China Enters The Danger Zone, SocGen Presents The Four Critical Themes

Tyler Durden's picture

As both anecdotal, local and hard evidence of China's slowing (and potential hard landing) arrive day after day, it is clear that China's two main pillars of strength (drivers of growth), construction and exports, are weakening. As Societe Generale's Cross Asset Research group points out, China is entering the danger zone and warns that given China's local government debt burden and large ongoing deficits, a large-scale stimulus plan similar to 2008 is very unlikely, especially given a belief that Beijing has lost some control of monetary policy to the shadow banking system. In a comprehensive presentation, the French bank identifies four critical themes which provide significant stress (and opportunity): China's economic rebalancing efforts, a rapidly aging population and healthcare costs, wage inflation and concomitant automation, and pollution and energy efficiency.  Their trade preferences bias to the benefits and costs of these themes being short infrastructure/mining names and long automation/energy efficiency names.

They detail their concerns about the Chinese economic outlook (weakening exports, housing bubble about to burst, local government's debt burden, and large shadow banking system), and show that China has no choice but to transition to a more consumption-driven economy leading to waning growth for infrastructure-related capital goods and greater demand for consumer-related manufacturing. Overall they see a hard-landing becoming more likely.


Weakness in PMIs, Exports, and Foreign Investments Are Emerging

Weakness Has Emerged In The Property Market

And The Chinese Financing System And Construction Industry Links Have Become Increasingly Complex

But Do Not Expect Another Large Infrastructure Stimulus Plan


Conclusion – The situation in China is worrying to say the least. Short-term indicators are weakening as past monetary tightening starts to bite and the export model is threatened once again by the risk of recession in Europe and the US. Data from the real estate industry show a significant deterioration, with a clear break in the confidence that real estate prices always go up. The debt burden of local governments and large ongoing deficits should prevent a large stimulus plan similar to that of 2008. Monetary easing could bring some relief, although we believe that Beijing lost some control of the financing system through the shadow banking.

So (Theme #1) Rebalancing Is Key - The Only Way Forward

And China Is Slowly Heading Towards Mass Consumption (Which Changes Commodity Demands)

Mining - The Hardest Hit


But There Are Three Other Long-Term Themes Driving/Stalling China's Growth

Theme #2: Aging Population and Healthcare Needs

Theme #3: Wage Inflation and Automation

Theme #4: Pollution and Energy Efficiency

And In Summary, The Global Industries Most At Risk (and likely to Benefit) From These Competitive Changes

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Mr Lennon Hendrix's picture

China likey inflation!

AldousHuxley's picture

Tim Geithner told them to not to buy oil from Iran anymore.


China told Tim to go take a hike.

jaffa's picture

The basic concept behind Critical geopolitics is that intellectuals of statecraft construct ideas about places, these ideas have influence and reinforce their political behaviors and policy choices, and these ideas affect how we, the people, process our own notions of places and politics. Thanks.
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jaffa's picture

The business of banking is in many English common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. Thanks.
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BoNeSxxx's picture

Me Chinee

Me play joke

Me go peepee

in your Coke

Real Estate Geek's picture


OT Alert.

Dylan Ratigan will be speaking on the evening of the 18th at The Commonwealth Club in SF.  He’s going to be pimping his book, but I respect the guy for making a consistent effort to awaken the masses.  Ron Paul is a stronger catalyst than Ratigan, but I can’t think of any others; maybe Tabbi.  These events typically have a Q&A period and the venue holds a couple hundred people.   Tickets are $20 for non-members.

jaffa's picture

In contemporary literary studies, a theme is the central topic, subject, or concept the author is trying to point out, not to be confused with whatever message, moral, or commentary it may send or be interpreted as sending regarding said concept. Thanks.
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Yen Cross's picture

tHE " yUAN " Peg was set  5 days  ago.   6. 1735- 6.34257!

                                                                                            I'm tired! C/U in Europe  I have a cross

 to ( BURN)!!!!

Cognitive Dissonance's picture

I love Wednesday night chart porn, China division.

brew's picture

when is the post going to learn that any story about china is an instant page turner...

RunningMan's picture

How is nuclear most at risk when uranium prices and the nuclear industry in general is still suffering post-Fukushima?

Automotive seems promising as a global sector short term... lots of people need to drive. Until the oil runs out I suppose. Then we just need hamsters or humans to pedal to charge the batteries.

jimmyjames's picture

How is nuclear most at risk when uranium prices and the nuclear industry in general is still suffering post-Fukushima?


My thoughts as well-

When something is hated so much and the sectors/uranium miners that furnish the industry are in the doldrums-what is there to fear-because it sounds like a bottom to me-

kauffmanch's picture

Emitting 25% of world co2 and having highest energy intensity why wouldn't China turn more to nuclear with both low co2 emissions and relatively low cost?

junkyard dog's picture

I like reading post by people like SocGen. If it were not for Bernanke, they would not be here.


