Inflation & Money Supply in China

As China’s economy overheats, inflation is the talk of the town these days:

In China, everyone is talking about inflation. Prices for food, raw materials and other commodities are rising, and that’s making people skittish.

Officially, prices grew at a 4.4 percent annual rate in October, the biggest jump in more than two years. But it’s striking how many people you meet in Beijing who say official statistics lowball the true inflation rate.

One economist I spoke with says inflation is probably running at twice the government’s estimate. A business executive I met says the same. He factors significant future inflation into any investment his firm makes these days.

And on the street it seems to be the same story. “I tend to agree with the housewives,” who are skeptical of the official inflation numbers, says economist Yu Yongding.

So why does China’s actual inflation rate matter? If forecasts are correct and China’s inflation rate levels out next year, then it’s full steam ahead for China’s economy. Factories will keep churning out goods. The building and investment boom will probably continue without pause.

But if China’s inflation rate climbs to 6 or 8 percent or higher, then the situation changes significantly. China’s central bank would continue to raise interest rates. The government might step into to control prices for grain or other commodities. It would probably be forced to rein all that money flowing out of the banking system that’s fueling China’s boom. Lenders would pull back.

And if all that happens, then the China miracle goes on hiatus, at least for a while. And the world will notice.

Some more data on Chinese money supply may help put things into context.

The Chinese money supply figure that is closest to my True Money Supply in the US is M1 as reported by the People’s Bank of China:

The money supply in China has easily tripled over the past 6 years.

And here is a comparison between the money supply growth rates in the US and China:

Money supply and credit supply have both been exploding in China, while money supply in the US has rather stagnated or at least grown a lot slower alongside contracting credit.

This is the main reason why I don’t think that the Yuan will remain strong against the US dollar for very long, and it is also why I don’t think the Chinese bubble can continue for much longer, but then … bubble often times last a lot longer than you’d expect.

The only way how the Yuan can maybe remain strong against the US$ for a sustained period of time, in my view, is if the PBC tries to cheapen the Dollar by selling reserves against Yuan, which in turn would exert an upward pressure toward exports from the US into China while having the adverse effect on Chinese exports, and thus hurt China’s politically powerful export lobby.

However, such a policy, too, would find its natural boundaries in the amount of Dollar reserves accumulated by the PBC.

Tags: china, money supply

Chinese Inflation Spirals Out of Control

May 19, 2010 · Posted in Global Economics · Comment

CNN Money accurately makes the obvious observation that Chinese inflation might be out of control:

One of the most popular debates in global macro circles currently relates to China and whether its economy is in a bubble. On the side of the bubble callers is one of the more successful short sellers of our generation, James Chanos. Admittedly, Chanos is usually on the right side of these big calls and, for the time being, I’m not going to debate him. Great Chinese bubble debate aside for now, how does Chanos’s theory hold up in light of the data we’ve been reviewing?

Data from various sources within China that we’ve seen over the past few weeks has pointed us directly toward one simple conclusion: China is experiencing serious inflation. Some of the keys for us include:

* Chinese CPI (Consumer Price Index) and PPI (Producer Price Index) are up 2.8% and 6.8%, respectively, year-over-year. Combined, this is the largest spike in combined inflation in 18 months;
* Chinese property prices, based on a survey of 70 cities, were up 12.8% year-over-year in April, which is the largest spike since 2005;
* Chinese money supply growth was up 21.5% year-over-year in April;
* Chinese loan growth was up 51% sequentially from March to April at 774B Yuan; and
* Chinese industrial production was up 17.9% on a year-over-year basis in April.

While economists in the United States continue to argue over whether the U.S. is experiencing meaningful inflation, there’s little room for debate when it comes to China.

The direction in China: up

Prices for consumers and producers are up, real estate prices are up double digits, and money supply is accelerating in a big way. The key factor is money supply. If it continues to grow, inflation will continue to accelerate.

