The most recent data being released by the Chinese authorities has showed some interesting developments in terms of growth and economic expansion. As much as one would tend to regard this particular trend as positive, it is important to remain cautious and don't rush conclusions on the meaning of the latest data published.
First and foremost, we should review the overall economic performance:
A picture usually says a thousand words. The growth has slowed considerably. There are always two camps when it comes to interpreting financial and economic data. Everyone likes to add their 2 cents and give their own view.
I will refrain from that. All I can tell in fact, is that there is a contraction. If we are reaching the point when situation will start to improve or further deteriorate, remains a question. I don't know and nobody really knows. All one can do is making an educated guess on what are the possible outcomes and the probability of such events.
Nothings is set in stone. With the China Bureau of Statistics data being questionable in many cases, one should try to look into other variables to gather a better picture of the situation.
China GDP Annual Growth Rate
The Gross Domestic Product (GDP) in China expanded 7.40 percent in the third quarter of 2012 over the same quarter of the previous year. Historically, from 1989 until 2012, China GDP Annual Growth Rate averaged 9.25 Percent reaching an all time high of 14.20 Percent in December of 1992 and a record low of 3.80 Percent in December of 1990. The annual growth rate in Gross Domestic Product measures the increase in value of the goods and services produced by an economy over the period of a year. Therefore, unlike the commonly used quarterly GDP growth rate the annual GDP growth rate takes into account a full year of economic activity, thus avoiding the need to make any type of seasonal adjustment.
The World's Supermarket
China is regarded as the main supplier of discount products in the planet. Putting it very simple, one of the main sources of revenues for China are its exports.
Balance of Trade
China reported a Trade surplus of 319.92 USD Million in October of 2012. Historically, from 1983 until 2012, China Balance of Trade averaged 50.56 USD Million reaching an all time high of 404 USD Million in November of 2008 and a record low of -314.83 USD Million in February of 2012. Export growth has continued to be a major component supporting China's rapid economic growth. Exports of goods and services constitute 39.7% of GDP. China major exports are: office machines & data processing equipment, telecommunications equipment, electrical machinery and apparel & clothing. China imports mainly commodities: iron and steel, oil and mineral fuels; machinery and equipment, plastics, optical and medical equipment and organic chemicals. Its main trading partners are: European Union, The United States, Japan, Hong Kong and South Korea.
Exports
Exports in China decreased to 1755.71 USD Million in October of 2012 from 1863.50 USD Million in September of 2012, according to a report released by the General Administration of Customs. Historically, from 1983 until 2012, China Exports averaged 400.88 USD Million reaching an all time high of 1863.50 USD Million in September of 2012 and a record low of 13 USD Million in January of 1984. Export growth has continued to be a major component supporting China's rapid economic growth. Exports of goods and services constitute 39.7% of its GDP.
China's exports to Europe have declined substantially. There is an acceleration on this particular trend. France, Italy and Germany experienced severe contractions on their inflows of Chinese goods.
There were far less shipments coming into the EU from China. As the situation is unclear in Europe, with France showing some concerning sigs of weakness, one could make a case for further distress in this particular segment of the economy.
China's ability to generate income, Credit and the trend in consumer demand are all tied to its ability to Generate income = Export goods and capitalized on its competitive advantages.
This contraction in exports should lead to decrease in capital inflows. This data is released annually. Therefore, one must use monthly adjusted data to build a forecast on what the next release could look like.
Money supply has marginally grew recently. It has a lot more to do with the decrease in Outflows - Imports - than expansion. The overall trend is contraction.
A reason for concern at this juncture is the fact that October 2012 has registered the second largest drop in M2 in the history of China. It was the second largest monthly decline ever. That is not coincidence. It reflects state of affairs.
Bank Deposits have shrunk. A fast and disorderly expansion on Bank Loans with another concerning sign matching it: Defaults in payments. The combination of factor, doesn't make the best Cocktail for success and growth.
Taking into account the fact that several countries rely heavily on China as client - Australia, Brazil & commodity exporting nations - there are more than reasons for those nations re-evaluate their strategies and sales forecasts for the near future.
