Investors Take Note: A Seismic Shift Has Begun in China…

Phoenix Capital Research's picture

Graham’s note: this is an excerpt from a recent client note I sent out regarding the situation in China. The impact of the coming change will be dramatic both in terms of its impact on Europe (China’s single largest trade partner) and the US with whom China is fast developing a trade war.

 

Most of the rally in China’s markets over the last few months stemmed from the belief that China was going to begin monetary easing again in order to soften its economic slowdown.

 

Risk Of Hard Landing Rises As China Begins

Monetary Easing (From Forbes 11/18/11)

 

Chinese policymakers have begun to selectively ease macroeconomic policy to support growth, according to Barclays’ analysts.  While full on easing won’t come until 2012, China will face a significant economic slowdown as the export sector feels the impact of a fragile global economy, and residential investment, which makes up 12% of GDP, falls drastically as the People’s Bank of China (PBoC) seeks to control a real estate bubble.

 

In their attempt to execute a “soft landing,” China’s leaders have engineered a slowdown by tightening policy over the last several quarters.  This was a response to unwanted consequences of prior stimulative policy.

 

Read the Rest of the Story

 

Note the effect this view had on FXI's action:

 

 

China cannot risk a severe economic slowdown. There are already over 30 million Chinese who have lost their jobs, left the coastal cities, and are moving back to the countryside.

 

Moreover, during times of economic turmoil, civil unrest grows. Since 2006, China has averaged 90,000+ "mass incidents" (riots and protests) per year. In 1993, during the boom years, this number was less than 10,000.

 

Suffice to say, an economic slowdown is a MAJOR problem for China's Government.

 

This is most recently clear in the village of Wukan, which in September began a series of protests based on the fact that the Government took away the villagers' farmland and fishing rights (thereby removing their primary means of earning  a living).

 

Wukan began a mass sit-in/ protest. The tiny village of 13,000 has since become such a headache (thanks to the international press) that China's Government actually let the villagers vote on who should be their local officials.

 

This is absolutely unbelievable. China...letting a village vote on its leadership. And it gives us some idea of just how tenuous the Chinese Government's control over the general population is.

 

However, while unemployment is a big problem for the Chinese Government, inflation is a HUGE problem. Over one third of China's population lives off less than $2 a day. If the price of food rises in China... those "mass incidents" will explode into outright widespread rioting and civil unrest.

 

Well, thanks to China's aggressive easing since November, inflation is back in a big way (it had been in decline since July 2011 before this).

 

China’s inflation rebounds in January,

renewing pressure to control living costs

(From Washington Post 2/8/12)

 

China’s inflation rebounded in January as food prices soared, renewing pressure on  Beijing to control surging living costs as it tries to boost slowing growth in the world’s  second-largest economy amid warnings of a global downturn.

 

Consumer prices rose by an unexpectedly strong 4.5 percent over a year earlier, up from December’s 4.1 percent, data showed Thursday. Food prices jumped 10.5 percent, accelerating from the previous month’s 9.1 percent.

 

Read the Rest of the Story

 

This is a major development. China's Government will ABSOLUTELY have to put the brakes on monetary easing and possibly even tighten if it doesn't want to have the whole country begin to go up in flames.

 

Investors take note, there is a seismic change taking place in China. As inflation spreads throughout China there will be dramatic social, political, and monetary changes. And these will ripple throughout both the Asian region as well as the global financial system.

 

Those investors who wish to outperform in the coming months will need to keep these trends in mind.

 

Swing by www.gainspainscapital.com for more market commentary, investment strategies, and several FREE reports devoted to help you navigate the coming economic and capital market changes safely.

 

Best Regards,

 

Graham Summers

 

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rsnoble's picture

You can't blame China people for being pissed working for $2day making gadgets that will sell for hundreds or thousands in other parts of the world and making billionaires out of the likes of Apple. Pretty disgusting.

Of course now we have globalism which has put the likes of the US on a level playing field. Just imagine people in the US making $2 a day lmao.

None of this is ever going to work and as everyone can plainly see it is failing and ending up in ruination for everyone. Well, except the big owners.

