Update: CDS now over 200 bps, or over 7 bps since this artice was posted.
This is an emergency announcement for bubble watchers: China CDS has soared to 194.5 bps, +14.5 in the past few hours (a trend first noted here about a week earlier), the biggest relative mover in the sovereign realm, which has just hit the widest it has been since March 2009. Ironically the incremental newsflow was mildly positive after the Final September HSBC PMI came at 49.9, still contractionary, but modestly better than the Preliminary 49.4, and unchanged from the August print. That however brought little solace to China bulls, who have seen their local stock holdings drop significantly in the last few days now that the China "Hard Landing" scenario is becoming widely accepted. Not helping is a just released UBS report which now expects Q1 2012 GDP to drop to below stall speed at 7.7%. Whether or not the country can land softly, or hardly, or at all, with that kind of growth drop, is certainly unknown. Look for more widening in CDS spreads as the China crash thesis permeates the vigilante community which has now picked its next target.
Bloomberg recaps the UBS piece:
- Weakened global growth prospects, aggravated by financial market turmoil which might further hurt consumer and corporate confidence, will cause export growth to slow to single digits in coming quarters, which will adversely affect manufacturing investment and consumption, UBS says.
- "We expect GDP growth to decelerate to around 8% y/y in Q4 2011 and 7.7% y/y in Q1 2012,’’ write Tao Wang and Harrison Hu, economists at UBS, in note today
- Expected drop in developed-markets growth will hurt China’s exports and related investment, so UBS has lowered its GDP growth forecasts from 9.3% to 9% in 2011 and from 9% to 8.3% in 2012
- When exports slow sharply, and if industrial production falters, government would likely ease macro policy, probably starting with fiscal policy: UBS
- Says CPI inflation likely to end 2011 at 4.0%-4.5%, and to ease further to 3.5% in 2012
- Forecasts CNY to appreciate gradually, trading at about 6.2 by year-end and 6.0 by end-2012 vs USD, unless EUR/USD weakens beyond 1.2