BACKGROUND IN PERSPECTIVE
Just slightly over a year ago, I warned of tougher times ahead for China - on a slower growth trajectory http://www.tremeritus.com/2011/08/12/update-9-global-economies-heading-for-turbulence-watch-out-china/. I cautioned this - After its economy grew 9.5 percent in the second quarter, the balance of meaningful probability must be further slowdown from credit tightening.” This premonition is correct. It did and China downgraded its 2012 forecast to 7.5% - a steep decline in its growth trajectory. Peter A. Sands, CEO, Standard Chartered, insisted there is no growth bubbles inside China. http://www.cnbc.com/id/43972390. I disagreed then and still do. And so is the Chinese government determined as ever to rein in the bubble in its property sector. http://www.cnbc.com/id/48108799 The Monetary Authority of Singapore (MAS) back in April 2011 global growth forecast was for sustainable growth drivers in 2011, apparently seeing no risks vulnerabilities to China. http://www.mas.gov.sg/about_us/annual_reports/annual20102011/cm.html That was way of the mark too. In fact, DPM Tharman Shanmugaratnum, took a contrary stance to the MAS prognosis by the beginning of 2012 when he warned “Sub-par growth for at least two years” headline reads, front page, Straits Times, 4 January 2012 by Cai Haoxiang. His sober caution came at a time when mainstream media expressed exuberance of a possible global turnaround uplifted by improved employment figures in US, supposedly signaling an upturn there.
BEGINNING OF A GLOBAL TURNAROUND ON THE BACK OF A US RECOVERY?
But that “green shoots” optimism faded after gaining some momentum. http://www.marketwatch.com/story/july-jobs-data-show-some-improvement-in-hiring-2012-08-03?pagenumber=1. Employment is always a lagged indicator, NOT a lead indicator of economic turnaround, and its quantitative numbers alone can be grossly misleading. Wages are falling rapidly in US and that boosted non-farm payroll numbers. http://www.wsws.org/articles/2012/may2012/cat-m31.shtml. Even prosperous Caterpillar Inc is aggressively pressing for “market rate” of pay, using temporary supplemental workers without rights to severance pay, as the lever. This author prefers to look at the demand/supply side of the economic equation. After all, it is level of economic activity driving employment and income. Take auto sales statistic over the last 6 months. http://ycharts.com/indicators/auto_sales. They mirror the US employment figures, peaking in February/March and falling off towards June. Consumer pared spending evidenced in three consecutive monthly declines in autos and retail sales. Stagnating employment figure and shrinkage in paychecks could not sustain consumer spending. July 2012 non-farm payrolls rose by 163,000 but that was against a backdrop of weaker business investment and forward ISM manufacturing index of factory order below 50. http://www.cnbc.com/id/48490164 . That needs caution of positive interpretation even though the US stock market signaled its approval barreling ahead despite thin volume in the lack of retail investors. http://www.cnbc.com/id/48703726 Will that sustain on thin volume of apparent lacking of investors’ confidence? http://sg.finance.yahoo.com/news/light-volumes-turn-wall-street-104726877.html There is a trickle of signs that the US housing sector is stirring at the bottom but this author believes it is not conclusive. Warren Buffet has been expressing optimism on the US housing market for months and it seems he was wrong too, having plonked $3.85 billion on Residential Capital LLC only to see it filed for bankruptcy in May 2012. http://www.huffingtonpost.com/2012/06/18/warren-buffett-bets-big-o_n_1606964.html. Clayton Homes, Berkshire Hathaway’s financier arm to the US residential showed improved results. http://www.marketwatch.com/story/buffetts-clayton-homes-hints-at-housing-recovery-2012-08-03. US housing starts have been on the uptrend since last October rising to an adjusted rate of 760,000 in June. http://annapoliswaterfront.blogspot.sg/2012/07/usa-today-reports-housing-starts-in.html But still way below the 1.5 million mark that economists would regard as normal market condition. There are some tentative signs of tepid housing “recovery” or at least some hopeful signs of bottoming from its falling abyss since early 2012. Dan Fulton, CEO of US second largest timber company, Weyerhaeuser (WY), reported a spectacular December 2011 qtr earnings, higher revenue than analysts’ consensus expected and promises of stronger outlook in 2012. http://www.cnbc.com/id/46255972. Weyerhaeuser sells all kinds of wood-based building materials and a real estate division to give it a good proxy insight into the US real estate sector before any other backward-looking national economic data. It is the first hint of return of consumer confidence. WY reported an even stronger second qtr with sale turnover up by 11% to $1.79 billion. http://www.marketwatch.com/story/weyerhaeuser-q2-net-soars-on-gain-higher-revenue-2012-07-27?siteid=bigcharts&dist=bigcharts. . Very interesting, Caterpillar’s Form 10-Q SEC filing first quarter 2012 reported “significantly higher sales volume in North America across all major products” in its construction sector. Homebuilder stocks like D.R. Horton (DHI), Pulte Group (PHM), Lennar (LEN) & Toll Brothers (TOL) rallied one-way up since year beginning giving further hint that the US housing market continues to heal. Held back by lower inventories of 144,000 new homes (against May’s 143,000) – the lowest on record dating back to 1963 - and higher prices, new home sales in June fell to a seasonally adjusted annual rate of 350,000, according to the latest Commerce Department data release. http://finance.yahoo.com/news/us-home-sales-fall-350k-140710146.html. First time home buyers now account for only one-third of home sales compares to about half traditionally. http://www.marketwatch.com/story/fewer-home-buyers-are-first-timers-2012-08-22. The vast majority looking for a home already owns a home.
