2011 will be remembered as a year of extreme turbulence. From Arab Spring uprising culminated in violent revolution and regime change in MENA to Fukushima twinning of earthquake/tsunami and nuclear disaster, the unprecedented massive month–long flooding in Thailand and near implosion of sovereign debt crisis in Europe, this author is pleasantly surprised that world economy is still standing in modestly “good” shape as it is today. Conditions remain tough. Politically, Middle East is still unsettled. We are watching the transitions to new leaderships in China, North Korea and definitely some prospects of a surprise falling into the abyss of political turmoil in Iran as well. EU is, for all seeming resilience till now, is waiting for a recession, the Japanese third-quarter strong economic recovery is stalling, broad-based deceleration noted in China, Taiwan, Singapore accompanied by signs of property bubble bursting in China, Hong Kong and Singapore. A flickering light of some hopeful signs of an economic recovery fight-back seems to have been ignited in the US - more of this a little later.
So what is the prospect going forward in 2012 – the dawn of a new spring of surprise recovery or the autumn of a wintry slide into a deep, fearful recession, possibly worst than 2008?
The hints are, in the collected thoughts of this author, found in financial markets, some recent macro-economic statistics, notwithstanding any other inevitable shocks of unpredictable natural and political calamities.
2011 in Perspective and what that tells us.
The intense inter-play of politics, finance and economic upheaval gripped the global economic landscape in 2011. Few might be aware or acutely conscious of these facts. Key European stock markets tumbled badly – the German DAX fallen 15%, French CAC 40 down 18% and the FTSE slipped 9% - though mostly off their September lows. Base metals complex across the board plunged a massive 18% to 30% despite the US Dollar (DXY) index returning and poise to close the year out where it begins at around 80. In effect, the US dollar remains unchanged against a weighted basket of 6 currencies, principally, the euro, Japanese yen, sterling pound, Canadian dollar, Swiss franc and the Swedish Kroner. Iron-ore prices also fell a massive 30% from peak. The information tells me industrial production and infrastructural construction has slowed globally – not surprising of reported deflationary property price tendencies in China, even in Australia, Hong Kong and Singapore. The consistent erosion of metal and mining shares in Canada and Australia is revealing to me the world economy is much weaker than thought. Despite resilience of oil price – thanks largely to new political sanctions against Iran, even oil shares are weaker than at year beginning. Iran is desperate now – defaulting its oil and iron-ore supply contracts in quality and quantity – and the Chinese have reduced demand of late. It is sure sign that Iran is a step closer to implosion – politically, economically and maybe even militarily confrontational of posturing against its neighbors and that can’t be good for the global economic landscape in 2012.
Globally, big fund managers reported poor performances in 2011 whether they invested in commodities, equities or bond. Financial markets were rocked by extreme volatility not seen in 2010 and inopportune timing of decisions at each big sudden swing exacerbated losses. In general, fund managers noted extremely high correlation between stocks and market indices. So it was very difficult to hunt and locate “under-valued” stocks at any given time. Big gold investors like George Soros and John Paulson differed widely on their forecast and outlook for gold through 2011 and their different timing of significant divestment exit points from gold investing mirrors the extreme gold price volatility. The sovereign and lurking banking crisis in Europe have been threatening liquidity flow through the hard economies of the world and that magnified currency and financial volatility. Stockbrokers, at times, are as confused as their clients of market read. The parallel, even seemingly synchronized, fall in the equities, bond and gold prices against renewed resilience of the US dollar tells compelling of investors fleeing to cash. Neither gold nor Swiss franc is seen as safe haven and the Chinese Yuan remain hardly convertible. Interesting that China and Japan have in this week announced their trades can be settled either via the Yuan and the Yen. There is no “yen” for long-term preference of other currency - be it the US dollar in trade. It means that current support for the US dollar is temporary refuge. Bigger currency and financial instability awaits us in 2012 – hardly surprising as global economies wait the inevitable recession in Europe.
Global economies as of now.
None of the EU sovereign debt risks have been resolved. The temporary US dollar swap arrangements to expire 1 February 2013 announced on 30 November 2011 by central bankers from both sides of the Atlantic prolonged, not resolved, the EU debt crisis.
Economies are slowing rapidly in EU. European banks have already cut business loans by 16 percent in the third quarter. And no one knows how much European banks will lose on their massive holdings of bonds of heavily indebted countries. Until the damage is clear, banks are reluctant to lend despite ECB lowered its main interest rate to 1% in early December from 1.25%. That is two quick successive cut is some indication of economic desperation engulfing EU economies. The ECB also lends US$641 billions to European banks last week. It helps stabilised nerves in financial markets but not resolving the risks inherent in sovereign indebtedness. Italy’s 10-year Treasury bond yield exceeded 7% again last week is proof of that. It is unsustainable of debt servicing. A recession and further financial market turmoil is ahead for the EU in2012.
As for China, its export growth have been sluggish in recent times and decelerating, partly due to deteriorating trade environment particularly in Europe and cheaper competitive costs structures elsewhere. The onward feeding trend of export growth for 2012 in print now is continuing negative slide, slower growth and shrinking state revenue Year-on-year direct foreign investment is also declining , more so of recent months. The last two quarters also saw manufacturing PMI readings, even dipping to negative. All these are indicative of strong recovery in 2010 is losing momentum. With tighter monetary policies in place, until some recent slight easing, property bubbles are slowly bursting in major cities, Bankruptcies among SMEs are rising as so is inflation-triggered riots in Southern Chinese industrial hubs. Nobody knows the true extent of banking bad loans exposure to semi-government and state-owned enterprises. While there is no immediate sign of imminent hard landings in China, the headwinds blowing are very strong and the days of double digit growth of the last decades are likely to be gone forever. The Chinese stock market is now trading close to 33-month low.
Japan’s economic scenario in the final quarter is also showing signs of stalling. Year-on-year retail November sales dipped 2.3% last month. After a strong and spirited third quarter growth, the current quarter performance is likely to be lacklustre. Industrial output fell 2.6% in November is below forecast. A strong yen hindered export, and prolonged floods in Thailand supplying component parts to Japanese manufacturing sector hurt throughput volume. With Christmas big consumer buying over in the northern hemisphere in major economies and weakening export markets, industrial production is unlikely to look up in early 2012.
Taiwan’s export growth in November was a sluggish 1.3% compared to a year earlier – thanks to waning demand for consumer electronics that also hurt Singapore and South Korea. Even though growth for Taiwan’s export was 13% for the eleven months but the steep fell off in November is telling. November exports of $24.7 million was nearly 9% drop from October, particularly to China and Hong Kong, – a grim warning of sudden steep deteriorating external conditions. Compared to 6.1% GDP growth in 2010, South Korea is expect to reach a slower 5% GDP in the current year.
US economy.
Sunday Times read – US job growth lifts hopes for economy, 25 December 2011 provides the convenient starting point. The headline read posits that rising employment level would be enough to propel the US economy upwards despite
- Stagnating consumer spending and income
- Slowed business investment
- Dismal home sales.
Or at least some economists and analysts agree with that thesis. Let us explore that a little further in details of facts before I attempt to offer some analysis and insights as to what real prospects might hold forward for the US economy.
Non-farm payroll employment rose 210,000, 100,000 and 120,000 respectively for the month of September, October and November. In the latest month, some 140,000 service private sector jobs were created as employment in public sector continues its declining trend despite stimulus spending through 2011. The gain is not due to manufacturing or construction and easing off since September’s huge gain. That gain is unlikely to extend into 2012 due to seasonal factors of retail sales and the enforced cutback of discretionary government spending to $1.344 trillion against a budget sought of $1.386 trillion. Public sector jobs attrition will increase given the expiry loss of economic stimulus package which is now part of “mandatory” (law mandated portion) government spending. Adjusted for the volatile aircraft sector, business demand spending of capital goods actually fell 1.2% in November, the steepest decline since January 2011. Yet another ominous sign of labour market demand forward. The softness of consumer demand is steeper for big ticket item. New home sales edged up marginally by 1.6% in November but 2011 is the worst year on record. Home prices continue to tumble even as average mortgage lending rate fell to a record low of 3.91% Consumers are fearful of big spending with long forward commitments.
However, there has been generally some gain in consumer discretionary in recent months. That was apparent in US third-quarter GDP and flowing into increased imports and not benefiting US-based manufacturing. Hence there is no obvious gain in manufacturing employment within the US. Black Friday sales in September evidenced the seasonal nature of consumer demand which did not, unfortunately, extend to this Christmas peak retailing. Sears has announced the closure of 120 of its Sears & K-mart outlets since Christmas. The restructuring of Sear came after the company reported US-wide unexpected drop in big ticket items in their stores – a sign of consumer’s continued debt deleveraging.
The consumer spending bonus expected for 2012 looks overly optimistic. Personal incomes grew by 0.4% in October and 0.1% in November. Consumer confidence rebounded to 56 in November after six months of consecutive decline. But that was way below the level of 100 seen before the GFC. There is not enough solid base of gain in consumer confidence and durability of spending consumption to sustain confidence of a consumer-led recovery of the US economy. The sovereign and debt crisis in EU has not yet impacted on US manufacturing as falling euro will pressure the competitive US export to this big market which coincides with shrinkage in Chinese demand now hurting Taiwanese exports.
So on all indications of economic barometer currently available, this author concludes that the Sunday Times’ optimistic prognosis is probably incorrect. This author prefers the outlook of the US economy for 2012 expressed by in this weblink
http://video.cnbc.com/gallery/?video=3000064189
That is a recession in EU and US dangling on the edge of a recession abyss. I believe we are in the autumn of sunset of a wintry recession – globally in 2012. The rebound from there has to come from the cash-rich corporate sector.
What are the possible hints of an ECONOMIC turnaround from the next recession I will be looking for?
Instead of US employment figure which is a lagged indicator of any actual recovery, this author prefers to look from a different perspective. Specifically, I would be watching for these developments before I can feel comfortable that global economies either hit bottom or near bottom, even though actual recovery might still lag in time.
- A steep decline in the commodity-sensitive Australian and Canadian currencies followed by a sector-wide rebound in base metal prices
- A rebound in global banking stocks generally, supported by top-line revenue increases, around the world i.e. the restoration of some stability of the banking liquidity systems and life-blood needed to sustain global economic recovery
- Signs of increased corporate spending in capital goods and enhanced level of corporate takeover activities globally – both seems to be in the desert of doldrums at the moment.
- A strong rebound of the US Nasdaq technology sector.
- A rebound in gold prices
- Strong growth in Chinese import trade figures.
- Or different mixes of some of the above.
Anyone wants to share some of his/her thoughts on this economic topic?
Zhen He
Friday, December 30, 2011
Wednesday, November 30, 2011
UPDATE 11- GLOBAL ECONOMIES HEADING FOR TURBULENCE, RECESSION AWAITS 2012.
Europe in turmoil, China retreats, trade financing freezing and rare earths fell out of love
Past 8 weeks since my last Update 10 – Global economies heading for turbulence, financial markets in turmoil as advanced economies slipping off the precipice into another recession – financial market and economic conditions in Europe have deteriorated significantly, threatening to slow down global economies and destabilizing China’s efforts to engineer a soft landing of its slowing economy. Two EU Prime Ministers cleared their desks – unprecedented in a financial crisis even in 2008 GFC
Anecdotal evidences of credit squeeze similar to 2008 are taking shape as risks aversion is gripping both trade and investments. US corporate and money market are withdrawing their funds from European banking system suggestive of a banking run has already commenced. http://www.cnbc.com/id/45417735/Has_the_Bank_Run_Begun_in_Europe. Chinese shippers have stopped payments to Norwegian ship-owners. http://sg.news.yahoo.com/1-second-major-chinese-firm-fails-pay-ship-041643010.html Both institutional/retail investment interest in an emerging Australian rare earths minerals producer (otherwise a hottest commodity speculative sector in the wake of Chinese export curtailment) collapsed - forcing Arafura Resources Limited to cancel its A$74 million renounceable rights issue needed to fund the bankable feasibility study of its promising Nolan’s project. http://www.asx.com.au/asxpdf/20111124/pdf/422smsldx0gdp4.pdf, Rare Earth minerals are a very small segment within the metals market but its aggregate end demand - being largely dependent on highly discretionary consumer use products - is therefore volatile and its pricing economics are highly sensitive to prevailing economic conditions. Commodities prices continue to fall, along with commodity-based currencies relative to the US dollar – except for oil. New sanctions against Iran by US, UK and Canada have buoyed oil prices and that could strangle the last hope for economic recovery to germinate from US. http://business.financialpost.com/2011/11/22/iran-sanctions-buoy-oil-prices-despite-demand-worry/. Across the board, base metal shares continue to fall in Australia and Canada – almost a 12 months rolling decline as destocking in end user market continues. BHP, the world largest miner, has revised its forward outlook from just a month ago, conceding publicly that tightening credit conditions and customers’ reluctance to restock inventories are threatening its business prospect forward. http://www.marketwatch.com/story/bhps-kloppers-cautious-on-market-outlook-2011-11-16-2023280. This is in line with earlier Rio Tinto’s negative forecast for the commodity sectors near to medium term outlook. BHP reported that the European crisis had negative impact among European banks’ capacity and willingness to undertake trade financing. http://www.smh.com.au/business/europe-crisis-hits-bank-financing-bhp-says-20111128-1o1zl.html
While corporate balance sheets in US is stronger than 2008, there has been precious little investment in fixed capital formation. Banks in US continue to report “better” earnings without top-line revenue gain – all thanks to hollow log accounting of bad debt provisions. European banks are strongly suspected of capital adequacy sufficiency – particularly French banks much weakened by massive loan assets write-off in “haircuts” concession made to Greece’s sovereign debt. Any slight decline in asset base value could have magnified negative implications on their solvency. Tightening credit conditions within China and the adverse impact of its export sector are shrinking domestic consumption demand just as property prices in major cities showing signs of steep decline. Latest news out of Chinese political leadership emphasizes continuation of property lending curbs despite damaging slump in prices. http://www.smh.com.au/business/world-business/china-to-maintain-property-curbs-20111128-1o2nz.html China’s economy is also from turning amber to red as I forewarned on August 5, 2011 – Update 9, Global economies heading for turbulence, watch out China.
The traffic signal of deleterious global economic outlook since May this year which turned amber towards August looks almost certain of turning red in 2012. Against a background of fast collapsing economic conditions in Europe and a slowing China impacting on other developing countries, the world faced the ugly prospects of downside risks confronting a steeply uphill struggle to keep the global economies on an even keel, resting upon some brighter (surprising and certainly much-welcomed) economic seeds germinating of improving American consumer spending. US private household’s debt is slowly being repaired over the last few years. But US consumer confidence is unlikely to sustain in 2012 as partisan politics in economic agenda will mean tougher economic targeting both in government spending and spending cuts adding uncertain to job security.
Mergers & Acquisitions – slow to bargain hunt, quick to dump
The first half of 2011 saw the busiest activity season of mergers and takeovers ever in the mining history, according to a PricewaterhouseCoopers study. Now all that evaporated in the second half. http://findarticles.com/p/articles/mi_hb5976/is_201110/ai_n58403165/. Volatile global market put downward pressures on mining assets. Mega mergers of recent past are history and most recent deals activity in commodities sectors center on biggest miners taking over much smaller explorers with very high quality assets. Classic case in point is the uranium giant, Cameco’s hostile bid for Hathor Exploration Inc. keenly contested by Rio Tinto. Hathor owns the Roughrider (a very large, high grade, and therefore, potentially offering low cost production possibilities) uranium deposit in Saskatchewan said to have the potential yield of C$2 billion pre-tax earnings over its currently estimated 11-year mine life. http://www.mineweb.com/mineweb/view/mineweb/en/page72103?oid=135381&sn=Detail. This is an outstanding rarely available acquisition opportunity in terms of mineral economics, except in a hostile bid. Cameco finally walked away from the bidding war. http://www.theaustralian.com.au/business/mergers-acquisitions/rios-bid-for-hathor-gets-boost-after-cameco-drops-offer/story-fn91vdzj-1226208754683. One must remember that China Guangdong Nuclear Power (CGNP) lowered its bid price for Kalahari Minerals by 7%, only to drop it completely last week in the face of opposition from the UK Takeover panel. http://www.miningweekly.com/article/extract-shares-fall-after-cgnp-withdraws-kalahari-offer-2011-05-11.
The contrasting results tell of how sensitive to quality asset pricing in takeover bids even in the newly effervescent uranium sector. No one else is bidding for Kalahari Minerals other than CGNP. The Chinese voracious appetite for takeover seems now to be only looking for depressed valuations in this climate of worsening economic conditions. Minmetals Resources’ $1.3 billion bargain takeover bid for Anvil Mining is one good example. http://af.reuters.com/article/investingNews/idAFJOE7AM0D820111123. At its pre-GFC peak, Anvil Mining was valued nearly 3X as much. That hit the economic nationalism brick wall in Congo and might also fell through.
It is particularly insightful that despite valuations of equities engaged in gold-mining significantly lagging the spectacular upsurge in bullion price, little is heard of gold mergers and takeovers in recent months. Shandong Gold’s predatory bid for Jaguar Mining showed how shrewd of their hunting of distressed assets at severely knocked-down pricing offering big premium on recently traded price but effectively paying very cheap valuation for underlying assets. http://www.bloomberg.com/news/2011-11-18/jaguar-record-premium-still-cheap-as-china-hunts-for-brazil-gold-real-m-a.html?cmpid=yhoo. Other cashed-up rich miners just sat on the sidelines waiting for lower valuations despite longer term structural supply deficiency issues in gold and base metals.
Commodities market is telling us a recession in 2012 awaits us all. No one wants to be caught acquiring even good assets on highly leverage financing and balance sheets - the painful lessons of pre-GFC days driving big miners on the verge of financial bankruptcy and/or financial vulnerabilities of an excessively geared capital base are not forgotten!
KEY MAJOR ECONOMIES – WEAKENING IN SULLEN MOOD OF FINANCIAL BAILOUT QUAGMIRE.
- OECD WARNING
OECD have reduced their growth forecasts to 1.9% this year and 1.6% in 2012 compared to 2.3% and 2.8% respectively made 5 months ago. Instead of uptrend momentum of recovery, the OECD is forecasting a downward slide of the 34-nations OECD economies. http://www.quamnet.com/newscontent.action?request_locale=en_US&articleId=2104774&view=NEWS. OECD warned of major western economies is just one step of plunging into the abyss of a deep recession driving a lot of businesses into bankruptcies. http://www.theaustralian.com.au/news/world/oecd-issues-depression-warning-on-debt/story-e6frg6so-1226208766511
- ESCALATING SOVEREIGN BORROWING COSTS
Yields on benchmark 10-year bonds have skyrocketed to record levels for many eurozone troubled economies of Greece, Italy (7.89%), Spain (7%), even relatively untroubled Belgium (5.65%), France (3.46%) and Germany (2.2). The bond market charges US 10-year bond 1.88% and UK Gilts 2.18%. In effect, Germany is also now viewed as so swamped with EU debt bailout that its own credit ratings have been endangered of higher risks default that until now has no precedent. The debt crisis contagion has spread from Greece, to Italy, Spain, France and Germany. The survival of euro is increasingly in doubt and its collapse could have serious damage to all EU economies and the rest of the world.
Italy and Spain are prime bailout candidates as yields of 7% on a 10-year bond auction implied that borrowing costs would have doubled their debt value within 15 years – that is very burdensome indeed given the state of intrinsic indebtedness and structural issues inhibiting recovery efforts forward.
- RECESSION LOOMING IN EUROPE
In any case, any bailout of Greece, Italy or Spain is only buying time, not solution. The world is drowning in debt funding asset bubbles and Europe’s distress is the epicentre of that un-sustainability. And without economic growth that must accompanied spending cuts in austerity drive, debt cannot be repaid with good money. Final Market Eurozone Manufacturing PMI read in October was 47.1, the third consecutive decline. That hint of EU is already in recession. Germany’s October PMI read of 46.1 is a steep decline from month preceding of 49.6 and the grim reading extends to Italy’s 5 points manufacturing PMI October drop to 43.3 point. http://finance.yahoo.com/news/Euro-zone-factory-data-rb-722517790.html?x=0&sec=topStories&pos=3&asset=&ccode=
Looking at the back mirror view of GDP growth statistics, eurozone has been teetering on the edge of recession – registering two consecutive razor-thin growth of a mere 0.2% in the June and September quarter. http://money.cnn.com/2011/11/15/news/international/europe_gdp/index.htm?hpt=hp_t2 After Canada, the EU is the US second largest export market and therefore a deep and/or prolonged recession poses considerable risks to the US economic recovery.
Just read the comment in this Bloomberg news http://www.bloomberg.com/news/2011-11-27/imf-readying-600-billion-euro-loan-offer-for-italy-stampa-says.html The La Stampa said this - "The money would give Italy’s Prime Minister Mario Monti 12 to 18 months to implement his reforms without having to refinance the country’s existing debt", There is no painful de-leveraging in Italy and Greeks fought austerity drives on the streets of Athens. There is strong evidence of political fatigue of de-leverage among EU governments as much as the austerity fatigue among EU’s citizenry already impoverished by poverty since the 2008 GFC. Worries of the EU sovereign debt drags on, regardless of bailout efforts constantly reworked in European capitals. It is EU’s version of the American real estate sub-prime crisis that will take maybe at least a decade to work through.
- THE DEMOGRAPHIC DEBT WALL CONSTRAINTS
All major western economies are riddled with demographic debt wall creating a fiscal squeeze. Declining labor market participation by the baby boomers generation in weakening economies reduced their national income and tax revenue contribution. It is further aggravated by increased welfare spending in health care and income support adding to national budgetary distress at a time when heavily indebted governments all need relief. Choices are limited of resorting to either other program spending cut reducing growth, further borrowings selling long-term bonds at inflated costs, raising taxes – all are politically very difficult choices. The easiest one is printing money with inflation pressure reducing real income further down the track.
European leaders have been very busy working this week structuring some urgent bailout funds for Italy to create a large-scale fire-wall to protect EU members from contagion and to calm financial markets from spiraling further upwards of long-term bond yields.
- PARTIAL SOLUTION WILL UNDERMINE MARKET CONFIDENCE.
Options canvassed include the use of the much-depleted European Financial Stability Facility (EFSF with a mere 250 billion euro in its coffer) as co-investor of bailouts and providing some sort of insurance coverage to private investors, possibly with IMF backing. Prospects do not look optimistic in view of US-led IMF objection and even European Central Bank declined to be the lender of last resort. http://www.theaustralian.com.au/business/in-depth/european-leaders-to-tackle-bailout-fund/story-fnawdwo8-1226208732077.
The leaders agreed on a standby credit facility of 500 to 700 Euros which they concede the agreed amount has insufficient capacity to bail out Italy, Spain and troubled European banks. Financial market was looking for a bailout fund between 1 to 2 trillion Euros. http://www.theaustralian.com.au/business/wall-street-journal/europe-leaders-concede-bailout-fund-to-have-less-capacity/story-fnay3ubk-1226209901667
The Chinese are not participating in this EFSF proposition tossed about on the table, preferring to invest in EU infrastructure projects instead but these are not offered for sale anywhere even in EU’s troubled economies.
Over the US, efforts to contain its debt explosion to place us public finance on a sustainable basis have also hit the wall. The failure of the so-called super committee to reach an agreement on spending cut has led Fitch to downgrade US outlook. http://www.quamnet.com/newscontent.action?request_locale=en_US&articleId=2104482&view=NEWS
All that failure means a trigger of a $1.2 trillion automatic spending cut. And even 2012 election year, short-term partisan politics will drive a lot of economic rationality. The US is heading for more fiscal gridlock as EU tumbles into turbulence and recession.
- IMPACT OF EU SOVEREIGN DEBT CRISIS ON OTHER ECONOMIES.
• Britain
Recession is looming in Europe, the UK economy on the brink with the latest forward forecast of 0.7% growth in 2012 from its Chancellor of Exchequer.
