Friday, February 13, 2009

China Looks Set to Be the First Major Economy to Recover from the Global Meltdown

Since the first of the year, China's Shanghai SE Composite Index is up by 23.5%, and is up 36% from the early November bottom (see chart above).

Dennis Gartman discussed China's stock market in today's The Gartman Letter, and wrote:

We’ve included a chart of the Shanghai Composite Index, for since the start of this year China’s markets have led the way higher. We are convinced that this trade in China’s favor has only just begun, for China, as we have said many, many times in the course of the past two or three months, is doing more things right and more things “capitalist” than nearly any other country in the world. When it was clear that the economy was softening, and when it was clear that share prices had become too over-sold, the Bank of China moved not only to reduce interest rates, but it moved swiftly and materially to reduce reserve requirements. Other central banks moved at the edges of their money markets to push rates lower; the BOC took a 2x4 and chose to hit the mule in the centre of its forehead to get its undivided attention. That has paid off handsomely. It shall continue to pay off in the weeks and months ahead.

Bloomberg: The benchmark Shanghai Composite Index has surged 24% this year, the world’s best performer. The rally in Chinese stocks should improve domestic consumer sentiment and encourage spending on big-ticket items such as cars and stimulate the property market.

More from
Bloomberg, "China looks set to be the first major economy to recover from the current global meltdown,” said Lu Ting, an economist with Merrill Lynch & Co. in Hong Kong. “China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse.”

Some commodity prices signal a tentative recovery may be under way, as Chinese companies rebuild inventories. China’s imported iron ore has climbed 28% to 690 yuan per metric ton since the end of October. Hot-rolled steel has surged 41% from Nov. 13 to 4,027 yuan per metric ton. The Baltic Dry Index, a measure of shipping costs for commodities, has more than doubled since Jan. 28.


At 2/13/2009 11:12 AM, Blogger Tom Nally said...

One absolute disaster that the Democrats need to avoid is this: America being a witness to the recovery starting on its own. Nothing would be worse than a populace not in need of the benevolance of the political Left.

That's why the stimulus has to be done NOW. Any delay risks the possibility of the onset of economic self-correction. To the Left, nothing is worse than a private entity that can help itself, and actually manage its own affairs without the assistance of government.

---Tom Nally, New Orleans

At 2/13/2009 11:35 AM, Blogger sethstorm said...

Much ado about a country known for its junk - China.

They have no issue with cutting corners, and not really wanting to move up in quality. The only way they want to do it is by forcing quality down with volume.

That is why I want to see more of Geithner's ability to scare China. I'll unconditionally forgive any "errors" he may have with taxes.

At 2/13/2009 11:48 AM, Blogger misterjosh said...

It's your fellow Americans you need to blame for shoddy Chinese quality. If we weren't buying it, they wouldn't make it.

At 2/13/2009 11:59 AM, Anonymous Anonymous said...

Seth: How should Geithner "scare" China? And what do you imagine that "scaring" China will accomplish?

At 2/13/2009 12:02 PM, Anonymous Anonymous said...

Most of my portfolio is in Chinese stocks. You have to like the prospects. They are much smarter than Democrats.

At 2/13/2009 12:11 PM, Blogger bob wright said...

Interestingly, China still likes U.S. treasuries.

At 2/13/2009 1:17 PM, Blogger lineup32 said...

Using the Shanghai composite for reference regarding the health of China's economy is a joke, here is Brad Setser take on the latest numbers:

"What worries me the most? The possibility that the sharp y/y fall in imports doesn’t just reflect a fall in imported components or a fall in commodity prices, but rather a major deceleration in China’s domestic economy.

In some sense, it is hard to imagine a worse combination. China’s export are falling, making China understandably reluctant to allow its currency to appreciate. But China’s trade surplus is also rising … certainly in nominal terms and quite possibly in real terms. That isn’t good for the world. "

At 2/13/2009 4:02 PM, Anonymous Anonymous said...

The Shanghai Index is a government-manipulated measure of equity prices. When the index falls to significant levels, socialist investors howl and the government begins to prop up prices by buying securities.

If we invest or trade based upon the Shanghai Index, we deserve to lose every cent we spend.

At 2/13/2009 5:26 PM, Blogger sethstorm said...

Anonymous, misterjosh:

It's your fellow Americans you need to blame for shoddy Chinese quality. If we weren't buying it, they wouldn't make it.

Well, it is all but unavoidable. I do my part by avoiding them by buying US/EU made products. Hard to do, but it is possible.

Seth: How should Geithner "scare" China? And what do you imagine that "scaring" China will accomplish?