The beauty of the Chinese system, being a command economy, is that the leadership of the country can make real time economic decisions to adjust to the data they’re getting. And we are already seeing Chinese leadership implement policies in the hopes of tempering these inflationary tailwinds.

On the real estate front, the government has ordered 78 state-controlled companies to exit the real estate sector, banks are newly requiring a 50% down payment on second homes, and the Chinese government mandates 20% cash down at land auctions. Collectively, these actions should help slow the white-hot Chinese real estate market.

The other key policy that Chinese government is implementing relates to bank loans. After a period in 1998 where the Chinese banking system was in effect insolvent, Chinese officials are rightfully cautious about rampant loan growth, for more than inflationary reasons. To combat bad loans and hopefully stymie inflation, reserve requirement have been raised three times for Chinese banks. Currently they’re at 17% for large banks and 15% for smaller banks — just under the all time high for reserves. In effect the government is forcing banks to park some money, making loans for the booming property market harder to come by.

At risk of actually creating a bubble, Chinese officials cannot allow these inflationary factors to pick up speed. Therefore Chinese officials will likely continue to take policy actions to slow growth and cool inflation. These policies will have some predictable effects. But the most direct and knowable effect relate to commodities.

Chinese citizens have negative incentive to save: sound familiar?

China is the world’s largest producer of steel, and also consumes almost one-third of all global steel. As construction slows in China, the demand for steel and specific commodities related to construction, copper in particular, will slow on the margin. Any slowdown in Chinese demand will create a negative headwind for the prices of many of the commodities related to construction, but will also affect other commodities, like oil.

As of now, the Chinese economy is signaling the need for more aggressive tightening based on the points above. But there is also the reality of negative real interest rates. Currently, the consumer price index is outpacing the one-year interest rate on savings of 2.25%, meaning the Chinese have no incentive to save any money. The two policies needed to offset inflation are an increase in interest rates and an upward revaluation of the Yuan. Both actions would help slow Chinese growth and commodity demand further in the coming months.

What worries Chinese economic planners considering these fixes is that rather than just slow down and control growth, they have the potential of “popping” the bubble, making Jim Chanos a happy man but also causing serious damage to China’s export heavy economy. China would like to have it both ways right now: rapid growth and wealth creation, but also the safety of a properly valued, non-inflationary economy. That’s a tough task: nearly every time we’ve seen this movie before, the ending is the same.

Over the past 4 years the Chinese money supply has risen by more than 100%. Meanwhile, in the US the true money supply has merely increased by 22% in that same period.

In the US credit has been contracting heavily for the past 2 years. In China it has been continuing to overheat during that time.

Flashback July 2009:

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar …

You see now what I was talking about? That upwards valuation of the Yuan that US exporters, the US government, and hyperinflationis keep on dreaming of is most likely not going to happen!

Tags: china, dollar, yuan

Beijing Property Prices Plunge 31.4% in One Month!

May 12, 2010 · Posted in Global Economics · Comment

Buckle up, the Chinese bubble is popping:

The average transaction price of commercial residential properties in Beijing for the week ended May 9 fell 1,790 yuan per square meter or 9.6 percent week-on-week to 16,898 yuan per square meter, reports The Beijing News, citing statistics released by Beijing Real Estate Information Network.

Compared with the week ended April 11, the average transaction price of commercial residential properties in Beijing plunged 31.43 percent to 7,744 yuan per square meter.

In the last weeks of April, the transation volume of commercial residential properties in Beijing decreased by 10.34 percent, 11.39 percent and 30.82 percent respectively. Average transaction price was flat at between 22,000 yuan to 23,000 yuan per square meter.

The share price of Poly Real Estate (600048) was down 2.65 percent to close at 10.66 yuan today.

The share price of Beijing Capital Development (600376) was down 4.16 percent to close at 13.26 yuan today.