• China
China’s industrial juggernaut is slowing down. Bubbly house pricing is buckling in Beijing and Shanghai with some suburban apartments falling 30% within weeks to less than a year sparking angry protests from recent buyers. http://www.ipinglobal.com/ipin-live/406072/chinese-protests-against-property-prices-falling
HSBC flash estimate of China’s November PMI read came in at 48 – that is a 32-month low. The steeply-dipping decline signals further fall ahead. The corresponding monthly PMI read since July was 49.3, 49.9, 49.9, 51.0. Against this background is GDP quarterly print of 9.7, 9.5 and 9.1 for the latest September quarter. http://money.cnn.com/2011/11/23/news/international/china_pmi_hsbc/index.htm. October trade figures showed imports stood at $140.46 billion while exports rose to $157.49 billion, leaving a trade surplus of $17.03 billion according to General Administration of Customs figures. http://www.upi.com/Business_News/2011/11/10/China-October-trade-surplus-1703-billion/UPI-83771320985418/ The GAC data showed China's foreign trade with its major trading partners -- the European Union, the United States and Japan – slowed this year. Total trade volume with Europe and US continues to grow robustly by 20.2% and 16.8% respectively, China’s external trade surplus have been shrinking. In the first 10 months of this year ended October, China's trade surplus totaled $124.02 billion, down 15.4 percent year-on-year. Rising Yuan and rising costs and a more competitive external market conditions were the main culprit.
• Japan
View the much-weaker-than expected Chinese PMI’s November read in the context of Japanese recent trade figures, there must be concerns that global trading conditions have weakened considerably. Japanese exports declined in October and its return to trade deficit in the same month (after recording a surplus in the month preceding) may signal the beginning of euro-led export slowdown impacting on export-oriented Asian economies.
The fear is that Japan is tipping back into recession again after recovering from the Fukushima-instigated downturn. Japanese exports are falling. http://www.cnbc.com/id/45455888. The tightening on trade financing from European banks is having negative impact on contract as far as BHP’s mineral sales to China as much as the dried up credit also sending economies in Eastern Europe wobbling on unsteady footing.
• India
India is also facing the heat of the eurozone contagion. The falling rupee relative to the US dollar due to uncertainty arising from the uncertain global economic environment, particularly unfolding eurozone sovereign debt crisis is hurting India’s economy badly. India imports 70% of its oil and gas from abroad, and falling rupee adds inflationary pressure to the headline inflation of 9% for 11 consecutive months. http://economictimes.indiatimes.com/news/economy/indicators/rupee-fall-due-to-global-economic-uncertainty-government/articleshow/10918728.cms
• Other Asian economies
Elsewhere, Taiwan’s October PMI dropped to a 33-month low, Singapore non-oil domestic export declined by a much-worse-than-forecast 16.2% on a year-on-year comparison. The island state’s electronic exports declined by 33.4$ compared to the year earlier. http://sg.finance.yahoo.com/news/UPDATE-1-Singapore-Oct-rsg-655314700.html?x=0
• USA
The US economy is less cloudy at the moment – thanks to stronger retail sales over the last 6 months but that is suspect too of part attribution to inflation, seasonality of Black Friday boost, and help from consumers debt de-leveraging since 2009 improving balance sheets of those employed and a tapering of employment retrenchment. A gauge of US consumer confidence in November showed its highest reading of 56 in July helped in part by lower gas prices at the pump. http://www.marketwatch.com/story/consumer-confidence-leaps-in-november-2011-11-29?link=MW_home_latest_news
But all that could change when unemployment benefits vanishes for 6 million unemployed by next year along with the commencement of automatic spending cuts of US$1.2 trillion taking effects. US corporate balance sheet is definitely stronger but where is that capital spending to create jobs when global economies keep hitting bumps after bumps of turbulence? Big US corporate remain stuck in predatory mentality – many made huge profits but paid no taxes and in some cases received “negative” taxes from a Government mired in public debt exceeding $15 trillion. http://www.marketwatch.com/story/big-profits-zero-taxes-for-large-us-companies-2011-11-03
Third-quarter US GDP growth has been revised downward to 2% from earlier more optimistic flash estimate of 2.5%. Ben Bernanke is predicting “frustratingly slow” growth ahead for the US economy.
CONCLUSION
The unfolding events in the bailout of Italy, and Spain – if the contagion spread beyond that and it seems to be already germinating of banking credit freezing evolving - is pivotal as to whether the headline read for 2012 is recession in most advanced economies except China, India, and maybe again the commodities-rich exporting countries of Canada, Brazil and Australia. As of now, there is little scope for optimism that a recession can be avoided next year, and at best delayed of its inevitable reaching.
Anyone disagreeing?
Zhen He
30 November 2011
Past 8 weeks since my last Update 10 – Global economies heading for turbulence, financial markets in turmoil as advanced economies slipping off the precipice into another recession – financial market and economic conditions in Europe have deteriorated significantly, threatening to slow down global economies and destabilizing China’s efforts to engineer a soft landing of its slowing economy. Two EU Prime Ministers cleared their desks – unprecedented in a financial crisis even in 2008 GFC
Anecdotal evidences of credit squeeze similar to 2008 are taking shape as risks aversion is gripping both trade and investments. US corporate and money market are withdrawing their funds from European banking system suggestive of a banking run has already commenced. http://www.cnbc.com/id/45417735/Has_the_Bank_Run_Begun_in_Europe. Chinese shippers have stopped payments to Norwegian ship-owners. http://sg.news.yahoo.com/1-second-major-chinese-firm-fails-pay-ship-041643010.html Both institutional/retail investment interest in an emerging Australian rare earths minerals producer (otherwise a hottest commodity speculative sector in the wake of Chinese export curtailment) collapsed - forcing Arafura Resources Limited to cancel its A$74 million renounceable rights issue needed to fund the bankable feasibility study of its promising Nolan’s project. http://www.asx.com.au/asxpdf/20111124/pdf/422smsldx0gdp4.pdf, Rare Earth minerals are a very small segment within the metals market but its aggregate end demand - being largely dependent on highly discretionary consumer use products - is therefore volatile and its pricing economics are highly sensitive to prevailing economic conditions. Commodities prices continue to fall, along with commodity-based currencies relative to the US dollar – except for oil. New sanctions against Iran by US, UK and Canada have buoyed oil prices and that could strangle the last hope for economic recovery to germinate from US. http://business.financialpost.com/2011/11/22/iran-sanctions-buoy-oil-prices-despite-demand-worry/. Across the board, base metal shares continue to fall in Australia and Canada – almost a 12 months rolling decline as destocking in end user market continues. BHP, the world largest miner, has revised its forward outlook from just a month ago, conceding publicly that tightening credit conditions and customers’ reluctance to restock inventories are threatening its business prospect forward. http://www.marketwatch.com/story/bhps-kloppers-cautious-on-market-outlook-2011-11-16-2023280. This is in line with earlier Rio Tinto’s negative forecast for the commodity sectors near to medium term outlook. BHP reported that the European crisis had negative impact among European banks’ capacity and willingness to undertake trade financing. http://www.smh.com.au/business/europe-crisis-hits-bank-financing-bhp-says-20111128-1o1zl.html
While corporate balance sheets in US is stronger than 2008, there has been precious little investment in fixed capital formation. Banks in US continue to report “better” earnings without top-line revenue gain – all thanks to hollow log accounting of bad debt provisions. European banks are strongly suspected of capital adequacy sufficiency – particularly French banks much weakened by massive loan assets write-off in “haircuts” concession made to Greece’s sovereign debt. Any slight decline in asset base value could have magnified negative implications on their solvency. Tightening credit conditions within China and the adverse impact of its export sector are shrinking domestic consumption demand just as property prices in major cities showing signs of steep decline. Latest news out of Chinese political leadership emphasizes continuation of property lending curbs despite damaging slump in prices. http://www.smh.com.au/business/world-business/china-to-maintain-property-curbs-20111128-1o2nz.html China’s economy is also from turning amber to red as I forewarned on August 5, 2011 – Update 9, Global economies heading for turbulence, watch out China.
The traffic signal of deleterious global economic outlook since May this year which turned amber towards August looks almost certain of turning red in 2012. Against a background of fast collapsing economic conditions in Europe and a slowing China impacting on other developing countries, the world faced the ugly prospects of downside risks confronting a steeply uphill struggle to keep the global economies on an even keel, resting upon some brighter (surprising and certainly much-welcomed) economic seeds germinating of improving American consumer spending. US private household’s debt is slowly being repaired over the last few years. But US consumer confidence is unlikely to sustain in 2012 as partisan politics in economic agenda will mean tougher economic targeting both in government spending and spending cuts adding uncertain to job security.
Mergers & Acquisitions – slow to bargain hunt, quick to dump
The first half of 2011 saw the busiest activity season of mergers and takeovers ever in the mining history, according to a PricewaterhouseCoopers study. Now all that evaporated in the second half. http://findarticles.com/p/articles/mi_hb5976/is_201110/ai_n58403165/. Volatile global market put downward pressures on mining assets. Mega mergers of recent past are history and most recent deals activity in commodities sectors center on biggest miners taking over much smaller explorers with very high quality assets. Classic case in point is the uranium giant, Cameco’s hostile bid for Hathor Exploration Inc. keenly contested by Rio Tinto. Hathor owns the Roughrider (a very large, high grade, and therefore, potentially offering low cost production possibilities) uranium deposit in Saskatchewan said to have the potential yield of C$2 billion pre-tax earnings over its currently estimated 11-year mine life. http://www.mineweb.com/mineweb/view/mineweb/en/page72103?oid=135381&sn=Detail. This is an outstanding rarely available acquisition opportunity in terms of mineral economics, except in a hostile bid. Cameco finally walked away from the bidding war. http://www.theaustralian.com.au/business/mergers-acquisitions/rios-bid-for-hathor-gets-boost-after-cameco-drops-offer/story-fn91vdzj-1226208754683. One must remember that China Guangdong Nuclear Power (CGNP) lowered its bid price for Kalahari Minerals by 7%, only to drop it completely last week in the face of opposition from the UK Takeover panel. http://www.miningweekly.com/article/extract-shares-fall-after-cgnp-withdraws-kalahari-offer-2011-05-11.
The contrasting results tell of how sensitive to quality asset pricing in takeover bids even in the newly effervescent uranium sector. No one else is bidding for Kalahari Minerals other than CGNP. The Chinese voracious appetite for takeover seems now to be only looking for depressed valuations in this climate of worsening economic conditions. Minmetals Resources’ $1.3 billion bargain takeover bid for Anvil Mining is one good example. http://af.reuters.com/article/investingNews/idAFJOE7AM0D820111123. At its pre-GFC peak, Anvil Mining was valued nearly 3X as much. That hit the economic nationalism brick wall in Congo and might also fell through.
It is particularly insightful that despite valuations of equities engaged in gold-mining significantly lagging the spectacular upsurge in bullion price, little is heard of gold mergers and takeovers in recent months. Shandong Gold’s predatory bid for Jaguar Mining showed how shrewd of their hunting of distressed assets at severely knocked-down pricing offering big premium on recently traded price but effectively paying very cheap valuation for underlying assets. http://www.bloomberg.com/news/2011-11-18/jaguar-record-premium-still-cheap-as-china-hunts-for-brazil-gold-real-m-a.html?cmpid=yhoo. Other cashed-up rich miners just sat on the sidelines waiting for lower valuations despite longer term structural supply deficiency issues in gold and base metals.
Commodities market is telling us a recession in 2012 awaits us all. No one wants to be caught acquiring even good assets on highly leverage financing and balance sheets - the painful lessons of pre-GFC days driving big miners on the verge of financial bankruptcy and/or financial vulnerabilities of an excessively geared capital base are not forgotten!
KEY MAJOR ECONOMIES – WEAKENING IN SULLEN MOOD OF FINANCIAL BAILOUT QUAGMIRE.
- OECD WARNING
OECD have reduced their growth forecasts to 1.9% this year and 1.6% in 2012 compared to 2.3% and 2.8% respectively made 5 months ago. Instead of uptrend momentum of recovery, the OECD is forecasting a downward slide of the 34-nations OECD economies. http://www.quamnet.com/newscontent.action?request_locale=en_US&articleId=2104774&view=NEWS. OECD warned of major western economies is just one step of plunging into the abyss of a deep recession driving a lot of businesses into bankruptcies. http://www.theaustralian.com.au/news/world/oecd-issues-depression-warning-on-debt/story-e6frg6so-1226208766511
- ESCALATING SOVEREIGN BORROWING COSTS
Yields on benchmark 10-year bonds have skyrocketed to record levels for many eurozone troubled economies of Greece, Italy (7.89%), Spain (7%), even relatively untroubled Belgium (5.65%), France (3.46%) and Germany (2.2). The bond market charges US 10-year bond 1.88% and UK Gilts 2.18%. In effect, Germany is also now viewed as so swamped with EU debt bailout that its own credit ratings have been endangered of higher risks default that until now has no precedent. The debt crisis contagion has spread from Greece, to Italy, Spain, France and Germany. The survival of euro is increasingly in doubt and its collapse could have serious damage to all EU economies and the rest of the world.
Italy and Spain are prime bailout candidates as yields of 7% on a 10-year bond auction implied that borrowing costs would have doubled their debt value within 15 years – that is very burdensome indeed given the state of intrinsic indebtedness and structural issues inhibiting recovery efforts forward.
- RECESSION LOOMING IN EUROPE
In any case, any bailout of Greece, Italy or Spain is only buying time, not solution. The world is drowning in debt funding asset bubbles and Europe’s distress is the epicentre of that un-sustainability. And without economic growth that must accompanied spending cuts in austerity drive, debt cannot be repaid with good money. Final Market Eurozone Manufacturing PMI read in October was 47.1, the third consecutive decline. That hint of EU is already in recession. Germany’s October PMI read of 46.1 is a steep decline from month preceding of 49.6 and the grim reading extends to Italy’s 5 points manufacturing PMI October drop to 43.3 point. http://finance.yahoo.com/news/Euro-zone-factory-data-rb-722517790.html?x=0&sec=topStories&pos=3&asset=&ccode=
Looking at the back mirror view of GDP growth statistics, eurozone has been teetering on the edge of recession – registering two consecutive razor-thin growth of a mere 0.2% in the June and September quarter. http://money.cnn.com/2011/11/15/news/international/europe_gdp/index.htm?hpt=hp_t2 After Canada, the EU is the US second largest export market and therefore a deep and/or prolonged recession poses considerable risks to the US economic recovery.
Just read the comment in this Bloomberg news http://www.bloomberg.com/news/2011-11-27/imf-readying-600-billion-euro-loan-offer-for-italy-stampa-says.html The La Stampa said this - "The money would give Italy’s Prime Minister Mario Monti 12 to 18 months to implement his reforms without having to refinance the country’s existing debt", There is no painful de-leveraging in Italy and Greeks fought austerity drives on the streets of Athens. There is strong evidence of political fatigue of de-leverage among EU governments as much as the austerity fatigue among EU’s citizenry already impoverished by poverty since the 2008 GFC. Worries of the EU sovereign debt drags on, regardless of bailout efforts constantly reworked in European capitals. It is EU’s version of the American real estate sub-prime crisis that will take maybe at least a decade to work through.
- THE DEMOGRAPHIC DEBT WALL CONSTRAINTS
All major western economies are riddled with demographic debt wall creating a fiscal squeeze. Declining labor market participation by the baby boomers generation in weakening economies reduced their national income and tax revenue contribution. It is further aggravated by increased welfare spending in health care and income support adding to national budgetary distress at a time when heavily indebted governments all need relief. Choices are limited of resorting to either other program spending cut reducing growth, further borrowings selling long-term bonds at inflated costs, raising taxes – all are politically very difficult choices. The easiest one is printing money with inflation pressure reducing real income further down the track.
European leaders have been very busy working this week structuring some urgent bailout funds for Italy to create a large-scale fire-wall to protect EU members from contagion and to calm financial markets from spiraling further upwards of long-term bond yields.
- PARTIAL SOLUTION WILL UNDERMINE MARKET CONFIDENCE.
Options canvassed include the use of the much-depleted European Financial Stability Facility (EFSF with a mere 250 billion euro in its coffer) as co-investor of bailouts and providing some sort of insurance coverage to private investors, possibly with IMF backing. Prospects do not look optimistic in view of US-led IMF objection and even European Central Bank declined to be the lender of last resort. http://www.theaustralian.com.au/business/in-depth/european-leaders-to-tackle-bailout-fund/story-fnawdwo8-1226208732077.
The leaders agreed on a standby credit facility of 500 to 700 Euros which they concede the agreed amount has insufficient capacity to bail out Italy, Spain and troubled European banks. Financial market was looking for a bailout fund between 1 to 2 trillion Euros. http://www.theaustralian.com.au/business/wall-street-journal/europe-leaders-concede-bailout-fund-to-have-less-capacity/story-fnay3ubk-1226209901667
The Chinese are not participating in this EFSF proposition tossed about on the table, preferring to invest in EU infrastructure projects instead but these are not offered for sale anywhere even in EU’s troubled economies.
Over the US, efforts to contain its debt explosion to place us public finance on a sustainable basis have also hit the wall. The failure of the so-called super committee to reach an agreement on spending cut has led Fitch to downgrade US outlook. http://www.quamnet.com/newscontent.action?request_locale=en_US&articleId=2104482&view=NEWS
All that failure means a trigger of a $1.2 trillion automatic spending cut. And even 2012 election year, short-term partisan politics will drive a lot of economic rationality. The US is heading for more fiscal gridlock as EU tumbles into turbulence and recession.
- IMPACT OF EU SOVEREIGN DEBT CRISIS ON OTHER ECONOMIES.
• Britain
Recession is looming in Europe, the UK economy on the brink with the latest forward forecast of 0.7% growth in 2012 from its Chancellor of Exchequer.
• China
China’s industrial juggernaut is slowing down. Bubbly house pricing is buckling in Beijing and Shanghai with some suburban apartments falling 30% within weeks to less than a year sparking angry protests from recent buyers. http://www.ipinglobal.com/ipin-live/406072/chinese-protests-against-property-prices-falling
HSBC flash estimate of China’s November PMI read came in at 48 – that is a 32-month low. The steeply-dipping decline signals further fall ahead. The corresponding monthly PMI read since July was 49.3, 49.9, 49.9, 51.0. Against this background is GDP quarterly print of 9.7, 9.5 and 9.1 for the latest September quarter. http://money.cnn.com/2011/11/23/news/international/china_pmi_hsbc/index.htm. October trade figures showed imports stood at $140.46 billion while exports rose to $157.49 billion, leaving a trade surplus of $17.03 billion according to General Administration of Customs figures. http://www.upi.com/Business_News/2011/11/10/China-October-trade-surplus-1703-billion/UPI-83771320985418/ The GAC data showed China's foreign trade with its major trading partners -- the European Union, the United States and Japan – slowed this year. Total trade volume with Europe and US continues to grow robustly by 20.2% and 16.8% respectively, China’s external trade surplus have been shrinking. In the first 10 months of this year ended October, China's trade surplus totaled $124.02 billion, down 15.4 percent year-on-year. Rising Yuan and rising costs and a more competitive external market conditions were the main culprit.
• Japan
View the much-weaker-than expected Chinese PMI’s November read in the context of Japanese recent trade figures, there must be concerns that global trading conditions have weakened considerably. Japanese exports declined in October and its return to trade deficit in the same month (after recording a surplus in the month preceding) may signal the beginning of euro-led export slowdown impacting on export-oriented Asian economies.
The fear is that Japan is tipping back into recession again after recovering from the Fukushima-instigated downturn. Japanese exports are falling. http://www.cnbc.com/id/45455888. The tightening on trade financing from European banks is having negative impact on contract as far as BHP’s mineral sales to China as much as the dried up credit also sending economies in Eastern Europe wobbling on unsteady footing.
• India
India is also facing the heat of the eurozone contagion. The falling rupee relative to the US dollar due to uncertainty arising from the uncertain global economic environment, particularly unfolding eurozone sovereign debt crisis is hurting India’s economy badly. India imports 70% of its oil and gas from abroad, and falling rupee adds inflationary pressure to the headline inflation of 9% for 11 consecutive months. http://economictimes.indiatimes.com/news/economy/indicators/rupee-fall-due-to-global-economic-uncertainty-government/articleshow/10918728.cms
• Other Asian economies
Elsewhere, Taiwan’s October PMI dropped to a 33-month low, Singapore non-oil domestic export declined by a much-worse-than-forecast 16.2% on a year-on-year comparison. The island state’s electronic exports declined by 33.4$ compared to the year earlier. http://sg.finance.yahoo.com/news/UPDATE-1-Singapore-Oct-rsg-655314700.html?x=0
• USA
The US economy is less cloudy at the moment – thanks to stronger retail sales over the last 6 months but that is suspect too of part attribution to inflation, seasonality of Black Friday boost, and help from consumers debt de-leveraging since 2009 improving balance sheets of those employed and a tapering of employment retrenchment. A gauge of US consumer confidence in November showed its highest reading of 56 in July helped in part by lower gas prices at the pump. http://www.marketwatch.com/story/consumer-confidence-leaps-in-november-2011-11-29?link=MW_home_latest_news
But all that could change when unemployment benefits vanishes for 6 million unemployed by next year along with the commencement of automatic spending cuts of US$1.2 trillion taking effects. US corporate balance sheet is definitely stronger but where is that capital spending to create jobs when global economies keep hitting bumps after bumps of turbulence? Big US corporate remain stuck in predatory mentality – many made huge profits but paid no taxes and in some cases received “negative” taxes from a Government mired in public debt exceeding $15 trillion. http://www.marketwatch.com/story/big-profits-zero-taxes-for-large-us-companies-2011-11-03
Third-quarter US GDP growth has been revised downward to 2% from earlier more optimistic flash estimate of 2.5%. Ben Bernanke is predicting “frustratingly slow” growth ahead for the US economy.
CONCLUSION
The unfolding events in the bailout of Italy, and Spain – if the contagion spread beyond that and it seems to be already germinating of banking credit freezing evolving - is pivotal as to whether the headline read for 2012 is recession in most advanced economies except China, India, and maybe again the commodities-rich exporting countries of Canada, Brazil and Australia. As of now, there is little scope for optimism that a recession can be avoided next year, and at best delayed of its inevitable reaching.
Anyone disagreeing?
Zhen He
30 November 2011
Wednesday, September 28, 2011
UPDATE 10 - GLOBAL ECONOMIES HEADING FOR TURBULENCE, FINANCIAL MARKETS IN TURMOIL AS ADVANCED ECONOMIES SLIPPING OFF THE PRECIPICE INTO ANOTHER RECESSION
Stock markets, exchange rate volatility, commodities shakeout and shifting economic landscape
Almost eight weeks ago, this author in – Update 9, Global economies heading for turbulence, watch out China - warned the global economy has turned red from amber. What was seen then by Singapore Finance Ministry as remote of possibility of yet another global financial melt-down , has now come to the contrary of fruition, with a degree of increasingly uncomfortable visibility that this is indeed the case .
It is already in the works last week. The Dow has its biggest one weekly fall since 10 October 2008. http://www.marketwatch.com/story/us-stocks-gain-dow-suffers-worst-week-since-08-2011-09-24?link=MW_story_latest_news. US 10-year Treasury yields closed at 1.81% after dipping to a record intra-week low of 1.67%. http://www.marketwatch.com/story/treasurys-gain-as-stocks-head-lower-again-2011-09-23-839350. The US dollar index, DXY was up 2.3% last week, last traded at 78.37 on Friday 23 September against a basket of six major currencies. http://www.marketwatch.com/story/dollar-slips-back-after-g-20-statement-2011-09-23.
European stock markets did not fare any better. The DAX and FT indices were trading below their 24 –month low and the CAC were trading about 300 points shy of its 2009 low. The steep sell-off in equities saw global stocks “officially” entered its bear market as the MSCI index encompassing the equity performances of 24 developed countries declined by more than 20% from its 2011 peak. http://www.cnbc.com/id/44640754. That includes China, India, Japan, Taiwan., South Korea and Australia. Germany, France and Hong Kong have already sunk deeply into the bear market territory, having slipped much closer to nearly a 30% fall. The sell-off in equities was brutal last week.