He was willing to call a spade a spade with regards to currency manipulation. Scaring them with that kind of comment shows that they won't "fall over" like previous administrations.

If they want to talk to the US, they play by a new ruleset. This means that they're going to have to give up a few things towards the US's favor. Human rights, product quality and dumping issues being the key issues.

At 2/13/2009 5:47 PM, Anonymous Anonymous said...

Seth: But the Bush administration did get the Chinese to devalue the yuan fairly significantly. Have you not been following this or do you get your news from Mother Jones?

At 2/13/2009 5:48 PM, Anonymous Anonymous said...

I meant revalue or increase the value of yuan relative to the dollar. Sorry for the type-o.

At 2/13/2009 6:10 PM, Anonymous Anonymous said...

Seth, frankly I never heard of a borrower scaring the lender. The US is a borrower and China is the lender.

I learned that from Mafia 101.

At 2/13/2009 7:29 PM, Blogger sethstorm said...

Anon 5:47:
They're still undervaluing it enough that their junk is still making it through.

Second, the Bush adminstration having Elaine Chao as Secretary of Labor gave them a friendly voice (even if not the most friendly one) towards allowing skilled worker immigration law abuse.

At 2/13/2009 9:07 PM, Blogger PeakTrader said...

Ralph, you never heard of risk?, in lending or investing.

The China Post
China No.1 holder of U.S. Treasury bonds
By D’Arcy Doran, AFP
November 20, 2008

SHANGHAI--China became the largest foreign holder of U.S. Treasuries, owning US$585 billion worth as of September, according to U.S. Treasury Department figures.

“China’s GDP per capita ranks around 100th in the world but it is actually subsidizing the world’s richest country,” said Zhang Ming, an economist with the Chinese Academy of Social Sciences, a government think-tank in Beijing.

Zhang argued that becoming the largest foreign holder of U.S. Treasuries is only an illustration of how serious the imbalances are in China’s overly export-driven economy, rather than an indicator of its strength.

“What China is doing involves high risks,” he said. “When the debts become massive, there are always more risks for the creditor — that’s by no means symmetrical.”

“The U.S. needs help and I think China and Japan want to help. They don’t see an alternative to the dollar right now,” said Andy Xie, an independent Shanghai-based economist.

“This is another bubble and it will burst,” he said. “It’s just a matter of time. No bubble lasts forever.”

Financial Times
Henny Sender
February 11 2009

China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday.

China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world’s largest holding of Treasuries.

Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York that China would continue to buy Treasuries in spite of its misgivings about US finances.

Mr Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: “Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion. . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

However, Mr Luo said Chinese officials would encourage its banks to finance domestic mergers and acquisitions rather than provide rescue finance to distressed financial companies in other countries: “There will be no bottom-fishing of financial institutions, particularly in the US, because there is a lot of uncertainty about the quality of the books.”

Mr Luo said China intends to maintain its separation of investment and commercial banking based on its observations of the US after repeal of the Glass-Steagall Act that enforced a similar division of banking activities.

“Deregulation in the US has gone a little bit too far. The market can’t be omnipotent.”

At 2/13/2009 9:25 PM, Blogger PeakTrader said...

The second article is from Bob Wright's link. China recently overtook Japan as the largest foreign holder of U.S. Treasury bonds.

At 2/13/2009 10:06 PM, Blogger lineup32 said...

China’s trade surplus for January was a mind-blowing $39.1 billion, just a smidgen under November’s all-time high of $40.1 billion (or about 25% higher, if we want to play the day-count game), and edging out December’s $39.0 billion for second place. That puts the trade surplus over the past four months $153.4 billion, well over half of all of last year’s record-smashing $297.5 billion trade surplus.

At any rate whether recent Chinese moves to lower interest rates, to increase dramatically the provision of credit to manufacturing companies, to reduce export tax rebates, to reduce corporate taxes, and to stall the earlier discussions over increasing minimum wages, should be considered “resorting to protectionism” is something one can debate extensively, but the fact is that all of these moves are aimed at boosting manufacturing output and employment. Matters are made worse by the fact that most of the stimulus package so far seems to consist of an explosion in bank lending (by the way last week’s rumors were confirmed – bank lending in January was up by RMB 1.62 trillion), and aside from the problems I discussed in my post earlier this week, bank lending is directed almost exclusively towards investment and manufacturing. Whatever effect it might have in increasing consumption could easily be exceeded by the impact it has on increasing output.

Of course the government can point to consumption-boosting measures too, and there is a lot of discussion about providing Chinese consumers with coupons to be used to consume before some expiry date (although whether these create new consumption or simply substitute for old consumption would be a tricky issue), the fact is that the transmission from domestic demand enhancement to import demand is, for whatever reason, very weak. China is still exacerbating the global overcapacity problem.