US MACRO-ECONOMIC PICTURE – STILL GLOOMY OUTLOOK
The macro picture overlaying the US housing sector, however, remains daunting.US second qtr GDP data was revised downward to 1.5% significantly down from a revised downward 2% in the first qtr. http://money.cnn.com/2012/07/27/news/economy/us-gdp/index.htm. The decelerating trend from December 2011 qtr is obvious with weakness noted in consumer spending, cuts in government spending and unsurprisingly imports helped by a stronger US dollar. Economists estimated that a 3% GDP growth rate is needed to cut unemployment rate down. That is unlikely to happen any time soon as US consumer spending slowed to 1.5% in second qtr down from 2.4% in the preceding qtr. Inventories climbed higher to estimated $66.3 billion, thus slowing manufacturing order in the September qtr. The Fed has warned of slower growth ahead since June. http://www.cnbc.com/id/47896453 Consumer spending needs to grow 3% annually. Three years after the recession, US consumers are still deleveraging. http://www.marketwatch.com/story/us-debt-load-falling-at-fastest-pace-since-1950s-2012-06-08. Total debt - public and private – share of the economy have been declining for 12 consecutive qtrs. The ratio of total debt to gross domestic product has fallen from 3.73 times GDP to 3.36 times. In the U.S., household debt has now fallen to 84% of GDP from a peak of 98% in 2009 but that is also partly due to mortgage release and credit card closures. Public debt has risen to 89% from 56%. There is still some more room to claw back in household debts to more sustainable levels and US consumers have shown the propensity to continue deleveraging. Retails sales tend to be volatile from month to month weakened in May/June but recapturing in July and a stronger seasonal August, as consumers muddled along. A long and sustained US recovery is not on the card at this moment. http://www.cnbc.com/id/48281577. As the economy hurtles towards the fiscal cliff, disposable income and consumption growth will slow. The weakening momentum already noted in the second quarter of 2012 is expected to weaken further. The “improved” corporate results among large-cap stocks in the last earning cycle did not measure to the declining GDP growth statistics – largely due to lower guidance expectations on one hand and the failures of most entities to report significantly higher revenue base gains. http://www.marketwatch.com/story/us-stocks-break-win-streak-after-ge-reports-2012-07-20?siteid=bigcharts&dist=bigcharts
There are big worries ahead even though bank profits in the second quarter improved http://www.marketwatch.com/story/fdic-bank-profits-decrease-in-second-quarter-2012-08-28?siteid=bigcharts&dist=bigcharts Consumer sentiment-index in July fell to 72.3 - the lowest since last December – from 74.1 in June and 79.3 in May. Another Conference Board consumer confidence survey showed its confidence index fell to a nine-month low of 60.6 in August from 65.4 in July. http://www.marketwatch.com/story/consumer-confidences-falls-to-9-month-low-2012-08-28 . They worried about the economy and job prospects. Uncertainty over EU’s debt crisis and looming fiscal cliff in the US undermine business capacity and willingness to invest in new businesses or adding more to its payroll. To move forward from point requires a lot of political determination and risks taking in Europe to address its debt crisis and/or some pushing out of its fiscal cliff beyond January 1, 2013.
EU DEBT CRISIS, US FISCAL CLIFF CORRODING RECOVERY PROSPECTS
This author believes that the EU debt crisis is quarantined to a very limited degree, though a long way from resolution – the ECB, in its assumption of debt, is unlikely to default unlike commercial banks in weak vulnerable economies. Working the push out of fiscal cliff is much harder in an election year politics in US. The simultaneous onset of tax increases and spending cuts is automatically triggered on January 1, 2013 unless Congress acts. Fiscal cliff aims to take out US$7 trillion out of the economy over 10 year period and of which $500 billion will be in 2013. The effect of fiscal cliff is recessionary of impact hit. http://money.cnn.com/2012/05/16/news/economy/fiscal-cliff/index.htm?iid=EL . But that immediately runs into stiff opposition from the Republicans – an ugly and protracted fight is looming ahead tightly linked with debt ceiling showdown.