Commodities, too, were caught in the rout. Crude oil fell 9%, reflecting the tensions in Europe and global outlook. http://www.theaustralian.com.au/business/markets/crude-oil-rises-along-with-us-dollar/story-e6frg91x-1226145131219. Spot gold also slumped 9% in the market carnage. And contrary to BHP-Billiton’s recent confident assertion that the near-term outlook for its products “remained robust” in the wake of global slow-down, http://myresources.com.au/index.php?option=com_content&view=article&id=3022:bhp-outlook-bright-after-105b-profit&catid=52:stories&Itemid=113 industrial metals, in fact, were worst hit in that week ended 23 September. Spot nickel, copper, zinc, lead, and aluminum prices plummeted by 14.1%, 13.2%, 8.8%, 16.6% and 6.6% respectively. This was despite the fact that in recent months, wet weather conditions have negatively impacted on supply for iron-ore, coal and copper in Australia, Brazil, Columbia, Indonesia and South Africa. The slide in industrial metals was much steeper than the 2.5% rise in the US dollar against a basket of currencies: EUR, JPY, GBP, CAD, CHF (Swiss franc) and SEK (Swedish Kroner). Compared against month beginning, the US dollar measured by this DXY index rose by a mere 6.5%. Commodities prices and their demand - specifically LME-traded metals, were proven flaccid. Besides Freeport McMoran’s re-scheduling of customers’ order deliveries, Rio Tinto has advised of the same from its customer this weekend. http://www.smh.com.au/business/buckle-up-for-apocalypse-dow-20110924-1kqsq.html That signals industrial metal demand is weakening suddenly. The strength of Asian demand could not withstand the eroding demand weakness of developed economies. Commodity-based currencies like Canadian Loonie, Australian dollar or the Brazilian Real could be vulnerable to steep falls in the weeks ahead as volatility of industrial metals escalates.
Chinese market represented 59 per cent of global seaborne iron ore demand, 39 per cent of copper demand, 38 per cent of nickel demand, 41 per cent of aluminum demand, 42 per cent of energy coal demand and 10 per cent of oil demand, according to BHP’s latest annual report. The strength and the overall size relevance of Chinese demand for nickel, copper, aluminum and oil could not sustain the spot prices of these commodities last week which BHP-Billiton is a leading supplier along with Rio Tinto and CVRD. The biggest fear now must be either a steep fall in iron-ore price or coal or both next. That, if eventuate, would tell global economy is screeching to a stalling slowdown, not just seen in developed economies but also a much slower pace of growth in China and emerging economies as well - in effect, a catastrophe worst in 2009 meltdown repeating and worst of global impact. George Soros warned of risk consequences that the euro debt crisis could be worse than the US experienced in 2008. http://www.cnbc.com/id/44653617
Against US dollar, Asian currencies depreciated since month beginning - the Korean Won by 9.6%, Indian Rupee and Singapore dollar by 8%, Thai Baht by 3.1%, Taiwan New Dollar by 4.9%. The US dollar, however, remained largely unchanged against Chinese Rmb and Japanese Yen. Capital inflow into Asia reversed direction last week as financial assets on the eastern side of Pacific were offloaded to buy US Treasuries - all in the chase of imaginary “safe haven” that won’t last. For such razor-thin yield of near zero returns in short-term US Government-backed treasuries, money from Asian zone was flowing back into US dollar-denominated Treasuries, even climbing a tall wall of currency reversal risk worry to the magnitude of 3% to 8% range. Such risks to return ratio looks appalling unattractive unless one assumes that the US dollar is in permanent ascend. It is most unlikely to be the sustainable case when Asian economies are performing stronger relative to North American economies in general and the US in particular. There is a noticeable qualitative sign of fear current in this “hot” money outflow but the panic proportion of tsunami has yet to incubate and evolve into visible capitulation. One can clearly sees the global wobbles have put a lid on corporate takeover surge. http://www.theaustralian.com.au/business/mergers-acquisitions/global-wobbles-put-a-lid-on-takeover-surge/story-fn91vdzj-1226146151398. Filings in the US Securities Exchange Commission disclosed of August strong insider buying of their own stocks have all but disappeared. Corporate insiders of cash-rich corporate sector are no longer confident of their own business outlook and that is telling of their assessment of more headwinds and uncertainty confronting global economies awaiting resolution.
Industrial metals are a proxy for economy and gold is a proxy of exchange rate volatility and inversely correlated to fiscal stability in developed economies. As prices for industrial metals fell far deeper than gold and both volatility on the downside way exceeds volatility of US dollar exchange rate, there must be deep soul-searching concerns of economic fundamentals have shifted away from fragile cyclical recovery into full-blown recession mode probably. At least this is what this author believes in. A bumpy journey of slow crawling growth lies ahead even in the best of bailout supports of re-energized globally coordinated efforts. Sovereign indebtedness in developed economies are structural weakness cannot be resolved by even more debt-funded stimulus of limited duration impact. Battered commodity prices triggered by the steep momentum loss of economic activity in developed countries will most likely hammer the economic lifeline of emerging economies. Global economies are heading for a deep slowdown.
Are global economies plunging headlong into a recession?
Not all economists agree on this point – at least not in the minds of mainstream institutions like the World Bank, IMF, ECB and sovereign governments, publicly at least. Or perhaps they are attempting to talk up market confidence and buying time to string together a bailout package of 440 billion Euros to stave off the imminent Greek insolvency default without triggering a global banking crisis and catastrophic contagion similar to or worst than the 2008 episode. Barclay Capital Managing Director, Larry Kantor, even see the US economy as likely to stage a rebound in the second half of this year – thanks to falling energy prices, late rebound in auto manufacturing. Moreover, US trade deficit unexpectedly declined to US$44.8 bln in July as compared to US$51.6 bln in June. A 3.6% surge in exports helped by a lower exchange rate was the contributing factor. September’s sudden reversal of US exchange rate upward might reverse this favorable terms of trade and US export performance for the rest of current year. http://www.cnbc.com/id/44442250.
Professor Michael Spence, of New York University, 2001 Nobel laureate economist, rates the world has 50% chance of going into a recession; the US as currently not in recession but evolving debt crisis in Europe is the wild card which could tip the balance. http://www.bloomberg.com/news/2011-08-31/brics-no-cure-for-global-economy-this-time-as-avon-to-siemens-shares-sink.html.
Nouriel Roubini is more pessimistic. He takes a view that there is a 60% chance of the world slipping into a recession worst than 2008. http://www.cnbc.com/id/44368995
Singapore’s Finance Minister, Mr Tharman Shanmugaratnum, despite earlier cautious optimism, now thinks that, on balance, the world economy is sliding into a recession. He believes that the world have now “entered a self-reinforcing cycle” of lost consumer confidence discouraging investment and Asia is not immune from the downturn.
http://www.smh.com.au/business/world-business/global-recession-likely-singapore-says-20110906-1jv8e.html
The confronting reality, however, is that the US has continually been plagued by consumer spending lethargy, massive and increasing government debt, Fed ‘s money printing in failed repeated quantitative easing, exacerbated lately by narrowing of policy option choices and political paralysis in making changes. Latest data shows manufacturing slowdown continued in most districts. Manufacturing has been the strongest engine and driver of US recovery from the GFC low. New housing starts decreased by 5% last month and US consumer confidence sank to the lowest point since June 2009. George Soros thinks the US is already in recession. US Federal Reserve Chairman Ben Bernanke gave a stark warning on the downside risks to the health of the US economy. Bernanke spoke of ““significant downside risks to the economic outlook, including strains in global financial markets.” Operation “Twist” failed to convince stock markets as equities were sold off aggressively across the globe since his public announcement. http://www.marketwatch.com/story/fed-decides-on-400-billion-bond-swap-2011-09-21. Republicans were publicly opposed to further Fed’s easing, politicizing the Fed’s independence of action adds to the growing dismay on Wall Street. The political dimension and platform of economic agenda tighten, further intensifying political bargaining on Capitol Hill. That is worrying of dysfunctional economic management in the exigency of fast deteriorating economic contingencies the Fed has warned.
Robert Zoellick, World Bank President warned the world is in a “danger zone” even though it is still not in recession at this moment. IMF, in similar stark warning, said that the world economy has entered a “dangerous new phase.” http://www.theaustralian.com.au/business/economics/global-recovery-stalled-says-imf-but-australia-well-placed-to-weather-economic-turmoil/story-e6frg926-1226142190157
Adding to the latest chorus of gloomy forecast is Royal Bank of Scotland’s prognosis. They forecast Europe entering into recession in the next quarter extending at least into the first quarter of 2012. And it could lead to very damaging consequences. The ECB could be forced into crisis management of containing the expected severe economic fallout as the inter-play of both mutually-reinforcing sovereign and banking crisis trigger widespread turbulence. http://www.cnbc.com/id/44667622. Whilst some relief could be afford by the record cash holdings in the hands of both corporate and individuals, the downside of a Greek default is cascading defaults, bank runs sweeping Europe and that catastrophic repeats reverberating across the world’s weaker economies. G 20 leaders are scheduled to meet in Cannes on the 3-4 of November to map out a rescue strategy or at least some kind of barrier relief to permit an orderly default of Greece. Will financial market display further tolerance to wait for another 6 weeks? It is anybody’s guess until that fateful date.
There is a confluence of economic activity shrinkage in all developed economies as there is unity of burdensome debt-ridden paralysis. European banks riddled with bad sovereign debt investment on their balance sheet as much as American banks trapped by households’ bad mortgage – both reinforcing each other of crisis of confidence, curbing demand and investment, employment and consumer spending. The world is right on track for a recession and China can’t help to any measurable extent of global growth stimulus support as it did in the last GFC – even in the false calming benign holding back of a Greece sovereign default and the risks of Italy contaminated perilously by this adversity contagion if Greece defaulted instead.
A BANKING CRISIS IN WAITING IN EU, USA AND CHINA TOGETHER?
Besides the vulnerable countries like Greece and Italy, there are crisis bystanders who could be badly hurt. Europe and US are two biggest markets for Chinese exports and therefore highly vulnerable to turbulence in both economies and systemic risks in their banking sector, worst still together. In current climate of sovereign and banking crisis in developed economies, banking everywhere operates in difficult terrain and China is NOT excluded – both of its banks and economy. While the European sovereign debt crisis threatening to spin out of control, the Chinese remained deeply and resolutely focused on containing inflation. Over the weekend, PBOC actually fixed the Yuan/Dollar reference rate to its highest level since the currency peg in 2005. Zhou Xiaochuan spoke in no uncertain terms of “high inflation remains the top concerns in China” and that will influence some flexibility of the Yuan. In other words, credit tightening is priority and any economic fall-out from European sovereign debt/banking crisis takes the background consideration of policy determination or any changes there from. China won’t be too aggressive in any stimulus similar to 2008/2009 to boost its economy and supporting global growth. http://www.theaustralian.com.au/business/world/china-signals-comfort-on-yuan/story-e6frg90o-1226147505085 Banking credit has all but dried up within China except for the largest state-owned enterprises and smaller property developers are at risks of liquidity crunch and sudden insolvency if property prices continue to drop and stay at those levels for the next few months.
Banking runs could start from either Europe from sovereign debt exposure or in China from a loss of confidence in real estate bubble burst and would reinforce each other in cascades. China is fearful. That explains why, I believe, the Chinese Premier in Europe (and repeated in China by the PBOC’s Deputy Governor Yi Gang) stated publicly that it could only help Europe “at the margin” and PBOC’s Zhou said it is “too early” to assess correctly what the risks of European sovereign debt and banking crisis and its impact. http://www.quamnet.com/newscontent.action?request_locale=en_US&articleId=2046279&view=NEWS. Chinese listed banks are also cash strapped in the property sector and also trapped in state-directed policy lending to municipal authorities. There are reports that Liaoning defaulted on 85% of its debt service payment last year. Now operating with tighter regulatory framework of capital adequacy ratio, Chinese banks either have to look for market funding to grow its business or curtail their lending growth. Question must be asked – who is feeding China’s cash hungry banks?http://www.marketwatch.com/story/chinas-capital-hungry-banks-2011-09-11
The Chinese have enough distress on their plate and presumably waiting for the rest of G20 leaders’ forthcoming November meeting to throw in their shoulder support before committing its own share of contributory efforts.
If European banks are forced to accept “haircut” from sovereign debt holdings, many European banks could go under. The implications of that are huge and damaging. http://www.cnbc.com/id/44397053. Italy credit rating was downgraded even as ECB struggles to manage a seemingly orderly default of Greece. Credit Agricole & Societe Generale, two of three largest French banks, had their credit ratings downgraded by Moody’s for their risks exposure to Greece sovereign indebtedness. British and US banks, bailed out in the GFC for their exposures to derivatives linked to subprime mortgages hardly made any progress on their lending front. http://www.theaustralian.com.au/business/markets/don-argus-looks-for-answers-after-the-debt-binge/story-e6frg916-1226139357596.
Right now, there are as much political paralysis in Europe and as there is also in Washington. High leverage is as damaging for corporate as for sovereign. Where is the quick fix except for one stumbles from one crisis after another in seemingly endless succession?
Bank of America, Well Fargo, Morgan Stanley and a host of investment bankers are on a non-interest cost cutting drive to improve their cost to revenue efficiency ratios. This is how tough of margin banks now operate and cannot afford another big haircut for bad loans, past and present continuing.
http://www.theaustralian.com.au/business/world/bank-of-america-to-cut-30000-jobs/story-e6frg90o-1226135371818
American banks are adjusting to new regulatory framework and still restructuring their lending portfolio. With very little top-line growth in revenue, the concern now is falling real estate prices could erode bottom-line and jeopardizing capital adequacy ratios as well going forward – at a time when financial markets are increasingly skeptical of this sector’s investment outlook to be supportive of new capital raising initiative.
SO WHAT IS THE CURRENT STATE OF GLOBAL ECONOMY NOW AND THE RISKS FORWARD?
Provided the sovereign debt crisis does NOT deteriorate further, there is a real prospect that a mild recession would visit Europe before the end of this calendar year. Any bailout rescue effort, even if effective, that could be formulate in Cannes on 3-4 November will be too little and too late of relief of positive economic impact for Europe. The biggest nightmare is the coincidence of deep recession risks in Europe just ahead of America’s is heading toward a major fiscal tightening in 2012, ahead of the Presidential election. A combative US Congress, majority-controlled by Republicans, is unlikely to be sympathetic to Obama’s re-election prospects to permit another round of quantitative easing spending and money printing by the Fed. Such an eventuality could either trigger another recession in the already weakened US economy, corrodes any recovery prospect in Europe or even aggravating it. http://business.financialpost.com/2011/09/26/developed-world-growth-will-slow-to-a-crawl/
That will leave China again to be the last bastion of defense, but this time, China itself is also weakened by its own worrying fiscal indebtedness, seemingly uncontainable domestic inflation threats and risks of fiscal instability after that orgy binge of poorly co-ordinated and loosely-managed stimulus spending boost of 2008/2009.
China’s official PMI has been steadily declining since March and in August was barely above the expansion/contraction divide at 50.9 after hitting a 28-month July low of 50.7. http://www.cnbc.com/id/44350776. Its August sub-index for new export order plunged into contraction of 48.3 from July’s 50.4. China’s export-oriented manufacturing declined for three consecutive months. These are first hint of its export market is faltering. Chinese trade surplus shrank since January as imports rise faster than export growth Its September trade figures will be closely watched. Chinese trade surplus over the 8 months period shrank 10% to US$92.7 bln compared to year preceding. http://www.theaustralian.com.au/business/economics/demand-in-china-remains-strong-as-imports-surge-30pc-in-august/story-e6frg926-1226133733677. Latest PMI read for South Korea, Taiwan and Singapore all contracted – increasing signs that global slowdown is taking effect.
Spending cuts to rein in budget deficits have cooled the German economy to slower growth. New export order fell for the 2nd consecutive months for German manufacturing. Manufacturing PMI for the 17-nation eurozone fell into negative territory of 49 in August from July’s slightly expanding read of 50.4. Markit Economic also reported first manufacturing contracted in both France and Italy since June and September 2009 respectively. Consumer confidence in Germany and France – the two strongest pillars of the GFC recovery – are now wallowing at a two-year low.
http://www.bloomberg.com/news/2011-09-01/europe-manufacturing-shrinks-more-than-initially-estimated-1-.html. Manufacturing, the pillar of European recovery story, is faltering into contraction. Eurozone dominant services sector registered a shock contraction in September – the first in 2 years. http://business.financialpost.com/2011/09/22/europe-china-slowdowns-stoke-recession-fears/
PIMCO, the world’s largest bond fund manager, forecast Europe will be in recession next year. http://www.bloomberg.com/news/2011-09-25/pimco-s-el-erian-sees-rich-economies-stalling-amid-new-european-recession.html
Growth has stalled in US and EU and China slowing. Most countries cannot simply borrow more. And developing countries will be badly battered. There is no decoupling from the resurgent economic woes confronting Europe or the US. Both major economic blocks together support 40% of the exports-dependent GDP’s of emerging economies. The writing of impending risks to emerging economies is already on the wall of commodity prices last week. Look no further than Canada and Australia whose economies escaped almost unscathed in the GFC of 2008/2009. Canada recorded negative growth in the June quarter and poised to be the first G20 countries to hit the recession patch this time as inflation corrodes consumer spending. The same is happening in Australia, all thanks to strong commodity prices and import costs, retailing are going through the worst times not seen for decades and housing mortgage distress is escalating despite the mining boom. A collapsed mining export sector will be a double blow and might force the Reserve Bank of Australia to cut interest rate just as inflation stubbornly refused to ease downwards. Another commodity-based economy – Brazil – is lowering its growth forecast to 3% to 4% after having cut its interest rate suddenly last month, taking cue from similar example in fast growing Turkey. And this is in spite of a noticeable quickening pace of inflation afflicting its economy.
http://www.businessweek.com/news/2011-09-27/world-s-biggest-rate-cut-forecast-on-global-slump-brazil-credit.html Israel trimmed its key interest rate on Monday, the 26 September, its first in two and a half years. Speculators are now betting that Brazil will soon cut its interest rate by the most in two years to boost domestic consumer spending in an effort to cushion its economy from a banking crisis slowing global growth. The message seems to be that emerging economies are more concern about slower growth than inflation threats looming. And for commodity exporting countries like Canada, Australia and Brazil, slower global growth will leave a far more telling impact and possibly longer in wait for the next recovery cycle. This impending economic downturn is different – it is structural, not cyclical. That is why cheap money of low interest rate has no positive impact on demand growth in developed economies. Debt-laden consumers are tired and no longer have any propensity to further addiction to debt-loaded spending.
IT IS RECESSION AND/OR LONG SLOW RECOVERY FROM TURBULENCE.
The world has changed – particularly the consumer behavior- post the GFC - among the much-battered baby boomer generation and national economic mindset in Governments. With economies of Europe and US are stalling in conjunction, China slowing and emerging economies waiting for the chill winds to blow in, tough times are ahead. Global demand will be decidedly weak and cautious. Without or without the pains of another deep global recession, we are, at best, in for a long, slow crawl of a recovery path going forward, maybe for years to come before sustainable balanced growth returns. The longer our wait of necessary adjustments and medication intake, the more bitter will be the curing (if effectively so) pills to swallow.
Anyone disagreeing?
Zhen He
28 September 2011.
Almost eight weeks ago, this author in – Update 9, Global economies heading for turbulence, watch out China - warned the global economy has turned red from amber. What was seen then by Singapore Finance Ministry as remote of possibility of yet another global financial melt-down , has now come to the contrary of fruition, with a degree of increasingly uncomfortable visibility that this is indeed the case .
It is already in the works last week. The Dow has its biggest one weekly fall since 10 October 2008. http://www.marketwatch.com/story/us-stocks-gain-dow-suffers-worst-week-since-08-2011-09-24?link=MW_story_latest_news. US 10-year Treasury yields closed at 1.81% after dipping to a record intra-week low of 1.67%. http://www.marketwatch.com/story/treasurys-gain-as-stocks-head-lower-again-2011-09-23-839350. The US dollar index, DXY was up 2.3% last week, last traded at 78.37 on Friday 23 September against a basket of six major currencies. http://www.marketwatch.com/story/dollar-slips-back-after-g-20-statement-2011-09-23.
European stock markets did not fare any better. The DAX and FT indices were trading below their 24 –month low and the CAC were trading about 300 points shy of its 2009 low. The steep sell-off in equities saw global stocks “officially” entered its bear market as the MSCI index encompassing the equity performances of 24 developed countries declined by more than 20% from its 2011 peak. http://www.cnbc.com/id/44640754. That includes China, India, Japan, Taiwan., South Korea and Australia. Germany, France and Hong Kong have already sunk deeply into the bear market territory, having slipped much closer to nearly a 30% fall. The sell-off in equities was brutal last week.
Commodities, too, were caught in the rout. Crude oil fell 9%, reflecting the tensions in Europe and global outlook. http://www.theaustralian.com.au/business/markets/crude-oil-rises-along-with-us-dollar/story-e6frg91x-1226145131219. Spot gold also slumped 9% in the market carnage. And contrary to BHP-Billiton’s recent confident assertion that the near-term outlook for its products “remained robust” in the wake of global slow-down, http://myresources.com.au/index.php?option=com_content&view=article&id=3022:bhp-outlook-bright-after-105b-profit&catid=52:stories&Itemid=113 industrial metals, in fact, were worst hit in that week ended 23 September. Spot nickel, copper, zinc, lead, and aluminum prices plummeted by 14.1%, 13.2%, 8.8%, 16.6% and 6.6% respectively. This was despite the fact that in recent months, wet weather conditions have negatively impacted on supply for iron-ore, coal and copper in Australia, Brazil, Columbia, Indonesia and South Africa. The slide in industrial metals was much steeper than the 2.5% rise in the US dollar against a basket of currencies: EUR, JPY, GBP, CAD, CHF (Swiss franc) and SEK (Swedish Kroner). Compared against month beginning, the US dollar measured by this DXY index rose by a mere 6.5%. Commodities prices and their demand - specifically LME-traded metals, were proven flaccid. Besides Freeport McMoran’s re-scheduling of customers’ order deliveries, Rio Tinto has advised of the same from its customer this weekend. http://www.smh.com.au/business/buckle-up-for-apocalypse-dow-20110924-1kqsq.html That signals industrial metal demand is weakening suddenly. The strength of Asian demand could not withstand the eroding demand weakness of developed economies. Commodity-based currencies like Canadian Loonie, Australian dollar or the Brazilian Real could be vulnerable to steep falls in the weeks ahead as volatility of industrial metals escalates.
Chinese market represented 59 per cent of global seaborne iron ore demand, 39 per cent of copper demand, 38 per cent of nickel demand, 41 per cent of aluminum demand, 42 per cent of energy coal demand and 10 per cent of oil demand, according to BHP’s latest annual report. The strength and the overall size relevance of Chinese demand for nickel, copper, aluminum and oil could not sustain the spot prices of these commodities last week which BHP-Billiton is a leading supplier along with Rio Tinto and CVRD. The biggest fear now must be either a steep fall in iron-ore price or coal or both next. That, if eventuate, would tell global economy is screeching to a stalling slowdown, not just seen in developed economies but also a much slower pace of growth in China and emerging economies as well - in effect, a catastrophe worst in 2009 meltdown repeating and worst of global impact. George Soros warned of risk consequences that the euro debt crisis could be worse than the US experienced in 2008. http://www.cnbc.com/id/44653617
Against US dollar, Asian currencies depreciated since month beginning - the Korean Won by 9.6%, Indian Rupee and Singapore dollar by 8%, Thai Baht by 3.1%, Taiwan New Dollar by 4.9%. The US dollar, however, remained largely unchanged against Chinese Rmb and Japanese Yen. Capital inflow into Asia reversed direction last week as financial assets on the eastern side of Pacific were offloaded to buy US Treasuries - all in the chase of imaginary “safe haven” that won’t last. For such razor-thin yield of near zero returns in short-term US Government-backed treasuries, money from Asian zone was flowing back into US dollar-denominated Treasuries, even climbing a tall wall of currency reversal risk worry to the magnitude of 3% to 8% range. Such risks to return ratio looks appalling unattractive unless one assumes that the US dollar is in permanent ascend. It is most unlikely to be the sustainable case when Asian economies are performing stronger relative to North American economies in general and the US in particular. There is a noticeable qualitative sign of fear current in this “hot” money outflow but the panic proportion of tsunami has yet to incubate and evolve into visible capitulation. One can clearly sees the global wobbles have put a lid on corporate takeover surge. http://www.theaustralian.com.au/business/mergers-acquisitions/global-wobbles-put-a-lid-on-takeover-surge/story-fn91vdzj-1226146151398. Filings in the US Securities Exchange Commission disclosed of August strong insider buying of their own stocks have all but disappeared. Corporate insiders of cash-rich corporate sector are no longer confident of their own business outlook and that is telling of their assessment of more headwinds and uncertainty confronting global economies awaiting resolution.