Several firms have engaged in debt financing. Many among them are Stock listed companies, member of the composite in Shanghai. What does it mean exactly - as of now - is impossible to define. It could sign some further deterioration or it could mean the point of reversal, when companies allocate new capital to new projects and expansion. Nobody knows for sure. Are they use capital to refinance existing credit lines? are they renegotiating old debts? are they investing and expanding? It is impossible to determine with precision. All one can do is try to use common sense to assess the current and near term prospects.
The Equities Markets and its role
The Chinese stocks have performed very poorly recently. Actually is one the worse performing indexes in the world this year. Value investors would argue that here is the point where one can load on these Cheap stocks and make a fortune. Certainly, in terms of evaluation, digits are difficult to beat. Yet, things are far from being so simple. It is wise to look at companies in case by case, individual analysis.
Not every company is a Steal right here. Many could go bust, as they have already been many cases in the manufacturing and textile sectors. One should take time to understand where Instituional money is flowing. Jumping conclusions here - even with low valuations - could prove costly if not done properly. Nobody understands China better, than Chinese - Hong Kong and Singapore Based - investment funds.
Each and every fund manager has its own forte and mentality. One should try to find those that match best an investor profile and investigate what this particular manager is doing. Follow the footprints of smart money saves a lot of headaches to investors.
China Stock Market (SSE Composite)
Stocks in China had a negative performance during the last month. China Stock Market (SSE Composite), declined 74 points or 3.53 percent during the last 30 days. Historically, from 1990 until 2012, China Stock Market (SSE Composite) averaged 1651 Index points reaching an all time high of 6092 Index points in October of 2007 and a record low of 100 Index points in December of 1990. The Shanghai SE Composite is a major stock market index which tracks the performance of all A-shares and B-shares listed on the Shanghai Stock Exchange, in China. It is a capitalization-weighted index. The SSE Composite Index has a base value of CNY100 as of December 19, 1990. This page includes a chart with historical data for China Stock Market (Shanghai SE Composite).
The Chinese central bank has been very accommodating in its policy. It has been lowering rates and try to make PLENTY - with capital letters yes!!!! - of capital available. They have now switched to the overall global trend of letting credit flow. If that is right or wrong, the possible damage that such policies can generate and how the economy will react to this measures are beyond the scope of this article. However, as I mentioned in my previous China economic analysis, there are issues; and they will sooner or later weigh.
Total banking assets rose to RMB128.5455 trillion by the end of Q3, up from RMB126.7831 trillion in the Q2, and increased by 19.67% from a year early according to CBRC. Total banking liabilities rose to RMB128.2893 trillion, up from RMB118.8470 trillion.
The all important but unbelievable total non-performing loans rose from RMB 456.4 billion to RMB 478.8 billion, while NPL ratio rose from 0.94% to 0.95%.
Many investment professionals we have been quite skeptical about the true level of bad debts as opposed to the level of bad debts that are actually being recognized in the Chinese banking system. This is how such system works, as a tightly controlled banking system should play an important role in stabilizing the economy. Recently, of course, we noted that the so-called "stimulus" to counter the current slowdown is being funded increasingly by non-bank sources, which is an entirely different discussion.
But the key, remains that if the government needs to keep credit growing, the best control the government has is to ask the tightly controlled banking system to lend, delay recognizing bad loans either by pretending that they do not exist, or to roll over bad loans indefinitely.
A case in point, is a similar occurrence in Japan during the years 90 and 94. The same pattern was experienced. The policies and negligence from policy makers also similar. It may serve as a warning and deserves a note of caution.
Chinese banks are now sitting on a tiny bit of non-performing loans which probably no one in their right mind should believe that it reflects the reality.The Wall Street Journal reports that a recent survey done by China Orient Asset Corp, one of the asset management companies which was set up to deal with a bad loan problem in the previous century, suggesting that many participants in the survey (which are the key players involved in dealing with bad loans) think that the actual level of non-performing loans are higher than it is currently being reported:
Interest rates remained the same.