US HOUSING RECOVERY – TOO SHALLOW AND TOO LATE TO BE BENEFICIAL OF OUTCOME
The precarious US housing recovery, even if sustained into the seasonally weaker third qtr to spur employment and consumption, in my opinion, comes too late and too thin in volume term, to be of credible available rescue. June 2012 new housing starts currently running at 760,000 levels annual rate is significantly better than 711,000 last but still very weak and a long way from the 1,500,000 new starts before the onset of the GFC. http://www.marketwatch.com/story/new-home-construction-rises-69-in-june-2012-07-18 That tells me the housing recovery has still a long way to climb if it was to fulfill its past history of leading the US economic recovery. There is also the foreclosure side dampening buyer traffic. According to RealtyTrac, homes entering foreclosure process in the June qtr jumped 9% over the March qtr and national foreclosure inventory remains near its all-time high, with 5.6 million U.S. mortgages either delinquent or in the foreclosure process. http://www.cnbc.com/id/48208989
ESM RECAPITALISATION OF BANKING LIQUIDITY IS ONLY TEMPORARY RELIEF & STABILIZATION
Over in EU, the July agreement for EU’s bailout fund, European Stability Mechanism (ESM) to recapitalize banks directly rather than through governments, only brought temporary calm to financial market. http://sg.news.yahoo.com/euro-ministers-under-pressure-progress-072052507.html. Its main benefit was that it avoided adding to existing sovereign debt burden making long-term borrowings difficult of access and unsustainably expensive. Europe banks’ loan pullout continues outside its own region and within it, much lending remains in deep freeze. EU bankers are uncertain of which currency will survive the political turmoil in its wake and the inevitable shake-out leaving them with huge potential, as yet unquantifiable, bad loans on their books. Fire fighting on many fronts has its limits. EU’s woes are rooted in three mutually reinforcing issues – sovereign, banking and economic outlook fragility. http://www.bruegel.org/nc/blog/detail/article/853-firefighting-has-limits/ The “fall” of anyone of these fragilities could easily trigger a catastrophic crisis. There is none of the political integration and an effective legal governance framework in a united response to crisis as it evolves and unfolds. Until financial stability is restored and credit flow back strongly into private sector to turnaround economies, it is hard to find a key to EU’s malaise. Analysts also pointed out correctly that the EMS promise of coordinated Central Bank “liquidity operations” in event of financial market deterioration does NOT resolve EU’s sovereign debt crisis. Such action only provides RELIEF of INSOLVENCY but the INSOLVENCY AND STRUCTURAL problems of indebtedness of peripheral economies remain. Infusion of liquidity can only buy short-term stability only to find the inevitable returning pattern of financial distress. http://www.hussmanfunds.com/wmc/wmc120618.htm. Bailout of EU banks is thus mistaken as the survival safety rope but it has increasingly proved these to be like a constant diet to keep the economy alive and teetering on collapsing. http://www.cnbc.com/id/47971328. The Bundesbank is against the ECB’s plan of new rounds of bond buying, warning that it could be addictive. http://www.marketwatch.com/story/bundesbank-chief-ecb-bond-buys-could-be-addictive-2012-08-26
WORLD BANK WARNED OF ROUGHER ROAD AHEAD AS EAST ASIAN ECONOMIES WITHER
The World Bank in June was forecasting rougher road ahead. http://www.ebeijing.gov.cn/BeijingInformation/BeijingNewsUpdate/t1195407.htm . Robert Zoellick, WB Group President noted the emergence of “ a new danger zone” manifested in debt and credibility crisis engulfing EU and US; banking bailouts consuming a massive amount of capital; transfer of private debt into public debt and abnormal voluminous stimulus spending to stimulate yet failing to sustain economic recoveries. These quantitative easing, instead, have fueled up inflationary pressures in commodities market and real estate bubble – these have imperiled sovereign governments’ capacity to undertake future rescue efforts. Recent market forecast that EU likely to decline by 0.3% on the big assumption of no further deterioration of global conditions including a bullish outlook of 5.3% in developing economies now looks overly optimistic http://www.youtube.com/watch?v=CFX0ITx1gJc. That is because of faster than expected slowdown in Brazil, India, simultaneouslyhttp://www.slate.com/articles/business/moneybox/2012/05/global_economic_crisis_china_india_brazil_are_slowing_down_plunging_world_into_possible_recession_.html and particularly China which is the main engine of global growth since the GFC. No help can be expected from Japan either. Japan’s real GDP grew by a mere 0.3% in the April-June quarter after growing for four consecutive