Industrial metals are a proxy for economy and gold is a proxy of exchange rate volatility and inversely correlated to fiscal stability in developed economies. As prices for industrial metals fell far deeper than gold and both volatility on the downside way exceeds volatility of US dollar exchange rate, there must be deep soul-searching concerns of economic fundamentals have shifted away from fragile cyclical recovery into full-blown recession mode probably. At least this is what this author believes in. A bumpy journey of slow crawling growth lies ahead even in the best of bailout supports of re-energized globally coordinated efforts. Sovereign indebtedness in developed economies are structural weakness cannot be resolved by even more debt-funded stimulus of limited duration impact. Battered commodity prices triggered by the steep momentum loss of economic activity in developed countries will most likely hammer the economic lifeline of emerging economies. Global economies are heading for a deep slowdown.
Are global economies plunging headlong into a recession?
Not all economists agree on this point – at least not in the minds of mainstream institutions like the World Bank, IMF, ECB and sovereign governments, publicly at least. Or perhaps they are attempting to talk up market confidence and buying time to string together a bailout package of 440 billion Euros to stave off the imminent Greek insolvency default without triggering a global banking crisis and catastrophic contagion similar to or worst than the 2008 episode. Barclay Capital Managing Director, Larry Kantor, even see the US economy as likely to stage a rebound in the second half of this year – thanks to falling energy prices, late rebound in auto manufacturing. Moreover, US trade deficit unexpectedly declined to US$44.8 bln in July as compared to US$51.6 bln in June. A 3.6% surge in exports helped by a lower exchange rate was the contributing factor. September’s sudden reversal of US exchange rate upward might reverse this favorable terms of trade and US export performance for the rest of current year. http://www.cnbc.com/id/44442250.
Professor Michael Spence, of New York University, 2001 Nobel laureate economist, rates the world has 50% chance of going into a recession; the US as currently not in recession but evolving debt crisis in Europe is the wild card which could tip the balance. http://www.bloomberg.com/news/2011-08-31/brics-no-cure-for-global-economy-this-time-as-avon-to-siemens-shares-sink.html.
Nouriel Roubini is more pessimistic. He takes a view that there is a 60% chance of the world slipping into a recession worst than 2008. http://www.cnbc.com/id/44368995
Singapore’s Finance Minister, Mr Tharman Shanmugaratnum, despite earlier cautious optimism, now thinks that, on balance, the world economy is sliding into a recession. He believes that the world have now “entered a self-reinforcing cycle” of lost consumer confidence discouraging investment and Asia is not immune from the downturn.
http://www.smh.com.au/business/world-business/global-recession-likely-singapore-says-20110906-1jv8e.html
The confronting reality, however, is that the US has continually been plagued by consumer spending lethargy, massive and increasing government debt, Fed ‘s money printing in failed repeated quantitative easing, exacerbated lately by narrowing of policy option choices and political paralysis in making changes. Latest data shows manufacturing slowdown continued in most districts. Manufacturing has been the strongest engine and driver of US recovery from the GFC low. New housing starts decreased by 5% last month and US consumer confidence sank to the lowest point since June 2009. George Soros thinks the US is already in recession. US Federal Reserve Chairman Ben Bernanke gave a stark warning on the downside risks to the health of the US economy. Bernanke spoke of ““significant downside risks to the economic outlook, including strains in global financial markets.” Operation “Twist” failed to convince stock markets as equities were sold off aggressively across the globe since his public announcement. http://www.marketwatch.com/story/fed-decides-on-400-billion-bond-swap-2011-09-21. Republicans were publicly opposed to further Fed’s easing, politicizing the Fed’s independence of action adds to the growing dismay on Wall Street. The political dimension and platform of economic agenda tighten, further intensifying political bargaining on Capitol Hill. That is worrying of dysfunctional economic management in the exigency of fast deteriorating economic contingencies the Fed has warned.
Robert Zoellick, World Bank President warned the world is in a “danger zone” even though it is still not in recession at this moment. IMF, in similar stark warning, said that the world economy has entered a “dangerous new phase.” http://www.theaustralian.com.au/business/economics/global-recovery-stalled-says-imf-but-australia-well-placed-to-weather-economic-turmoil/story-e6frg926-1226142190157
Adding to the latest chorus of gloomy forecast is Royal Bank of Scotland’s prognosis. They forecast Europe entering into recession in the next quarter extending at least into the first quarter of 2012. And it could lead to very damaging consequences. The ECB could be forced into crisis management of containing the expected severe economic fallout as the inter-play of both mutually-reinforcing sovereign and banking crisis trigger widespread turbulence. http://www.cnbc.com/id/44667622. Whilst some relief could be afford by the record cash holdings in the hands of both corporate and individuals, the downside of a Greek default is cascading defaults, bank runs sweeping Europe and that catastrophic repeats reverberating across the world’s weaker economies. G 20 leaders are scheduled to meet in Cannes on the 3-4 of November to map out a rescue strategy or at least some kind of barrier relief to permit an orderly default of Greece. Will financial market display further tolerance to wait for another 6 weeks? It is anybody’s guess until that fateful date.
There is a confluence of economic activity shrinkage in all developed economies as there is unity of burdensome debt-ridden paralysis. European banks riddled with bad sovereign debt investment on their balance sheet as much as American banks trapped by households’ bad mortgage – both reinforcing each other of crisis of confidence, curbing demand and investment, employment and consumer spending. The world is right on track for a recession and China can’t help to any measurable extent of global growth stimulus support as it did in the last GFC – even in the false calming benign holding back of a Greece sovereign default and the risks of Italy contaminated perilously by this adversity contagion if Greece defaulted instead.
A BANKING CRISIS IN WAITING IN EU, USA AND CHINA TOGETHER?
Besides the vulnerable countries like Greece and Italy, there are crisis bystanders who could be badly hurt. Europe and US are two biggest markets for Chinese exports and therefore highly vulnerable to turbulence in both economies and systemic risks in their banking sector, worst still together. In current climate of sovereign and banking crisis in developed economies, banking everywhere operates in difficult terrain and China is NOT excluded – both of its banks and economy. While the European sovereign debt crisis threatening to spin out of control, the Chinese remained deeply and resolutely focused on containing inflation. Over the weekend, PBOC actually fixed the Yuan/Dollar reference rate to its highest level since the currency peg in 2005. Zhou Xiaochuan spoke in no uncertain terms of “high inflation remains the top concerns in China” and that will influence some flexibility of the Yuan. In other words, credit tightening is priority and any economic fall-out from European sovereign debt/banking crisis takes the background consideration of policy determination or any changes there from. China won’t be too aggressive in any stimulus similar to 2008/2009 to boost its economy and supporting global growth. http://www.theaustralian.com.au/business/world/china-signals-comfort-on-yuan/story-e6frg90o-1226147505085 Banking credit has all but dried up within China except for the largest state-owned enterprises and smaller property developers are at risks of liquidity crunch and sudden insolvency if property prices continue to drop and stay at those levels for the next few months.
Banking runs could start from either Europe from sovereign debt exposure or in China from a loss of confidence in real estate bubble burst and would reinforce each other in cascades. China is fearful. That explains why, I believe, the Chinese Premier in Europe (and repeated in China by the PBOC’s Deputy Governor Yi Gang) stated publicly that it could only help Europe “at the margin” and PBOC’s Zhou said it is “too early” to assess correctly what the risks of European sovereign debt and banking crisis and its impact. http://www.quamnet.com/newscontent.action?request_locale=en_US&articleId=2046279&view=NEWS. Chinese listed banks are also cash strapped in the property sector and also trapped in state-directed policy lending to municipal authorities. There are reports that Liaoning defaulted on 85% of its debt service payment last year. Now operating with tighter regulatory framework of capital adequacy ratio, Chinese banks either have to look for market funding to grow its business or curtail their lending growth. Question must be asked – who is feeding China’s cash hungry banks?http://www.marketwatch.com/story/chinas-capital-hungry-banks-2011-09-11
The Chinese have enough distress on their plate and presumably waiting for the rest of G20 leaders’ forthcoming November meeting to throw in their shoulder support before committing its own share of contributory efforts.
If European banks are forced to accept “haircut” from sovereign debt holdings, many European banks could go under. The implications of that are huge and damaging. http://www.cnbc.com/id/44397053. Italy credit rating was downgraded even as ECB struggles to manage a seemingly orderly default of Greece. Credit Agricole & Societe Generale, two of three largest French banks, had their credit ratings downgraded by Moody’s for their risks exposure to Greece sovereign indebtedness. British and US banks, bailed out in the GFC for their exposures to derivatives linked to subprime mortgages hardly made any progress on their lending front. http://www.theaustralian.com.au/business/markets/don-argus-looks-for-answers-after-the-debt-binge/story-e6frg916-1226139357596.
Right now, there are as much political paralysis in Europe and as there is also in Washington. High leverage is as damaging for corporate as for sovereign. Where is the quick fix except for one stumbles from one crisis after another in seemingly endless succession?
Bank of America, Well Fargo, Morgan Stanley and a host of investment bankers are on a non-interest cost cutting drive to improve their cost to revenue efficiency ratios. This is how tough of margin banks now operate and cannot afford another big haircut for bad loans, past and present continuing.
http://www.theaustralian.com.au/business/world/bank-of-america-to-cut-30000-jobs/story-e6frg90o-1226135371818
American banks are adjusting to new regulatory framework and still restructuring their lending portfolio. With very little top-line growth in revenue, the concern now is falling real estate prices could erode bottom-line and jeopardizing capital adequacy ratios as well going forward – at a time when financial markets are increasingly skeptical of this sector’s investment outlook to be supportive of new capital raising initiative.
SO WHAT IS THE CURRENT STATE OF GLOBAL ECONOMY NOW AND THE RISKS FORWARD?
Provided the sovereign debt crisis does NOT deteriorate further, there is a real prospect that a mild recession would visit Europe before the end of this calendar year. Any bailout rescue effort, even if effective, that could be formulate in Cannes on 3-4 November will be too little and too late of relief of positive economic impact for Europe. The biggest nightmare is the coincidence of deep recession risks in Europe just ahead of America’s is heading toward a major fiscal tightening in 2012, ahead of the Presidential election. A combative US Congress, majority-controlled by Republicans, is unlikely to be sympathetic to Obama’s re-election prospects to permit another round of quantitative easing spending and money printing by the Fed. Such an eventuality could either trigger another recession in the already weakened US economy, corrodes any recovery prospect in Europe or even aggravating it. http://business.financialpost.com/2011/09/26/developed-world-growth-will-slow-to-a-crawl/
That will leave China again to be the last bastion of defense, but this time, China itself is also weakened by its own worrying fiscal indebtedness, seemingly uncontainable domestic inflation threats and risks of fiscal instability after that orgy binge of poorly co-ordinated and loosely-managed stimulus spending boost of 2008/2009.
China’s official PMI has been steadily declining since March and in August was barely above the expansion/contraction divide at 50.9 after hitting a 28-month July low of 50.7. http://www.cnbc.com/id/44350776. Its August sub-index for new export order plunged into contraction of 48.3 from July’s 50.4. China’s export-oriented manufacturing declined for three consecutive months. These are first hint of its export market is faltering. Chinese trade surplus shrank since January as imports rise faster than export growth Its September trade figures will be closely watched. Chinese trade surplus over the 8 months period shrank 10% to US$92.7 bln compared to year preceding. http://www.theaustralian.com.au/business/economics/demand-in-china-remains-strong-as-imports-surge-30pc-in-august/story-e6frg926-1226133733677. Latest PMI read for South Korea, Taiwan and Singapore all contracted – increasing signs that global slowdown is taking effect.
Spending cuts to rein in budget deficits have cooled the German economy to slower growth. New export order fell for the 2nd consecutive months for German manufacturing. Manufacturing PMI for the 17-nation eurozone fell into negative territory of 49 in August from July’s slightly expanding read of 50.4. Markit Economic also reported first manufacturing contracted in both France and Italy since June and September 2009 respectively. Consumer confidence in Germany and France – the two strongest pillars of the GFC recovery – are now wallowing at a two-year low.
http://www.bloomberg.com/news/2011-09-01/europe-manufacturing-shrinks-more-than-initially-estimated-1-.html. Manufacturing, the pillar of European recovery story, is faltering into contraction. Eurozone dominant services sector registered a shock contraction in September – the first in 2 years. http://business.financialpost.com/2011/09/22/europe-china-slowdowns-stoke-recession-fears/
PIMCO, the world’s largest bond fund manager, forecast Europe will be in recession next year. http://www.bloomberg.com/news/2011-09-25/pimco-s-el-erian-sees-rich-economies-stalling-amid-new-european-recession.html
Growth has stalled in US and EU and China slowing. Most countries cannot simply borrow more. And developing countries will be badly battered. There is no decoupling from the resurgent economic woes confronting Europe or the US. Both major economic blocks together support 40% of the exports-dependent GDP’s of emerging economies. The writing of impending risks to emerging economies is already on the wall of commodity prices last week. Look no further than Canada and Australia whose economies escaped almost unscathed in the GFC of 2008/2009. Canada recorded negative growth in the June quarter and poised to be the first G20 countries to hit the recession patch this time as inflation corrodes consumer spending. The same is happening in Australia, all thanks to strong commodity prices and import costs, retailing are going through the worst times not seen for decades and housing mortgage distress is escalating despite the mining boom. A collapsed mining export sector will be a double blow and might force the Reserve Bank of Australia to cut interest rate just as inflation stubbornly refused to ease downwards. Another commodity-based economy – Brazil – is lowering its growth forecast to 3% to 4% after having cut its interest rate suddenly last month, taking cue from similar example in fast growing Turkey. And this is in spite of a noticeable quickening pace of inflation afflicting its economy.
http://www.businessweek.com/news/2011-09-27/world-s-biggest-rate-cut-forecast-on-global-slump-brazil-credit.html Israel trimmed its key interest rate on Monday, the 26 September, its first in two and a half years. Speculators are now betting that Brazil will soon cut its interest rate by the most in two years to boost domestic consumer spending in an effort to cushion its economy from a banking crisis slowing global growth. The message seems to be that emerging economies are more concern about slower growth than inflation threats looming. And for commodity exporting countries like Canada, Australia and Brazil, slower global growth will leave a far more telling impact and possibly longer in wait for the next recovery cycle. This impending economic downturn is different – it is structural, not cyclical. That is why cheap money of low interest rate has no positive impact on demand growth in developed economies. Debt-laden consumers are tired and no longer have any propensity to further addiction to debt-loaded spending.
IT IS RECESSION AND/OR LONG SLOW RECOVERY FROM TURBULENCE.
The world has changed – particularly the consumer behavior- post the GFC - among the much-battered baby boomer generation and national economic mindset in Governments. With economies of Europe and US are stalling in conjunction, China slowing and emerging economies waiting for the chill winds to blow in, tough times are ahead. Global demand will be decidedly weak and cautious. Without or without the pains of another deep global recession, we are, at best, in for a long, slow crawl of a recovery path going forward, maybe for years to come before sustainable balanced growth returns. The longer our wait of necessary adjustments and medication intake, the more bitter will be the curing (if effectively so) pills to swallow.
Anyone disagreeing?
Zhen He
28 September 2011.
Saturday, August 6, 2011
UPDATE 9 - GLOBAL ECONOMIES HEADING FOR TURBULENCE, WATCH OUT CHINA.
Global economy turning red from amber
Global economy turned amber this week, I warned of this on 21 May 2011 at http://www.temasekreview.com/2011/05/21/what-is-next-in-economic-policy-rethinking/. Seemingly 8 weeks “behind the curve”, our most learned Finance Minister, Mr. Tharman Shanmugaratnam, shared the same sluggish global economic thoughts on 17 July 2011 Sunday Times headline read. He, however, eviscerated the possibility of another 2008 global financial meltdown as remote. I certainly disagree with that. METAPHORICALLY SPEAKING, I BELIEVE THE PREVAILING ECONOMIC CONDITIONS WILL “PAINT THE WHOLE TOWN RED” soon. We came close to US sovereign debt default disaster, had it not for the down-to-the-wire compromise in the “love-making” between OBAMA (the flea?) and the “elephants” on the upward revised US debt ceiling over the previous weekend. The global economy, to me, is turning red from amber. The share market carnage has already begun globally; the next chapter could be the banking meltdown of risks aversion, taking global economies down the rapid slippery slide.
Until this 17 July 2011 shift, the Monetary Authority of Singapore had been bullish on global economy despite the repercussions of the Fukushima nuclear/earthquake disaster and oil supply disruption emanating from the Libyan civil war. MAS’s half-yearly macro-economic review released on 27 April 2008 had been very bullish – GLOBAL ECONOMY ON SUSTAINABLE PATH: MAS, written by Joanne Lee, page C28, Straits Times, 28 April 2011.
What is the reality in the interlude?
Firstly, there was a HUGE DISCONNECT between the bubbly financial markets and the underlying global economies. Nestle, which spent 60 billion Swiss francs on food raw materials in 2010 reported strong buying by investment funds into commodities because these offer better return than equities.
http://www.theaustralian.com.au/business/news/nestle-faces-big-commodity-price-rises/story-e6frg90o-1226071786151.
Not surprisingly, US corporate insiders have been selling their shareholdings in entities they manage since June, even as stock market was declining – an ominous sign of shift in insider behavior and loss of confidence in the real economy.
http://blogs.marketwatch.com/thetell/2011/06/07/corporate-insiders-are-selling/
And they recently accelerated the selling of their companies’ shares.
http://www.marketwatch.com/video/asset/corporate-insiders-are-selling-faster-than-usual-2011-07-28/51167DFD-4376-4EC6-AD0D 41BBCB755638?siteid=bigcharts&dist=bigcharts.
Insiders obviously don’t believe in the sustainability of the debt-funded rally in the equities markets or the sustainable benefits of the much-hyped hoped-for recovery arising from the QE2 spending boost.
• THE FAILURES OF QE2 MONETARY STIMULUS
Contrary to what Professor Linda Lim, Professor of Strategy, Ross School of Business, University of Michigan, said in Straits Times read – What’s up with the world economy, Monday, July 11, 2011, A17, the US Federal Reserve’s second round of “quantitative easing” (QE2 monetary stimulus) did NOT averted the feared “double-dip” recession, and deflation. In my view, it merely delayed it. The US first qtr GDP plunged steeply to a shocking final 0.4% growth compared to the US Bureau of Economic Analysis (BEA) final estimate of 3.1% preceding qtr.
http://useconomy.about.com/od/economicindicators/a/GDP-statistics.html.
The final qtr of 2010 GDP boost had the benefit of seasonal upturn of increased consumer spending over Christmas but the long term deceleration remains. The revised 0.4% first qtr 2011 GDP statistics is also a big fall from the third estimate of 1.9% GDP growth of the BEA.
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm.
And this weak performance of the US economy had not yet been even negatively impacted upon by the supply chain disruptions to US manufacturing resulting from the Fukushima earthquake/tsunami disaster of 7 April 2011.
About the only “successful damage” of this US QE2 injection did was it successfully triggered a speculative liquidity-driven global commodities and share market boom in the first quarter of 2011 The negative impact of that on the real economy was partnered only by inflationary spiral globally and a falling US dollar. In just 6 months, the US currency depreciated about 8% against Euro, Australian dollar, Singapore dollar, Korean Won, 4% against Canadian Loonie, Malaysian Ringgit, UK Sterling Pound, Japanese Yen and an awesome 16% against the Swiss Franc. Against the Chinese RMB, it depreciated only 2.5% and remains unchanged against the HK dollar. This author had forewarned of big fall of the US dollar since 16 September 2010.
http://global-economies-outlook.blogspot.com/2010_09_01_archive.html.
The US Dollar index future had fallen from 82.74 since end-August 2010 to currently around 74.26 – more than 10% decline in less than a year! Any further steep decline in the greenback from this point risks a steep rise in the US interest rate to support the dollar and forestall imported inflation. That could potentially wreck the US economy.
• BASE METALS SHOWED NO EFFERVESENCE AS CHINA TOOK TO MONETARY POLICY TIGHTENING
Base metal prices had been falling for much of the last 6 months even as the US dollar is falling instead of moving in the opposite direction. The reasons included among many – the Chinese have been destocking their stockpile of base metals. Rising industrial & infrastructural construction demand from recovering economies globally, excluding China, have not kept pace evidencing global recovery momentum had been dogged by Fukushima tragedy and the aftermath of political crisis in Middle East and North Africa (MENA). Global economies were struggling, feeling the impact of Fukushima’s natural disaster and MENA’s political turmoil, and in China, the slowdown of economic activity consequent upon increasing tightening of banking credit. This author has no recollection of major natural disaster having no durable impact on global economies – Cyclone Yasi (Feb. 2011), Chilean earthquake (Feb 2010) Chinese snowstorm (December 2008) all left negative impact. So why is Fukushima “Black Swan” event any different – particularly no reconstruction of earthquake damaged zone is possible given durable radiation damage to environment? Even with the recent steep rebound, 6 month base metal prices were down for nickel but are now at the same level for copper, nickel, zinc and aluminum despite big fall in the US dollar. Latest trade figures show Chinese demand elasticity to and negative imports of copper and tin in the face of rising prices. Metals with falling prices attracted Chinese buying, notably aluminum, nickel, lead and zinc. The “effervescence” in Chinese demand for base metal seems to have taken a momentary freeze. There are two tell-tale signs. Societe Generale warned recently that the Chinese construction boom could be stalling.
http://www.marketwatch.com/story/china-construction-boom-may-be-stalling-socgen-2011-06-24.
That is bore out in Chinese June PMI statistical read. Consumer spending on autos were sharply down and forecast to continue the only on a moderate growth rebound trend forward.
http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/1139733/1/.html.
China’s import growth decelerated sharply in June to a 19.3 percent annual pace from May’s 28.4 percent – the slowest pace in 20 months. June exports rose 17.9 percent from a year ago, slowing from a 19.4 percent rise in May. The former evidenced how fast the Chinese economy is slowing as a result of broadening impact of monetary tightening and the latter points to slower global demand as rising material and labor costs squeezed margin.
http://sg.news.yahoo.com/china-june-import-growth-weakest-20-months-063939188.html.
Chinese may be getting tired of building more ghost towns beyond the notorious Kang Ba Shi
http://www.bloomberg.com/news/2011-07-13/china-cities-sell-land-at-winnetka-values-with-bonds-seen-toxic.html
There are no positive economic news coming out of China. Only big negative news – namely hiking its banking reserve ratio for large institutions for the 6th to 21.5% effective June 20 2011.
• GLOBAL BANKING STILL GOING THROUGH HARD TIMES
Thirdly, there was hardly any compelling reason to celebrate stock market ebullience anywhere even before this week’s financial market turmoil. Banking stocks have been underperforming wider markets in North America, Australia and in Europe since year beginning. Eight European banks recently failed the stress test.
http://finance.yahoo.com/news/8-banks-flunk-controversial-apf-202243619.html?x=0&sec=topStories&pos=7&asset=&ccode=.
And another 16 barely scrapped through. Except for JP Morgan Chase, all major US banks continued to report revenue slides. If major US banks are not expanding its business and revenue base, how could the US economy is growing beyond a tepid pace? Two years after the GFC, Bank of America’s second qtr results is still “absorbing our legacy of mortgage issues” while Citibank “improved” results has been “ driven by a continued release of loan loss reserves” – legacy of hollow log accounting, leaving Vikram S. Pandit still to hunker down the rest of Citigroup’s troubled business .
http://www.thestreet.com/story/11186409/1/citi-blows-out-the quarter.html?puc=tscmarketwatch&cm_ven=tscmarketwatch.
Banking is dog’s business in current economic climate, particularly in EU. Resurgent spreading sovereign debt crisis cut Barclays first half earnings by 1/3 and it is retrenching another 3,000 employees before this year is out.
http://finance.yahoo.com/news/Barclays-to-cut-3000-jobs-as-rb-3164624384.html?x=0&.v=2.
