China

That’s STAGflation, as in stagnant economy, not the more benign INflation, as in the stuff the US pretends doesn’t exist.

After a few days ago we released the "definitive" factual presentation on China courtesy of HSBC, today we look at the future of the only country that matters (and which according to Goldman was the only saving grace for America, decoupling and what not, before the firm went full propaganda retard) with CLSA's complete (124 pages) and historically very authoritative 2011 outlook on China. While not a departure from conventional wisdom in any way, all those who wish to follow trends and be part of the lemming herd for as long as possible, are advised to read the report: it will certainly permit the collection of a few pennies before the rollercoaster shows up. And when that happens, everyone will naturally quickly and quietly pocket their profits and head for exits in a cool, calm and collected manner. Because, after all, what else can you do when "trading the tape" aka being a momentum trader, is all that works...

The much awaited Chinese CPI and PPI have been released: CPI came at 5.1%, on top of the whisper number, but higher than the official consensus of 4.7%, and the highest number by far in over two years. PPI beat by 100 bps, printing at 6.1%, compared to 5.1%. This "data" should be sufficient to negate the impact of last night's RRR hike and force the PBoC to raise its interest rate, as if the Chinese central bank does not act, one would wonder why the Politburo would allow the release of data which would only enflame the domestic inflation scare even more.

In China, where according to whisper numbers, inflation is expected to spike by over 5% in the last month, inflation is already surging. However, courtesy of its autocratic regime, China can simply quash any protests over inflation... for now. "Sovereign Man" Simon Black explains the tenuous dynamic between social instability and economic growth in the world's most populous and fastest growing country. As he notes: "The price of a Big Mac is going up in China by 7%. In fact, Chinese state media outlets are reporting that prices for all items at McDonalds fast food restaurants across China are going up by 1/2 to 1 renminbi (RMB), roughly 7.5 to 15 US cents." Let's hope that China does not stop importing the US' biggest export: inflation. Otherwise, our own regime may soon be forced to see just what it means when runaway inflation (ahem, oil) ends up creating just a little popular unrest. And, in the most ironic of boomerang effects, should China start reexporting our own inflation back to us, via increased prices for beads and trinkets, then all bets may just be off.

Following up on the earlier news of more Chinese rate hike speculations, we present what is arguably the most comprehensive summary of the country that conventional wisdom sees as becoming the world's biggest economy within a decade, and less than conventional wisdom sees as the biggest bubble in the history of the world. As report authors HSBC point out: "What emerges from this guide is a more complex picture of China than even many experts have assumed. For anyone hoping to conclude a business deal in China it offers this message: don’t assume you only have to deal with decision-makers in Beijing. You must also make sure local officials are on your side. Whether you are a China expert or a mere beginner, we hope you enjoy what follows." Must read for everyone (especially Americans) to get a sense of what the future rulers of the world will be like.

China has made it clear that it is NOT pleased with the US’s current monetary policy (China has blamed the Fed for its inflation woes with some officials going so far as to label the Dollar’s status as a reserve currency, “absurd”).

The US has in turn responded by labeling China a currency manipulator and blaming it for the US’s economic woes. Indeed, it seems almost every other week that some US Government official comes out with a “it’s ALL China’s fault” statement.

However, when push comes to shove, it is China that holds the trump cards in the form of interest rates.

To all those who are considering buying the futures on the long-ago priced in news of the tax cut extension, we would like to caution that according to the state-run China Securities Journal (which is the same as prophet Jon Hilsenrath telling the great unwashed what the Printing God is about to do with near 99.9% accuracy), China will raise interest rates this weekend. Some additional color from Dow Jones: "Given the central bank set a precedent by raising interest rates right before the release of the consumer price index (previously), there's a 'sensitive policy window' before and after this weekend." If the hike is confirmed (and it is in line with our expectations, that China will hike first before it revalues the CNY any more) look for the greatest marginal credit bubble to promptly collapse, dragging down the US and EU with it, proving that all those who are preaching that Decoupling 2.0 is so different this time, are as always, merely Econ Ph.D.'s.

CNBC last week quoted an HSBC analyst's note pointing out that California California currently consumes more crude oil than China. It is hard for me to fathom California even belongs in the same sentence with China on any economic measures, and decided to do some research.

From the exquisite stream of consciousness of Nomura's recent addition: Bob Janjuah, who luckily discovered he was far too smart to be held back by the D-grade bailed out banker-clowns at RBS (we can only hope Bob will next discover the carriage return button): "If you are wondering why the title "Bulls in a China shop", I hope that after reading the [below], it makes sense: financial markets are very fragile right now, and any bullish risk-on phase seems to be based on very hopeful assumptions (“don't fight the Fed”; “beware animal spirits in the US”; “don't position against the US consumer”; “Germany owes us”; and lastly, “China will always grow at 10%”). We prefer to rely less on hope and more on hard reality and sensible and credible policies – even if they may mean more pain in the short term."

