China Is Quietly Unraveling as the World Frets Over Europe
29 Septemberm 2011
As we limp towards the finish line of the third quarter, we're on track for what could be the fifth consecutive month of declines on the S&P 500. Stocks are down roughly 5% for September and commodities have been among the weakest performers with Copper down 25% plunge in the past 2 weeks that have pushed it to a 14-month low.
But "Dr. Copper" is not alone. Others tied to economic growth are feeling the pain. Silver, Coffee, Corn, and Wheat are all down more than the 10%. If you're looking for a culprit, you need look no further than China, where Michael Darda, the chief economist at MKM Partners, points to copper and a hole host of other warning signs.
"We are seeing signs of stress. A big slow down in Chinese liquidity indicators, China's yield curve spread has collapsed," Darda says in the attached clip. "We're seeing a tone and tenor to the forward business cycle indicators in China that we haven't seen since 2008."
On the equity side, September has been brutal for China. As the world worried about Europe, the benchmark Shenzhen Index quietly shed 12% and is now wallowing at a 14-month low. Compare that to a 3% haircut for the STOXX50 in Europe this month and the trouble-ahead story starts to gain traction.
"The recent trends are a sobering setback to the view that China was just gonna motor on through and continue to be the locomotive of global growth," says Darda. He says 9% growth forecasts for China are "several hundred basis points" too high and points out that a technical recession there is not necessary to inflict serious damage on commodity markets, emerging markets and large cap multi-nationals.
Economic Slump Hits China in Earnest
30 September, 2011
There have been a number of convincing arguments that China will be spared the recession that has begun to spread across the world — or, by the recession that never ended but has begun to grow anew. The theory that China’s economy is isolated enough to expand at 9% while the rest of the world drags along at 4% has deep flaws. New PMI data from the People’s Republic signal exactly how flawed the expansion assumption is. September’s number was 49.9. A figure of 50 is a signal of growth. China’s PMI has now been weak for three consecutive months.
The optimism about China’s economy is based on at least three things. The first is that its emerging middle class is large enough to consume much of what China’s factories make. This middle class is relatively new and expanding as more people in the country move from rural areas to the large cities where production is centered. However, Chinese consumers are hobbled by their propensity to save and by inflation rates the undermine their purchasing power.
The second theory about China’s financial health is that its ability to control the value of its currency will keep its exports attractive. The period when that is true may have started to end. Developing nations like Brazil have aggressively attacked China’s currency policies. It would not be beneath these countries to erect trade barriers to make their points. In the U.S., Congress has a bill pending that would label China as a currency manipulator. China would face sanctions if the American government took that stance officially.
The third theory about China’s growth is that developed nations with slow GDPs and those that are still growing will need China’s finished goods because no other nation can muster the size of its factory output. China’s position as the world’s preeminent manufacturer may be unquestionable, but a deep recession would touch even countries like India and Brazil, which are in periods of economic hypergrowth.
The slowdown in China has started. It is hard to say what would constitute a recession in a country were 9% expansion is the norm. Perhaps 4% or 5% would “feel” like a recession in China. And, it is certainly possible that the world could pull China in that direction soon.
Douglas A. McIntyre
China hard-landing fears hit high-end retailers
NEW YORK (MarketWatch) — Shares of several high-end retail goods companies slumped Thursday in the U.S. and Europe on worries a worsening global economic climate could weaken Chinese appetite for premium branded products.
The tumble came amid growing fears of a hard economic landing in China, which has emerged as a key driver of the world’s economy in the wake of the global financial crisis.
The concerns circle around the possibility that China could face a sharp slowdown in exports in coming months, aggravating the headwinds facing the Asian country and dampening the nation’s demand for premium brands such as Louis Vuitton and Tiffany.
“Fears of a hard landing in China have once again intensified. While our base case remains a soft landing led mainly by an investment slowdown, we see increasing downside risk from the situation in Europe and at home,” Barclays Capital economists led by Yiping Huang wrote in a report earlier this week.
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