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Faltering Thursday – China’s Downhill Move Picks Up Steam

ilene's picture




 

Faltering Thursday – China’s Downhill Move Picks Up Steam

By Phil Davis of Phil's Stock World

CHINA!!!

 

FXI WEEKLY

(Chart by Dave Fry)

 

China is the reason so many companies tell you how great their prospects are. TSLA is going to China, YUM and MCD sell so much fast food in China that now Chinese people are getting fat and having heart attacks – just like we do!  Casinos make their money in China, luxury goods manufacturers do significant portions of their sales there and, of course, it's the raison d'etre for the commodities industry.  

But what if China is a fairy tale and, rather than a decade of growth ahead, we have a decade of stagnation or, even worse, contraction on the other side of the World? As you can see from Dave Fry's FXI chart (above), the Chinese market has gone nowhere this whole decade – DESPITE the S&P starting 2010 at 1,100 and gaining 68% since then.

The WSJ has a list of "China's Rising Risks," including:

This morning we got data out of China showing Industrial Production growth slowed to 8.6% from 9.7% measured just a month earlier and no, it wasn't the weather. Retail Sales fell to 11.8% from 13.6% and Fixed Investments fell to 17.9% from 19.6% and none of those are BAD numbers (still growth, just slower) but, as I pointed out in Monday's post, bank loans and the bond market there are in no way priced for slower growth.  

China's GDP is "only" $8Tn, a little over 10% of the World's total.  Our GDP is $17Tn and Europe clocks in at around $18Tn ($20+Tn if you include the UK) and Japan is $6Tn.  Russia is $2Tn, India $2Tn, Australia $1.5Tn, Mexico and South Korea are over $1Tn and then there's the rest.  

If the rest of the World is going up 3.5% instead of 2.5%, then we can easily shake off a 2.5% pullback in China – but we have to be VERY SURE we have a good balance going forward. More importantly, we have to be more realistic about the prospects of our corporations and think about whether their sky-high valuations are likely to be realized in a market where growth prospects in China are no longer infinite.  

(Picture source)

Of course China is a "planned" economy and that means they can keep growing the economy by force if they want to.  Last year alone, China bought $500Bn worth of debt from the US to keep the Dollar strong against the Yuan, which keeps the export wheel spinning.

With an $8Tn economy holding $4Tn of US debt, China needs to be VERY concerned about our stability, the same way we would be if we held $8.5Tn worth of Chinese debt.  But there's the real problem – we don't hold $8.5Tn, or even $1Tn of the $100Tn worth of Chinese debt (see Monday's post for breakdowns) – that's owned by Asia and Europe and most of all by the Chinese people, who have been convinced to pour their savings into Chinese Corporate Bonds which never (until now) defaulted.  

Of course your economy is going to grow 7.5% a year when you are paying 10% interest rates on bonds that "never" fail – how could it not?  Maybe we should start doing that in the US.  After all, what can possibly go wrong?  

If you can think of a few things – then we need to be concerned about China…

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Sat, 03/15/2014 - 18:39 | 4553036 Notarocketscientist
Notarocketscientist's picture

High energy prices = less consumption because everything including the fuel in your tank costs more = layoffs = less tax revenue = government cutbacks, layoffs and debt increases = less consumption = more layoffs = less taxes =====  economic death spiral.

 

Compounding the problem is the fact that a weak labour market means real wages drop - as they are across the world right now - that means everything is more expensive and your buying power is dropping at the same time.

 

Governments recognize this and are trying to offset with debt, easy lending (they are purposely inflating bubbles), lower interest rates and money printing.

 

Of course they will fail - because the disease is expensive oil.  And there is no substitute

 

The economic death spiral will accelerate when the QE and ZIRP no longer have any effect and the confidence game collapses.

 

This moment will be known as the end of the industrial revolution by the few who survive.

 

This is not a Hollywood movie where the hero saves the day.  This is the reality we are facing.

Sat, 03/15/2014 - 11:03 | 4551716 whidbey-2
whidbey-2's picture

The global economy is entering an unstable period.  The boomers are disappearing from work, politics has become wholly unproductive, one of the "great powers" is declining (read Russia), and the USA is running on empty on leadership in world affairs, not to mention domestic affairs.  we could be seeing the early stages of a new dark age in which much we take for granted is found to be gone or illusionary. 

Fri, 03/14/2014 - 06:59 | 4546959 ptolemy_newit
ptolemy_newit's picture

Ilene what is the time line required to move 300 million people into urban life and a new medical system?  You are confused with the thinking that the stock market represents wealth of a nation.

The wealth is in what you know and what you can produce, it is NOT what you can skim or charge interest on.  amerika recession would not hurt China, can you stop using conditioner or tooth paste?

Chinese couples (engineers 200 million) put their extra money in housing, bank interest is low and who trust them. They do not care of the bubble or the next cycle, Chinese think longer term.

The government will accept 5% GDP and spend the next 5 years on medical infrastructure and privatization.

Tesla,  you are joking right, is that like another Hummer.

 

Put your money on Chinese health care or walk in clinics.

Fri, 03/14/2014 - 23:12 | 4550964 Bazza McKenzie
Bazza McKenzie's picture

"Chinese think longer term".  Those of us who have been around long enough remember that's exactly what was said about the Japanese as Japan was supposedly about to overtake the US.  That "long term" thinking didn't work out well that time either.