Caviar Emptor's picture

What a biflationary world we live in when even Chevron can't benefit from higher oil prices: 


Chevron warns 4Q earnings below 3Q results

All the old paradigms no longer work

fonzannoon's picture

Caviar I am listening to your thoughts on biflation. If they do more QE like Kito says they will (joke) how does a weak dollar impact a situation like Chevron"s earnings? Worse or better? Sorry for the ignorance.

Caviar Emptor's picture

No, not ignorant at all. It's not what we've all been conditioned to understand and expect. 

In every past time period, the large integrated oil majors (CVX, XOM etc) would gain large windfalls from a spike in crude prices: they produced more, sold more, refined more and simply passed the extra costs down the line to end consumers. They made so much money during the oil spike of the 1970s that Congress voted the Windfall Profits Tax on the oil majors in response to accusations they were price-gauging the public. 

Times have indeed changed. 

They can't pass the extra cost of crude, or the higher cost of crude production on to consumers or businesses constrained by biflation: decreasing incomes and net worth and poor employment prospects for consumers and narrowing margins for business (affected Chevron too). Demand for refined product has actually declined, a sure sign of deflation and a very alarming trend for the economy. Keep in mind it wasn't because of fuel efficiency: DOT and AAA reported that vehicle miles driven have actually dropped (!). Not only that, as the quality of crude is slowly deteriorating, the cost of refining is up. 

Caught between inflating costs and deflating demand. The classic picture of biflation. If the dollar declines, the cost of crude imports will rise further adding "fuel to the fire". Higher prices will only depress demand further. And QE is the ultimate Biflation-maker

fonzannoon's picture

Okay thanks for explaining. Would the retailers be feeling this inability to pass through the increased costs as well? I feel like I am just not seeing it or the market just is ignoring it.

Stax Edwards's picture

Generally neutral refiners, long producers/exploration.  Refinery biz is tough on the margins.

Caviar Emptor's picture

Margins have been declining since the start of QE. Companies from all industries are feeling it now. Retailers have been hit hard. Now even raw material producers. Watch for it in earnings this quarter

fonzannoon's picture

They are playing games with the earnings. A comnpany reports earnings. A week later they revise guidance down. The bar gets lowered. Everyone forgets this happened. Two months later they report earnings and hit the lowered bar. All the market cares about is they hit the number. I guess my point is you are right but the market seems to shrug it off. Or it has so far anyway.

Caviar Emptor's picture

The "Market" is no longer a reflection of economic growth. It's a barometer of anticipated monetary expansion

fonzannoon's picture

If that is the case. Would it be better to try to maintain purchasing power in the market or in cash. Right now you can say gold and it will be checkmate. I understand this.

Caviar Emptor's picture

With your money in the market you're entrusting your dollars to a combine who's interests you hope line up with yours. If that situation changes, your capital is at risk. 2008, 2010, and 2000-1 are not that long ago but memories can be short. There could be giant disapointment without QE. With gold you're hedging agianst monetary dilution and other risks we've discussed. Your buying power is protected. But your time frame has to be long term. 

tabasco71's picture

Retail has some flexibility with margins as they can move it around from one product to another (discounting, 2 for 1, etc) while they increase elsewhere and keep the average margin level-ish.  Apart from when something particular has happened that influences a business model (acquisition, commodity spike...) margin pressure has been steadily downwards since 2008 for sure.  Traditional buyer power still features although appears to be weaker relatively. 

Q1 retail will have to absorb a wave of returns from the christmas season's purchasing frenzy which benefitted from benign weather but was shadowed by austerity.

Difficult to say what the market is following as 40% of it is computerised HFT now - its more aligned to what Caveat mentioned.

Teamtc321's picture

Service and support companies are unable to pass through as well. It is a vicious cycle that has hit us since 08'. The pinch hit the service and support companies for production companies hard in 09'. 

oddjob's picture

The snivelling greedy boomers that comprise management have no intention of making money for anybody but themselves through outrageous compensation and stock option abuse. After that is paid out, who gives a fuck whats left for shareholders or the enviorment. Same goes for almost every corporation out there.

RunningMan's picture

I was looking at images of unfinished developments in Arizona and Nevada, and reminded of the empty cities in China. It is interesting that the US housing boom built capacity for hypothetical second home owners and retirees who will never arrive because of the bust, where China built cities for a middle class that may never arrive, because of their own hard landing. Everyone keeps telling me China is different though... 

ForTheWorld's picture

Everyone keeps telling me that Australia is different too, because we have immigrants (both legal and illegal) coming here, and everyone wants to live in Sydney, so that's why house prices MUST go up.