Do I think the Chinese Central Bank ( People's Republic Bank) will lower rates in the near future? Yes I do. There is room to do so and they will do whatever they can to keep The Chinese Wonder Alive. It does not come as surprise the type of Fortunes being amassed by Chinese Politicians and play-makers. It serves their best interest to get that INCENTIVES or Hush money for their business connections. Therefore, my opinion. Lobbyist are doing their best to keep things going as far as they can.
BTW, such practices are not novelty in Asia. A straight forward research in countries like Thailand, Indonesia, Japan and Taiwan, can deliver a clear picture in this front. Mr. Taksin Fortune in Thailand, Soharto's and others in Indonesia, Scandals in Japan and Korea as well as the soon to become more open Burma/Myanmar will supply plenty to verify this claim. Not that I personally care, to be quite sincere. This has been part of the world history for centuries and as long as money power players can profit personally from situations, they will. It is Human Behavior.
I will not try to be the next guru or market forecaster. There are a good group of Individuals far better equipped, educated & experienced that myself, is this world that one should listen to when it comes down to forecasts. Quite brilliant Individuals with the fine knowledge to make such forecasts. An example would be Dr. Marc Faber; he is definitely one of them and personally one that I deeply admire. Therefore, I leave to Mr. Faber, a brilliant mind, the task of giving us the hint of when and where.
I am very humble and down to earth. I don't make secrets and I admit that instead of trying to go out of my zone and make a fool of myself, I rather pay attention to what such brilliant individuals are saying and use what I have on my disposal to make the a sound decision. I simply listen carefully to their forecasts and follow such bright mind's. Nothing more nor less. Listen, absorb and act accordingly.
China Retail Sales
A very interesting set of data comes from Retailing.
Retails Sales growth expanded from 14.2% YoY in September in nominal terms to 14.5% YoY in October. The results came above expectations . In Real term, retail sales were up bu 13.5%, up from 13.2% in YoY in September.
On a seasonally adjusted month on month basis, retail sales have increased by 1.34% in October, down from the revised figure of 1.65% in September.
Retails sales have been expanding for the past five years. It is almost replicating what retail sales in the US does, which is curious to put it mildly. Another important aspect to take into considertaion, is the value of retail in China if converted to US currency.
With the current exchange rate, the sales in China represents 75% of the sales in the U.S.
Five years ago, that represented only 25%. The power of purchase is increasing in China, meaning that the Chinese are playing a far more important role in Worldwide consumption, as well as the fact that they are being far more aggressive in their consumption pattern than counterparts.
Although the percentages have been impressive, there are some concerning issues. The contraction on real term growth once inflation is taken into consideration. That is a point to be explored. How long they can hold that growth without export expansion is the type of question one must ask itself.
Exports lead to growth in Income, that leads to Increase in Money Supply and consequently Credit expansion and Retail expansion. It is a process. Key factor: Exports.
Normally, growth in Income would also lead to increase in savings. Now, that part of the puzzle is not being filled. As that doesn't happen Export figures become central to every single other factor in the Economic Equation.
CPI
CPI inflation fell in October. Headline CPI inflation fell from 1.9% yoy in September to 1.7% yoy in October. The market was expecting CPI inflation to be unchanged on a year-on-year basis.
On a month-on-month basis, headline CPI was –0.1%, back to a deflationary territory after returning to positive month-on-month price change for the previous two months.
Looking into individual components, there is almost nothing in particular which would draw anybody’s attention. Food prices were up 1.8% yoy, lowest since late 2009, while non-food prices increased by 1.7% yoy. Thus prices of most categories of products remain largely stable.
Meanwhile, producer price index for October was –2.8% yoy, up from –3.6% yoy, but below consensus estimate of –2.7% yoy. On a month-on-month basis, it returns to positive territory at 0.2% after staying negative for 5 consecutive months.
With the current exchange rate, the sales in China represents 75% of the sales in the U.S.