quarters in a row. http://www.japantimes.co.jp/text/ed20120823a1.html Forward, Japan’s GDP is forecast to slow further for two reasons. Recent prior quarters’ stronger economic showing is due to temporary enhanced public works and housing construction after the 11/3/2011 Fukushima disaster. Secondly, consumer spending which account for 60% of Japan’s GDP economic base expanded by a meager 0.1% in the June quarter compared to preceding qtr. If China slows down, Japan is heading for a recession. EU is China’s biggest export destination, representing about 18.8% of all goods shipped out from Mainland’s ports to EU. http://www.reuters.com/article/2012/03/01/us-china-economy-exports-idUSTRE8200BR20120301, but this figure is likely to be under-estimated. Hong Kong is a major trans-shipment point of Chinese exports and as of 2011, the figure stood at about 14.1%. Other key export destinations of Chinese exports are US (18.3%), Hong Kong (14.1%) Japan (7.8%) South Korea (4.4%) India (2.6%) and Singapore (2.1%) http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113366.pdf Exports of goods and services now roughly constitute 39.7% of its gross domestic product. http://www.tradingeconomics.com/china/exports
As of now, the outlook in Europe is grim. The EU has just announced euro zone’s second qtr GDP has contracted 0.2% from its flat first qtr. Factoring its December 2011 qtr negative 0.3% decline, there must be real concern that the euro currency zone is heading for a recession. http://www.tradingeconomics.com/euro-area/gdp-growth. Caterpillar warned that its sales growth was decelerating with a particular, slowing to a mere 4% in Europe, Middle East and Africa for the three-month period to June. The comparative statistics for same interval to May and April was 21% and 14% respectively. http://in.reuters.com/article/2012/06/20/caterpillar-europe-idINL1E8HKDPL20120620. Beyond construction, manufacturing in EU has taken big hits, particularly in its strongest economy – Germany. German manufacturing is slowing at the fastest rate since June 2009 undermining its services sector while in France, both manufacturing and services sector keeps falling. http://sg.finance.yahoo.com/news/gllobal-economy-eurozone-business-activity-152014115.html. With EU slowing down and falling exchange rate, we are looking at huge declines in US and Chinese manufacturing exports in Europe – more so for China than US as a negative weight which manufacturing is NOT such a big weight in the US economy. But manufacturing is the only consistent bright spot in the US recovery story since the GFC, but that is changing to becoming a wet blanket hurting consumer confidence as Caterpillar’s results and warning is telling now.
GLOBAL WIDE RETRENCHMENT & JOB CUTS ACROSS ALL SECTORS, INCLUDING RESOURCES
In the midst of global slowdown, job cuts are rampant beyond EU banks with ripple effects globally and having to meet new liquidity requirements under Basel III. Australian banks hitting record profits are downsizing anticipating slower growth as mining boom seems to evaporate much faster than anticipated. http://www.asiaone.com/Business/News/Story/A1Story20120113-321636.html Even giants like Sony http://www.bbc.co.uk/news/business-17686681 HPhttp://www.bbc.co.uk/news/business-18184930, outperformer Cisco , http://businessnews.howzit.msn.com/business-gallery.aspx?cp-documentid=250749853&page=9 Google http://www.guardian.co.uk/technology/2012/aug/13/motorola-job-cuts-google are retrenching by thousands and Siemens are reversing its recent increasing headcounts. http://finance.yahoo.com/news/siemens-seeks-thousands-job-cuts-060519605.html. Llyods Banking Group after shed 28,000 jobs since taking over HBOS is cutting back on another 15,000 in an attempt to start paying dividend again http://www.guardian.co.uk/business/2011/jun/26/lloyds-strategic-review-puts-up-to-15000-jobs-at-risk. Bank of Scotland is also retrenching. http://www.youtube.com/watch?v=q6MGVJprlf8 Even the booming mining sector in Australia is losing momentum unexpectedly rapidly - laying off workers across the continent as metal prices sagged. http://www.theaustralian.com.au/business/wall-street-journal/australias-resources-boom-is-losing-momentum-unexpectedly-rapidly/story-fnay3ubk-1226454689736. Thermal coal is at 10-year low and the price for iron-ore fines recently was trading around US$104 per metric tonne from its peak of US$190 per tonne. http://www.theaustralian.com.au/business/mining-energy/spot-iron-ore-price-hits-2009-low-despite-rise-in-chinese-consumption/story-e6frg9df-1226456296673. PC giant Hewett Packard and clothing retailer Guess took top-line revenue fall in the latest qtr. http://www.marketwatch.com/story/h-p-guess-results-on-tap-after-market-close-2012-08-22?dist=tbeforebell . They indicate cross-sector weakness within US economy and the world from technology to mining to consumer goods and banking.