There are several property bubbles around the world that are ready for a massive correction, just as US home prices slip back into decline. This is just the beginning …

Tags: china, china property bubble

Faber: China May Crash in 9-12 Months

May 4, 2010 · Posted in Global Economics · Comment

Bloomberg writes China May ‘Crash’ in Next 9 to 12 Months, Faber Says:

Investor Marc Faber said 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 Shanghai Composite Index has failed to regain its 2009 high while industrial commodities and shares of Australian resource exporters are acting “heavy,” Faber said. The opening of the World Expo in Shanghai last week is “not a particularly good omen,” he said, citing a property bust and depression that followed the 1873 World Exhibition in Vienna.

“The market is telling you that something is not quite right,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong today. “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.”

An index tracking Chinese stocks traded in Hong Kong dropped 1.8 percent today, the most in two weeks, after the central bank raised reserve requirements for the third time this year. The Shanghai Composite has slumped 12 percent this year, Asia’s worst performer, as policy makers seek to rein in a lending boom that’s spurred record gains in property prices. China’s markets are shut for a holiday today.

Copper touched a seven-week low and BHP Billiton Ltd., the world’s biggest mining company, fell the most since February on concern spending in the world’s third-largest economy will slow and after Australia boosted taxes on commodities producers. Rio Tinto Ltd., the third-largest, slid as much as 6 percent.

Chanos, Rogoff

Faber joins hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff in warning of a crash in China.

China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade.

The government has banned loans for third homes and raised mortgage rates and down-payment requirements for second-home purchases. Prices rose 11.7 percent across 70 cities in March from a year earlier, the most since data began in 2005.

The government has stopped short of raising interest rates to contain property prices. Within an hour of the central bank announcement on reserve ratios, Finance Minister Xie Xuren said that officials remained committed to expansionary policies to cement the nation’s recovery.

Stocks ‘Fully Priced’

The nation’s economy grew 11.9 percent in the first quarter, the fastest pace in almost three years. The government projects gross domestic product growth for the year of about 8 percent.

The clampdown on property speculation may prompt investors to turn to the nation’s stock market, Faber said. Still, shares are “fully priced” and Chinese investors may instead become “big buyers” of gold, he said.

BlackRock Inc. is among money managers reducing their holdings on Chinese stocks on expectations that economic growth has peaked. The BlackRock Emerging Markets Fund has widened its “underweight” position for China versus the MSCI Emerging Markets Index to about 7.5 percent from 4.6 percent at the end of March, the fund’s London-based co-manager Dan Tubbs said.

Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd, the nation’s three largest banks, are trading near their lowest valuations on record as rising profits are eclipsed by concern bad loans will increase.

Local Governments

Citigroup Inc. warned in March that in a “worst case scenario,” the non-performing loans of local-government investment vehicles, used to channel money to stimulus projects, could swell to 2.4 trillion yuan by 2011.

Housing prices nationwide may fall as much as 20 percent in the second half of the year on government measures to curb speculation, BNP Paribas said April 23. Under a stress test conducted by the Shanghai branch of the China Banking Regulatory Commission in February, local banks’ ratio of delinquent mortgages would triple should home prices in the country’s commercial center decline 10 percent.

I think it is clear. The Chinese reflation bubble has been over since August 2009. Since then Chinese stocks have lost quite some ground, even inspite of a mini rally inbetween. As I said last year in September, Rally in Chinese Stocks – Time to Kiss it Goodbye and Cash Out.

Tags: china, chinese market, chinese stocks

China’s Bubble Produces Empty (!!!) City

December 18, 2009 · Posted in Global Economics · Comment

… it is hard to find a better example of how government spending produces rampant malinvestment. Note that spending on such useless projects is not the only source of “GDP growth” by Chinese measures: Even funds that are only earmarked, not yet spent, are included.

What drives all this madness? It’s simple:

China’s banks extended more loans in November than economists forecast.

New local-currency loans totaled 294.8 billion yuan ($43.2 billion), compared with 253 billion yuan in October, according to data released by the People’s Bank of China on its Web site today. The median forecast of 19 economists in a Bloomberg News survey was 250 billion yuan.

