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CLSA's Chris Wood Explains Why Chinese Tightening Moves Are A Whole Lot Of Noise
With everyone speculating what China's actions may mean, we go to one of the few true experts on the world's most populous country - CLSA Chris Wood (author of Greed and Fear).
Risk is suddenly “off” again. After a two-week “road show” in the US GREED & fear met his first “stressed” investor last Friday. This was a reminder that many in the long-short absolute-return investment community are not temperamentally positioned for price moves to go sharply against them for even more than one day. This is also a reminder that many in the same community were still running low risk positions going into September. As “risk” was piled on in the proceeding two months in the run up to QE2, there is a natural desire to lock in any profit outstanding on any hint of weakness, most particularly with the end of year score line pending. This dynamic clearly creates the potential for more of a correction.
What about the cause of the latest scare in Asia? That is the China inflation/tightening scare. Fundamentally, GREED & fear cannot get too concerned. As noted by CLSA’s China macro strategist Andy Rothman, this remains primarily a food inflation story (see CLSA research Sinology – Food fight!, 11 November 2010). Food CPI rose by 10.1% YoY in October, accounting for 74% of the 4.4% YoY increase in headline CPI, while core CPI (excluding food and energy) rose by only 1.3% YoY (see Figure 1). Most particularly, consumer prices for fresh vegetables and fresh fruit were up 31% YoY and 17.7% YoY respectively in October.
The reality is that, for now at least inflation ex-food remains remarkably tame based on CPI inflation data. Still the political sensitivity of food means the PRC is making executive decisions, such as imposing price controls on specific food items or threatening to lock up commodity hoarders. This makes investors nervous. Such measures have put a policy risk on the commodity stocks in the same way that policy risk has capped the Chinese property stocks over the past year and more. Still GREED & fear would use this correction to add to positions in Chinese bank and insurance stocks which would seem to be the beneficiaries of higher interest rates in China.
As for monetary tightening in China it is important to remember, amidst the present noise, that the key tightening measure in the command economy system is the loan growth quota not interest rate hikes or increases in the reserve requirement ratio. For now CLSA is estimating that the new loan quota for 2011 will be reduced relatively marginally from Rmb7.5tn this year, or 18% loan growth, to Rmb6.5-7tn or 14-15% loan growth. CLSA’s head of HK & China financial research Kevin Chan also expect full-year new loans to surpass the Rmb7.5tn mark this year, with new loans for the first ten months of this year already reaching Rmb6.9tn or 92% of the full-year target (see CLSA research China Banks – Ahead of target, again, 12 November 2010).
Meanwhile, it is also worth remembering from an overall stock market perspective that the last time inflation and interest rates went up, which was in 2007, the A share market rose as its focus then was on the positive of a stronger economy. Thus, the A share market rose by 110% during a period when there were six interest rate hikes in China between March 2007 and December 2007 before the one-year lending rate peaked at 7.47% (see Figure 2). While CPI inflation rose from 2.7% YoY in February 2007 to a peak of 8.7% in February 2008.
With the Chinese property market still the subject of government cooling down measures, it will be interesting to see if the same dynamic takes hold now. There is certainly the domestic liquidity to fuel a stock market move. Household savings deposits totalled Rmb29.9tn at the end of September, compared with the current A-share tradable market capitalisation of Rmb20tn. While average daily A-share market turnover rose to a record high of Rmb470bn last week, up from Rmb100bn in early July (see Figure 3).
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I think the Chinese are full of shit. Remember the great military threat, the Soviet Union? Same sort of bullshit, in that case they benefited our defense industry. The Chinese will continue along their current lines until it is more profitable politically to re-enslave their people. Then watch what happens to emerging market portfolios.
Need proof? Check 5000 years of history. The Chinese have managed to fuck themselves over and over again.
Stay away.
I would say recent history shows that some of the blame should be levied towards western nations. Two opium wars and arming Japan to the teeth had something to do with a very fractured China. If you go back 5000 years, then I think it would also be safe to say that no region on the planet faired very well. Europe comes to mind.
spartan,
Yes, if it wasn't for those darn Japs Chairman Mao wouldn't have starved more than the Japs killed to trade food for weapons from Russia. And also we know that if the 3 times married and God knows how many mistresses Chairman Mao had, him and his soldiers never would have raped the Japanese girls, like the Victors in Nanjing..... or lied in their textbooks about the Korean War, or lied that Japan never apologized, or stolen land from India, or stolen land from Tibet, or killed their own citizens in 1989, or had 13+ villagers kill themselves making i-Pods for the Chinese factory slavemasters. That was all the West's and Jap's fault.......... yeah........
Its great time there, who wants to ruin it? Bubble, any bubble, will have to run its course. the day of a pack of cigarette costed 60,000 was in the 40s, and that day may come again some time. remember no one really wants that, it's just gonna happen naturally.
China tightens.
Ultra-high p/e mo-mo stocks like CRM rocket higher.
Consumer stocks like DELL, WYNN keep climbing.
Gold tanks.
Crude sells off.
So much for the "hard asset" boom...
LOL.....
Hate to fixate on details, but the DELL chart looks like crap, and WYNN looks an awful lot like GDX. And gold down 8 bucks pre-options expiry's really not that big a deal. I think your love of the tech sector's biasing your posts.
How on earth can anyone believe Figure 1? Food CPI went from 25% to negative in one year? The 08 crisis created massive deflation in China?
I must have been asleep. Or the stats are massively rigged.
I'll believe the latter.
Unless it's directly correlated to the Baltic Dry.
Hmmmm.....