Some time in January, we presented an extended analysis by Mark Hart's Corriente Fund in which the successful hedge manager presented a comprehensive case for the Chinese bubble. Today, about a year later, and after China is finally on the verge of realy pulling in the liquidity avalanche, tired of importing Bernanke's rampant inflation, Art Cashin looks at the very same Mark Hart in his market commentary: "Several readers asked if I had more details on Mark Hart’s bearish call on China. I pulled up a couple of articles, most notably the U.K. Telegraph. Mr. Hart manages Corriente Advisors. He set up a bearish sub-prime fund in 2006 and a bearish European debt fund in 2007. The anomalies he sees in China are somewhat familiar: Excess floor space exceeds 3.3 billion square meters and there are still 200m being built this year; The price to rent ratio is 39.4 times versus 22.8 times in America before the housing crises; Banks are hiding their exposure in Local Investment Vehicles; On a Sovereign level, China’s debt to GDP comes out at 107%, five times published numbers; China has consumed just 65% of the cement it has produced in the last six years; There are 200m tons of excess steel capacity, more than the EU and Japan’s total production this year. According to the articles, Mr. Hart has been growing bearish on China for months. Several other successful hedge fund managers are also said to be making negative bets on China. It certainly bears watching." We would like to help Art, and provide with a redux of what we posted back in January that summarizes Corriente's outlook.

Busy day in the markets today as Eurozone concerns took a breather and a backseat to a barrage of positive dataflow, starting with a big beat in Chinese November manufacturing PMI (55.2 vs 54.8 expected vs 54.7 prior) that helped boost markets. Significant support levels in the euro, which I pointed out in last night’s piece, and moving average ceiling in the US Dollar Index, set up a market ripe for a rally and the data catalysts followed through. A great beat in US November ADP employment (+93k vs +70k expected vs +82k prior) and a 56.6 print for US ISM PMI, higher than the 55.5 consensus estimates, helped send markets rallying further. Upward revisions by GS to its macro forecasts for both US & global growth added fuel to the fire.

As usual, Soc Gen's  Albert Edwards does not pull any punches: "Once again, investors see China plays as the only investment game in town. Dylan and I remain convinced we are witnessing a bubble of epic proportions which will burst – catching investors as unawares as the bursting of the Asian bubbles of the mid-1990s." Already we have seen traces of Edwards proving correct after the Chinese market has swooned dangerously in the past week. Should the world realize that, as Edwards claims, even near-unlimited liquidity is insufficient to keep the system going, then the China-initiated avalanche will be severe. Not only that, but in the recent fake economic renaissance (sorry, unwind QE1, QE Lite and QE2 and then we'll talk how real this recovery is) Edwards sees nothing less than the shades of the dreaded 1990s economic Triple Dip...

And here is the catalyst: China has approved a fund that will invest in gold exchange-traded funds outside the country, opening the door to mainland China investors who face negative real interest rates on their bank deposits and want to hedge against inflation. Beijing-based Lion Fund Management Co. said they received approval from the China Securities Regulatory Commission on Monday to proceed with the fund. Next stop: gold much higher as the bubble mania is really unleased in such ETFs as GLD, UGL and PHYS.

In a surprising reversal, the Shanghai Composite has dropped 3% in early trading following a statement by the China State Council which on Monday said it will revise penalties to crack down on price violations to tackle inflation, which has been interpreted by traders as an imminent December rate hike. Per Dow Jones: "Shanghai Composite Index down 2.5%3.0% at 2793.95, faces immediate support at 2750 level. "There has been heightened expectations for an interest rate hike soon, which exacerbated earlier weakness in the index from sovereign debt concerns from Europe as well as a stronger U.S. dollar," says Wang Junqing, analyst from Guosen Securities." More importantly key stat arb pairs such as the AUDJPY and the ESZ/NDZ are being dragged below the surface. On an indexed basis, the ES will soon take out the intraday lows per the AUDJPY. For Brian Sack's sake, we hope the Fed has its midnight crew in tow as this could get ugly fast. We will be following.

The onslaught against Chinese fraud stocks is getting stronger as we expected, and the cottage industry of those looking for Chinese public scams is starting to make some serious cash. Today's casualty is China Education Alliance which according to Kerrisdale Securities "is fabricating its SEC financial statements. We believe that the company’s revenue and profit are highly overstated in its SEC filings and that the company is mostly a hoax." Stock down about 18% at last check. Of course, from $3.61 to zero it still has a long way to fall. All in all, this is just another slap in the face for the NYSE which continues to admit the biggest (alleged) scam companies to trade on it, destroying all credibility of prescreeing, merely to pursue a listing dollar here and there.