest losers were electrical machinery and special purpose equipment.

 

 

A Hard Landing

24 Nov

About 6 weeks ago I wrote a blog entry called things are getting messy. Continuing with the theme of issues in the Chinese economy, I’d like to draw you attention to 2 recent news items.

  1. According to Beijing Business Today, Zhonghong Holdings have HALVED prices of units in their Xiangsu project in Chaoyang (to 11,600 Yuan per square meter from 22,900). This project used to record the highest monthly sales for the firm. In addition, the local Beijing regulator says that month-to-date home sales are down 60% in the city. I don’t really need to comment any more.
  2. There are reports of strikes and unrest in Shenzhen and Dongguan, two export hubs in Guangdong. According to the province’s acting governor, orders are down 9% sequentially.

For those expecting a soft landing in China, these data points suggest (as I’ve said for a while) that they are wrong. This comes of the back of an HSBC Chinese manufacturing index published last week that fell to the lowest level since March of 2009 during the depths of the economic crisis. In my opinion an HSBC index is more credible than the Madoff-esque official figures. (note – I hear that even the  electrical consumption figures are massaged these days!)

This portrait of China should be put in the context of other emerging market economies. While all eyes are on the European debt pantomime, Brazilian and Indian credit conditions have been deteriorating, and EM currencies (led by the likes of Turkey) have continued their slide / required massive intervention to hold them up – such intervention can only help for so long.

Those economies that fared well through 2008 and 2009 (i.e. EM) are rapidly heading for their down cycle now. For investors it’s time to focus on the US. Recent data has been very positive. The consumer is spending. The only reason GDP growth came below expectations (2% vs. 2.5%) is because in inventory draw down (clearly as positive). House building is beginning to turn around slowly (led by multi-family homes). US corporates are reporting good results, and beating expectations. Don’t get me wrong – it’s not a blow out, and there are likely to be bumps on the way, but the data point to a more robust US recovery than the market is pricing in now.

(PS – maybe the Middle East is a good place to be. The Saudi and Qatari economies seem to be in for business!)