Five years ago, that represented only 25%. The power of purchase is increasing in China, meaning that the Chinese are playing a far more important role in Worldwide consumption, as well as the fact that they are being far more aggressive in their consumption pattern than counterparts.
Although the percentages have been impressive, there are some concerning issues. The contraction on real term growth once inflation is taken into consideration. That is a point to be explored. How long they can hold that growth without export expansion is the type of question one must ask itself.
Exports lead to growth in Income, that leads to Increase in Money Supply and consequently Credit expansion and Retail expansion. It is a process. Key factor: Exports.
Normally, growth in Income would also lead to increase in savings. Now, that part of the puzzle is not being filled. As that doesn't happen Export figures become central to every single other factor in the Economic Equation.
CPI
CPI inflation fell in October. Headline CPI inflation fell from 1.9% yoy in September to 1.7% yoy in October. The market was expecting CPI inflation to be unchanged on a year-on-year basis.
On a month-on-month basis, headline CPI was –0.1%, back to a deflationary territory after returning to positive month-on-month price change for the previous two months.
Looking into individual components, there is almost nothing in particular which would draw anybody’s attention. Food prices were up 1.8% yoy, lowest since late 2009, while non-food prices increased by 1.7% yoy. Thus prices of most categories of products remain largely stable.
Meanwhile, producer price index for October was –2.8% yoy, up from –3.6% yoy, but below consensus estimate of –2.7% yoy. On a month-on-month basis, it returns to positive territory at 0.2% after staying negative for 5 consecutive months.
Translating the data properly, it becomes clear that China is experiencing Price Deflation.
Short term interest rates adjusted to Inflation is increasing. There is a serious possibility for further increases in the near future - namely first quarter 2013
Conclusions
The Economic Data coming from China moves markets. It affects Equities, Commodities, Currencies and Interest Rate markets. In fact, today, professionals await Chinese data with as much intensity as they await US or European economic data or news.
On a global scale, China's importance is not going away anytime soon. On the contrary, its importance is only increasing for a couple of reasons:
- The immediate reason - need for good news somewhere - leaves no doubt that China is the place to look for. The U.S . and Europe are not being able to supply that kind of news lately. China economic data can emulate the the kind of joy that policy makers and the public in general wishes to hear.
So, today, instead of U.S. and Europe, we look elsewhere, to a large economy with Fire Power to lift our moods. China is the immediate choice, with some other emerging economies lagging behind. Yet, China is THE REPLACEMENT by choice.
- The picture in Europe and U.S. is not very bright. Until further notice, it will remain so. Messages are always mixed, one day joy ( A speech here and there, an isolate figure somewhere....) the next day Hell! That has been the mode for quite a while. What defines Joy and Hell here is the kind of expectation the general public would like to hear. For astute enough investors, there are opportunities in this Chaos.
- With the Panic Button at close reach everywhere, Investors, Speculators and Hedgers are again looking into Gold as an alternative. Central Bankers as well. They are now net Buyers, which is a new role.
- The Dollar has been appreciating against all major for the last 4 weeks. Except the Chinese Renminbi. That is a factor to point out and pay attention to closely.
- Equities markets are starting to show weakness. Commodities could suffer the same fate, as asset classes become very intertwined. Once the ball rolls in one side, it bounces immediately on the other.
ASIA'S IMPORTANCE AND ROLE
One cannot ignore the power and importance of this region. Asia is not a Fly by night, one time wonder; Far from That! China came to stay! Hong Kong and Singapore are now Leading financial centers. Hong Kong and Singapore will take over the role of London City by 2015. That is shocking for many, but a wake up call to what reality brings.
Singapore has taken over Switzerland as the favored location for Asset protection, and I add here WITH MERITS. It deserves that position! Service quality is second to none, friendly, efficient and above all flexible. Besides, in a region where the curve is positive still and there is far more to offer.
Professionals of every single sector and industry are being influenced by the Chinese Economy. There isn't an Industry that is immune to Asian competition.
China is the reference, however, other Asian nations also play important roles in the overall global performance. Large consumer markets, expanding economies and vast resources have to be taken seriously.
