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A Bull In A China Shop

Tyler Durden's picture




 

Submitted by Shane Obata of Triggers

A Bull In A China Shop

China’s stock market is on fire but its economy is cooling off.  Can the divergence last? And what’s next for China? Stay tuned to find out.

Money flows

Corruption

According to the Financial Times, “Mr. Xi (China’s President) has launched the most aggressive anti-corruption drive ever seen in Communist China” in order to strength the public’s perception of the Communist party’s legitimacy.

“Lavish banquets have stopped” and “gift-giving is less generous.”

The war on graft may be one of the reasons the growth of China’s luxury market was negative in 2014:

Although some areas were strong, men’s wear and watches were particularly weak.

Furthermore, the gambling industry has suffered...

Gambling revenues

Total gaming revenues in Macau are now contracting – year over year:

Likewise, VIP revenues are also suffering.

China’s housing market is also under pressure…
 

Housing market

Chinese home prices have been cooling off since early-mid 2014:

Still, they increased over 100% from 1999 to Q2 2014.

Despite the concerns mentioned above, China’s stock market continues to rally…

 
Top performing stock markets in 2014

As reported by CNBC, “the two Chinese benchmarks, the Shanghai Composite and the China Securities Index 300, came 2nd and 3rd in the list of best performing stock markets in 2014.”:

The Shanghai Composite finished last year +52.84%; it continues to rally in 2015.

But what’s driving it???

A-shares accounts, margin debt

The drastic increase in the number of new A-shares accounts – which began in early 2014 – suggests that retail investors are piling into the market:

What’s more concerning is that they’re taking on a lot of debt in the process.

Could China’s market continue to rally from here? Surely.

Nevertheless, there are reasons to be cautious – one of which is its decelerating economy…

Slowing growth

Economic output

On the surface, it seems as though everything’s alright in China.

GDP growth came in at 7.3% in Q4 of 2014:

It’s been in a downtrend since 2010; however, it’s actually quite good – relatively speaking.

Then again, GDP doesn’t tell the whole story…
 

Real activity

China’s “real activity indicators” suggest more weakness than its economic growth does.

Cement production growth was negative and steel and electricity production growth were marginally positive on Jan 20, 2015:

Moreover, each of these indicators has been in decline since mid-late 2013.

Falling commodity prices also suggest that China’s slowing down…
 

Commodities

China is the world’s biggest consumer of coal, iron ore, and copper
. It follows that falling metal prices may be indicative of weaker demand from China:

The same can be said for falling coal prices.

China’s growing debt load is also concerning…
 

Debt

China’s outstanding credit to GDP is at 200.11%:

What’s more is that non performing loans have been rising since late 2011-early 2012.

How has China accumulated so much debt in such a short time? Overinvestment

 

Investment

China’s gross fixed capital formation grew from less than $1 trillion in 2005 to more than $4 trillion in 2013:

In addition, China’s gross fixed capital formation as a % of GDP is > 45%.

To put this in perspective, India’s is < 30%, Japan’s is < 25%, and both the US and EU’s are < 20%.

That said, China is trying to move away from its dependence on investment…

 

Going forward

FX reserves

“China’s foreign (exchange) reserves are falling, even though its trade surplus is (at) a record high.” – Jamie McGeever:

Why are they falling? Presumably because China is trying to reduce its reliance on the USD.

And then there’s consumption…

 

Consumption

“There is still huge room for Chinese consumption to grow rapidly. Its private consumption represents only 36% of its GDP, compared with the world’s average of 60%.” – Li-Gang Liu:

It’s likely that China will focus more on growing from within in the future.

What are the key points to remember???

 

That’s all folks!

Anti-corruption policies and a softening housing market are pushing money into China’s stock market.

Meanwhile, its economy is losing momentum.

This discrepancy might last for some time but there are multiple risks to consider.

If China wants to strengthen its economy then it needs to shift its emphasis from investment to consumption.

 

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Mon, 02/09/2015 - 22:53 | 5764789 Harbanger
Harbanger's picture

The Merikan engine is slowing, Bitchez.

Mon, 02/09/2015 - 23:08 | 5764822 JoeySandwiches
JoeySandwiches's picture

"China’s stock market is on fire but its economy is cooling off."

Sounds familiar, but ours is cooling off like the way a corpse 'cools off'.

Tue, 02/10/2015 - 05:40 | 5765427 cnmcdee
cnmcdee's picture

$1 Billion dollar store meet $25 Million grilled cheese truck..

Mon, 02/09/2015 - 22:54 | 5764792 Bangalore Torpedo
Bangalore Torpedo's picture

Is it me or did anyone else's eyes glaze over after the 12th chart?

Mon, 02/09/2015 - 22:58 | 5764800 Soul Glow
Soul Glow's picture

The Chinese house price index reminded me of an acid trip I once had.

Mon, 02/09/2015 - 22:58 | 5764801 Harbanger
Harbanger's picture

It's not just you.  New study shows 1 in 5 children suffer from ADD. Don't know why, new study to follow and explain it.

Tue, 02/10/2015 - 00:37 | 5765074 Rock On Roger
Rock On Roger's picture

USA had better increase it opium production in Afghanistan to keep up with the ADD kids.

 

What a bunch of goofs. Drug your children so they don't act like a kid.

Mon, 02/09/2015 - 23:02 | 5764814 stvitus
stvitus's picture

Shucks dude, you missed the best chart.