The thing to remember is that for the rest of the world it doesn’t really matter what explanation Chinese policymakers give for this high and rising trade surplus. They will consider the fact that with China’s export of overcapacity extremely high, and growing even further, anger within their political constituencies cannot help but rise. Of course China needs to fight rapidly rising unemployment, but so does nearly every other country in the world. At all costs China must move quickly to defuse the threat of trade war, but unfortunately I see little evidence that Chinese policymakers are even beginning to understand China’s role in the Great Global Imbalance.

At 2/14/2009 3:57 AM, Blogger OBloodyHell said...

> Much ado about a country known for its junk - China.

More hot air from a blatherer known for his bunk -- seth.

At 2/14/2009 3:59 AM, Blogger OBloodyHell said...

> Interestingly, China still likes U.S. treasuries.

In the business world, EVERYONE likes the US --
From last October, and still quite applicable:

Hockey moms and capital markets


At 2/14/2009 7:40 AM, Anonymous Anonymous said...

Peak trader, I understand your point but to me the real "risk" with this magnitude of lending is default on the part of the borrower. It seems to me that is exactly the reason China is investing in U.S. Securities, i.e. there is no chance of default. Therefore, whatever they do with their domestic situation (devaluation, human rights, etc.) has nothing to do with our pontificating.

Once the recession is over and most economies are expanding, then we are the ones saddled with the debt which will be a drag on our economic growth.
Furthermore, the next step in this process will be a tax increase to a) finance more government programs and b) to finance the increased debt. The ever decreasing percent of the population actually paying federal taxes will be the ones asked to pony up and be "patriotic".

I just don't accept the notion we can spend and borrow our way to prosperity.

At 2/14/2009 9:29 AM, Blogger bob wright said...

Too much borrowing and spending is what got us into the mess we're in.

So what's the solution presented by the all-seeing, all-knowing crowd in DC? More borrowing and more spending. Brilliant!

At 2/14/2009 11:13 AM, Blogger QT said...

Amen, Bob.

At 2/14/2009 11:29 AM, Blogger QT said...


Just one question. If China is trying to raise manufacturing output despite sagging exports, why is unemployment rising and factories shuttering? Most recent figures out of China indicate 20 million unemployed migrant workers (1 in 6)?

At 2/14/2009 6:03 PM, Anonymous Anonymous said...

So what's the solution presented by the all-seeing, all-knowing crowd in DC? More borrowing and more spending. Brilliant!

Your observation is not particularly brilliant, Bob. You must be late to the cocktail hour.

A more brilliant opinion would be a solution. The libertarian prescription is crash and burn. Is that why Florida ran out of ammo? Good luck, Bob, in your Mad Max dystopia. Order a 2 year supply of your meds.

At 2/14/2009 11:01 PM, Blogger OBloodyHell said...

> More borrowing and more spending. Brilliant!

Ah, but it's "carefully targetted spending", bob.

Carefully targetted to go into the pockets of Democrat supporters.

At 2/14/2009 11:06 PM, Blogger OBloodyHell said...

> Your observation is not particularly brilliant, Bob. You must be late to the cocktail hour.

Anonymouse, you continue to astound me with the amazing degree of "WHAT THE F***?" you manage to inject into things.

In this case, WTF does THAT assinine comment have to do with ANYTHING in this friggin' thread?

Talk about being "off your meds"!!

EARTH TO MOUSE -- your antipsychotics are either woefully underperforming or not being properly ingested. See your doctor immediately.

At 2/15/2009 3:10 PM, Anonymous Anonymous said...

OBH, your capacity for analysis ranks right up there with juandos and q-tippy.

Juandos can only link to right wing rags and q-tippy is a Polyanna Perry cheerleader. What's your excuse?

The day the three of you can bring any independent analysis to bear on the issues, is the day that the triumvirate tweenies graduate.

Good luck and may the force be with you.

At 2/16/2009 12:24 PM, Blogger sethstorm said...

With slave labor companies like these, it is more evidence against them improving.

Any recovery will just mean that we see more of Meitai and friends. That is, more junk to help lower the quality of electronics.

At 2/16/2009 3:28 PM, Blogger Jacoline Loewen said...

China is in the midst of its own industrial revolution and is hungry.
Here in Canada, our government is funding business trips to BRIC countries as well as Europe if marketing to expand into thos countries.
The government talk of Buy American did not go down well here. We've been through it with free trade with the USA. We were urged to buy Canadain. Now we buy globally and Canadian companies are being urged to go global.
The US govt bonds are still in a stable part of the world and will be attractive for a log time.


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