These are signs that the conditions in the global economy is deteriorating significantly even if the US economy is showing baby steps of tentative recovery. EU’s banking and fiscal crisis is slowing global trade and creating strong headways eroding the foundation of the US fragile recovery – itself threatened by the looming fiscal cliff due 1 January 2013. http://www.marketwatch.com/story/qe3-is-pointless-as-we-head-over-the-cliff-2012-07-17?siteid=bigcharts&dist=bigcharts. Political resolution of fiscal cliff is meeting chaotic political paralysis close a Presidential election when unyielding bargaining overrides all economic rationality. Equally, China is unlikely to spend big on another stimulus when all its major exports markets are either in recession, doldrums or near recession. The stage is set for another global recession as the last frontier and engines of global growth crumbles inevitably. We are seeing the germination of that unfolding now.
CHINA IS CAUGHT IN THE TAILSPIN OF DELAYED IMPACT – SIGNS OF WORSENING DETERIORATION
THE WRITING IS ON THE WALL OF ANOTHER GLOBAL RECESSION AND, THIS TIME, CHINA LEADING THE PACK. The traffic indicators include:
- IMF downgrade of global current year growth rate in August to 3.5% (from 3.9% in July forecast), the pace of growth slowing in recent months amidst increasing signs of weaknesses. http://www.smh.com.au/business/europes-woes-continue-to-pose-threat-to-global-economy-imf-20120716-226f3.html#ixzz20qN87pMS
- EU financial woes cannot be solved simply by quantitative easing. The problems are as much structural as political, as much is the same in US and Japan. Some of the liquidity flooded into the banking system by quantitative easing has been kept in cash-strapped banks instead of unleashing onto the credit market and activity. This can be found even in investment bank as M & A activity levels shrink in weak commodities/real estate markets and corporate balance sheets, particularly in the US, is very strong. And this is in spite of the fact that interest rate set by ECB, Fed Reserve, Bank of England are already all-time lows. BOJ has slowed down its asset buying. There is no reason why the next round of quantitative easing would be beneficial to economic growth. http://finance.yahoo.com/news/why-further-easing-may-not-061447418.html
- Euro zone economic downturn continues in August, as output contracts further in Germany, France, Italy and Spain. http://www.markit.com/assets/en/docs/commentary/markit-economics/2012/sep/EZ_Composite_ENG_1209_PR.pdf At 46.3 . At 46.3 PMI Composite Output Index read for August, it was down slightly from 46.5 in July but that was seven consecutive months of activity decline and manufacturing is the hardest hit. It also points to a strong likelihood that the EU is heading for a technical recession in the third quarter. It could stay in a recession in the foreseeable future. There is little to resuscitate them back onto recovery growth path as long as its banking deleverage is continuing and emerging markets are also slowing down concurrently. The massive transfer of toxic assets from European private sector balance sheet to official sector balance sheet did nothing for employment, consumer spending and level of economic activity. Reduced government spending forced upon by austerity drive will further impair growth recovery dragging out the recession further ahead. The crisis is shrinking growth and growth is needed to truly solve the crisis. http://sg.finance.yahoo.com/news/europes-growth-woes-110000602.html. At the same time, major cutback in government spending and employment is needed to restore budget solvency and market confidence to sustain the restructuring. It is a tightrope that has little scope for success.
- US budget deficit of nearly $1.1 billion this year would have added 6.6% gain to its GDP base but the economy is expected to grow only 1.6%. That is telling of the ineffectual impact of stimulus spending on growth recovery. It is unsustainable of this repeated injection – the only gain being the decreasing marginal positive impact on unemployment level and even that is faltering of late.
- Big corporate are pessimistic of forward outlook looking at continued retrenchment despite record profits in some instances. BHP, Rio Tinto, Xstrata and Anglo-American have trimmed their near-term capital expenditures plans. http://www.marketwatch.com/story/bhp-billiton-profit-falls-35-as-projects-delayed-2012-08-22 as EU sovereign debt crisis is curtailing consumption there, US economic “recovery” anemic and China’s growth slowing faster than expected.
- Copper prices have been non-performing (except for the recent spike following recent US quantitative easing) even though the US housing sector showing some signs of nascent recovery. It is estimated that 50% of the refined copper is used in building and construction activity and China account for 40% of the consumption of global copper supply. http://www.kitco.com/ind/Brecht/20120718.html. Barclays Bank estimated that China accounted for 42% of the world’s usage of aluminum and 43% of the nickel last year. http://www.quamnet.com/newscontent.action?request_locale=en_US&articleId=2325435&view=NEWS. Neither of these is performing. Marius Kloppers, BHP’s CEO sees a long-term “price declines” for its commodities. Late last month, BHP, announced a A$68 billion spending freeze on new capital projects already in the pipeline and NO MONEY WILL BE ALLOCATED TO NICKEL AND ALUMINUM as demand weakens. http://www.bloomberg.com/news/2012-08-26/kloppers-sees-long-term-price-decline-for-bhp-s-commodities.html There is little hope of another construction-led infrastructural bazooka-type stimulus similar to 2008 huge burst, mainly because it is still cleaning up the property asset bubbles and local government indebtedness consequences of that ill-managed 4 trillion Yuan programme.
