Tag Archives: WSJ

Chinese Excavator Sales Crash!

23 Jun

Earlier this month the Wall Street Journal carried an article headlined “China’s holes in the road”. The journal contented that a recent slump in excavator sales is a lead indicator of a hard landing in China’s GDP growth.

The headline figures are indeed stark. Year-on-year excavator sales in May were down 9.6%. What’s more, sales of heavy duty trucks declined 22.4% over the same period.

The WSJ’s conclusions are simply sloppy! These data points do not necessarily indicate (and should not cause!) a sudden and quick slowdown in GDP growth and fixed asset investment. Why?

• Sales in durable goods are naturally choppy, and a contraction in excavator sales in May comes off the back of a massive 20.8% growth in April. Heavy duty truck sales did decline in April too (-8.3%), but this also comes off the back of a strong March (10.2% growth).

• A limited period of falling sales in such goods will not have a significant impact on FAI growth, as the actual number of outstanding machines continues to grow. In addition, industry can increase utilization rates, and increase the lifespan of outstanding machinery.

• The Chinese authorities have been implementing a process of tightening. This leads corporates to allocate more of their cash to more immediate concerns like working capital.

• As for a reduction in excavator / heavy duty trucks causing a slowdown itself…well it only accounts for ~1.7% of China’s fixed asset investment, and a third of excavators are actually imported!

Looking at the economy from another angle – what is there supporting a soft landing?:

• Money supply is still supportive

• Social housing should fill the gap left by private real estate developers

• Healthy overall fiscal situation


Off to the US. The reserve trap – What can the Chinese do?

27 Jul

Chinese Vice Premier Wang Qishan and State Councilor Dai Bingguo are off to Washington this week to meet primarily with Clinton and Geithner in a “Strategic and Economic Dialogue”.

In an op-ed in today’s Wall Street Journal Clinton and Geithner explain that “few global problems can be solved by the U.S. or China alone. And few can be solved without the U.S. and China together”.  The pair contend that addressing the global economic crisis and discussing sustained global growth will top their agenda, and outline the following points (amongst others):

1. Rebuilding savings
2. Strengthening their financial system
3. Investing in energy, education and health care

1. Continuing financial sector reform and development.
2. Spurring domestic demand growth and making the Chinese economy less reliant on exports.
3.  Raising personal incomes and strengthening the social safety

1. Avoid the temptation to close off their respective markets to trade and investment

There is a  Chinese saying: “When you are in a common boat, you need to cross the river peacefully together.” – so these talks  have the right idea.

Both economies are more tied than ever.  With its US$2 trillion in dollar denominated reserves the Chinese have been funding US consumption and growth for years.  Over that period talk between the two nations focused on what the US considers an artificially under valued Chinese remenbi.  With such staggering reserves I see the dialogue as likely to change, and expect the Chinese to start focusing US attention on its fiscal responsibility in a bid to ensure the value of those reserves.

The reserve trap? What can the Chinese do?
In my opinion the best thing the Chinese can do is to gradually and gently unwind a significant portion of its US reserves, and reinvest in ‘commodity’ producing assets, for example refiners and fuel sites,  and mines.  The fruits of these assets will ensure a long-term cash flow from ‘products’ the world cannot do without, and decouple the economy from such significant and direct influence of the greenback.  In addition, the Chinese will have greater control over the commodities required for its own domestic growth

Perhaps this is why the Chinese are so keen to invest in overseas mining, metal, and oil companies.