I'm wondering at what point does this all short-circuit? Meaning things in the US are going to hell in a handbasket so how much longer can corporations keep dragging their overpriced crap over here and dumping it on us??  Bascially they sold out longevity for a short term explosive profit move for the here and now and destroyed everything in the process.

CEOoftheSOFA's picture

I think China will have a soft landing. Just like the Hindenburg.

falga's picture

china is importing inflation because it's currency is undervalued. Watch a big development on this soon.... Probably not good news for China exports but will take care of the inflation problem quickly!

slowsmile's picture

Bit ridiculous this article. I've been reading that China will have a hard landing because of her inflation for over a year now. China's inflation stands at about 4.5%. 

Well, it hasn't happened yet. 

And another thing. It took only a year for China  to zoom out of the terrible financial crisis on turbo with a GDP right back up there at 10% in 2009. That's pretty good national economic management in my book.

And another thing. China's Core Inflation INCLUDES food and energy -- unlike the secretive Fed's stats. In fact, China has a weighting of 33% just for food alone in her CPI.

The Fed says US CPI is only about 2%. Yeah, but food and energy are banned from their stats. Too volatile they say.

You think so ?

So the best and fairest US comparison against China's CPI is against Real US Inflation(includes food and energy) -- which currently stands at a MASSIVE 11% !!

And the author is scared of a hard landing in China?

The author should grow some economic legs and stop generating faff. He should start interpreting stats in the correct way. Try visiting Shadowstats.com for the real deal.

Oh and China will most probably have a soft landing. I can't say the same about the US though...Trainwreck soon I'm thinking...But China will get all the blame again as usual...

Well, of course she will....LOL

It's all about distraction, fear and blame and it goes without saying that neither the US govt nor the Fed are to blame for any of this financial mess.

Resident Evil rings a loud bell here...

 

 

 

 

 

 

 

 

 

jimmyjames's picture

Bit ridiculous this article. I've been reading that China will have a hard landing because of her inflation for over a year now. China's inflation stands at about 4.5%.

**********************

HONG KONG (MarketWatch) — China’s consumer prices accelerated to a-three-year high in June as food prices soared 14.4%, according to data released Saturday, reaffirming expectations that Beijing won’t be in a hurry to relax its monetary stance even if it may not aggressively pursue more interest-rate increases.

Monthly data released by the National Bureau of Statistics of China showed the consumer price index for June climbed 6.4 % from the same period the year before. Many economists had expected the rise to be between 6.2% and 6.4%.

http://www.marketwatch.com/story/chinas-june-inflation-rises-64-2011-07-...

theXman's picture

Wukan was last month's focus, it is just a side show now. Right now another more sensational political drama is unfolding. It involves the top leadership of the country. It is more intriguing than an HBO movie. We are waiting for the finale which could lead to mass demonstration, a la Arab Spring.

PSEUDOLOGOI's picture

"Over one third of China's population lives off less than $2 a day. If the price of food rises in China..."

 

2/3 of the world lives on little over $2 a day.  which is about 1/10 oz of silver; silver dime to be more precise.  same as what a soldier got in the roman army 2000+ yrs ago. and when bankers are done with China, they can go to those other 2/3 and screw them...

rinse and repeat

falak pema's picture

after hard landing in Eurozone, read hard landing in China, to be followed by hard landing on Moon; only on this post! 

Buy your next edition before it goes out of print, going, going, ...well are you buying or not???

Mr Lennon Hendrix's picture

CNBC had this idiot on today, and I didn't know who she is, so I checked her out.  She is saying that stocks are going up, like she always does.  I'm not going to post the link I found of her, because the point is in the headline.

 

From July 28th, 2011.....

Schwab's Liz Ann Sonders: Relax About The Stock Market Already — The Outlook Is Good
narapoiddyslexia's picture

What a relief! And here I thought it was a huge Ponzi scheme!!!

 

Cole Younger's picture

Great news....I am going to spend it before I make it.....the American Dream...isn't it wonderful? 

AldousHuxley's picture

McDonald's, McJobs, McMansions, iPad and Hummer for every person...the American Dream coming soon to China