Despite unveiling stronger pre-tax results of $370 million compared with the first six months of 2010, while total revenues edged ahead to $35.7 billion, HSBC, Europe’s biggest lender, announced staff cutbacks of 30,000 globally over the next 2 years but also selectively recruiting. Banking business have changed from retail focus to big computerisation and focussing on relationship management, and more than ever so, the criticality of prudent risks containment. One cannot help it but noticed that HSBC’s razor-thin pre-tax margins translated to 1.03c in a dollar of risks exposure forcing the massive restructuring of its banking operation to save $2.5-3.5 billion in costs by 2013. This is indicative of how tough the global economic landscape is.
http://sg.news.yahoo.com/hsbc-axe-30-000-jobs-bumper-profits-131344054.html
• FUKUSHIMA NUCLEAR DISASTER TOSSED JAPAN INTO A RECESSION
Over in Japan, the economic story is even more somber. In the first quarter, the economy shrank an annualized real 3.5 percent. Private sector economists forecast another 2.6% real annualized rate of economic decline for the April-June qtr, noting the drag in industrial production and export shrinkages arising from the Fukushima earthquake and tsunami impact. Technically, Japan is in recession.
http://mdn.mainichi.jp/mdnnews/business/news/20110801p2g00m0bu087000c.html
Japanese auto industry is recovering from Fukushima but there is greater worry that its steel industry could be constrained by further nuclear power shutdowns leading to power shortages ahead.
http://www.steelguru.com/international_news/Japanese_earthquake_-_Fukushima_nuclear_power_shutdown_may_impact_steel_industry_-_JISF/216428.html
• RISING OIL AND STEELMAKING FEEDSTOCK PRICES EXACERBATED WORSENING INFLATION
Growing economic strength in developing countries face strong headwinds of rising inflation as oil price spiked to triple-digits again not seen since 2008. In contrast to base metals, crude oil and coking coal, priced in US dollar terms, rose sharply. Brent crude oil is up 24% over 6 months to currently around US$118 per barrel.
http://www.indexmundi.com/commodities/?commodity=crude-oil-brent
Wesfarmers recently reported 58% increase in Australian hard coking coal prices for the April to June qtr. to roughly US$320 per tonne FOB.
http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9ODgxNTR8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1.
All thanks to the damaged coal fields and infrastructure in Queensland after the February 2011 Cyclone Yasi. The International Energy Agency (IEA) June 2011 release of 60 million barrels of oil spread of over 30 days from strategic reserves of 27 member countries was an exercise of futility.
http://www.epmag.com/2011/June/item84535.php.
It can only be a case of false positive negative impact. False positive is because the quantum would not even satisfy a single day consumption of roughly 85 million barrels and not one of the oil consuming countries would be prepared to release more since.
http://www.cnbc.com/id/43849352/Oil_Consumers_Decide_Against_New_Stocks_Release.
And it is a negative because the depletion of stockpiles needs to be replenished against a background of supply/demand imbalance still incapable of solution in the immediate future. Libya’s shutdown of oil production has short term supply shortfall impact and long-term enduring damage to its oil production capacity. Libyan oil production is mainly light sweet crude while the Saudis pumping more, are mainly sour heavy sulphur crude more demanding of costly refining process . Libyan oilfields are likely to have been significantly damaged without properly-managed shut-down procedures undertaken as foreign workers fled the civil war in a hurry.
Of course, these rises in oil and steel-making feedstock input costs hurt China more than anyone else and, pertinently, most unhelpful to Chinese costs of steel production. Average steel production costs for Chinese steel mills rose 27.5 percent in the first quarter from a year ago. Coking coal costs climbed 15.17 percent and iron ore import costs surged 54.4 percent. It is still on the rising uptrend. Average profit margin is razor thin, at around 6% pre-tax currently.
http://www.mineweb.com/mineweb/view/mineweb/en/page39?oid=126020&sn=Detail.
China is the world’s largest steel producer and exporter – so manufactured costs of consumer and industrial durable goods must escalate going forward. Now who says inflationary pressures are temporary?
The above observations tell me the recent Chinese raging and escalating inflation has its origin other than volatile base metal prices. It is crude oil and critical feedstock in steelmaking that translate into higher production costs. As the Chinese Yuan fluctuates around 2.5% of the falling greenback, Chinese currency is also falling relative to all other major currencies like the Euro, Australian, Canadian, Sterling Pound and particularly Swiss Franc, imported consumer goods and raw material imports into China have become a lot more expensive than the 6.4% June CPI suggests. As we all know, the cost of living devil rises much higher on the supermarket shelves than the statistical CPI ghost. Adding to that is the Chinese seemingly insatiable cravings on all consumer goods foreign-made, consumer inflation spiked up will continue to uptrend though much will not captured in CPI calculation. That pressure is amply reflected in unprecedented wage cost spiral across China.
ttp://www.financialpost.com/opinion/businessinsider/wage+inflation+mess+breaking+over+China/5058536/story.html .
With labor shortages in coastal industrial zones, wage Inflation is unlikely to let up any time sooner as food prices also continue to escalate. Both wheat and corn – the staples of global food system – have rebounded as so is oil price.
http://www.cnbc.com/id/43762905.
Livestock sector demand adds to total consumption despite rising prices for wheat. And likewise, competitive bio-fuel demand for corn is underlying long-term pressures – these are unavoidable and escalating. The much hoped for inflation breather for the 2nd half of 2011 seems to have evaporated. . Inflation has taken a strong hold in China and China is exporting inflation to the rest of the world instead of deflation previously.
• TEPID US ECONOMIC RECOVERY LARGELY BYPASSED AMERICAN CONSUMERS.
All the major economies – EU, Japan, China and USA saw slumping consumer confidence but much of the world didn’t notice at all. It is amazing to this author that record corporate profit in US corporate history in the so-called “economic recovery” were matched by the slowest pace of new home sales ever- according to data released by the BEA. Sales of existing home fell again in June to a 7-months low, in effect, signaling a housing second dip. This economic recovery bypassed US consumers, leaving fearful consequences ahead of the likely un-sustainability of forward recovery efforts and outlook.
http://www.wsws.org/articles/2011/mar2011/econ-m26.shtml
• CHANGED CAUTIOUS AMERICAN CONSUMERS POST-GFC ADD TO A MISERABLE RECOVERY AFTER MISERABLE RECESSION.
Equally astounding is that US consumers’ new found thriftiness. American consumers, particularly the baby boomer generation, with little prospect of re-employment and income generation forward, has changed substantially, post the GFC - but not their dependency on credit card for groceries spending. Cheaper US dollar means higher food, energy and clothing prices are at record levels as imported inflation hits home. Consumers in US are relying on credit to pay for necessities such as food and gasoline as inflation and cheaper greenback erodes disposable income.
http://www.bloomberg.com/news/2011-07-21/consumers-in-u-s-relying-on-credit-as-inflation-erodes-incomes.html.
Poorer segments of US consumers are living hand-to-mouth and the wealthier ones trickled down to simplicity of shopping at Wal-Mart in place of more expensive specialty outlets.
http://www.marketwatch.com/story/discount-stores-attract-plenty-of-wealthy-shoppers-2011-06-24.
Discount stores now attract plenty of wealthy shoppers. Retail sales excluding autos, gasoline stations and building materials, had the smallest gain in June in 11 month are signs of deteriorating economic conditions, not an improvement. What is good for Wal-Mart is not necessary a good indicator of the true state of the US economy in terms of consumer spending.
The US is now seeing stronger corporate earnings with stronger balance sheets but dying consumers, oppressed also by inflated housing burden, energy and food prices and no increase in disposable income to spend. In the words of Martin Wolf, the US economy is a story of “miserable recession and a miserable recovery.”
http://finance.yahoo.com/blogs/breakout/economic-downturn-years-unravel-wolf-180823003.html.
External stimulus via QE1 and QE2 has been proven not to be working, so the recovery would need to be a long drawn out process. Large investors in the US are getting nervous just as US businesses were near the end of its 2nd qtr corporate results season.
http://finance.yahoo.com/banking-budgeting/article/113238/large-investors-nervous-marketwatch?mod=bb-budgeting
• CONSUMERS GLOBALLY ARE ALSO RETRENCHING DEBT AND SPENDING
Elsewhere, falling US dollar means rising costs of imported consumer goods driving consumers out of shopping malls. It is the same retailing sentiment even in places like Canada.
http://business.financialpost.com/2011/06/21/canadian-retail-sales-lacklustre/.
Statistics Canada showed the inflation rate hit an eight-year high of 3.7% in May. As incomes are unlikely to exceed inflation, Canadian consumers are shopping frugally to reducing debt
level.
http://www.financialpost.com/personalfinance/Consumers+shop+around+prices+rise/5131151/story.ml .
And Australia is no different.
http://www.bbc.co.uk/news/business-14009797.
Over in Australia, the mining boom created a two-track economy prospering on a resource sector boom but Interest rate hikes to curb inflationary pressure on housing had strong negative impact on retailing. There is now a global slump in consumer confidence - the lowest since late 2009, according to a Nielsen survey.
http://www.newsdaily.com/stories/tre76g1lh-us-nielsen-confidence-survey/
Whilst it is true that a lot of corporate worldwide have eclipsed pre-recession profit levels, this was achieved only after having gone through aggressive cost-cutting restructuring exercises since 2009. Strongly negative interest rate environment also subsidized corporate earnings but people forget that this is a finite phenomenon that can’t last forever. For most of the rest, it has been largely a jobless recovery and one accompanied by falling living standards for bargain-driven consumers. This is even true of Chinese retailing sector.
http://www.cnbc.com/id/43712712.
Luxury retail malls are largely deserted.
• EURO ZONE SWIMMING IN SOVEREIGN DEBT CRISIS SINKING AGAIN
Euro zone is constantly challenged of its debt overhang. Weak growth in slowing economy amid bouts of eruption of sovereign debt crisis threatens the funding requirements of European banks. IMF warns of capitalization of banks in Europe as relative low, especially compared to US.
http://online.wsj.com/article/BT-CO-20110714-712179.htm.
This makes financial systems in Europe less resilient to systemic shocks. As of current indication, Italy, Euro zone’s third largest economy and too big to rescue by the ECB in any crisis, suffered a deep contraction and Spain moved into negative territory.
http://business.financialpost.com/2011/08/03/for-world-investors-its-the-economy-stupid/
The 17-nation Euro zone’s service PMI slid to 51.8, as Germany and France which had propped up the tepid EU’s growth also fell closer to the 50 contraction divide. Italy services sector suffered two consecutive qtrs of decline and Spain’s service index fell to 46.5 compared to June reading of 50.2. The Markit Euro zone manufacturing PMI fell to 52.0 from 54.6 in May which itself declined 3.4 from preceding April read of 58.
http://www.ourbusinessnews.com/euro-zone-june-manufacturing-pmi-falls-to-52-0/.
The two months consecutive output weakness is the greatest extent of decline since late 2008. Under threat of inflation and despite the weak growth, the ECB hiked interest rates by 25 basis points to 1.5% on 7 July. It aimed at tackling inflation now running at 2.7% (against an ECB target of 2%) despite Euro zone’s intensifying debt crisis. Higher currency and interest rates prevailing relative to the US must dampen its competitive prospect for recovery as US economy itself also showing increasing signs of stalling.
WHAT PROSPECTS GOING FORWARD?
• MANUFACTURING PMI ARE FALLING
Let us take a peek into the July-September qtr early economic indicator. US manufacturing activity barely grew in July. Its Institute of Supply Management gauge in July declined 4.4 points to 50.9, the worst reading since July 2009.
http://www.marketwatch.com/story/ism-manufacturing-gauge-falls-to-two-year-low-2011-08-01?siteid=bigcharts&dist=bigcharts.
China, Russia, UK, Spain, Greece all reported sub-50 PMI readings of manufacturing contraction. HSBC Brazil July PMI reading came in at 47.8, the second consecutive sub-50 reads below the no-change 50 line. India’s factory growth slide for the third consecutive months. The HSBC Markit Business Activity India Index fell to a 20-month low of 53.6 in July from 55.3 in June. India’s 10-year benchmark bond yield shot past 8.3% making Government borrowing prohibitively expensive to fund development projects.
http://sg.news.yahoo.com/high-bond-yields-impact-govt-borrowing-source-062942568.html
These figures are universally bad, stretching from US, EU, to developing economies like Russia, Brazil, China and India.
• STEELMAKERS ARE TELLING US MORE BAD NEWS OF GLOOMY OUTLOOK
If steel-making is any reliable early signpost of possible turnaround in manufacturing, it does not look good either. China is the world’s largest steel producing and consumer nation. Chinese steel production peaked in May, is expecting a seasonal slowdown as summer power outages in July/August due to nationwide “load shedding” reduction of pressure on its overwhelmed power grid as consumption peaks.
http://www.mineweb.com/mineweb/view/mineweb/en/page39?oid=129259&sn=Detail
After posting a 17% fall in qtrly earnings, POSCO, the world’s third largest steelmaker warned of weakening demand growth and high input costs. Record Chinese production is flooding the market. POSCO warned of high prices of iron ore and coking coal, which rose between 25 and 47 percent quarter on quarter in April-June, show no signs of a sharp retreat due to tight supply. POSCO is only expecting a gradual recovery after it bottoms (if any) out in the third qtr. Autos, appliances and construction accounts for nearly 70% of aggregate customer base of steelmakers. Despite seasonal slide in Chinese production in July-September qtr, POSCO is not expecting an improved outlook of demand and pricing resistance in the market-place.
American producers U.S. Steel and AK Steel also warned of reduced earnings in the July-Sept period, echoing comments last week from Korea's POSCO.
http://www.reuters.com/article/2011/07/27/steel-idUSL3E7IR18K20110727.
Contrary to earlier bullish outlook by all three Detroit automakers, US car manufacture is much less upbeat after a tepid sales growth in July as American consumers are pulling back on car purchase.
http://biz.thestar.com.my/news/story.asp?file=/2011/8/3/business/20110803084851&sec=business
Acelor Mittal, the world’s largest steelmaker, supplying 6% to7% of the world’s steel production but not dependent on Chinese market, also forecast a seasonal dip in this coming qtr. http://www.bbc.co.uk/news/business-14304503. All steel producers are expecting Chinese public housing sector construction for long steel products to offset expected decrease in private sector housing. Short steel products used in autos and household appliances in China may still weaken if consumer confidence is further adversely affected by inflation. Just like Singapore, the authorities in China placed limits on new car in Beijing hampering demand growth. And right now, consumer confidence is also under severe attack in US and EU. There is real fear and doubt whether the euro zone can overcome its sovereign debt woes. Italian and Spanish bond yields have surged to 14-year highs.
http://www.reuters.com/article/2011/08/03/us-eurozone-idUSTRE7712HB20110803.
And Chinese auto production picked up only marginally in June after huge decline in April and May. Only Chinese steel consumption surged past the pre-crisis level since early 2009 but developing economies are approaching. See page 9 at
http://www.arcelormittal.com/rls/data/upl/627-55-0-0 110303FinlaPresentationAutoInvestorDay.pdf
Developed economies still have a long way to climb to reach there. As steel consumption typically lags economic recovery, the steel consumption pattern post-GFC shows how little the developed economies have recovered of capital investment and consumer durable spending in the last 2 years. If Chinese steel consumption stumbles badly, it would indicate that the world economies are in big trouble.
Steelmakers and consumer confidence are telling us no good times ahead.
AT THE MACRO LEVEL, CHINA IS YET THE LAST DEFENCE BUT A WORRISOME ONE.
• MONEY PRINTING, GOLD, INFLATION, INTEREST RATE & DEBT UNSUSTAINABILITY.
Bernanke attributed the slow interim US GDP growth to temporary factors like gasoline prices pulling back consumers spending and supply disruption caused by Japan’s disaster slowing industrial production. But the real culprits were depressed housing market, credit tightening, and stubbornly unyielding unemployment. These are longer durable malaise undermining consumer confidence. Moreover, elevated gasoline is only part of a generalized imbalanced demand-driven (relative to supply) inflation and, more serious is the liquidity-driven price speculation sweeping the entire world ranging from real estate, base metals to food and traded equities. After QE2, the world is flooded with borderless liquidity stimulating assets bubbles across much of Asia and these are debt-funded. EU, USA, and China were big on printing money to spend on stimulus BUT NO ONE THOUGHT ABOUT THE CONSEQUENCES NOR THE EXIT STRATEGY THAT WON’T UNDERMINE THE REAL RECONOMY if it fails. It is too late now to stare at failures right before our eyes.
The evidences are plenty. In Europe and US, consumers refuse to spend, banks refuse to lend, businesses refuse to hire, corporate refuse to invest in fixed capital investment, the economies either stalled, stalling or crawling at a pace little faster than stagnation but Central bankers clueless on what to do next other than buying gold bullion in fear of doubtful value of paper money in a sea of raging seemingly unstoppable inflation surging beyond target rate, rising debt worries, volatile treasury yields, waning faith safe-haven currencies like greenback and euro etc. Even central banks from poor developing countries like Mexico, Blanga Desh, Bolivia, Sri Lanka, India, Brazil, and most recently, Thailand and Russia are buying gold which promises only risks but no coupon or interest return by gold leasing to gold producers.
http://www.reuters.com/article/2011/08/03/businesspro-us-gold-reserves-idUSTRE7722IK20110803.
Bank of Korea bought bullion for the first time recently – its first purchase of gold since the Asian currency crisis of 1997-1998 as gold price keeps hitting new peaks. Central bankers are fearful of the brittle global economic recovery and the precarious debt situation in Europe and USA, the implied volatile currency yield risks of US 10-year bond yields, and waning faith in so-called safe-haven paper currencies such as the US dollar, euro. Inflation too, has been rampantly running ahead of target in India, China, Europe, Canada, and Australia and is at multi-year high. From net negative sellers of gold in the last decade, central bankers turned net positive net buyers globally. It is easy to understand the bearish sentiment prevailing among economists of prospects for near-term recovery of economies of USA, Europe and Japan.
Interest rate is set to rise globally, despite tough economic conditions. The reason, this author, argues is that, rising food, material, energy prices are feeding into wage inflation which seeps into inputs of manufacturing costs WITH VICIOUS CIRCLE OF FEEDBACK LOOPS INEVITABLY. The speed at which oil price rebound from two-digits back to triple-digits of Brent sweet crude despite the IEA stockpile release proves my point. Coking coal, iron-ore price seems immune to the glut of global steel supply and see how fast wheat and corn price bounced up steeply again. The Asian and Australian property bubble s are set to burst and needs to be so before Asian finds itself envelops by the same sub-prime intractable crisis engulfing them in a banking crisis and wrecking their economies exactly the same way much of Europe and USA followed Japan’s lost decade.
With rising interest rates, the debt profile of USA and most of EU (except Germany) raises question about their debt sustainability. So where the hope for sustained recovery pathway for USA and Europe is for the next few years as fiscal discipline must take hold to avoid insolvency default risks? FISCAL DISCIPLINE IN US AND EUROPE MEANS SLOWER GROWTH. In the environment of slow growth, where is the capacity of sovereign to service their debt liabilities? Greece has seen two bailouts in deepening recession and that aggravates its sovereign borrowing costs adding further pressure of risks default going forward even more intensely. Greece’s 10 year bond rate is now close to 14% and this will escalate its debt to GDP ratio further from 142.8 in 2010. Italian Govt 10 year bond gross yield of 6.13% is at decade high
http://www.tradingeconomics.com/italy/government-bond-yield
Spain 10-year bond yield is now 6.28% - also ten year high
http://www.tradingeconomics.com/spain/government-bond-yield.
And their most recent economic growth rates? Italy’s GDP rose 0.3 percent in the second quarter, up from a 0.1 percent pace in the first quarter, while Spain’s GDP expanded 0.2 percent in the second quarter, down from 0.3 percent the previous quarter.
http://www.bloomberg.com/news/2011-08-05/german-10-year-bunds-advance-11th-day-on-debt-crisis-italian-bonds-slump.html
Estimated debt-to-gross-domestic-product ratio is 120 percent this year for Italy, the second-highest level in the euro region, compared with 68.1 percent for Spain. Inflation in Italy and Spain is running at 2.7% and 3.1% respectively, above ECB target rate of 2%. Inflation restrains policy makers from loosening monetary policy. Italy, Spain, Greece has all found themselves stuck in an economic quagmire. Growing debt to GDP ratio in circumstances of sustained weak economic performance triggers risks of continuing contagion spread. On market ‘s concern of a possible EU’s 'Double Dip' recession, credit-default swaps (CDS) on Spain surged 30 basis points to 420 and Italy jumped 34 to 367 in early August. What is CDS? CDS function like a default insurance contract for debt. A widening of one basis point in a five-year CDS spread equates to a $1,000 increase in the annual cost of protecting $10 million of debt for five years. The cost of insuring against default on Spain and Italy surged to records, leading an increase in European sovereign bond risk, on concern indebted governments will struggle to fund themselves as the global economy slows.
http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/08/02/bloomberg1376-LPAH800YHQ0X01-0UR9RE0LR6A178JI2UTIEGC9IA.DTL
Europe will remain buffeted in slow growth, mired in recurring sovereign debt crisis and constrained by continuing pressures of fiscal tightening. Presently, about 20% of the US S& P earnings originate from Europe. That spells disaster for US businesses which also face a much weakened economy of consumer demand pullback within US and the much awaited fiscal impact of budgetary cutbacks to local government and municipality funding. Meredith Whitney could be proven right to have warned of local government debt may be at the doorstep of a major crisis. States and local governments, which make up 12 percent of US GDP, are really pulling back,"
http://www.cnbc.com/id/43973763
The austerity drive forward could be a thunderbolt strike at the heart US economy after it could only be sustained to such disastrous outcome following the failed QE2 stimulus. Another orgy of US stimulus will almost certainly drive the US dollar down lower, adding to inflation, raising interest rate and sinking US into a delayed but much deeper recession.
CHINA – YOUR LAST FRONTIER OF LITTLE HOPES AND TERRIFYING RISKS
ECB President Jean-Claude Trichet, Ben Bernanke, US Federal Reserve Chairman and Christine Lagarde might have sleepless nights worrying about the state of sinking global economies, PBoC governor, Zhou Xiaochua has immediate worries of how to better deploy China’s 3 trillion plus FX reserves and rising, adding big pressures on PBoC’s sterilization.
http://asianbankingandfinance.net/foreign-exchange/in-focus/pboc-governor-china-needs-reduce-fx-reserves
Mr Zhou, unlike other central bankers around the world, does NOT seems to have such a big hurried appetite for gold bullion buying beyond China’s current holdings of under 1200 tonnes.
http://www.commodityonline.com/news/China-to-raise-gold-silver-reserves-in-2011-36118-3-1.html.
For fair comparison of relativity, the Mexican Central bank bought 100 tonnes of physical gold recently.
http://www.ft.com/cms/s/0/cbc02e10-7637-11e0-b4f7 00144feabdc0,s01=1.html#axzz1U4Miu3Ew.
Perhaps, Chinese got bigger risk appetite – come what may of global economic turbulence - as they are of managing of risks. Life is cheap in China. Chinese will build and happily operates nuclear power plants far more dangerous of accident risks than Fukushima. Chinese economic model is like its super high-speed rail network linking Shanghai to Beijing which recently had a big crash at Wenzhou. True to Chinese grit and political humor, they quickly buried the derailed carriages with the corpses inside of incriminating evidences – relenting only on a barrage of cyberspace howling protests from its millions of disapproving netizens! That is how Chinese psyche works – defying gravity, and so far on the economic front, all previous forecasts of hard landing by doomsayers have found their grief of disbelief. Less known to economists, however, is the suspect that China’s GDP figures are "man-made" and therefore unreliable, said Li Keqiang, according to leaked U.S. diplomatic cables released byWikiLeaks.
http://www.reuters.com/article/2010/12/06/us-china-economy-wikileaks-idUSTRE6B527D20101206. .
Li is widely expected to succeed Wen Jiabao as China’s next premier in early 2013.
But all that gravity-defying economic miracle achievements were before the GFC and before the world gets to know of GDP-boosting infrastructural white elephants like Kang Ba Shi besides and beyond already well-known and publicized empty commercial and residential blocks in major developed cities.
http://www.businessinsider.com/pictures-chinese-ghost-cities-2010-12#there-are-no-cars-in-the-city-except-for-a-few-dozen-parked-at-the-glamorous-government-center-2.
Chinese ghost cities were built out of debt mountains. And this white elephant real estate is located in a smallish countryside township of Loudi, Hunan Province.
http://www.bloomberg.com/news/2011-07-13/china-cities-sell-land-at-winnetka-values-with-bonds-seen-toxic.html .
And in Yinchuan in northwest China's Ningxia Hui sparsely-populated autonomous region, it built a 25-km long eight-lane highway running through the city, with wide forest belts on both sides years ago.
http://www.chinadaily.com.cn/opinion/2009-09/01/content_8646607.htm.
All of these are sub-prime bursting in-the-making scatters across the entire spread of China from north to south and west. Now this is the real China that never got into print of official media release nor got the attention of foreign economists’ publishing.