- Global steel industry is in deep trouble. About one-fifth of the world’s nickel industry is in the red – i.e. cash negative at US$7.20 per lb currently. http://www.theaustralian.com.au/business/opinion/nickel-in-the-red-and-there-is-worse-to-come/story-fnciihm9-1226423880962 ArcelorMittal, the world’s largest steel producer, by volume, recently reported that nine out of 25 furnaces in Europe were idle. http://online.wsj.com/article/SB10000872396390444840104577553460712866028.html Domestic Chinese steel prices have plummeted to 3 year low with steel producers either defaulted on supply contract or delaying shipment to cut losses. Chinese steel production is set to reach record level this year. Export shipments to global market were 8.7% of total domestic production in June, the highest level since July 2010. http://www.bloomberg.com/news/2012-07-24/china-to-flood-steel-market-hurting-arcelormittal-commodities.html. Chinese steel output is said to be more than double of that production from Japan, USA, India and Russia combined. Forecast is for 5.4% growth to reach 760 million tonnes this year. Dramatic slowing Chinese industrial production and economy must therefore point to big destocking ahead until 2013. http://blogs.the-american-interest.com/wrm/2012/08/22/chinese-steel-prices-plummet/
- Caterpillar, world’s largest earth moving equipment maker, reported rising stockpile of inventories in China – falling FDI, falling industrial production, subdued real estate sector are indicators of weakening growth forward. http://seekingalpha.com/article/826061-caterpillar-s-tale-in-china?source=yahoo. Slowdown in infrastructure building after the 2011 train crash and the onset of mining sectors decline in China are forcing Caterpillar to pare down its Chinese production. http://finance.yahoo.com/news/caterpillar-cuts-china-production-digger-020708491.html
- IMF forecast a soften outlook for Singapore’s economy this year to slightly below 3% growth assuming benign global conditions cautioning of further downside risks if euro zone conditions deteriorates further or a sharp slowdown in China. http://sg.finance.yahoo.com/news/1-singapore-economy-slowed-weaker-221516166.html. Volume of world trade has stopped growing. http://www.businessinsider.com/oecd-world-trade-has-stopped-growing-2012-9. Exports in August in all bellwether economies like South Korea and Taiwan shrank on the trail of India’s July 15% fall in exports.http://online.wsj.com/article/SB10000872396390443779404577643203509021624.html?mod=googlenews_wsj. The fall in India’s July export came after its shock June 1.8% contraction in industrial output. http://sg.news.yahoo.com/indian-industrial-output-shock-contraction-085636727.html. That is to say, the nation’s sharp growth slowdown has accelerated. Japan revised downwards its April-June Qtr to 0.2% from earlier official estimate of 0.3%. http://www.cnbc.com/id/48964720. And that was again revised downwards last week in the face of weak global demand. http://www.cnbc.com/id/49027156. One economist warned that “Japan's economy is probably at a standstill in July-September as the overseas economy has been slowing more rapidly than expected”. South Korea has embarked on a $5.2 billion dollar stimulus package. http://www.cnbc.com/id/48965410
- There is a silent banking deleveraging going on. Developed-world lenders are systematically withdrawing funding to emerging markets either by reducing their asset bases via reduced lending rollover rates or be selling their equity stakes. http://www.cnbc.com/id/48281577. Even booming sectors, at least until recently, like mining in Canada and Australia are finding it difficult to raise money for medium sized development projects and strong East Asian economies reporting shrinking trade volumes this year. Plunging export orders globally says recession has arrived. http://globaleconomicanalysis.blogspot.ca/2012/07/plunging-new-orders-suggest-global.html
- Electricity demand in China has slowed – thermal coal is currently trading around US$93 per tonne, down 18% from year beginning. And metallurgical coal used in steel manufacture is now just under US$170 per tones, a drop of 20% in late August since early July this year. http://www.smh.com.au/business/mining-and-resources/bhp-warns-of-job-cuts-at-coal-mines-20120816-24a8k.html
- China’s last week announced suddenly a Keynesian-style stimulus spending on ports and railway projects, spreading over the next 3 to 8 years, totaling 1 trillion Yuan. The amount represented 2.1% of the size of China’s GDP last year. http://www.marketwatch.com/story/china-adds-highways-to-stimulus-plan-2012-09-06. Its impact is long drawn out with little relevance in support short-term economic cycle valley looming. This infrastructural spending earmark came despite recent repeated vehement assertions from outgoing Premier Wen Jiabao that no further stimulus spending is in the pipeline. Economic conditions inside China must be deteriorating faster than expected, triggering this apparent change of heart.