M2, the broadest measure of money supply, rose a record 29.74 percent in November from a year earlier.

This is why I believe that the wide spread notion Free Floating Yuan = Stronger Yuan is a complete and utter fallacy.

China’s growth is a mirage, its bubble a monstrous one, its impending crash completely inevitable.

Tags: china, chinese bubble

Free Floating Yuan = Stronger Yuan ??

November 18, 2009 · Posted in Global Economics, Monetary Economics · 6 Comments

An interesting assumption in virtually all debates concerning the Yuan is that it would appreciate against the Dollar, once let float freely. A good example is the article below in which this premise is applied, set in stone and unquestioned from start to finish:

A growing number of global leaders are urging China to look to its long-term interests and allow its tightly controlled currency to rise. But they are encountering reluctance from a government still very much worried about the economy in the short term.

President Barack Obama and Dominique Strauss-Kahn, managing director of the International Monetary Fund, in Beijing on separate visits Tuesday, told Chinese officials that yielding to market pressures for a stronger yuan would help the global economy recover.

Nonetheless, Chinese President Hu Jintao didn’t announce any new commitment on currency policy to Mr. Obama. Other Chinese officials and economists continue to defend China’s policy of keeping the yuan steady against the dollar to aid Chinese exports, which are still vital in sustaining the nation’s economic recovery despite growing domestic consumption.
[Geithner] Reuters

Treasury Secretary Timothy Geithner took a softer tone on China’s currency at a Senate Foreign Relations Committee hearing on Tuesday.

At a congressional hearing Tuesday, Treasury Secretary Timothy Geithner sounded a much softer tone than in the past on China’s currency, saying it’s “very important” that the Chinese government pursue “broader reforms to their exchange system over time.”

“China has to take steps to move away from excessive reliance on exports” and find ways to stimulate domestic consumption, Mr. Geithner said at the hearing before the Senate Foreign Relations Committee, refraining from harsh rhetoric toward the Asian giant. He said that China is already making progress on rebalancing its economy and that “we’re seeing very promising, early signs” of a shift toward growth that relies on “domestic consumption and investment.”

The discussions highlight how China’s heavily managed currency is once again at the center of debates over global economic policy, after being pushed to the background by the financial crisis.

Though Mr. Hu, Mr. Obama and other world leaders have promised to cooperate in pulling the world economy out of its deepest slump in a generation, coordinating economic policies across very different countries remains difficult.

High unemployment makes trade with China a volatile political issue in the U.S., but similar pressures make it difficult for China to yield to U.S. pressure on the currency. A stronger yuan would make Chinese exports less competitive, which is unappealing for China in a year when exports are down about 20% and many manufacturers have closed.

Chinese leaders who have criticized the West’s economic management may also find it politically difficult to yield to demands on the currency.

On the other hand, China’s economy has recovered faster than most. Because the yuan has weakened sharply against other currencies, European and Asian competitors complain that China has an unfair advantage.

Meanwhile, some economists worry the extra juice to the economy from the cheap yuan, in addition to huge government stimulus, risks new bubbles in real estate and stocks.

Mr. Strauss-Kahn said keeping the currency down may help exports in the short term, but it imposes other costs. “You have to balance your needs in the short term with the long term,” he said. For instance, an undervalued currency encourages companies to invest in ways that may not be viable once the currency rises.

“If you have wrong prices, you make wrong decisions, especially concerning investment in the long run,” he said, adding that it is time for China to look more toward long-term stability now that it has accumulated advantages from an undervalued currency.

A stronger currency also would boost the purchasing power of Chinese households, which would support the Chinese government’s drive to make economic growth less dependent on exports, Mr. Strauss-Kahn said.

Chinese officials frequently counter that big swings in the exchange rate can harm companies and disrupt the economy, which is of particular concern at a time when confidence is fragile. They sometimes contrast the stability of the yuan’s exchange rate — which makes it easier for firms to plan ahead — with the wild swings in the dollar’s value.