So how much can one trust of Chinese GDP statistics and its measure of underlying sustainable real economy? I will give some credit of reliability to official sources – at least those on the downside, even if these are most likely to be understated. China does not have a sophisticated banking system in place, unlike the developed countries. The State Council is the policy decision-makers on major macro-economic decision as interest rate. From the somewhat detached position, governing China and managing its economy suffer from the tyranny of size, geography and cumbersome bureaucratic layering. It is as like frying a very small fish in a big wog of very hot frying oil – removing too soon leaves it uncooked and too late burnt it. In both instances, the fish is not deliciously edible. The contextual sometimes contradicts the holistic and that is how this author believes Chinese statistics should be interpreted of its usefulness and reliability. China is not one uniform monolith but a mosaic of evolving landscape. Compounding these complications is the lack of transparent statistics. A lot of guesswork, glimpses of China’s policy making decisions and anecdotal evidence necessarily framework of assessment of the true picture of the state of affairs inside China.
SO IS THERE A REAL ESTATE BUBBLE & GROWTH BUBBLE INSIDE CHINA?
Beyond the obvious deserted empty luxury retail malls, ghost towns, vanity projects dispersed over China, affordability has become a real issue in big cities. It is said that in today’s inflated price climate, only 20% of Beijing top earners can afford their own housing. While the mass migration towards urbanization continues, prohibitive costs of living in big cities like Beijing, Shanghai, Guangzhou have encouraged migration to Chinese second-tier and even some third-tier cities where technology will allow of similar conveniences that big cities has of comfort-providing infrastructure. Beijing, Shanghai etc have seen restrictive measures on property investment such as property taxes, increases in down-payment requirements, and raised interest rates. As at the time of writing this article, China Banking Regulatory Commission (CBRC) is urging commercial banks to lend healthy local government financing vehicles (LGFC) to support state-sanctioned projects including the building of subsidized housing. THIS CONTRADICTS CBRC’S RECENT DIRECTION TO BAN ALL LENDING TO LOCAL GOVERNMENT after they chalked up an estimated 10.7 trillion yuan ($1.66 trillion) in debt, stirring fears of widespread loan defaults that could shake the world's No.2 economy.
http://in.reuters.com/article/2011/08/05/china-economy-housing-idINL3E7J50K520110805.
Under this new directive, loans issued for the construction of affordable housing should not be priced below 0.9 percent of the central bank's benchmark lending rate and should have maturities no longer than 15 years. CBRC dictates also that provincial government should step in to assist in repayment of local governments which encounter loan repayment difficulties. That leaves enough room for meaningful conjecture, not definitively, that there is price bubbles in residential accommodation to varying degree across China.
Peter A. Sands, CEO, Standard Chartered, insisted this week there is no growth bubbles inside China.
http://www.cnbc.com/id/43972390.
“There is asset inflation in China and property bubbles in some parts, but that doesn't mean that Chinese growth is a bubble,” I, substantially dispute him! The CBRC’s quick about turn of bank lending assistance to affordable public housing amid credit clampdown on all bank lending to local government points to desperation need of housing affordability across China. There is real estate PRICE BUBBLES in top 10 Chinese cities, and certainly, to varying degrees in second-tier Chinese cities as well. Affordable public housing is in dire needs. The massive scale of subsidized public housing project over the next 5 years illuminates my contention. Housing construction and supporting infrastructure is a big driver of capital formation spending supporting China’s economic growth. So, if LGFC are financially-strapped or worst still technically insolvency of loan repayment liabilities as they fall due, and provincial government also unable to assume that liability, prudential lending by banks must necessarily deflate the growth bubble!
Another aspect and extent of real estate bubbles not seen in public eyes is the prevalence of vacant residential apartments. That became public sometime in March 2010. A report emerged of some power entities – that 64.5 million urban electricity meters registered zero consumption over a recent, six-month period.
http://english.caing.com/2010-08-03/100166589_3.html.
Not all are permanently unoccupied available space but there is certainly a lot of speculative buying of price bubbles overlaying this QUANTITY bubble. Asset inflation is leading the bubbles and quantity bubble is leaning on the price bubbles for viability support. The magnitude is scary; the vacancy rate of occupancy is enough to house close to 200 million Chinese. What would happen to these unoccupied, residential accommodations when affordability public housing fills the void which this 64.5 million vacant apartments waiting to be filled? Wouldn’t there is a gigantic banking crisis of massive mortgage defaults in a real estate crash, beyond the banking sector’s lending to nearly insolvent LGFVs?
• TIDES, TORRENTS, TSUNAMI - SHIFTING FROM PLACID CLUSTERED TO TURBULENT ENVIRONMENT WILL HAVE EARTHQUAKE EFFECTS.
Hong Kong sits just next door to China. If booming Chinese economy is so resilient, why are so many real estate developers lately have been talking about the risk prospects of a property crash? Plenty of Chinese buyers could literally walk across the Shenzhen border and snapped all the “bargains” which locals either can’t afford or unwilling to pay? Robin Chan, Chairman of Hong Kong’s third largest property developer, has this warning.
http://www.cnbc.com/id/43966773
Every market tanks; what doesn't change is cycles….. "Each time the reason may be different, but (prices) will come down." That is exactly right with all financial market cycles. Will China’s push for massive affordable public housing squeeze private developer’s margin? Will the correction in asset inflation drives overleveraged developers and speculators there over the edge of the cliff hurting banks and destabilizing its economy?
There is also a chorus of views inside China that the real estate in China is due for a correction. IT COULD COME SOONER than many expect. Three official interest rate rises this year have pushed mortgage rate over 7%, leaving an expanding inventory of unsold properties. There are now signs of a price stalemate as Chinese home price teetering on a precipice. http://www.smh.com.au/business/china-home-prices-teeter-on-a-precipice-20110722-1hs94.html. Home price could fall this qtr and it may be a question of what extent and timing .Whilst it is true that escalating cooling measures had been in place since last October such as increased credit lending rates and jacking up banking reserve requirements, these policy initiative have not worked well correcting prices downwards as yet. Its subdued impact is because of the more “benign” global economic environment even if there is some degree of at least some degree of disturbed reactive environment. There is a measure of financial stability prevailing in global financial markets at least until recent weeks to give speculators and aspiring owners some confidence of continued buying support. That confidence stability impact could well turn devastatingly toxic now. IT IS LIKE THE SHIFT FROM TIDES, TO TORRENTS AND NOW THE TSUNAMI – MOVING UP THE CHAIN OF ESCALATION FROM THE PAST OF PLACID CLUSTERED ENVIRONMENT. POST –GFC, TO DISTURBED REACTIVE ENVIRONMENT AT YEAR BEGINNING TO NOW UNPREDICTABLE TURBULENT FIELDS! The financial rout in global financial markets late this week will leave tsunami impact as severe as the last GFC, this author must sadly reminds. As I wrote this line above, breaking news on my desktop reads – S & P downgrades US to AA+ rating with negative outlook on a Saturday morning. Last night, Australia’s central bank slashed the country’s GDP growth for 2011 down to 2% - a far cry from its most recent estimate of 3.25%. That itself is a significantly lower than earlier estimates of revised 4% down from 4.25%. Australia is a leading commodity export nation depending on China. The expectation within the Reserve Bank of Australia must be China will slow down significantly for the rest of 2011.
A BANKING BUBBLE ON ALONGSIDE A REAL ESTATE BUBBLE?
The IMF released its annual review of China a fortnight ago, warning that inflation, real-estate bubbles and weak monetary controls pose "significant risks to financial and macroeconomic stability" in the world’s second-biggest economy.
http://www.theaustralian.com.au/business/economics/chinas-manufacturing-activity-contracts-hsbc-survey-shows/story-e6frg926-1226099012286.
Food inflation is currently running round 17% and real estate inflation compounding. Inflation surged higher to 6.4% in June even as the 5th interest rate hike in eight months lifted the Yuan lending rate to 6.56% and deposit rate to 3.5% last month. The PBoC is obviously “behind the curve” trying to slow the inflationary spiral.
http://www.theaustralian.com.au/business/interest-rates/chinese-scholars-state-case-for-higher-rates-agenda-in-beijing/story-fn91wad8-1226089890.
Yet it can’t raise interest rate too fast without the rest of the world lifting their own interest rate first, given comparative interest rates are much lower in EU and particularly in US. Raising interest rate too frequently also risks the inflow of hot money into China via Hong Kong looking for higher yields in a strong Yuan which therefore offer the advantage of lower risk. As Hong Kong dollar is pegged to the greenback, it is easy for banking channels in Hong Kong to access very cheap money near zero interest rate costs in the US. That influx could easily defeat China’s inflation fight. Indeed, it has already been happening. This week, PBoC stops offshore Yuan borrowing of hot money by Chinese companies through Hong Kong. Until this week, there was a growing trend among mainland companies of borrowing relatively cheap offshore Yuan in Hong Kong and remitting it home for business purposes to circumvent tight domestic cash conditions in the mainland.
http://www.cnbc.com/id/43982853.
Yet another source of credit flowing into business and real estate speculation has now been shut. As deposit rates in China remain well below inflation, people are encouraged to spend or invest in speculative assets. As luxury malls are empty, a lot of money went to other assets. Stripped of property affordability, a lot of money went into physical gold and short-term bubble investment of certificates of deposits.
The 6th reserve requirement hike this year took China’s reserve requirement ratio to 21.5% for large institutions effective 20 June 2011.To fund their tightened loan-to-deposit below the 75% regulatory threshold, banks now offer a whole range of “wealth management products” akin to short term investment certificates of deposits with maturity duration of 2 days and up 31 days. The rates of interest offered as high as 8% are much higher than the one-year benchmark bank deposit rate of 3.25%. Big banks and smaller financial institutions are circumventing the reserve requirement ratio to build their deposit base and expand their lending portfolio. Instead of managing their asset side (lending), banks are now managing their liability side of their balance sheet deposits taking making regulatory control harder for China Banking Regulatory Commission. Banks must roll over these “wealth management products” to keep their cash rolling i.e. in effect they are increasingly supporting illiquid long-term lending with short-term cash flow. The moment this customers stop buying, it is tantamount to withdrawal of funding supply. There is a real risk of a sudden run on all bank deposits in any sudden banking crisis.
http://www.cnbc.com/id/43585557.
A fuller descript of Chinese banking woes can be found at
http://www.temasekreview.com/2011/07/13/temasek-holdings-change-of-direction-needed/
The China Banking Regulatory Commission (CBRC) boasts China’s banking system has a bad loan coverage ratio of about 220 percent, or 1.2 trillion yuan. It certainly looks impressive on paper. The big Chinese banks boast some of the lowest loan-to-deposit ratios and some of the highest coverage ratios on bad loans in the world.
The BIG QUSTION is what constitute “bad” loan when banks in China are known to have been pushing a variety of off-balance sheet lending?
http://finance.yahoo.com/news/Analysis-Chinas-big-banks-rb-261135357.html?x=0&.v=1.
Lending to LGFVs of local government for infrastructural construction with long and uncertain payback is prime suspect. “What bank would want to take re-possession of a toll road” is the repose. There are signs many entities created by local governments to finance infrastructure projects could face trouble repaying their loans.
http://finance.yahoo.com/news/Analysis-Chinas-big-banks-rb-261135357.html?x=0&.v=1
It will all become non-performing only when massive defaults occur en masse. By then it will be too late of rescue efforts.
China's state auditor said in June that local governments held a massive 10.7 trillion yuan ($1.53 trillion) in debt at the end of 2010, warning there was a risk some might default.
http://www.theaustralian.com.au/business/economics/chinas-growth-unsustainable-say-analysts/story-e6frg926-1226100929751.
By that sum, local governments owed debts equal to a quarter of its gross domestic product.
http://www.theaustralian.com.au/business/markets/china-bears-sharpen-tools-amid-debate-over-worlds-second-biggest-economy/story-e6frg94o-1226086903484.
And this is not the end of its banking woes. Lending to LGFVs of local government is not valid compartmentalized analysis. There are lending to local government and related entities NOT included in this 10.7 trillion yuan exposure. All that lending to SMEs could also turn toxic to add to the banking wreckage if the economy turns badly sour. That moment could be now as EU scrambles for some semblance of financial stability and the faltering US economy stalling to negative outlook. The signs are ominous.
CHINA’S NEAR TERM RISKY OUTLOOK – MANY NEGATIVES
Europe remains China's first export destination and the US second, but growth in the West remains stubbornly anaemic. Not surprisingly, China lambasted US handling of the recent raised debt ceiling debate. China’s Foreign Minister Yang Jiechi said his nation will support Europe and the euro. It is in China’s own self-interest to do so.
http://www.bloomberg.com/news/2011-08-05/china-s-scope-for-supporting-global-growth-limited-as-inflation-reaches-6-.html.
At the same time, the Chinese are restricting their exposure to US treasury when it comes to investing its huge US$3.2 trillion of foreign reserve.
http://www.smh.com.au/business/world-business/china-to-limit-us-exposure-blasts-debt-bomb-20110803-1iarg.html.
Whatever, its domestic banking crisis, China would not find it easy to liquidate its foreign reserve holdings to prop up its own economy in a precipitated crisis. This is hard reality. And even if the Chinese Government is unable to shores up its banking sector’s non-performing loans of yet indeterminate size, what would happen to the decimated savings of ordinary Chinese citizenry deposited in its banking system? A banking crisis some reasonable magnitude hitting, even rescued with state capital injection, will be weakened and may not be strong enough to revitalized its stalled economy and underwrite Chinese future growth prospect. Without massive bailout in any banking distress, China will not recover to positive growth. It needs domestic consumption to sustain its economy instead of reliance on exports to EU and US. Domestic consumption now accounts for 30% of China’s GDP base and manufacturing around 40% according to market estimates.
Meanwhile, the rout and bloodbath in global financial markets could not have come at a worse time for China. US and EU consumers’ confidence so brittle in the fragile recovery has now taken a big hit. Meanwhile, massive retrenchments will cause big pullbacks in consumer spending worldwide dampening consumption with severe negative impact expect to hit China in the third qtr. This author is forecasting no good Christmas in 2011. Now that darks clouds are sweeping the global economic landscape, the loss of momentum in the qtr is also unlikely to inspire a seasonal upturn in the final qtr. There is also a seasonal slowdown in China itself in the hot summer. The cost push in material, energy and labor input and falling global currencies (relative to Yuan and US dollar) have squeeze manufacturing margins to razor thin. China's power companies are hemorrhaging cash, losing $2.3 billion in the first half of the year compared to $1.4 billion in the same period last year. They can’t raise energy prices without permission from Beijing. So without a bailout, power cut is inevitable to contain losses and energy shortage could undermining China’s economy.
http://www.financialpost.com/opinion/businessinsider/China+facing+energy+crisis/5192570/story.html
Since 2007, coal prices have climbed 80% but they are allowed to raise prices by a mere 15%. And coal price is still increasing along with recent spike in oil price. Any energy price rise will hit its margin-stricken over-supplied steel sector with flow-on negative effects into autos, industrial and consumer durable manufacture. The vulnerable steel sector poses threat to China’s sustained recovery.
China is not immune to the developed-world debt overhang on global growth. Foreign direct investment slowed to just 2.8% annual growth rate but which was running at 13.4% in May and 15.2% in April.
http://www.marketwatch.com/story/china-faces-slowing-foreign-investment-2011-07-17.
Going forward, that could evaporate as corporate worldwide cut fixed capital investments in the wake of expected shrinkage in earnings and uncertain economic outlook ahead.
HSBC’s preliminary Purchasing Managers’ Index survey read of 48.9 signals China’s manufacturing contraction – the first first contraction in manufacturing activity since July 2010, and the lowest reading in 28 months – and a DOUBLE DIP. HSBC economist Qu Hongbin said: "The July preliminary PMI implies that June's rebound in industrial production was just temporary. We expect industrial growth to decelerate in the coming months as tightening measures continue to filter through."
http://www.theaustralian.com.au/business/economics/chinas-manufacturing-activity-contracts-hsbc-survey-shows/story-e6frg926-1226099012286
The US first half GDP growth is sub-par – the worst since March 2009.
http://www.tradingeconomics.com/united-states/gdp-growth.
And the financial market rout this week is set to keep it on a downward trajectory. US July ISM manufacturing survey came in at a shocking 50.9, down from 55.3 the month earlier – very close to contraction. Manufacturing is the strongest consistent pillar of the US recovery story till now and that is faltering.
http://www.cnbc.com/id/43980631
Anaemic US economy would be detrimental to China exports as the US is its second largest market after EU.
China's growth has been over-stimulated since its 2008 RMB4 trillion ($581 billion) stimulus package, which focused on physical capital investment. Infrastructure spending has long-term payback period and adds little to continual multiplier effect. Investments make up a record 48 per cent of GDP. It is unsustainable. What is worst is these were funded out of debt borrowings with little capacity for repayment unless money can be continuously raised via land sales by local government. The economic model is spending first via debt financing and then paying back later by taxing consumers via housing squeeze of inflated land costs which inevitably sucked the savings out of citizenry. This policy cannot last forever and China is now facing up to it. LIKE THE US, EU, THERE WAS NO PRE-PLANNED EXIT STRATEGY.
http://www.theaustralian.com.au/news/world/we-must-be-ready-for-china-slowdown/story-e6frg6ux-1226097819349
A real estate crash in highly bubbly Hong Kong not only damage its own banking sector’s liquidity but also could have important ripple effects for China as many big Chinese conglomerates raise money there.
http://www.theaustralian.com.au/news/world/we-must-be-ready-for-china-slowdown/story-e6frg6ux-1226097819349
China is past its sizzling 11% to 14% annual GDP growth rates seen just before the GFC.
http://en.wikipedia.org/wiki/Historical_GDP_of_the_People's_Republic_of_China
Without stimulus support of autos and white goods spending of its consumer, it is unlikely that China could have returned to the plus 10% annual growth rate in the last two years. With this end of economic stimulus, it is now settling on a slower growth trend. Auto sales growth slumped steeply in the first half and the forecast forward till end of this year is only moderate gain expected. Economists have also noted “sharp declines” in growth in investment in infrastructure, property and manufacturing in June. China is heading for a slowdown, though not yet a contraction except manufacturing. After its economy grew 9.5 percent in the second quarter, the balance of meaningful probability must he further slowdown from credit tightening.
http://www.bloomberg.com/news/2011-08-05/china-s-scope-for-supporting-global-growth-limited-as-inflation-reaches-6-.html
Meanwhile, China's central bank chief Zhou Xiaochuan vowed to maintain a "prudent policy" to fight stubbornly high inflation. It is consistent with Chinese Premier Wen Jiabao’s exhortation that China must “treat stabilizing overall price levels as the top priority of our macro-economic controls and keep the direction of macro-economic adjustments unchanged," Mr. Zhou comment that the central bank would work to "avoid big fluctuations" in the economic growth, indicating some concerns over downside risks to the economy is a CLEAR REFERENCE TO THE DOWNSIDE PROSPECTS OF SLOWER GROWTH FOR THE BALANCE OF THIS YEAR EVEN BEFORE THE CURRENT UPHEAVEL SWEEPING GLOBAL FINANCIAL MARKETS.
http://www.cnbc.com/id/43708346
CONCLUSION
China led the rebound from the global recession in 2009 This time, it faced very strong headwinds of financial turbulence originating in its key export markets as it CONCURRENTLY struggles to contain domestic inflation amid escalating worries of its own banking vulnerability to local government debt and a residential real estate perching on the knife edge. China now may have limited room to counter weakening growth in the U.S. and Europe as inflation restrains policy makers from loosening monetary policy.
China’s only option available could be just watching the rapidly evolving financial turbulence and keeping its own financial house from catching neighborly economic fires originating from Europe, USA and the rest of Asia. I can’t imagine the dire consequences to global economies, if China hit the hard landing
WATCH OUT CHINA, the last sustaining bastion in this global turbulence could be a time-delayed cluster bomb waiting to explode of double-blow impact damage after EU and US have both meltdown into deep recession.
Anyone disagreeing?
ZHEN HE
Global economy turned amber this week, I warned of this on 21 May 2011 at http://www.temasekreview.com/2011/05/21/what-is-next-in-economic-policy-rethinking/. Seemingly 8 weeks “behind the curve”, our most learned Finance Minister, Mr. Tharman Shanmugaratnam, shared the same sluggish global economic thoughts on 17 July 2011 Sunday Times headline read. He, however, eviscerated the possibility of another 2008 global financial meltdown as remote. I certainly disagree with that. METAPHORICALLY SPEAKING, I BELIEVE THE PREVAILING ECONOMIC CONDITIONS WILL “PAINT THE WHOLE TOWN RED” soon. We came close to US sovereign debt default disaster, had it not for the down-to-the-wire compromise in the “love-making” between OBAMA (the flea?) and the “elephants” on the upward revised US debt ceiling over the previous weekend. The global economy, to me, is turning red from amber. The share market carnage has already begun globally; the next chapter could be the banking meltdown of risks aversion, taking global economies down the rapid slippery slide.
Until this 17 July 2011 shift, the Monetary Authority of Singapore had been bullish on global economy despite the repercussions of the Fukushima nuclear/earthquake disaster and oil supply disruption emanating from the Libyan civil war. MAS’s half-yearly macro-economic review released on 27 April 2008 had been very bullish – GLOBAL ECONOMY ON SUSTAINABLE PATH: MAS, written by Joanne Lee, page C28, Straits Times, 28 April 2011.
What is the reality in the interlude?
Firstly, there was a HUGE DISCONNECT between the bubbly financial markets and the underlying global economies. Nestle, which spent 60 billion Swiss francs on food raw materials in 2010 reported strong buying by investment funds into commodities because these offer better return than equities.
http://www.theaustralian.com.au/business/news/nestle-faces-big-commodity-price-rises/story-e6frg90o-1226071786151.
Not surprisingly, US corporate insiders have been selling their shareholdings in entities they manage since June, even as stock market was declining – an ominous sign of shift in insider behavior and loss of confidence in the real economy.
http://blogs.marketwatch.com/thetell/2011/06/07/corporate-insiders-are-selling/
And they recently accelerated the selling of their companies’ shares.
http://www.marketwatch.com/video/asset/corporate-insiders-are-selling-faster-than-usual-2011-07-28/51167DFD-4376-4EC6-AD0D 41BBCB755638?siteid=bigcharts&dist=bigcharts.
Insiders obviously don’t believe in the sustainability of the debt-funded rally in the equities markets or the sustainable benefits of the much-hyped hoped-for recovery arising from the QE2 spending boost.
• THE FAILURES OF QE2 MONETARY STIMULUS
Contrary to what Professor Linda Lim, Professor of Strategy, Ross School of Business, University of Michigan, said in Straits Times read – What’s up with the world economy, Monday, July 11, 2011, A17, the US Federal Reserve’s second round of “quantitative easing” (QE2 monetary stimulus) did NOT averted the feared “double-dip” recession, and deflation. In my view, it merely delayed it. The US first qtr GDP plunged steeply to a shocking final 0.4% growth compared to the US Bureau of Economic Analysis (BEA) final estimate of 3.1% preceding qtr.
http://useconomy.about.com/od/economicindicators/a/GDP-statistics.html.
The final qtr of 2010 GDP boost had the benefit of seasonal upturn of increased consumer spending over Christmas but the long term deceleration remains. The revised 0.4% first qtr 2011 GDP statistics is also a big fall from the third estimate of 1.9% GDP growth of the BEA.
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm.
And this weak performance of the US economy had not yet been even negatively impacted upon by the supply chain disruptions to US manufacturing resulting from the Fukushima earthquake/tsunami disaster of 7 April 2011.
About the only “successful damage” of this US QE2 injection did was it successfully triggered a speculative liquidity-driven global commodities and share market boom in the first quarter of 2011 The negative impact of that on the real economy was partnered only by inflationary spiral globally and a falling US dollar. In just 6 months, the US currency depreciated about 8% against Euro, Australian dollar, Singapore dollar, Korean Won, 4% against Canadian Loonie, Malaysian Ringgit, UK Sterling Pound, Japanese Yen and an awesome 16% against the Swiss Franc. Against the Chinese RMB, it depreciated only 2.5% and remains unchanged against the HK dollar. This author had forewarned of big fall of the US dollar since 16 September 2010.
http://global-economies-outlook.blogspot.com/2010_09_01_archive.html.
The US Dollar index future had fallen from 82.74 since end-August 2010 to currently around 74.26 – more than 10% decline in less than a year! Any further steep decline in the greenback from this point risks a steep rise in the US interest rate to support the dollar and forestall imported inflation. That could potentially wreck the US economy.