- Until this stimulus spending announcement, China was in the throes of political upheaval, consumed by politically-tainted and much-hurried proxy trial of Gu Kailai - after the fall from grace of her husband, Bo Xilai, Chongging’s maverick party boss - and the corruption-stained demotion of key power arm-breaker, Ling Jihua, backing outgoing President Hu Jin Tao. http://sg.finance.yahoo.com/news/brutal-1-million-ferrari-crash-131319194.html Economic agenda was side-tracked in these political manoeuvring ahead of looming once-a-decade leadership change that must then grabble with rapid turbulent economic deteriorations not seen of a magnitude of gravity since the Mao’s era. The incoming leadership transition, now locked in intense power struggle, needs time to settle in, cut out legacy failures of preceding leadership, formulate its own policy reform agenda and policy response to daunting macro economic woes confronting China. There is a fear of cycle-driven hard landing similar to the GFC in developed western economies delayed artificially by the 2008/2009 trillion Yuan stimulus. http://www.theepochtimes.com/n2/china-news/china-faces-economic-meltdown-in-2013-says-state-researcher-287129.html
- In the midst of these political struggles for stability transition, economic news hitting the headline made particular grim reading. The latest – July factory output was the weakest in 3 years of a mere 1% growth year-on-year comparison. August official PMI read was 49.2, down from July 50.1 reading http://www.cnbc.com/id/48890784. The stronger July reading itself is a continuation of falling trend since last November, noting that June factory activity had already hit a 7-month low with a sharp fall in export orders and shrinking new order. http://www.cnbc.com/id/48030826. August PMI read simply confirms the Chinese factory activity is now sinking back into contraction deceleration. The much weaker economic environment in major developed economies slowing demand had already shown up in China’s PMI barometers of a double dip negative growth in November 2011 and again in March 2012 in between marginal expansion read of sub-51 but above 50. Gone are the heady days of PMI reads of 55 points or higher. http://www.macrobusiness.com.au/2012/04/china-flash-pmi-improves-a-bit/. China’s flash PMI read for April 2012 is 49.1 but that hid contractions in output, new orders, exports of new orders, backlog of new orders etc. Most recent August factory output PMI read 49.2 is the third dip into negative territory since November 2011. There is no sign of recovery in sight. This year’s Christmas export order is tumbling. http://www.cnbc.com/id/48116307?__source=yahoo|related|story|text|&par=yahoo. August industrial production growth was 8.9% year-on-year comparison, slightly down against the 9.2% July growth. http://sg.finance.yahoo.com/news/china-industrial-output-rose-8-061249026.html It was the slowest rate of growth in 39 months, a sure sign of continuing slowdown.
- These latest grim economic statistics confirms earlier cloudy prognosis, notably recent warnings of rising non-performing loans within its banking sector http://www.marketwatch.com/story/china-construction-bank-sees-bad-loans-rising-2012-08-27-204852931 rising capital outflow pointing to waning confidence in its economy http://www.marketwatch.com/story/china-actually-wants-capital-outflows-2012-08-27?pagenumber=1 the momentum of direct foreign investment decelerated since last November http://www.marketwatch.com/story/china-1st-half-fdi-down-3-on-year-at-591-bln-2012-07-16?amp%3Bsiteid=rss&SiteId=djm_HAMWRSSGMktgsH falling industrial profits since January this year http://www.stats.gov.cn/english/pressrelease/t20120827_402830820.htm four straight months of falling Producer Price Index (PPI) to August in producer price deflation suggesting a large part of the economy is already in deflation threatening profits going forward (since falling PPI often suggest quickening erosion of corporate pricing power as demand weakens at the factory gate as well as rapid deterioration in accounts receivable) http://in.reuters.com/article/2012/07/09/china-economy-inflation-idINL6E8I900A20120709 warning from Andy Xie, former Morgan Stanley ‘s Chief Asia-Pacific Economist, of germination of an expanding pool of “zombie” companies artificially state-supported via the banking system. http://finance.yahoo.com/news/zombie-firms-growing-risk-china-080632524.html and China’s premier warned of “stabilization of growth” as top priority, instead of seeking growth. http://www.marketwatch.com/story/china-premier-stabilizing-growth-now-top-priority-2012-07-10?siteid=bigcharts&dist=bigcharts
