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Schrödinger Goes To Shanghai - Finds Economy Both Alive And Dead
Back in February we were quite amused by conflicting internal and external reports of manufacturing growth in China, which according to the HSBC Markit Manufacturing PMI index had contracted for a 4th consecutive month even as the official Chinese PMI data showed 3 consecutive expansions. It just happened again, only this time the spread between the two indices has jumped to the second highest ever, with the official PMI index surging to 53.1, an expansionary number, an eleven month high while according to HSBC it slid to 48.3, indicative of contraction, and paradoxically indicating that in "the first quarter as a whole, the index averaged its lowest reading since Q1 2009." In other words, the Schrödinger paradox - where the economy was doing better and worse at the same time - which was experienced for the past three months in the US (and is now finished with the economy rolling over), has shifted to Shanghai, where it is now the PBOC's turn to baffle all with bullshit. Why? One simple reason: despite what everyone believes, China still has residual and quite strong pockets of inflation. So while the world may be expecting an RRR, or even interest rate, cut any second now (just as China surprised everyone literally house before the November the global FX swap line expansion by the Fed in November 2011), the PBOC is just not sure it can afford the spike in inflation, or even perception thereof.
This also explains why while HSBC, being a member of the banking cartel would love nothing more than more easing from PBOC, China is far more more cautious about further easing, especially if the Fed does go ahead with more QE anyway, the bulk of which China would import as excess inflation anyway. For vivid proof of this observe chart two: the last time we had a record spread between HSBC and China PMI, Chinese CPI soared from -2% to over 6%. China is now at 3%, just as the index spread is the second highest ever. If we are to assume that Chinese easing will follow the March 2009 episode, and thus assume a trough Chinese inflation of 3.2%, one can see that the 12% implied inflation at the end of the current easing episode is why the PBOC will be far, far more reluctant to engage in the same easing policies as the Markit group of banks would wish for it to.
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"If current trends continue..."
The current chinese leadership used to be backers of Tien An Men protests.
Now whoever thinks that Tien An Men protests were democracy and freedom seeking protests, is an ignorant.
Those were FOOD INFLATION RELATED PROTESTS. What goes around, comes around.
Current leadership have converted from Protesters about 23 years ago to Shitters right now. When people are hungry and food makes up for 70% of their income, nothing is more important than keeping food prices down otherwise......................Tien An Men #2, which I think it's coming, regardless.
Which is why CCTV9 was running newscasts encouraging the average Chinese layman to buy Silver bullion. Those guys at the Politburo cannot control a hard landing but they have far higher IQ than our average Western politician to the notable exception of Ron Paul.
Yep, why spend govt funds when you can get the masses of millionaires to help out.
That cat is around here somewhere.
nice lower high on that chart.
China is the elephant in the china room...
I love this headline.
Just like the "recovery" cat here in the U.S. that is both here and not here, alive on the couch in a sunspot yet also dead and flat as a pancake on the freeway.
there are currently an awful lot of new billionaires in china - the 0.1% of the 1%, that have been fomenting rumination,... fostering copulated disarray over the average plebeian. time to rein in these unscrupulous characters and bring back some semblance of a fair and level playing field. by this I mean, the perpetuation amongst outrageous land-grabs, facilitating real-estate and therefore escalating the monopolizing of the commodities market. thusly, having a profound impact on ones daily bread and shelter.
the Chinese Politburo will be very intolerant of said individuals shortly, sending a clear message of, 'admission-of-guilt'! there will be no, 'get-out-of-jail-free-cards' as there is in america's travesty of justice, but rather a swift divine justice.
jmo
It's a catch 22, as the Chinese Politburo are also among those new billionaires. However, it is true that in China, the rich are never safe. Unlike the west, were the rich don't fear the state. In China, the rich fear the state and thus they are fleeing like mice. Money is flowing out of China from Macao and also the rich are taking new citizenship and taking their wealth with them.
In China, there must always be someone to take the fall. If there is an industrial accident, some individual takes the fall as in prison time or even death penalty. Nothing can change for the better, but all is well if someone takes the fall. Therefore, yes, its likely that China's most extravagant billionaires, the ones who flaunt their wealth visibly, will be made an example of.
Sadly, although you can call this a form of justice, its really more like a compromise, or mob justice. The real problems are not solved, its just that the mob gets a few heads on pikes and then quiets down a bit.
Smart rich Chinese people share their wealth with their extended family, the average 40-50 year old billionaire has multiple brothers and sister add in the wife's brothers and sisters and you have a decent sized extended family that the billionaire will be supporting. Buying property in relatives names, they can get around the rules limiting mortgages for additional properties. The upside for relatives is that they legally own the property. Thatcher spoke of "trickle down economics" which actually does occur in China. The billionaire will also be supporting his relatives in their assorted business adventures. After a while the rich and the billionaires are supporting dozens and even hundreds of relatives especially if they and wife were one of five or six kids. The billionaire becomes a bit of a cow just providing milk for everyone else. Add to that supporting a dozen companies which always seem to require additional investment and it starts to seem less like fun and just a monsterous responsibility.