• BASE METALS SHOWED NO EFFERVESENCE AS CHINA TOOK TO MONETARY POLICY TIGHTENING
Base metal prices had been falling for much of the last 6 months even as the US dollar is falling instead of moving in the opposite direction. The reasons included among many – the Chinese have been destocking their stockpile of base metals. Rising industrial & infrastructural construction demand from recovering economies globally, excluding China, have not kept pace evidencing global recovery momentum had been dogged by Fukushima tragedy and the aftermath of political crisis in Middle East and North Africa (MENA). Global economies were struggling, feeling the impact of Fukushima’s natural disaster and MENA’s political turmoil, and in China, the slowdown of economic activity consequent upon increasing tightening of banking credit. This author has no recollection of major natural disaster having no durable impact on global economies – Cyclone Yasi (Feb. 2011), Chilean earthquake (Feb 2010) Chinese snowstorm (December 2008) all left negative impact. So why is Fukushima “Black Swan” event any different – particularly no reconstruction of earthquake damaged zone is possible given durable radiation damage to environment? Even with the recent steep rebound, 6 month base metal prices were down for nickel but are now at the same level for copper, nickel, zinc and aluminum despite big fall in the US dollar. Latest trade figures show Chinese demand elasticity to and negative imports of copper and tin in the face of rising prices. Metals with falling prices attracted Chinese buying, notably aluminum, nickel, lead and zinc. The “effervescence” in Chinese demand for base metal seems to have taken a momentary freeze. There are two tell-tale signs. Societe Generale warned recently that the Chinese construction boom could be stalling.
http://www.marketwatch.com/story/china-construction-boom-may-be-stalling-socgen-2011-06-24.
That is bore out in Chinese June PMI statistical read. Consumer spending on autos were sharply down and forecast to continue the only on a moderate growth rebound trend forward.
http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/1139733/1/.html.
China’s import growth decelerated sharply in June to a 19.3 percent annual pace from May’s 28.4 percent – the slowest pace in 20 months. June exports rose 17.9 percent from a year ago, slowing from a 19.4 percent rise in May. The former evidenced how fast the Chinese economy is slowing as a result of broadening impact of monetary tightening and the latter points to slower global demand as rising material and labor costs squeezed margin.
http://sg.news.yahoo.com/china-june-import-growth-weakest-20-months-063939188.html.
Chinese may be getting tired of building more ghost towns beyond the notorious Kang Ba Shi
http://www.bloomberg.com/news/2011-07-13/china-cities-sell-land-at-winnetka-values-with-bonds-seen-toxic.html
There are no positive economic news coming out of China. Only big negative news – namely hiking its banking reserve ratio for large institutions for the 6th to 21.5% effective June 20 2011.
• GLOBAL BANKING STILL GOING THROUGH HARD TIMES
Thirdly, there was hardly any compelling reason to celebrate stock market ebullience anywhere even before this week’s financial market turmoil. Banking stocks have been underperforming wider markets in North America, Australia and in Europe since year beginning. Eight European banks recently failed the stress test.
http://finance.yahoo.com/news/8-banks-flunk-controversial-apf-202243619.html?x=0&sec=topStories&pos=7&asset=&ccode=.
And another 16 barely scrapped through. Except for JP Morgan Chase, all major US banks continued to report revenue slides. If major US banks are not expanding its business and revenue base, how could the US economy is growing beyond a tepid pace? Two years after the GFC, Bank of America’s second qtr results is still “absorbing our legacy of mortgage issues” while Citibank “improved” results has been “ driven by a continued release of loan loss reserves” – legacy of hollow log accounting, leaving Vikram S. Pandit still to hunker down the rest of Citigroup’s troubled business .
http://www.thestreet.com/story/11186409/1/citi-blows-out-the quarter.html?puc=tscmarketwatch&cm_ven=tscmarketwatch.
Banking is dog’s business in current economic climate, particularly in EU. Resurgent spreading sovereign debt crisis cut Barclays first half earnings by 1/3 and it is retrenching another 3,000 employees before this year is out.
http://finance.yahoo.com/news/Barclays-to-cut-3000-jobs-as-rb-3164624384.html?x=0&.v=2.
Despite unveiling stronger pre-tax results of $370 million compared with the first six months of 2010, while total revenues edged ahead to $35.7 billion, HSBC, Europe’s biggest lender, announced staff cutbacks of 30,000 globally over the next 2 years but also selectively recruiting. Banking business have changed from retail focus to big computerisation and focussing on relationship management, and more than ever so, the criticality of prudent risks containment. One cannot help it but noticed that HSBC’s razor-thin pre-tax margins translated to 1.03c in a dollar of risks exposure forcing the massive restructuring of its banking operation to save $2.5-3.5 billion in costs by 2013. This is indicative of how tough the global economic landscape is.
http://sg.news.yahoo.com/hsbc-axe-30-000-jobs-bumper-profits-131344054.html
• FUKUSHIMA NUCLEAR DISASTER TOSSED JAPAN INTO A RECESSION
Over in Japan, the economic story is even more somber. In the first quarter, the economy shrank an annualized real 3.5 percent. Private sector economists forecast another 2.6% real annualized rate of economic decline for the April-June qtr, noting the drag in industrial production and export shrinkages arising from the Fukushima earthquake and tsunami impact. Technically, Japan is in recession.
http://mdn.mainichi.jp/mdnnews/business/news/20110801p2g00m0bu087000c.html
Japanese auto industry is recovering from Fukushima but there is greater worry that its steel industry could be constrained by further nuclear power shutdowns leading to power shortages ahead.
http://www.steelguru.com/international_news/Japanese_earthquake_-_Fukushima_nuclear_power_shutdown_may_impact_steel_industry_-_JISF/216428.html
• RISING OIL AND STEELMAKING FEEDSTOCK PRICES EXACERBATED WORSENING INFLATION
Growing economic strength in developing countries face strong headwinds of rising inflation as oil price spiked to triple-digits again not seen since 2008. In contrast to base metals, crude oil and coking coal, priced in US dollar terms, rose sharply. Brent crude oil is up 24% over 6 months to currently around US$118 per barrel.
http://www.indexmundi.com/commodities/?commodity=crude-oil-brent
Wesfarmers recently reported 58% increase in Australian hard coking coal prices for the April to June qtr. to roughly US$320 per tonne FOB.
http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9ODgxNTR8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1.
All thanks to the damaged coal fields and infrastructure in Queensland after the February 2011 Cyclone Yasi. The International Energy Agency (IEA) June 2011 release of 60 million barrels of oil spread of over 30 days from strategic reserves of 27 member countries was an exercise of futility.
http://www.epmag.com/2011/June/item84535.php.
It can only be a case of false positive negative impact. False positive is because the quantum would not even satisfy a single day consumption of roughly 85 million barrels and not one of the oil consuming countries would be prepared to release more since.
http://www.cnbc.com/id/43849352/Oil_Consumers_Decide_Against_New_Stocks_Release.
And it is a negative because the depletion of stockpiles needs to be replenished against a background of supply/demand imbalance still incapable of solution in the immediate future. Libya’s shutdown of oil production has short term supply shortfall impact and long-term enduring damage to its oil production capacity. Libyan oil production is mainly light sweet crude while the Saudis pumping more, are mainly sour heavy sulphur crude more demanding of costly refining process . Libyan oilfields are likely to have been significantly damaged without properly-managed shut-down procedures undertaken as foreign workers fled the civil war in a hurry.
Of course, these rises in oil and steel-making feedstock input costs hurt China more than anyone else and, pertinently, most unhelpful to Chinese costs of steel production. Average steel production costs for Chinese steel mills rose 27.5 percent in the first quarter from a year ago. Coking coal costs climbed 15.17 percent and iron ore import costs surged 54.4 percent. It is still on the rising uptrend. Average profit margin is razor thin, at around 6% pre-tax currently.
http://www.mineweb.com/mineweb/view/mineweb/en/page39?oid=126020&sn=Detail.
China is the world’s largest steel producer and exporter – so manufactured costs of consumer and industrial durable goods must escalate going forward. Now who says inflationary pressures are temporary?
The above observations tell me the recent Chinese raging and escalating inflation has its origin other than volatile base metal prices. It is crude oil and critical feedstock in steelmaking that translate into higher production costs. As the Chinese Yuan fluctuates around 2.5% of the falling greenback, Chinese currency is also falling relative to all other major currencies like the Euro, Australian, Canadian, Sterling Pound and particularly Swiss Franc, imported consumer goods and raw material imports into China have become a lot more expensive than the 6.4% June CPI suggests. As we all know, the cost of living devil rises much higher on the supermarket shelves than the statistical CPI ghost. Adding to that is the Chinese seemingly insatiable cravings on all consumer goods foreign-made, consumer inflation spiked up will continue to uptrend though much will not captured in CPI calculation. That pressure is amply reflected in unprecedented wage cost spiral across China.
ttp://www.financialpost.com/opinion/businessinsider/wage+inflation+mess+breaking+over+China/5058536/story.html .
With labor shortages in coastal industrial zones, wage Inflation is unlikely to let up any time sooner as food prices also continue to escalate. Both wheat and corn – the staples of global food system – have rebounded as so is oil price.
http://www.cnbc.com/id/43762905.
Livestock sector demand adds to total consumption despite rising prices for wheat. And likewise, competitive bio-fuel demand for corn is underlying long-term pressures – these are unavoidable and escalating. The much hoped for inflation breather for the 2nd half of 2011 seems to have evaporated. . Inflation has taken a strong hold in China and China is exporting inflation to the rest of the world instead of deflation previously.
• TEPID US ECONOMIC RECOVERY LARGELY BYPASSED AMERICAN CONSUMERS.
All the major economies – EU, Japan, China and USA saw slumping consumer confidence but much of the world didn’t notice at all. It is amazing to this author that record corporate profit in US corporate history in the so-called “economic recovery” were matched by the slowest pace of new home sales ever- according to data released by the BEA. Sales of existing home fell again in June to a 7-months low, in effect, signaling a housing second dip. This economic recovery bypassed US consumers, leaving fearful consequences ahead of the likely un-sustainability of forward recovery efforts and outlook.
http://www.wsws.org/articles/2011/mar2011/econ-m26.shtml
• CHANGED CAUTIOUS AMERICAN CONSUMERS POST-GFC ADD TO A MISERABLE RECOVERY AFTER MISERABLE RECESSION.
Equally astounding is that US consumers’ new found thriftiness. American consumers, particularly the baby boomer generation, with little prospect of re-employment and income generation forward, has changed substantially, post the GFC - but not their dependency on credit card for groceries spending. Cheaper US dollar means higher food, energy and clothing prices are at record levels as imported inflation hits home. Consumers in US are relying on credit to pay for necessities such as food and gasoline as inflation and cheaper greenback erodes disposable income.
http://www.bloomberg.com/news/2011-07-21/consumers-in-u-s-relying-on-credit-as-inflation-erodes-incomes.html.
Poorer segments of US consumers are living hand-to-mouth and the wealthier ones trickled down to simplicity of shopping at Wal-Mart in place of more expensive specialty outlets.
http://www.marketwatch.com/story/discount-stores-attract-plenty-of-wealthy-shoppers-2011-06-24.
Discount stores now attract plenty of wealthy shoppers. Retail sales excluding autos, gasoline stations and building materials, had the smallest gain in June in 11 month are signs of deteriorating economic conditions, not an improvement. What is good for Wal-Mart is not necessary a good indicator of the true state of the US economy in terms of consumer spending.
The US is now seeing stronger corporate earnings with stronger balance sheets but dying consumers, oppressed also by inflated housing burden, energy and food prices and no increase in disposable income to spend. In the words of Martin Wolf, the US economy is a story of “miserable recession and a miserable recovery.”
http://finance.yahoo.com/blogs/breakout/economic-downturn-years-unravel-wolf-180823003.html.
External stimulus via QE1 and QE2 has been proven not to be working, so the recovery would need to be a long drawn out process. Large investors in the US are getting nervous just as US businesses were near the end of its 2nd qtr corporate results season.
http://finance.yahoo.com/banking-budgeting/article/113238/large-investors-nervous-marketwatch?mod=bb-budgeting
• CONSUMERS GLOBALLY ARE ALSO RETRENCHING DEBT AND SPENDING
Elsewhere, falling US dollar means rising costs of imported consumer goods driving consumers out of shopping malls. It is the same retailing sentiment even in places like Canada.
http://business.financialpost.com/2011/06/21/canadian-retail-sales-lacklustre/.
Statistics Canada showed the inflation rate hit an eight-year high of 3.7% in May. As incomes are unlikely to exceed inflation, Canadian consumers are shopping frugally to reducing debt
level.
http://www.financialpost.com/personalfinance/Consumers+shop+around+prices+rise/5131151/story.ml .
And Australia is no different.
http://www.bbc.co.uk/news/business-14009797.
Over in Australia, the mining boom created a two-track economy prospering on a resource sector boom but Interest rate hikes to curb inflationary pressure on housing had strong negative impact on retailing. There is now a global slump in consumer confidence - the lowest since late 2009, according to a Nielsen survey.
http://www.newsdaily.com/stories/tre76g1lh-us-nielsen-confidence-survey/
Whilst it is true that a lot of corporate worldwide have eclipsed pre-recession profit levels, this was achieved only after having gone through aggressive cost-cutting restructuring exercises since 2009. Strongly negative interest rate environment also subsidized corporate earnings but people forget that this is a finite phenomenon that can’t last forever. For most of the rest, it has been largely a jobless recovery and one accompanied by falling living standards for bargain-driven consumers. This is even true of Chinese retailing sector.
http://www.cnbc.com/id/43712712.
Luxury retail malls are largely deserted.
• EURO ZONE SWIMMING IN SOVEREIGN DEBT CRISIS SINKING AGAIN
Euro zone is constantly challenged of its debt overhang. Weak growth in slowing economy amid bouts of eruption of sovereign debt crisis threatens the funding requirements of European banks. IMF warns of capitalization of banks in Europe as relative low, especially compared to US.
http://online.wsj.com/article/BT-CO-20110714-712179.htm.
This makes financial systems in Europe less resilient to systemic shocks. As of current indication, Italy, Euro zone’s third largest economy and too big to rescue by the ECB in any crisis, suffered a deep contraction and Spain moved into negative territory.
http://business.financialpost.com/2011/08/03/for-world-investors-its-the-economy-stupid/
The 17-nation Euro zone’s service PMI slid to 51.8, as Germany and France which had propped up the tepid EU’s growth also fell closer to the 50 contraction divide. Italy services sector suffered two consecutive qtrs of decline and Spain’s service index fell to 46.5 compared to June reading of 50.2. The Markit Euro zone manufacturing PMI fell to 52.0 from 54.6 in May which itself declined 3.4 from preceding April read of 58.
http://www.ourbusinessnews.com/euro-zone-june-manufacturing-pmi-falls-to-52-0/.
The two months consecutive output weakness is the greatest extent of decline since late 2008. Under threat of inflation and despite the weak growth, the ECB hiked interest rates by 25 basis points to 1.5% on 7 July. It aimed at tackling inflation now running at 2.7% (against an ECB target of 2%) despite Euro zone’s intensifying debt crisis. Higher currency and interest rates prevailing relative to the US must dampen its competitive prospect for recovery as US economy itself also showing increasing signs of stalling.
WHAT PROSPECTS GOING FORWARD?
• MANUFACTURING PMI ARE FALLING
Let us take a peek into the July-September qtr early economic indicator. US manufacturing activity barely grew in July. Its Institute of Supply Management gauge in July declined 4.4 points to 50.9, the worst reading since July 2009.
http://www.marketwatch.com/story/ism-manufacturing-gauge-falls-to-two-year-low-2011-08-01?siteid=bigcharts&dist=bigcharts.
China, Russia, UK, Spain, Greece all reported sub-50 PMI readings of manufacturing contraction. HSBC Brazil July PMI reading came in at 47.8, the second consecutive sub-50 reads below the no-change 50 line. India’s factory growth slide for the third consecutive months. The HSBC Markit Business Activity India Index fell to a 20-month low of 53.6 in July from 55.3 in June. India’s 10-year benchmark bond yield shot past 8.3% making Government borrowing prohibitively expensive to fund development projects.
http://sg.news.yahoo.com/high-bond-yields-impact-govt-borrowing-source-062942568.html
These figures are universally bad, stretching from US, EU, to developing economies like Russia, Brazil, China and India.
• STEELMAKERS ARE TELLING US MORE BAD NEWS OF GLOOMY OUTLOOK
If steel-making is any reliable early signpost of possible turnaround in manufacturing, it does not look good either. China is the world’s largest steel producing and consumer nation. Chinese steel production peaked in May, is expecting a seasonal slowdown as summer power outages in July/August due to nationwide “load shedding” reduction of pressure on its overwhelmed power grid as consumption peaks.
http://www.mineweb.com/mineweb/view/mineweb/en/page39?oid=129259&sn=Detail
After posting a 17% fall in qtrly earnings, POSCO, the world’s third largest steelmaker warned of weakening demand growth and high input costs. Record Chinese production is flooding the market. POSCO warned of high prices of iron ore and coking coal, which rose between 25 and 47 percent quarter on quarter in April-June, show no signs of a sharp retreat due to tight supply. POSCO is only expecting a gradual recovery after it bottoms (if any) out in the third qtr. Autos, appliances and construction accounts for nearly 70% of aggregate customer base of steelmakers. Despite seasonal slide in Chinese production in July-September qtr, POSCO is not expecting an improved outlook of demand and pricing resistance in the market-place.
American producers U.S. Steel and AK Steel also warned of reduced earnings in the July-Sept period, echoing comments last week from Korea's POSCO.
http://www.reuters.com/article/2011/07/27/steel-idUSL3E7IR18K20110727.
Contrary to earlier bullish outlook by all three Detroit automakers, US car manufacture is much less upbeat after a tepid sales growth in July as American consumers are pulling back on car purchase.
http://biz.thestar.com.my/news/story.asp?file=/2011/8/3/business/20110803084851&sec=business
Acelor Mittal, the world’s largest steelmaker, supplying 6% to7% of the world’s steel production but not dependent on Chinese market, also forecast a seasonal dip in this coming qtr. http://www.bbc.co.uk/news/business-14304503. All steel producers are expecting Chinese public housing sector construction for long steel products to offset expected decrease in private sector housing. Short steel products used in autos and household appliances in China may still weaken if consumer confidence is further adversely affected by inflation. Just like Singapore, the authorities in China placed limits on new car in Beijing hampering demand growth. And right now, consumer confidence is also under severe attack in US and EU. There is real fear and doubt whether the euro zone can overcome its sovereign debt woes. Italian and Spanish bond yields have surged to 14-year highs.
http://www.reuters.com/article/2011/08/03/us-eurozone-idUSTRE7712HB20110803.
And Chinese auto production picked up only marginally in June after huge decline in April and May. Only Chinese steel consumption surged past the pre-crisis level since early 2009 but developing economies are approaching. See page 9 at
http://www.arcelormittal.com/rls/data/upl/627-55-0-0 110303FinlaPresentationAutoInvestorDay.pdf
Developed economies still have a long way to climb to reach there. As steel consumption typically lags economic recovery, the steel consumption pattern post-GFC shows how little the developed economies have recovered of capital investment and consumer durable spending in the last 2 years. If Chinese steel consumption stumbles badly, it would indicate that the world economies are in big trouble.
Steelmakers and consumer confidence are telling us no good times ahead.
AT THE MACRO LEVEL, CHINA IS YET THE LAST DEFENCE BUT A WORRISOME ONE.
• MONEY PRINTING, GOLD, INFLATION, INTEREST RATE & DEBT UNSUSTAINABILITY.
Bernanke attributed the slow interim US GDP growth to temporary factors like gasoline prices pulling back consumers spending and supply disruption caused by Japan’s disaster slowing industrial production. But the real culprits were depressed housing market, credit tightening, and stubbornly unyielding unemployment. These are longer durable malaise undermining consumer confidence. Moreover, elevated gasoline is only part of a generalized imbalanced demand-driven (relative to supply) inflation and, more serious is the liquidity-driven price speculation sweeping the entire world ranging from real estate, base metals to food and traded equities. After QE2, the world is flooded with borderless liquidity stimulating assets bubbles across much of Asia and these are debt-funded. EU, USA, and China were big on printing money to spend on stimulus BUT NO ONE THOUGHT ABOUT THE CONSEQUENCES NOR THE EXIT STRATEGY THAT WON’T UNDERMINE THE REAL RECONOMY if it fails. It is too late now to stare at failures right before our eyes.
The evidences are plenty. In Europe and US, consumers refuse to spend, banks refuse to lend, businesses refuse to hire, corporate refuse to invest in fixed capital investment, the economies either stalled, stalling or crawling at a pace little faster than stagnation but Central bankers clueless on what to do next other than buying gold bullion in fear of doubtful value of paper money in a sea of raging seemingly unstoppable inflation surging beyond target rate, rising debt worries, volatile treasury yields, waning faith safe-haven currencies like greenback and euro etc. Even central banks from poor developing countries like Mexico, Blanga Desh, Bolivia, Sri Lanka, India, Brazil, and most recently, Thailand and Russia are buying gold which promises only risks but no coupon or interest return by gold leasing to gold producers.
http://www.reuters.com/article/2011/08/03/businesspro-us-gold-reserves-idUSTRE7722IK20110803.
Bank of Korea bought bullion for the first time recently – its first purchase of gold since the Asian currency crisis of 1997-1998 as gold price keeps hitting new peaks. Central bankers are fearful of the brittle global economic recovery and the precarious debt situation in Europe and USA, the implied volatile currency yield risks of US 10-year bond yields, and waning faith in so-called safe-haven paper currencies such as the US dollar, euro. Inflation too, has been rampantly running ahead of target in India, China, Europe, Canada, and Australia and is at multi-year high. From net negative sellers of gold in the last decade, central bankers turned net positive net buyers globally. It is easy to understand the bearish sentiment prevailing among economists of prospects for near-term recovery of economies of USA, Europe and Japan.
Interest rate is set to rise globally, despite tough economic conditions. The reason, this author, argues is that, rising food, material, energy prices are feeding into wage inflation which seeps into inputs of manufacturing costs WITH VICIOUS CIRCLE OF FEEDBACK LOOPS INEVITABLY. The speed at which oil price rebound from two-digits back to triple-digits of Brent sweet crude despite the IEA stockpile release proves my point. Coking coal, iron-ore price seems immune to the glut of global steel supply and see how fast wheat and corn price bounced up steeply again. The Asian and Australian property bubble s are set to burst and needs to be so before Asian finds itself envelops by the same sub-prime intractable crisis engulfing them in a banking crisis and wrecking their economies exactly the same way much of Europe and USA followed Japan’s lost decade.
With rising interest rates, the debt profile of USA and most of EU (except Germany) raises question about their debt sustainability. So where the hope for sustained recovery pathway for USA and Europe is for the next few years as fiscal discipline must take hold to avoid insolvency default risks? FISCAL DISCIPLINE IN US AND EUROPE MEANS SLOWER GROWTH. In the environment of slow growth, where is the capacity of sovereign to service their debt liabilities? Greece has seen two bailouts in deepening recession and that aggravates its sovereign borrowing costs adding further pressure of risks default going forward even more intensely. Greece’s 10 year bond rate is now close to 14% and this will escalate its debt to GDP ratio further from 142.8 in 2010. Italian Govt 10 year bond gross yield of 6.13% is at decade high
http://www.tradingeconomics.com/italy/government-bond-yield
Spain 10-year bond yield is now 6.28% - also ten year high
http://www.tradingeconomics.com/spain/government-bond-yield.