“China keeping a basically stable exchange-rate policy is, in reality, good for the global economic recovery,” Yao Jian, spokesman for China’s Ministry of Commerce, told reporters Monday. “If the request is to strengthen other currencies, while allowing the dollar to keep weakening, that’s not very fair.”

Chinese officials aren’t totally closed to arguments for a stronger yuan. In a statement many interpreted as a gesture to the growing concerns about the currency, the People’s Bank of China last week said exchange-rate policy would take into account “changes in international capital flows and the trends of major currencies.”

Still, many private analysts don’t think a move on the yuan is imminent.

Authorities may feel freer to shift once exports are growing again and inflation has turned positive, which could happen early next year. In coming months, China will have to tell other members of the Group of 20 leading economies how it plans to boost consumer spending.

Although China’s government publicly has grown more confident about the strength of its recovery, growth still remains heavily dependent on government stimulus programs.

“China needs the U.S. economy to recover strongly and renew its import growth. Otherwise, China will have a tough time sustaining its recovery,” said Eswar Prasad, an economist at Cornell University.

That is one of the key reasons China is reluctant to lift its currency now. World Bank chief economist Justin Yifu Lin, a former Chinese government adviser, has argued that if a stronger yuan snuffs out a recovery in China’s export sector, it could weaken China’s entire economy and have negative consequences for global growth.

As I noted before on this matter (and so far I see no reason to change my mind on that):

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.

We will see how things develop over time. I am not saying that my scenario HAS to occur. But I think it certainly is a possibility over the next 2 years or so. What I reject is a completely one-sided approach to this question. As Ayn Rand always used to say: Whenever you encounter contradiction in your thinking, check your premise. I will surely check mine if I turn out to be wrong.

Tags: china, dollar, yuan

Tariffs on Chinese Tire Imports – Continuing Mistakes from The Great Depression

September 13, 2009 · Posted in Global Economics · Comment

So far, the US government has been diligently repeating each and every mistake committed during The Great Depression. The only thing they had left undone so far was to match the Smoot-Hawley Tarriff Act from 1930, widely recognized as the worst decision during that period:

In mid 1930 the Smoot-Hawley Tariff is signed into law, raising import tariffs to record highs, and spreading protectionism all over the world – consumers and exporters suffer from the ensuing decline of international trade

Now, president Obama is rushing in to fill that void:

In a break with the trade policies of his predecessor, President Obama announced on Friday night that he would impose a 35 percent tariff on automobile and light-truck tires imported from China.

The decision is a major victory for the United Steelworkers, the union that represents American tire workers. And Mr. Obama cannot afford to jeopardize his relationship with major unions as he pushes Congress to overhaul the nation’s health care system.

But China is certain to be antagonized by the decision, made less than two weeks before Mr. Obama will come face to face with Chinese leaders at a summit meeting in Pittsburgh for the Group of 20 industrialized and fast-growing emerging nations.

The decision signals the first time that the United States has invoked a special safeguard provision that was part of its agreement to support China’s entry into the World Trade Organization in 2001.

Under that safeguard provision, American companies or workers harmed by imports from China can ask the government for protection simply by demonstrating that American producers have suffered a “market disruption” or a “surge” in imports from China.

Unlike more traditional anti-dumping cases, the government does not need to determine that a country is competing unfairly or selling its products at less than their true cost.

The International Trade Commission had already determined that Chinese tire imports were disrupting the $1.7 billion market and recommended that the president impose the new tariffs. Members of the commission, an independent government agency, voted 4-2 on June 29 to recommend that President Obama impose tariffs on Chinese tires for three years. Mr. Obama had until this coming Thursday to make a decision.

American imports of Chinese tires tripled between 2004 and 2008, and China’s share of the American market grew to 16.7 percent, from 4.7 percent, according to the United States Trade Representative. Four American tire factories closed in 2006 and 2007, and several more are set to close this year.