Mon, 02/09/2015 - 23:18 | 5764858 OldPhart
OldPhart's picture

Got dazed and wandered over to Barnhardt's (http://www.barnhardt.biz/).

Mon, 02/09/2015 - 23:36 | 5764912 sodbuster
sodbuster's picture

Why gamble at Macau, when stocks are a sure thing!!!!!!!!!!!

Mon, 02/09/2015 - 23:02 | 5764816 yogibear
yogibear's picture

They need to IPO some steamed bun trucks. Wall Street will have a Chinese IPO buying frenzy. Look at Alibaba 

Mon, 02/09/2015 - 23:18 | 5764853 reader2010
reader2010's picture

Just like the US, China too can build the largest financial market in the world with a declining real economy. 

Mon, 02/09/2015 - 23:28 | 5764888 Miffed Microbio...
Miffed Microbiologist's picture

I don't know. Maybe if women get a sudden urge to buy handbags things may recover. They just need to apply proper marketing techniques geared towards fanning the flames of consumerism buried deep in our being. The men seem to have given up.

Miffed;-)

Tue, 02/10/2015 - 05:18 | 5765419 BorisTheBlade
BorisTheBlade's picture

Buy your Gucci bag today and get your food for only a price of a second bag tomorrow.

Tue, 02/10/2015 - 00:05 | 5764987 disabledvet
disabledvet's picture

I still think looking at China as "One China" (zhong) is at a variance to the facts.

 

I also don't think they've ever shaken off their belief in Marxist/Leninism.  The "state entities" keep getting bailed out even though prices keep falling.

 

Seems crazy to say you can get top quality steel for ten bucks a ton "to infinity" while you wind up with a wicked inflation but that is exactly what happened to the USA in the seventies.

Or course in the USA the bulk of those mills went kaput.

 

 That was not a process without pain.

 

China is the world's largest coal producer as well.

 

Those prices have collapsed.

 

If the "yuan" is about to become another renminbi...well, it really wouldn't matter what the Fed did basically.

 

Certainly would go a long way towards explaining why the mere announcement of taper had such a massive impact.

 

I do think Russia is in some serious doo-doo here but we'll see.  There is no "energy crisis" in China.

 

Might have one in Russia though.

Tue, 02/10/2015 - 02:57 | 5765257 Md4
Md4's picture

It’s likely that China will focus more on growing from within in the future."

Well, I predict they will have a very long wait.

It really is simple; western outsourcing created the modern China. China has gone ape preparing a bigger and bigger manufacturing engine to produce the goods shortsighted western (especially American) corporations gave them to make for us...better, faster, and cheaper.

Much cheaper.

Problem is, these same outsourcing corporations did nothing to replace what they sent abroad. Cheap credit anesthtized the pain of our mounting domestic income crisis, until what was left of the now-broken middle class was chocking on expensive debt, while struggling to delever on sharply reduced incomes and exorbitant interest rates (especially owing to universal default provisions written into virtually all credit contracts).

China eventually felt the effects of our self-inflicted income disaster, but because it was--and still is--a manufacturing society on steroids, it could only mimick the western credit game in the form of wild infrastructure spending to keep the peasants busy. There was/is no middle class (as we know it) to blow easy credit bubbles with, so oligarchs and local governments got the loans.

They've gone completely insane with building out China. Yet western consumption still hasn't returned to restart their previously ridiculous double-digit GDP growth (and won't, given our real labor and debt situation). China is now chocking on it's own debt, and falling commodity consumption and stimulus game playing can no longer be hidden or rationalized away. Absent a real recovery in the west, they're going down in a ball 'o fire.

China has become like a ten year old abandoned before fully weened. It knows how to be a ten year old, but without a real means of developing a genuine Chinese middle class (something they might've been able to do if things hadn't gone so wrong with the corporate bonsai charge into globalism), they will not mature into a self-sufficient adult for many, many years...if ever.

After all, how long did it take the west?

m

Tue, 02/10/2015 - 02:17 | 5765262 Manipuflation
Manipuflation's picture

Well God damn it all.  I just went to buy 500 ounces of silver bit did not so I can shut fuck up.  The best I found was $2.50 over spot and that is too much on 500 ounces.  The bill came to $9900 something.  Where are you folks buying from?  Yes, I can but that is too much of premium and I understand why.  In the meantime, I think will go accumulate some dimes.

Tue, 02/10/2015 - 05:29 | 5765424 hedgiex
hedgiex's picture

Good summary. Before you rush to buy snake oils on consumptiion themes, please remember that consumption cannot be dictated by a planned economy on people paranoid with savings. Pararanoid because they have learnt well the lessons in not trusting their Government. Besides, there is a high household debt/GDP. Most of the debts are mortgages against a declining property market.

You have to rain cheap credit on them to spur consumption. It is going to be a long (not hard or soft) landing. Get used to this new paradigm shift.

 

Tue, 02/10/2015 - 09:41 | 5765820 Pesky Labrador
Pesky Labrador's picture

Watch the episode of Myth Busters with Bull in a China shop and you will never think the same when you hear that term.

Tue, 02/10/2015 - 10:52 | 5766155 Eahudimac
Eahudimac's picture

So by all accounts, the cooling off in China is good, right? This means that their central bank will but equity futures and like the fed? Is it time to go all in on companies with negative revenue?

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