Fri, 03/14/2014 - 07:21 | 4546965 ptolemy_newit
ptolemy_newit's picture

Ileane are you a cross dresser?

i mean your post on seeking alpha??  (fry)

Sat, 03/15/2014 - 11:07 | 4551727 whidbey-2
whidbey-2's picture

Doubtful, but also too personal and distasteful.  One never knows until about 11AM, and some times not even then. Are you suggesting or just searching?

Thu, 03/13/2014 - 22:31 | 4546269 Notsobadwlad
Notsobadwlad's picture

The only ways that economies thrive is either by putting more money into them or moving the money faster. However, here is the difference between China and the US. China is a manufacturing economy that employs people to produce value added goods. The labor content adds value to the economy and contributes to wealth so that the hundreds of millions employed can spend money.

The US is a financialization and government economy. Those are the places that money goes to die. US financialization and government labor does not generate value. It just moves money around and without generating increasing value, pumping in more money only results is inflation and collection of money in no velocity dead ends.

Thu, 03/13/2014 - 21:54 | 4546153 AdvancingTime
AdvancingTime's picture

Most of the growth in China is directly the result of America investment and support. China has been growing like a weed for a long time. In recent years many of the investment decisions in China have been driven by politics and corruption. This has created massive overcapacity. Money has been poorly allocated and often shoveled into deep holes like ghost cities and bridges to nowhere.

We now see the 6.6 trillion dollar spending spree used as stimulus to combat global economic slowdown after 2008 is coming back to haunt China. This has greatly expanded credit and created huge overcapacity during the past five years. A massive debt crisis now looms as companies are struggling to repay loan taken to build factories that sit idle because of weak demand. The article below goes into more detail.

http://brucewilds.blogspot.com/2013/11/china-land-of-overcapacity-and-de...

Thu, 03/13/2014 - 21:31 | 4546079 Iam_Silverman
Iam_Silverman's picture

I am sure that there is a rational explanation for this.

Isn't it a very mattering thing - being all blobbed up by non Chinese citizenism?

Thu, 03/13/2014 - 19:52 | 4545759 mobydick
mobydick's picture

What's happening with employment numbers in China? Any chance we see a few princelings swinging from a lampost in tiananmen square?

Thu, 03/13/2014 - 21:49 | 4546135 MrSteve
MrSteve's picture

If the USA can wipe away a financial crisis by changing a FASB rule so banks mark to model instead of market, why can't China or any economy do the same thing and just sweep the problems under the rug. I'm sure their regulatory authorities are as inventive as Uncle Sam's are. They can generate any number they want with seasonal adjustments, hedonic factors and rebasing stat series, just like the USA's BLS and FED do. Panicking is so 2007, don't worry, just be happy!

Sat, 03/15/2014 - 10:44 | 4551697 Ban KKiller
Ban KKiller's picture

Crooked accounting is the key. FASB is officially corrupted.

Are there any honest accountants left?

Fri, 03/14/2014 - 12:43 | 4548463 easypoint
easypoint's picture

The US can export inflation while China can only export deflation and that is why they are in trouble. Of course if enough of SE Asia goes down the US will have no place to which it can export its inflation and that is why this spells trouble for us.

And, there's that worthless fiat money thing too.

Fri, 03/14/2014 - 01:25 | 4546721 RafterManFMJ
RafterManFMJ's picture

China: Print print print paper buy buy buy gold - keep dollar strong
Amurika: Print print print paper sell sell sell gold - keep dollar strong

I wonder, when the music stops, which country will be in better shape?

Fri, 03/14/2014 - 22:34 | 4550835 JerseyJoe
JerseyJoe's picture

Well put. 

Thu, 03/13/2014 - 22:36 | 4546287 Notsobadwlad
Notsobadwlad's picture

Who said the US wiped away a financial crisis? That is silly. All that happened was the banks created more money to give to themselves (after first tacking the new debt to the government's head). China will do the same thing.

Fri, 03/14/2014 - 04:10 | 4546857 hootowl
hootowl's picture

A real, conservative, U.S. Government can solve the debt problem with repudiation of the FED debt and a return to the granite stone standard of currency backing.  Who is there to stop it.

Am I the only one here that has figured this out?

Fri, 03/14/2014 - 22:41 | 4550862 JerseyJoe
JerseyJoe's picture

Who's debt will be dumped?  US Pension plan held debt?  Insurance co. held debt?  Foreign conutry's? 

It is easy to say to just reputiate but it is another to be on the receiving end.  And the US is not alone.  I would not want to be a debt holder - like say the SS admin.   

Even if we loped off 50% of our debt - we added that in 5 or 6 years and can do it again quicker.  Then what?  

Thu, 03/13/2014 - 19:47 | 4545733 RaceToTheBottom
RaceToTheBottom's picture

Just because they print three times more paper money than we do doesn't mean there is a problem.

Thu, 03/13/2014 - 21:35 | 4546091 new game
new game's picture

the problem is what all that paper is leveraged against, not to mention multiple claims on the same colateral...

when she starts crumbling, look the fuck out, the tremors are being felt.

Fri, 03/14/2014 - 20:51 | 4550508 Buck Johnson
Buck Johnson's picture

I know, the paper is leveraged on real assets that have multiple claims on them.  China is about to fall and it's going to be nasty.

Thu, 03/13/2014 - 23:36 | 4546502 old naughty
old naughty's picture

multiple, only?

You're so kind...

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