ORI
http://aadivaahan.wordpress.com
By the way, the number coming out China can be whatever the fuck they want them to be. If you want 10% growth, you will get 10.1%. if you want the CPI to be 4%, it's 4.2 or 3.99%. This time its against big Ben's policy, so CPI is up. next time it may go down, since they put the policy to curb it. It can be whatever the fuck they want them to be! If you really go there and live, you will find that real CPI could be at 8-20%. who knows?
As I and others said the other day, what China does will be more an indication of their real statistics.
I think the months ahead we will see a number of increasingly large mearures being taken by China.
"The reality is that, for now at least inflation ex-food remains remarkably tame"
This is because there are no Chinese consumers. All they buy is Food and Cell Phones. They make the Cell Phones they're not going to go up in price. Dah, I don't even work in the Financial industry and I can see this. Who is this guy? He's all wet.
"With the Chinese property market still the subject of government cooling down measures"
Here would be my other point, how does Chinese Core CPI exlude Housing? Chinese housing is going through the roof (see article yesterday on the very subject of Inflation in China)
What does this all mean? As soon as the Chinese can buy more of the stuff they make their inflation is going to the moon. Maybe that's why the Chinese Politburo doesn't want to introduce 1.2 Billion Chinese to Walmart.
the political sensitivity of food means the PRC is making executive decisions, such as imposing price controls on specific food items or threatening to lock up commodity hoarders.
This makes sense to me. Chinese authorities value political stability over all else. They will lose control if the people can't eat.
There is certainly the domestic liquidity to fuel a stock market move.
Could this be part of the reason that China is encouraging its people to buy gold and silver: to mop up liquidity?
Q: Why Chinese Tightening Moves Are A Whole Lot Of Noise?
A: Pain
http://www.youtube.com/watch?v=yWJr6SAW_Vg
"The reality is that, for now at least inflation ex-food remains remarkably tame based on CPI inflation data." Translation: But for the cost of goods necessary for survival, the cost of living remains remarkably tame.
We hear the same nonsense said in the US, and most sensible people here snicker at the silliness of it. Yet when a thugocracy issues its statistical data, most people simply oooh and aaahh at the stability of it all.
Maybe it's familiarity breeding contempt in the case of US, and in the case of Chine, we see what we want to see because we're not sure what we're looking at.
So where’s all the flow go?
Nov. 18 – Zhou Xiaochuan, governor of the People’s Bank of China, believes that the openness of debt capital market will greatly contribute to the foundation of a more mature market-oriented economy at a time when China expects more speculative investment inflow after the second round of quantitative easing by the U.S. Federal Reserve.
Zhou cast his “pool” theory on November 16 while attending the China Global Debt Capital Markets Congress co-hosted by the People’s Bank of China and the National Association of Financial Market Institutional Investors, in response to the concern of hot money inflows. Zhou said that China hopes to build up a “pool” where most of the speculative capital flows, instead of letting the excess money flood into the country’s real economy.
While people wonder whether the pool should be placed in the stock or real estate market, the two major markets where the speculators seem most likely to go, Vice President Ba Shusong of the State Counci’s Research Center of Finance says it is more possible that China is building up the pool in the bond market.
When compared to the fluctuating stock and real estate markets, Ba believes that the stable bond market, if reformed and regulated to attract most of so-called hot money, will work better for the future development of China’s real economy. Ba also points out that although it usually takes longer for the bond market to have massive profit return, a “pool” in this market supported by new opening-up policies will still be attractive to investors since there are no legal channels yet for foreign speculators to invest in China’s stock or real estate markets. Ba suggests the pool should be a special area in the bond market selling distinct bond products to foreign investors.
http://www.china-briefing.com/news/2010/11/18/china-considers-opening-up-debt-capital-market.html
I suspect the flow will go into a real estate pool, with some funding likely going into a stock market pool. Remember, China does not want to see much hot money in their economy. I suspect the pools will operate like hedge funds where redemptions may be difficult when times become stressful.
Take a look at Now & The Future's Weimar Charts page:
http://www.nowandfutures.com/weimar.html
If you go near the bottom of the page you will find the following chart:
Table 6 - Expenditures Of A Three-Person Household (Middle-Ranked Salaried Employees), from 1912-1913 to 1923 (%)
Let that chart sink in for a minute...
China went through hyperinflation in the 1940's and knows how things developed and knows what to expect. I suspect any hot money that comes into their market will have to run the gauntlet going out of their market. Expect most hot money to end up in real estate. Look at the above referenced chart to see how important real estate rent was to the purchasing decisions of the Weimar Germans. I suspect China was no different in the 1940's and will be no different going forward.
Look at the importance of food purchases... What does that tell you vis-a-vis animal spirits...
Using that Weimar table as a benchmark, today China is likely where Germany was at the end of World War I.
China, as the world's most populous nation of copycats, is copying the US with an unsustainable boom in manufacturing, housing, automobiles, etc., greatly moving forward the day of extremely expensive, if not peak, oil, not to mention that of the many other commodities tracing similar trajectories.
The US appears to be falling behind, but in fact it is forging ahead. It is approaching and will reach a political climax well before China does and then begin reorganizing its economy around a paradigm that has not yet emerged, but which I suspect will envision an energy transition from oil to thorium or fusion power using many alternative energy resources and technologies in the interim: natural gas, solar, wind, wave, geothermal, coal, bio, and conservation.
There is no natural shortage of exploitable energy resources, but a natural surplus of ignorant and incapable backslappers that constitute the current political elite, exceeded in incompetence only by a deluded power elite that has to work through the clumsy political elite. If these don't change all will be lost, but they will change.
All IMHO.
You can always count on Americans to do the right thing - after they've tried everything else...W.S.C.