China

Has it already started?

By now you have undoubtedly heard both that China's economy is now officially overheating and about to blow the NO2 canister, courtesy of another dramatic pick up in credit-driven "growth" and a unmitigated liquidity explosion, and that as a result its stock market has officially entered a bear market. Here are some additional thoughts on China's economy from Citigroup.

The chorus of anti-Chinese sentiment is becoming troubling: after virtually every major hedge fund manager has recently voiced in support of a Chinese bubble pop, with today's most recent statement by Marc Faber just the cherry on top, could Farrell's rule #9 be relevant here and with everyone expecting the endgame, one would end up not occurring? Earlier Marc Faber said in a Bloomberg TV interview that "China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst. The market is telling you that something is not quite right. The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months." Roger's sentiment comes on the heels of the latest Chinese increase in the reserve requirement (RRR) which has had a nasty effect on Asian markets overnight (and, briefly, on US futures as well). Alas, the Chinese action is not enough, as even JP Morgan admits: "PBOC’s 50bp RRR hike underlines two messages on monetary policy: (1) More tightening in China is needed; (2) Pace of action will be moderate. BI should again signal it is in no hurry to hike."

What do you do when your last multi-trillion stimulus is expiring and its effects no longer generate asset bubbles as you once did? Why, you launch another multi-trillion stimulus of course, although if you are the US you call it something funky like Pennies for Prosties, Benjies for Bodyrubs or something comparable. China has no problems with nomenclature so it calls it how it is: as Bloomberg observes, "China will announce in August a new stimulus package of possibly 4 trillion yuan ($586 billion), the China Business newspaper reported on its Web site, citing unidentified sources. The plan, from China’s National Development and Reform Commission, will likely cover nine industries including information technology and new energy, the report said." So much for monetary prudence. At this point all economies will spend money into overdrive until each and every economy (that can print its own currency) simply implodes into a Keynesian supernova.

sia is on its way back up to an historical weighting of 50% of world GDP/ that means china’s economy triples from here. Another $500 billion stimulus package is sitting on the shelf. Don’t count on China bailing out our $14.4 trillion economy. (FXI), (DBC), (DYY), (DBA), (PHO).

Here comes protectionism: South Carolina Senator Lindsey Graham has told reporters that he has 80 or 90 votes of support in the Senate (guaranteed passage) if his Bill to stop Chinese currency "manipulation" were to ever get to the Senator floor. Graham must be getting some serious voter push to get this passed asap: "I understand why the administration is reluctant to push China, but unfortunately we're running out of time. This will be the year." With the delay in the official US Treasury's stance on the Chinese manipulation stance set to expire soon, Geithner must decide if the fall out from an escalation in trade war at the highest level is worth the offsetting legislation that now seems set to pass should he chicken out once again. The end result, of course, will be the same not matter what: tariffs, duties, subsidies, and generally protectionism. How the collapse of trade helps boost the great export-oriented US boom is beyond our meager analytical skills.

Olivier Blanchard, chief economist at the International Monetary Fund (IMF), talks with Bloomberg this morning about the prospects for an asset bubble in China. Blanchard, speaking from Washington, also discusses the impact of sovereign debt on global economic growth.

Although it would seem that the Goldman-linked SEC case single-handedly killed the price of gold, it was only a catalyst to a technical correction that was overdue. Furthermore, gold’s long term outlook is further solidified by a couple of new “China factors.”

I presented my thesis on China and Japan at my alma mater University of Colorado at Denver at International Executive Roundtable yesterday. Here is updated version of my China presentation.

Headline for now: Dow Jones: China To Gradually Adopt Floating Exchange-Rate System Under Management

A report issued by the US Joint Forces Command has a rather bleak view on US oil production, and on peak oil in general. In a foreword to the report issued by General James Mattis, he warns that "By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day." Does this mean that oil, just like in the Bush administration, is about to become a "strategic interest", which coupled with the upcoming discoveries of non-existent weapons of mass destruction, would result in some additional geopoltical tensions particularly in the middle east? With nuclear tensions between Iran and Israel already at boiling hot levels, will Uncle Sam decide to make landfall in the Persian Gulg once again? More from the General: "While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India." Well, Mr. Chanos, there's your catalyst. We just hope that the negative carry of a five year short position is palatable to your LPs.

A few days ago we highlighted Richard Koo's most recent media appearance here. Below we provide his most recent presentation extolling the virtues of unbridled Keynesianism. Keynes' ideas may have been an operable theory when the world was not leveraged 100% debt/GDP (and 400% total debt including assorted off balance sheet items). Now, it is not. And everyone who blindly pushes for endless stimuli will find out that the endplay to Keynes' fatally flawed economic theory is sovereign default. And yes, that certainly includes the default of the country which is pring the most paper.

Reuters reports that according to two "sources" the Chinese economy grew at a 11.9% rate in Q1, compared to expectations of 11.5%. Of course, the rate of growth is 10 bps below where the economy is considered to be in the official redline, and rates hikes become inevitable. And even as the economy surges, inflation is somehow supposed to come in under expectations: "Consumer price inflation in March was roughly 2.4 percent, one of the sources said. That would be a deceleration from the 2.7 percent rate in February and below forecasts of 2.6 percent." As the source of the leak appears to have been greenlighted by China, we should expect the daytrading algos which trade only on leak catalysts, to have a field day frontrunning each other on all Chinese issues, as they leave the Ambac corpse behind. "The numbers heard by Reuters matched those reported earlier on Wednesday by China Business News, a Chinese-language newspaper which cited an unidentified source."

Roubini, who recently made headlines by discussing his grim outlook for "the barbarous relic", discusses the trade deficit, the Fed's (lack of an) exit strategy, China, and, once again, gold, about which he says: "“In my view, gold is not going to rise to the levels $1,500, $2,000 the gold bugs argue because gold tends to sharply rise only under two conditions. Either there's a significant increase in inflation - and in US, Europe, Japan, we worry more about deflation than inflation. Or gold rises when there is really risk aversion like after the collapse of Lehman or a year ago when the banks US looked like borderline insolvent. So we have avoided the tail risk of a near depression. So gold prices shouldn't go higher. And for now, there is more deflation than inflation. So for the time being, I see gold in a very narrow range, not shooting up much higher than current levels."