Nevermind these facts:

- With China purchasing as many Australian farms it can get its hands on, we're losing out on money from farming
- We've lost the majority of our manufacturing, and now a private equity group (KKR) wants to purchase a once famous brand of Australian made (now Chinese made) clothing
- Average rent per week in Sydney is $400, meaning that if you were on minimum wage ($583 per week before tax), you'd be paying 68% of your gross income for rent. That's good, right?
-  Average petrol price is $1.50/litre, a pack of cigarettes is $17, and a 6 pack of cheap beer is $12-$15. That would wipe out the rest of your minimum wage.
-  The Australian Government implemented a tax last year (they said would only last 1 year) on the majority of Australians incomes that would pay for rebuilding of towns hit by floods, and we'll have a "carbon pricing scheme" starting July 1st this year.

With food costs still going up, I'm not sure how people will still be able to afford to keep living the "Australian" lifestyle.

Oh that's right, it's different here.

ZeroPower's picture

Whoa...with a strong AUD, that makes those prices (of beer, smokes) even more ridiculous. 

RunningMan's picture

Australia and Canada both have some corrections in their future. Housing never corrected in the major urban centers so price to income multiples are above long run averages in both countries. Exceptionally so in certain cities (e.g. Vancouver), suggesting a trigger event would start that decline. The prudence of the Canadian banking market (aka risk aversion, lack of GSEs, mostly balance sheet lending) makes it less risky there. Not so sure about Australia in terms of reliance on wholesale funding (and frankly the wholesale mortgage market there makes me think of US parallels, whereas less developed in Canada).

China may be the trigger for both countries.

ForTheWorld's picture

Australian banks post increasing profits year on year (it was north of $24bn for the 4 largest banks servicing around 12 to 14 million customers customers during the last financial year), and continue to pass on, as they state, "the increased cost of borrowing from overseas lenders".

The way I read this is that they've already used up whatever funds are available on their balance sheets, and have been hitting up overseas lenders for the last few years. One of our largest banks, Westpac Banking Corporation, was on the list of banks borrowing funds from the Fed in 2007/2008.

Looking at the following link paints a bleak picture for our banking sector:

As for housing prices, we've been seeing discounts on housing prices in major cities except Sydney, which is the golden child of all those in real estate as an example of prices "never going down" or "prices double every seven years". Purchasing a 1 bedroom apartment in Sydney will run you anywhere between $250K for a filthy shoebox, to upwards of $400K for something rather decent, but those are within 20km of the CBD. The further out you go, the worse it gets in most areas.

It's a case of the blind leading the mute here - the blind don't know where they're leading people to, and the mute can't say anything when they see problems, so we're all screwed.

Mr Lennon Hendrix's picture

DoChen has got to start selling bearings to China

??'s picture

I know there is a great deal of hype about insourcing but I suspect bearings are still being produced in some slave factory in Zhejiang, which is the Ball Bearing capital of the world

Yen Cross's picture

 Launching Paper Gliders off a " Soviet Carrier" ?    You tell me?

surf0766's picture

How can any financial information about a communist country be taken with an level of trust? China this China that. No one really knows...

slewie the pi-rat's picture

not to mention enron; or the FED

at least if you question the chinese they will show you the abacus and say, "See?"

hard landing;  take it or leave it

your guess is as good as theirs or anybody else's since we all have about the same info and almost none of it is right

Danger Zone - Kenny Loggins (Top Gun)


The trend is your friend's picture

Somehow it will be twisyed as positive news by MSM tomorrow morning

Caviar Emptor's picture

Gartner reports worldwide PC shipments declined 1.4% in Q4 after 2 positive quarters. Weakness in Europe, US cited. "The big surprise was the US" "Worst performance since Q4 2008"

tarsubil's picture

It's like it has already happened. We've seen the flash but the sound and shockwave still haven't made it to us yet. What a fucking bizarre situation.

Excuse me while I go get high.

fonzannoon's picture

Thank you. That is exactly what I am saying but did not articulate.

Caviar Emptor's picture

When things don't add up there's always a reason. 

847328_3527's picture
Michael Olenick: 9.8 Million Shadow Inventory Says Housing Market is a Long Way From the Bottom


Put more simply, things are actually worse than any of the prevailing estimates indicates, although Goodman is very close to the mark. Current loss experience suggests that this figure is staggering, easily in the $1 trillion range.

Why aren’t those losses more visible yet? Well, evidence suggests that servicers are stalling the foreclosure process, not taking title to and selling these houses. For the lenders, such delay likely allows them avoid the write-offs of both the negative equity as well as the worthless second liens. More generally, it keeps the trillion dollar losses hidden. Lenders aren’t acknowledging their stall tactics, however. When people notice how slowly foreclosures are progressing from initial steps to resale, lenders point at their foreclosure fraud related dysfunction. Lenders conveniently don’t mention that such dysfunction was self-induced, instead blaming borrowers and courts.



You got to read this:

This is just disheartening  and what's coming in a few other countries near you soon.