Debating a “Hard Landing”
"Schrödinger Goes To Shanghai - Finds Economy Both Alive And Dead"
It's called a zombie economy... when he returns to Europe and looks around he may get deja vue flashbacks
God Bless the ECB and socialism
Ha!
This site is so good. The headlines: genius.
Here is the amusing thing.
On average every year since 2005, PMI jumps 3 points from Jan/Feb to March. EVERY YEAR.
Per WSJ:
But there might also be seasonal adjustment issues at work. On average since 2005, the CFLP’s PMI has bounced 3.1 points from February to March. That probably reflects failure to adjust for the impact of the lunar New Year, which has a negative impact on manufacturing in January or February, only for activity to rebound after the holiday is over.
Of course the number doesn't matter. Ultimately the only think that is relevant is the markets reaction to the number. And judging by early FX moves, nobody cares that this is likely a one month move, that occurs every year.
I have noticed lately that my suppliers seem to have more capacity. My orders are being made and shipping at record speeds. I have also noticed that the solicitations from other manufacturers in China have increased dramatically in the last month or so. I can only guess that Europe is really on the ropes and trade with China is taking a beating. The Chinese are now turning to America trying to drum up more business to take up the slack.
I have tried different manufactures in China that primarily trade with Europe. The quality of goods is absolute shit. Many times worse than the stuff they send to America. I can't believe that Europe buys such fucking garbage that I can't give it away in North America.
But what do I know. Every time I go out to get anything I see full parking lots, Long lineups at the register. Lots People driving expensive cars. Everyone seems to be doing well. It’s freaky and I don’t understand it anymore. Even my business has picked up.
Maybe this is just the eye of the hurricane and the other shoe is about to drop.
It's strange because we see the exact opposite. It must be an industry specific issue? We are struggling to get capacity. We track on-target delivery and we are less then 20% now. In the past we have been as high as 70%. This is the absolute worst its ever been. For us, its a combination of several factors. 1.) A tight labor market in China has reduced the number of workers in our factories and increased their costs significantly. 2.) Domestic demand has increased dramatically over the last three years. Now many factories choose domestic production over exports. Typically domestic production has higher margins and much faster cash flow. 3.) Export orders do not seem to have slowed down.
From what I know, the only place where there is over capacity is in the south (Guangzhou), where they overbuilt capacity. But from what I know, even there, labor is in short supply. We are in the center of China and its booming and labor can chose where they want to work and they aren't choosing the exporting factories.
Regarding Europe quality vs the USA. That does not make a lot of sense to me. Our European product is basically the same product that we ship to the rest of the world. Are you talking Eastern Europe/Russia? These folks tend to need the lowest possible price.
Increased solicitations does not mean more capacity. I would argue that it's a trend for factories to begin to try to sell direct. The approach most factories are taking is to find young students just out of school or still in school. Pay them a very minimal base salary and then a commission for each sale. Often the same factory will hire an army of kids. I know one factory that has 65 kids sending e-mails to the same tiny niche e-mail list. So its common to see multiple e-mails from the same factory, just from different "Sales VP's", giving the illusion of increased capacity, but in fact its just increased marketing.
One final note, we are battling local governments who are attempting to form cartels. They are actually requiring factories to uniformly raise prices (by a huge amount, like 30-50%) or face fines from the local government. This seems to be driven by a few factors. 1.) The perception that the west is filthy rich and that western importers can easily absorb a 50% price increase and still have people buy this stuff. (which is most likely wrong as most product China exports is price inelastic) 2.) Factories that make low profit margins pay low taxes. So, the local governments are trying to boost profits and thus tax revenue. 3.) I am getting an increasing feeling of nationalism in China. The feeling like China slaved for the West for long enough and now its time for China to stick it to the west. In general, I get the feeling that the pendulum has swung too far in China. Growth has been so strong for so long now, that people forget that there can be a downturn. People are amazingly optimistic about the future. They will quit a job on a whim with no fear of finding a new one and at higher pay. They will turn down business if its not "easy". They will turn down work if it is not "easy". They seem to care more about days off then salary. Hell, there are more public holidays in China that most places I know of... we are partially shut down this week for "tomb sweeping day"! All in all, it seems to me that this is either the eye of the hurricane, or that the days of low cost manufacturing in China are over.
Great post, meatbag.
I don't think its nationalism I think its more that Europe is broke and USA is broke so who really cares what they think. The Chinese are enjoying the upper hand, in that before they had to eat humble pie as the west was rich and now they can tell buyers if you don't like it go else where.
Maybe they learned something from Australia when it kept doubling the price of its coal exports to China, because it could. Chinese factories are doing the same now as well. Why not take the extra profit.
China does seem to have that same sort of high employment and optimism that the US had when Clinton was in power. We employers are all so desperate for good employees they realize they are a valuable commodity and will bounce if they don't get what they think is fair.
i 2nd that :-))