The Tire Industry Association has opposed the tariffs, arguing that they will not preserve American jobs but will instead cause manufacturers to relocate plants to other countries where they can produce tires cheaply.

President George W. Bush received four similar recommendations from the trade commission, the most recent one involving steel pipe in December 2005, but he rejected all of those recommendations. Under the law, the president is allowed to accept or reject the commission’s recommendations.

“The president decided to remedy the clear disruption to the U.S. tire industry based on the facts and the law in this case,” the president’s spokesman, Robert Gibbs, said in a statement Friday night.

Mr. Gibbs said the United States, which already imposes a 4 percent tariff on Chinese tires, would impose an additional tariff of 35 percent for one year. The tariff will be reduced to 30 percent in the second year and 25 percent in the third year. The tariff is to take effect on Sept. 26.

The trade commission proposed higher tariffs than the president actually imposed, recommending an initial levy of 55 percent.

The president of United Steelworkers International, Leo W. Gerard, applauded Mr. Obama’s decision, saying, “The president sent the message that we expect others to live by the rules, just as we do.”

Senator Sherrod Brown, an Ohio Democrat who had pressed for the tariffs, also praised the decision.

He said in a statement, “If American workers and manufacturers are going to compete in the global market, they need to have a government that uses trade enforcement tools.”

The stupidity behind those tirades is so rampant and obvious that most people will of course be able see through it easily. If American workers want to be competitive in the global market they need to be productive and their services priced competitively when compared with workers from other countries.

The very reason why higher tariffs are introduced is the fact that they are NOT competitive, and they will stay uncompetitive without the necessity to outstrip competition. We have already seen this with the big auto manufacturers. Now they are moving down the supply chain to wreck yet another industry. This will of course ultimately discourage investment and destroy jobs.

“The president sent the message that we expect others to live by the rules, just as we do.”

What is he talking about? Which rules? The rule that a Chinese entrepreneur should not benefit US importers by offering affordable goods which in turn benefits those consumers who buy end products from them?

Reactions to follow

To every action there will be consequences. China will probably retaliate in kind and impose similar tariffs. On top of that, other labor associations may feel encouraged now and start pushing for more similar tariffs. Up to now, it seemed to be a gentlemen’s agreement among governments not to resort to protectionism because they all claimed to understand the disastrous long term consequences on global trade. Now it seems as though all that is forgotten and all bets are off.

Tags: china, global trade, tariffs, tires, US imports

Rally in Chinese Stocks – Time to Kiss it Goodbye and Cash Out

September 2, 2009 · Posted in Global Economics · Comment

The Chinese stock market has staged a remarkable 100% rally from October 2008 through the end of July 2009. August 09, however, hasn’t been good for Chinese stocks. Since August 4th, Chinese stocks have now fallen by more than 20%.

The Shanghai Composite Index:

Click on image to enlarge.

EWI writes China’s Stocks Crash: Is The United States Next?:

In the past three weeks alone, China’s formerly sizzling stock market has gone from bull market leader to bear market letdown. On August 30, the Shanghai Composite Index plummeted 6.7%, its largest one-day drop of 2009 so far. And, of the 89 global markets tracked by Bloomberg, the Shanghai index came in last place.

As for what caused the freefall, mainstream experts point their collective finger at one main factor: Growing fears that China’s monetary officials will turn off their easy-money spigot. Here, this August 31 BusinessWeek stands in:

“Investors began selling on concerns that banks will cut back on lavish lending that had helped push shares up by more than 80% since that start of the year.”

Here’s the thing: the drunken lending habits of China’s banks have been on the global Concern-O-Meter for quite some time now. And last I checked, its needle reading jumped from “Don’t worry be happy” — to — “Be Afraid, Be Very Afraid” many months ago. To wit:

May 2009: China’s deputy central bank governor seriously questions the “sustainability of the rapid growth in credit and its possible adverse impact,” and a Wall Street Journal piece warns that China’s stimulus spree is “pillaging bank balance sheets” as the quantity of loans vastly outweighs their quality.