And their most recent economic growth rates? Italy’s GDP rose 0.3 percent in the second quarter, up from a 0.1 percent pace in the first quarter, while Spain’s GDP expanded 0.2 percent in the second quarter, down from 0.3 percent the previous quarter.
http://www.bloomberg.com/news/2011-08-05/german-10-year-bunds-advance-11th-day-on-debt-crisis-italian-bonds-slump.html
Estimated debt-to-gross-domestic-product ratio is 120 percent this year for Italy, the second-highest level in the euro region, compared with 68.1 percent for Spain. Inflation in Italy and Spain is running at 2.7% and 3.1% respectively, above ECB target rate of 2%. Inflation restrains policy makers from loosening monetary policy. Italy, Spain, Greece has all found themselves stuck in an economic quagmire. Growing debt to GDP ratio in circumstances of sustained weak economic performance triggers risks of continuing contagion spread. On market ‘s concern of a possible EU’s 'Double Dip' recession, credit-default swaps (CDS) on Spain surged 30 basis points to 420 and Italy jumped 34 to 367 in early August. What is CDS? CDS function like a default insurance contract for debt. A widening of one basis point in a five-year CDS spread equates to a $1,000 increase in the annual cost of protecting $10 million of debt for five years. The cost of insuring against default on Spain and Italy surged to records, leading an increase in European sovereign bond risk, on concern indebted governments will struggle to fund themselves as the global economy slows.
http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/08/02/bloomberg1376-LPAH800YHQ0X01-0UR9RE0LR6A178JI2UTIEGC9IA.DTL
Europe will remain buffeted in slow growth, mired in recurring sovereign debt crisis and constrained by continuing pressures of fiscal tightening. Presently, about 20% of the US S& P earnings originate from Europe. That spells disaster for US businesses which also face a much weakened economy of consumer demand pullback within US and the much awaited fiscal impact of budgetary cutbacks to local government and municipality funding. Meredith Whitney could be proven right to have warned of local government debt may be at the doorstep of a major crisis. States and local governments, which make up 12 percent of US GDP, are really pulling back,"
http://www.cnbc.com/id/43973763
The austerity drive forward could be a thunderbolt strike at the heart US economy after it could only be sustained to such disastrous outcome following the failed QE2 stimulus. Another orgy of US stimulus will almost certainly drive the US dollar down lower, adding to inflation, raising interest rate and sinking US into a delayed but much deeper recession.
CHINA – YOUR LAST FRONTIER OF LITTLE HOPES AND TERRIFYING RISKS
ECB President Jean-Claude Trichet, Ben Bernanke, US Federal Reserve Chairman and Christine Lagarde might have sleepless nights worrying about the state of sinking global economies, PBoC governor, Zhou Xiaochua has immediate worries of how to better deploy China’s 3 trillion plus FX reserves and rising, adding big pressures on PBoC’s sterilization.
http://asianbankingandfinance.net/foreign-exchange/in-focus/pboc-governor-china-needs-reduce-fx-reserves
Mr Zhou, unlike other central bankers around the world, does NOT seems to have such a big hurried appetite for gold bullion buying beyond China’s current holdings of under 1200 tonnes.
http://www.commodityonline.com/news/China-to-raise-gold-silver-reserves-in-2011-36118-3-1.html.
For fair comparison of relativity, the Mexican Central bank bought 100 tonnes of physical gold recently.
http://www.ft.com/cms/s/0/cbc02e10-7637-11e0-b4f7 00144feabdc0,s01=1.html#axzz1U4Miu3Ew.
Perhaps, Chinese got bigger risk appetite – come what may of global economic turbulence - as they are of managing of risks. Life is cheap in China. Chinese will build and happily operates nuclear power plants far more dangerous of accident risks than Fukushima. Chinese economic model is like its super high-speed rail network linking Shanghai to Beijing which recently had a big crash at Wenzhou. True to Chinese grit and political humor, they quickly buried the derailed carriages with the corpses inside of incriminating evidences – relenting only on a barrage of cyberspace howling protests from its millions of disapproving netizens! That is how Chinese psyche works – defying gravity, and so far on the economic front, all previous forecasts of hard landing by doomsayers have found their grief of disbelief. Less known to economists, however, is the suspect that China’s GDP figures are "man-made" and therefore unreliable, said Li Keqiang, according to leaked U.S. diplomatic cables released byWikiLeaks.
http://www.reuters.com/article/2010/12/06/us-china-economy-wikileaks-idUSTRE6B527D20101206. .
Li is widely expected to succeed Wen Jiabao as China’s next premier in early 2013.
But all that gravity-defying economic miracle achievements were before the GFC and before the world gets to know of GDP-boosting infrastructural white elephants like Kang Ba Shi besides and beyond already well-known and publicized empty commercial and residential blocks in major developed cities.
http://www.businessinsider.com/pictures-chinese-ghost-cities-2010-12#there-are-no-cars-in-the-city-except-for-a-few-dozen-parked-at-the-glamorous-government-center-2.
Chinese ghost cities were built out of debt mountains. And this white elephant real estate is located in a smallish countryside township of Loudi, Hunan Province.
http://www.bloomberg.com/news/2011-07-13/china-cities-sell-land-at-winnetka-values-with-bonds-seen-toxic.html .
And in Yinchuan in northwest China's Ningxia Hui sparsely-populated autonomous region, it built a 25-km long eight-lane highway running through the city, with wide forest belts on both sides years ago.
http://www.chinadaily.com.cn/opinion/2009-09/01/content_8646607.htm.
All of these are sub-prime bursting in-the-making scatters across the entire spread of China from north to south and west. Now this is the real China that never got into print of official media release nor got the attention of foreign economists’ publishing.
So how much can one trust of Chinese GDP statistics and its measure of underlying sustainable real economy? I will give some credit of reliability to official sources – at least those on the downside, even if these are most likely to be understated. China does not have a sophisticated banking system in place, unlike the developed countries. The State Council is the policy decision-makers on major macro-economic decision as interest rate. From the somewhat detached position, governing China and managing its economy suffer from the tyranny of size, geography and cumbersome bureaucratic layering. It is as like frying a very small fish in a big wog of very hot frying oil – removing too soon leaves it uncooked and too late burnt it. In both instances, the fish is not deliciously edible. The contextual sometimes contradicts the holistic and that is how this author believes Chinese statistics should be interpreted of its usefulness and reliability. China is not one uniform monolith but a mosaic of evolving landscape. Compounding these complications is the lack of transparent statistics. A lot of guesswork, glimpses of China’s policy making decisions and anecdotal evidence necessarily framework of assessment of the true picture of the state of affairs inside China.
SO IS THERE A REAL ESTATE BUBBLE & GROWTH BUBBLE INSIDE CHINA?
Beyond the obvious deserted empty luxury retail malls, ghost towns, vanity projects dispersed over China, affordability has become a real issue in big cities. It is said that in today’s inflated price climate, only 20% of Beijing top earners can afford their own housing. While the mass migration towards urbanization continues, prohibitive costs of living in big cities like Beijing, Shanghai, Guangzhou have encouraged migration to Chinese second-tier and even some third-tier cities where technology will allow of similar conveniences that big cities has of comfort-providing infrastructure. Beijing, Shanghai etc have seen restrictive measures on property investment such as property taxes, increases in down-payment requirements, and raised interest rates. As at the time of writing this article, China Banking Regulatory Commission (CBRC) is urging commercial banks to lend healthy local government financing vehicles (LGFC) to support state-sanctioned projects including the building of subsidized housing. THIS CONTRADICTS CBRC’S RECENT DIRECTION TO BAN ALL LENDING TO LOCAL GOVERNMENT after they chalked up an estimated 10.7 trillion yuan ($1.66 trillion) in debt, stirring fears of widespread loan defaults that could shake the world's No.2 economy.
http://in.reuters.com/article/2011/08/05/china-economy-housing-idINL3E7J50K520110805.
Under this new directive, loans issued for the construction of affordable housing should not be priced below 0.9 percent of the central bank's benchmark lending rate and should have maturities no longer than 15 years. CBRC dictates also that provincial government should step in to assist in repayment of local governments which encounter loan repayment difficulties. That leaves enough room for meaningful conjecture, not definitively, that there is price bubbles in residential accommodation to varying degree across China.
Peter A. Sands, CEO, Standard Chartered, insisted this week there is no growth bubbles inside China.
http://www.cnbc.com/id/43972390.
“There is asset inflation in China and property bubbles in some parts, but that doesn't mean that Chinese growth is a bubble,” I, substantially dispute him! The CBRC’s quick about turn of bank lending assistance to affordable public housing amid credit clampdown on all bank lending to local government points to desperation need of housing affordability across China. There is real estate PRICE BUBBLES in top 10 Chinese cities, and certainly, to varying degrees in second-tier Chinese cities as well. Affordable public housing is in dire needs. The massive scale of subsidized public housing project over the next 5 years illuminates my contention. Housing construction and supporting infrastructure is a big driver of capital formation spending supporting China’s economic growth. So, if LGFC are financially-strapped or worst still technically insolvency of loan repayment liabilities as they fall due, and provincial government also unable to assume that liability, prudential lending by banks must necessarily deflate the growth bubble!
Another aspect and extent of real estate bubbles not seen in public eyes is the prevalence of vacant residential apartments. That became public sometime in March 2010. A report emerged of some power entities – that 64.5 million urban electricity meters registered zero consumption over a recent, six-month period.
http://english.caing.com/2010-08-03/100166589_3.html.
Not all are permanently unoccupied available space but there is certainly a lot of speculative buying of price bubbles overlaying this QUANTITY bubble. Asset inflation is leading the bubbles and quantity bubble is leaning on the price bubbles for viability support. The magnitude is scary; the vacancy rate of occupancy is enough to house close to 200 million Chinese. What would happen to these unoccupied, residential accommodations when affordability public housing fills the void which this 64.5 million vacant apartments waiting to be filled? Wouldn’t there is a gigantic banking crisis of massive mortgage defaults in a real estate crash, beyond the banking sector’s lending to nearly insolvent LGFVs?
• TIDES, TORRENTS, TSUNAMI - SHIFTING FROM PLACID CLUSTERED TO TURBULENT ENVIRONMENT WILL HAVE EARTHQUAKE EFFECTS.
Hong Kong sits just next door to China. If booming Chinese economy is so resilient, why are so many real estate developers lately have been talking about the risk prospects of a property crash? Plenty of Chinese buyers could literally walk across the Shenzhen border and snapped all the “bargains” which locals either can’t afford or unwilling to pay? Robin Chan, Chairman of Hong Kong’s third largest property developer, has this warning.
http://www.cnbc.com/id/43966773
Every market tanks; what doesn't change is cycles….. "Each time the reason may be different, but (prices) will come down." That is exactly right with all financial market cycles. Will China’s push for massive affordable public housing squeeze private developer’s margin? Will the correction in asset inflation drives overleveraged developers and speculators there over the edge of the cliff hurting banks and destabilizing its economy?
There is also a chorus of views inside China that the real estate in China is due for a correction. IT COULD COME SOONER than many expect. Three official interest rate rises this year have pushed mortgage rate over 7%, leaving an expanding inventory of unsold properties. There are now signs of a price stalemate as Chinese home price teetering on a precipice. http://www.smh.com.au/business/china-home-prices-teeter-on-a-precipice-20110722-1hs94.html. Home price could fall this qtr and it may be a question of what extent and timing .Whilst it is true that escalating cooling measures had been in place since last October such as increased credit lending rates and jacking up banking reserve requirements, these policy initiative have not worked well correcting prices downwards as yet. Its subdued impact is because of the more “benign” global economic environment even if there is some degree of at least some degree of disturbed reactive environment. There is a measure of financial stability prevailing in global financial markets at least until recent weeks to give speculators and aspiring owners some confidence of continued buying support. That confidence stability impact could well turn devastatingly toxic now. IT IS LIKE THE SHIFT FROM TIDES, TO TORRENTS AND NOW THE TSUNAMI – MOVING UP THE CHAIN OF ESCALATION FROM THE PAST OF PLACID CLUSTERED ENVIRONMENT. POST –GFC, TO DISTURBED REACTIVE ENVIRONMENT AT YEAR BEGINNING TO NOW UNPREDICTABLE TURBULENT FIELDS! The financial rout in global financial markets late this week will leave tsunami impact as severe as the last GFC, this author must sadly reminds. As I wrote this line above, breaking news on my desktop reads – S & P downgrades US to AA+ rating with negative outlook on a Saturday morning. Last night, Australia’s central bank slashed the country’s GDP growth for 2011 down to 2% - a far cry from its most recent estimate of 3.25%. That itself is a significantly lower than earlier estimates of revised 4% down from 4.25%. Australia is a leading commodity export nation depending on China. The expectation within the Reserve Bank of Australia must be China will slow down significantly for the rest of 2011.
A BANKING BUBBLE ON ALONGSIDE A REAL ESTATE BUBBLE?
The IMF released its annual review of China a fortnight ago, warning that inflation, real-estate bubbles and weak monetary controls pose "significant risks to financial and macroeconomic stability" in the world’s second-biggest economy.
http://www.theaustralian.com.au/business/economics/chinas-manufacturing-activity-contracts-hsbc-survey-shows/story-e6frg926-1226099012286.
Food inflation is currently running round 17% and real estate inflation compounding. Inflation surged higher to 6.4% in June even as the 5th interest rate hike in eight months lifted the Yuan lending rate to 6.56% and deposit rate to 3.5% last month. The PBoC is obviously “behind the curve” trying to slow the inflationary spiral.
http://www.theaustralian.com.au/business/interest-rates/chinese-scholars-state-case-for-higher-rates-agenda-in-beijing/story-fn91wad8-1226089890.
Yet it can’t raise interest rate too fast without the rest of the world lifting their own interest rate first, given comparative interest rates are much lower in EU and particularly in US. Raising interest rate too frequently also risks the inflow of hot money into China via Hong Kong looking for higher yields in a strong Yuan which therefore offer the advantage of lower risk. As Hong Kong dollar is pegged to the greenback, it is easy for banking channels in Hong Kong to access very cheap money near zero interest rate costs in the US. That influx could easily defeat China’s inflation fight. Indeed, it has already been happening. This week, PBoC stops offshore Yuan borrowing of hot money by Chinese companies through Hong Kong. Until this week, there was a growing trend among mainland companies of borrowing relatively cheap offshore Yuan in Hong Kong and remitting it home for business purposes to circumvent tight domestic cash conditions in the mainland.
http://www.cnbc.com/id/43982853.
Yet another source of credit flowing into business and real estate speculation has now been shut. As deposit rates in China remain well below inflation, people are encouraged to spend or invest in speculative assets. As luxury malls are empty, a lot of money went to other assets. Stripped of property affordability, a lot of money went into physical gold and short-term bubble investment of certificates of deposits.
The 6th reserve requirement hike this year took China’s reserve requirement ratio to 21.5% for large institutions effective 20 June 2011.To fund their tightened loan-to-deposit below the 75% regulatory threshold, banks now offer a whole range of “wealth management products” akin to short term investment certificates of deposits with maturity duration of 2 days and up 31 days. The rates of interest offered as high as 8% are much higher than the one-year benchmark bank deposit rate of 3.25%. Big banks and smaller financial institutions are circumventing the reserve requirement ratio to build their deposit base and expand their lending portfolio. Instead of managing their asset side (lending), banks are now managing their liability side of their balance sheet deposits taking making regulatory control harder for China Banking Regulatory Commission. Banks must roll over these “wealth management products” to keep their cash rolling i.e. in effect they are increasingly supporting illiquid long-term lending with short-term cash flow. The moment this customers stop buying, it is tantamount to withdrawal of funding supply. There is a real risk of a sudden run on all bank deposits in any sudden banking crisis.
http://www.cnbc.com/id/43585557.
A fuller descript of Chinese banking woes can be found at
http://www.temasekreview.com/2011/07/13/temasek-holdings-change-of-direction-needed/
The China Banking Regulatory Commission (CBRC) boasts China’s banking system has a bad loan coverage ratio of about 220 percent, or 1.2 trillion yuan. It certainly looks impressive on paper. The big Chinese banks boast some of the lowest loan-to-deposit ratios and some of the highest coverage ratios on bad loans in the world.
The BIG QUSTION is what constitute “bad” loan when banks in China are known to have been pushing a variety of off-balance sheet lending?
http://finance.yahoo.com/news/Analysis-Chinas-big-banks-rb-261135357.html?x=0&.v=1.
Lending to LGFVs of local government for infrastructural construction with long and uncertain payback is prime suspect. “What bank would want to take re-possession of a toll road” is the repose. There are signs many entities created by local governments to finance infrastructure projects could face trouble repaying their loans.
http://finance.yahoo.com/news/Analysis-Chinas-big-banks-rb-261135357.html?x=0&.v=1
It will all become non-performing only when massive defaults occur en masse. By then it will be too late of rescue efforts.
China's state auditor said in June that local governments held a massive 10.7 trillion yuan ($1.53 trillion) in debt at the end of 2010, warning there was a risk some might default.
http://www.theaustralian.com.au/business/economics/chinas-growth-unsustainable-say-analysts/story-e6frg926-1226100929751.
By that sum, local governments owed debts equal to a quarter of its gross domestic product.
http://www.theaustralian.com.au/business/markets/china-bears-sharpen-tools-amid-debate-over-worlds-second-biggest-economy/story-e6frg94o-1226086903484.
And this is not the end of its banking woes. Lending to LGFVs of local government is not valid compartmentalized analysis. There are lending to local government and related entities NOT included in this 10.7 trillion yuan exposure. All that lending to SMEs could also turn toxic to add to the banking wreckage if the economy turns badly sour. That moment could be now as EU scrambles for some semblance of financial stability and the faltering US economy stalling to negative outlook. The signs are ominous.
CHINA’S NEAR TERM RISKY OUTLOOK – MANY NEGATIVES
Europe remains China's first export destination and the US second, but growth in the West remains stubbornly anaemic. Not surprisingly, China lambasted US handling of the recent raised debt ceiling debate. China’s Foreign Minister Yang Jiechi said his nation will support Europe and the euro. It is in China’s own self-interest to do so.
http://www.bloomberg.com/news/2011-08-05/china-s-scope-for-supporting-global-growth-limited-as-inflation-reaches-6-.html.
At the same time, the Chinese are restricting their exposure to US treasury when it comes to investing its huge US$3.2 trillion of foreign reserve.
http://www.smh.com.au/business/world-business/china-to-limit-us-exposure-blasts-debt-bomb-20110803-1iarg.html.
Whatever, its domestic banking crisis, China would not find it easy to liquidate its foreign reserve holdings to prop up its own economy in a precipitated crisis. This is hard reality. And even if the Chinese Government is unable to shores up its banking sector’s non-performing loans of yet indeterminate size, what would happen to the decimated savings of ordinary Chinese citizenry deposited in its banking system? A banking crisis some reasonable magnitude hitting, even rescued with state capital injection, will be weakened and may not be strong enough to revitalized its stalled economy and underwrite Chinese future growth prospect. Without massive bailout in any banking distress, China will not recover to positive growth. It needs domestic consumption to sustain its economy instead of reliance on exports to EU and US. Domestic consumption now accounts for 30% of China’s GDP base and manufacturing around 40% according to market estimates.
Meanwhile, the rout and bloodbath in global financial markets could not have come at a worse time for China. US and EU consumers’ confidence so brittle in the fragile recovery has now taken a big hit. Meanwhile, massive retrenchments will cause big pullbacks in consumer spending worldwide dampening consumption with severe negative impact expect to hit China in the third qtr. This author is forecasting no good Christmas in 2011. Now that darks clouds are sweeping the global economic landscape, the loss of momentum in the qtr is also unlikely to inspire a seasonal upturn in the final qtr. There is also a seasonal slowdown in China itself in the hot summer. The cost push in material, energy and labor input and falling global currencies (relative to Yuan and US dollar) have squeeze manufacturing margins to razor thin. China's power companies are hemorrhaging cash, losing $2.3 billion in the first half of the year compared to $1.4 billion in the same period last year. They can’t raise energy prices without permission from Beijing. So without a bailout, power cut is inevitable to contain losses and energy shortage could undermining China’s economy.
http://www.financialpost.com/opinion/businessinsider/China+facing+energy+crisis/5192570/story.html
Since 2007, coal prices have climbed 80% but they are allowed to raise prices by a mere 15%. And coal price is still increasing along with recent spike in oil price. Any energy price rise will hit its margin-stricken over-supplied steel sector with flow-on negative effects into autos, industrial and consumer durable manufacture. The vulnerable steel sector poses threat to China’s sustained recovery.
China is not immune to the developed-world debt overhang on global growth. Foreign direct investment slowed to just 2.8% annual growth rate but which was running at 13.4% in May and 15.2% in April.
http://www.marketwatch.com/story/china-faces-slowing-foreign-investment-2011-07-17.
Going forward, that could evaporate as corporate worldwide cut fixed capital investments in the wake of expected shrinkage in earnings and uncertain economic outlook ahead.
HSBC’s preliminary Purchasing Managers’ Index survey read of 48.9 signals China’s manufacturing contraction – the first first contraction in manufacturing activity since July 2010, and the lowest reading in 28 months – and a DOUBLE DIP. HSBC economist Qu Hongbin said: "The July preliminary PMI implies that June's rebound in industrial production was just temporary. We expect industrial growth to decelerate in the coming months as tightening measures continue to filter through."
http://www.theaustralian.com.au/business/economics/chinas-manufacturing-activity-contracts-hsbc-survey-shows/story-e6frg926-1226099012286
The US first half GDP growth is sub-par – the worst since March 2009.
http://www.tradingeconomics.com/united-states/gdp-growth.
And the financial market rout this week is set to keep it on a downward trajectory. US July ISM manufacturing survey came in at a shocking 50.9, down from 55.3 the month earlier – very close to contraction. Manufacturing is the strongest consistent pillar of the US recovery story till now and that is faltering.
http://www.cnbc.com/id/43980631
Anaemic US economy would be detrimental to China exports as the US is its second largest market after EU.
China's growth has been over-stimulated since its 2008 RMB4 trillion ($581 billion) stimulus package, which focused on physical capital investment. Infrastructure spending has long-term payback period and adds little to continual multiplier effect. Investments make up a record 48 per cent of GDP. It is unsustainable. What is worst is these were funded out of debt borrowings with little capacity for repayment unless money can be continuously raised via land sales by local government. The economic model is spending first via debt financing and then paying back later by taxing consumers via housing squeeze of inflated land costs which inevitably sucked the savings out of citizenry. This policy cannot last forever and China is now facing up to it. LIKE THE US, EU, THERE WAS NO PRE-PLANNED EXIT STRATEGY.
http://www.theaustralian.com.au/news/world/we-must-be-ready-for-china-slowdown/story-e6frg6ux-1226097819349
A real estate crash in highly bubbly Hong Kong not only damage its own banking sector’s liquidity but also could have important ripple effects for China as many big Chinese conglomerates raise money there.
http://www.theaustralian.com.au/news/world/we-must-be-ready-for-china-slowdown/story-e6frg6ux-1226097819349
China is past its sizzling 11% to 14% annual GDP growth rates seen just before the GFC.
http://en.wikipedia.org/wiki/Historical_GDP_of_the_People's_Republic_of_China
Without stimulus support of autos and white goods spending of its consumer, it is unlikely that China could have returned to the plus 10% annual growth rate in the last two years. With this end of economic stimulus, it is now settling on a slower growth trend. Auto sales growth slumped steeply in the first half and the forecast forward till end of this year is only moderate gain expected. Economists have also noted “sharp declines” in growth in investment in infrastructure, property and manufacturing in June. China is heading for a slowdown, though not yet a contraction except manufacturing. After its economy grew 9.5 percent in the second quarter, the balance of meaningful probability must he further slowdown from credit tightening.
http://www.bloomberg.com/news/2011-08-05/china-s-scope-for-supporting-global-growth-limited-as-inflation-reaches-6-.html
Meanwhile, China's central bank chief Zhou Xiaochuan vowed to maintain a "prudent policy" to fight stubbornly high inflation. It is consistent with Chinese Premier Wen Jiabao’s exhortation that China must “treat stabilizing overall price levels as the top priority of our macro-economic controls and keep the direction of macro-economic adjustments unchanged," Mr. Zhou comment that the central bank would work to "avoid big fluctuations" in the economic growth, indicating some concerns over downside risks to the economy is a CLEAR REFERENCE TO THE DOWNSIDE PROSPECTS OF SLOWER GROWTH FOR THE BALANCE OF THIS YEAR EVEN BEFORE THE CURRENT UPHEAVEL SWEEPING GLOBAL FINANCIAL MARKETS.
http://www.cnbc.com/id/43708346
CONCLUSION
China led the rebound from the global recession in 2009 This time, it faced very strong headwinds of financial turbulence originating in its key export markets as it CONCURRENTLY struggles to contain domestic inflation amid escalating worries of its own banking vulnerability to local government debt and a residential real estate perching on the knife edge. China now may have limited room to counter weakening growth in the U.S. and Europe as inflation restrains policy makers from loosening monetary policy.
China’s only option available could be just watching the rapidly evolving financial turbulence and keeping its own financial house from catching neighborly economic fires originating from Europe, USA and the rest of Asia. I can’t imagine the dire consequences to global economies, if China hit the hard landing
WATCH OUT CHINA, the last sustaining bastion in this global turbulence could be a time-delayed cluster bomb waiting to explode of double-blow impact damage after EU and US have both meltdown into deep recession.
Anyone disagreeing?
ZHEN HE
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