June 2009: “China’s Banks Are Warned About Loans” (WSJ). China Bank Regulatory Commission issues an internal directive to commercial banks to “tighten supervision of loans” and ensure those loans serve the needs of the “real economy” and not “financial speculation.”

July 2009:“China Aims To Rein In Lending.” (Associated Press) China’s two largest lenders reveal they will “sharply slow credit growth.”

Yet during that time, the mounting anti-lending rhetoric failed to take the wind out of the Shanghai Composite Index’s sails. Prices rallied without resistance to new yearly highs until early August.

So if the “fundamental” shoe doesn’t fit, what’s the real story here? Well, I’ll make it really simple: the Shanghai Composite Index has plunged more than 20% from its 2009 high on August 4. And, in the days leading up to the market’s reversal, China landed on the radar of several of EWI’s subscription-based publications. For our analysts, the time had come to stage a full frontal attack and warn of a major turn in China’s fortunes.

Here, the following catalogue of previous publications fills in the blanks:

August 2009 Elliott Wave Financial Forecast observes the unsustainable nature of China’s latest stock market rise and writes: “China’s debt bubble will succumb.”

August 14 Asian Short Term Update: “All eyes continue to be on China as we ascertain whther or not an intermediate-term-top is in place.“

August 14 Short Term Update: Presented the following close-up of China’s main stock market and wrote: “A break of the trendline will be the next important tip” that a larger decline is underway.

August 14 European Short Term Update: “Though not under our normal purview for ESTU, China has been the central source of liquidity…China’s sharp decline may be a case of the pin meeting the balloon.”

And how about the fundamentals of the oh so vibrant, dynamic, unbreakable, sound, and decoupling economy? Some facts Mish posted today about China’s unsustainable stimulus and property bubble:

A 4-Minute Tour of the China Property Bubble

What is China doing with all that printing? Please take a A 4-Minute Tour of the China Property Bubble to find out.

World’s Largest Shopping Mall Sits Vacant

The world’s largest shopping mall, South China Mall in Guangzhou, China, is almost entirely empty. Click on the link to see a fascinating video.

If you thought Minnesota’s Mall of America was the world’s biggest shopping center, think again. South China Mall is a Vegas-like spectacle built in 2005 that now sits almost entirely empty. In the current economic climate, could this be a symbol of things to come?

The entire mall sits empty save 10-12 small shops.

Malinvestments and Commodity Prices

Think about all the concrete, steel, copper, and energy it took to build that mall. This is not an isolated case either as the previous 4-minute video shows.

Let’s not confuse a renewed crack-up boom in China with a sustainable recovery. And let’s not pretend much of this building is anything other than malinvestment.

The truth is: There is no decoupling. The Chinese economic miracle is a mirage, a very popular one to be sure. If it is China the world is banking on to lead a recovery, then the world is royally screwed.

Tags: china, chinese bubble, chinese stocks, shanghai composite

US Trade Deficit Continues to Decline to $26 Billion in May

July 10, 2009 · Posted in Global Economics · Comment

Today the BEA announced that the US trade deficit declined to $26 billion in May 2009:

Goods and Services

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total May exports of $123.3 billion and imports of $149.3 billion resulted in a goods and services deficit of $26.0 billion, down from $28.8 billion in April, revised. May exports were $1.9 billon more than April exports of $121.4 billion. May imports were $0.9 billion less than April imports of $150.2 billion.

In May, the goods deficit decreased $2.6 billion from April to $37.3 billion, and the services surplus increased $0.2 billion to $11.4 billion. Exports of goods increased $2.0 billion to $82.1 billion, and imports of goods decreased $0.5 billion to $119.4 billion. Exports of services decreased $0.1 billion to $41.3 billion, and imports of services decreased $0.4 billion to $29.9 billion.

In May, the goods and services deficit decreased $34.6 billion from May 2008. Exports were down $33.3 billion, or 21.3 percent, and imports were down $67.9 billion, or 31.3 percent.

…this is an ongoing and expected continuation of the end of the last Consumption Business Cycle, the End of Consumerism. It is reasonable to assume that Chinese government’s suppressing the value of the Dollar is accelerating this process of declining US trade deficits significantly, as can be seen in this chart:

Tags: china, current account deficit, trade deficit

US on the Hook for Chinese Investments

March 14, 2009 · Posted in Global Economics · 5 Comments

When a government has to publicly start assuring foreign creditors about the soundness of their debt holdings, it is high time to worry:

Some excerpts from Obama Administration Tries to Reassure China on Treasury Debt:

“There’s no safer investment in the world than in the United States,” White House Press Secretary Robert Gibbs said yesterday at a briefing in Washington.

This statement shows the sheer arrogance of policymakers. Even if there was no safer investment in the world than in the US, it is most definitely not with the US government. Why should it be? Why should an organization that does nothing but borrow and spend money, while facing a massive tax shortfall and not creating any factors of production be a “safe” investment? Just because they are currently considered a safe haven and might continue to play this role for quite a little while longer, who seriously believes that this will never come to an end?

White House National Economic Council Director Lawrence Summers, asked yesterday about Wen’s remarks, said overseas “confidence” in Treasuries would be hurt without the administration’s steps to end the economy’s decline.

Yes, and confidence in Treasuries deserves to be hurt. Too much confidence in debtors is what created the credit crisis in the first place, in case anyone still remembers.

“The U.S. Treasury market remains the deepest and most liquid market in the world,” Treasury spokeswoman Heather Wong said in an e-mailed statement. “President Obama is committed to taking the steps necessary to restore growth and put this country on the path of fiscal sustainability, including cutting the long-term deficit in half over the next four years.”

Actually President Obama is doing absolutely nothing to restore growth. Which one of his policies exactly restores growth? Which intelligent and/or competent person would seriously believe and say with a straight face that this government will cut the deficit in half within the next four years, while at the same time passing a budget that dwarfs all previous ones and while facing a massive tax shortfall.

The administration is “tackling many long-ignored problems, ensuring that the U.S. will be in a stronger position than ever,” Wong said. “We are facing whatever challenges come up and will continue to do so.”

The truth is: The government is not tackling any long-ignored problem. It maintains business as usual and it has proven this in the fields of fiscal as well as foreign policy. Wong is simply firing platitudes at the problem, hoping they will stick.

“Of course we are concerned about the safety of our assets,” Wen said after an annual meeting of the legislature. “To be honest, I am a little bit worried.”

You should be.

China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves, Wen said. Yu Yongding, a former adviser to the central bank, said in an interview on Feb. 10 that the nation should seek guarantees that its Treasury holdings won’t be eroded by “reckless policies.”

China has no other choice than to stop buying US treasuries and begin ensuring that past obligations will be paid. The US will need to export more and import less while China has to reduce exports to the US and import more. This is the only way the US will ever be able to pay off their debt to China. More on this in The US Current Account Deficit.

U.S. Secretary of State Hillary Clinton urged China, while visiting officials in Beijing on Feb. 22, to continue buying U.S. debt, which she called a “safe investment.”

She actually urged China to keep buying treasuries which are a “safe investment”? If they were such a safe investment then why should Hillary Clinton need to assure them about their safety. Why at the same time would she need to “urge” them to buy more?

The outcome of all this is pre-ordained: The massive current account deficit will be reduced because people in the US consume less. Americans have begun to save more. There is no way this trend will stop anytime soon. China will need to export less and begin investing more domestically, while at the same time importing and buying more goods from or in the US. This will happen, whether the US government likes it or not. The End of Consumerism is in full swing. But the government’s reckless borrowing, spending and bailouts assure that this correction will take a very long time. I don’t think it is unreasonable to assume that it will take until 2020 or so until an approximate trade balance between the US and China is restored.

Tags: china

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