- China’s central bank announced two surprise interest rate cut in July and lowered its banking system reserved requirement three times since last November. Both injected more liquidity into its economy. http://www.smh.com.au/business/china/chinas-economy-slowing-but-revivial-ahead-think-tank-20120712-21y4x.html. China has, yet again, delayed tighter bank capital rules to 2013. http://www.bloomberg.com/news/2012-06-06/china-delays-tighter-bank-capital-rules-to-2013-as-economy-slows.html. These rules first announced in August 2011, had been set to go into effects on 1 January 2012. China Banking Regulatory Commission – China’s banking watchdog – announced the delay in June saying that it wants to provide the banking sector reasonable time to comply in a way that helps to “maintain appropriate credit growth” as the economy weakens. Delaying tighter banking rules is not without major risk vulnerabilities. There is pressing need for recapitalization of Chinese banks balance sheet. The big worry, over time, is that the huge infrastructure, real estate and other projects – the pet products of its 2008 spending binge of 4 trillion Yuan won’t turn in profit. Borrowers, including local government trapped by the lack of funding from land sales in recessionary economic condition, will default on interest payments and even the loan principal loans. http://dealbook.nytimes.com/2012/04/23/chinas-biggest-banks-are-squeezed-for-capital/. China’s big four banks are not managed purely on commercial terms but uncut of umbilical cord and remain an integral part of State-directed capitalism. That “obligated” them to pay handsome dividend to its State-dominated shareholders and funding high dividend payout by fresh capital calls to replenish their base capital. One source has it that in 2010, China five biggest banks – big four plus Bank of Communications – actually paid out more than 144 billion Yuan in dividend and raised more than 199 billion in the capital markets at the same time. Comes the crunch, the potential risks to their base capital are unpredictable. For the moment, China cannot afford to let its property sector bubble further which, when and if that burst, could endanger the stability of its banking sector health. http://www.quamnet.com/newscontent.action?articleId=2342075&view=NEWS
- Slower growth curbs demand for raw materials import with reports of high inventories in coal and iron clogging up Chinese ports trapping idle ghost ships within in. There are reports of increasing defaults and deferrals of imports. http://www.cnbc.com/id/48076866. Record-setting mountains of excess coal have accumulated in inland storage areas as electricity production and consumption dropping rapidly as power companies slowed coal burning in the face of falling demand. They are strongest sign of weakening of industrial sector not yet captured in official statistics or deliberately under-reported. http://www.cnbc.com/id/47929035?__source=yahoo|related|story|text|&par=yahoo
- Hong Kong-listed Mainland Chinese companies issued profit warnings at a record pace at a time of rapid macro economic conditions deteriorate both within and outside China. http://www.alsosprachanalyst.com/companies/contrarian-interpretation-of-record-profit-warnings.html China’s biggest companies, ranging from tech giants, airlines, banking to retailing representing the broad sector of technology, transportation to consumer demand, warned of profit plunges up to 80% fall. http://www.businessinsider.com/chinas-biggest-companies-warn-of-profit-plunges-up-to-80-2012-7. They are grim warnings and speak of struggling survival of smaller businesses.
- Even more terrifying is the falling price of cotton – a massive drop of 65% from its decade-long peak of 2011. http://futures.tradingcharts.com/chart/CT/M. Iluka Resources, the world’s largest producer of zircon warned of tough trading conditions citing China’s sputtering construction sector, Italy and Spain's plummeting demand for ceramics amid the euro zone debt crisis etc. http://www.smh.com.au/business/iluka-dives-after-warning-on-conditions-20120709-21qh6.html . Even Bill Gross, bond king, MD and Co-Chief Investment Officer of PIMCO, is now leaning toward gold over bonds. http://www.bloomberg.com/video/pimco-s-gross-says-focus-on-reflationary-assets-2O7jpjl2S6CIcM1B2vJy4g.html . This follows expansion of ECB’s balance sheet from current 4 trillion euro – the inflationary standpoint eroding confidence in equities and hampering economic recovery.
- British fashion house, Burberry, profit warning sends shivers through the luxury consumer market sector. It warned that a slowing economic growth in China and EU crisis is bringing the boom in demand for luxury clothes and accessories to a grinding halt. http://finance.yahoo.com/news/burberry-warning-sends-shiver-luxury-094726900.html That means also “mistress spending” of luxury goods by the rich tycoons for their playmates has stalled – the clearest sign yet of trouble brewing in the Chinese economy even for the wealthy rich. The softness in consumer spending is further illuminated in this week’s announcement by US home improvement retailer, Home Depot, closing all its 7 remaining outlets in China. http://www.cnbc.com/id/49031640
- A mere 5 weeks elapsed after Chinese Premier Wen warned on July 10 of need to stabilize growth http://www.marketwatch.com/story/china-premier-stabilizing-growth-now-top-priority-2012-07-10?siteid=bigcharts&dist=bigcharts, he warned of urgent need to stabilize EXPORTS. http://sg.finance.yahoo.com/news/wen-says-china-needs-stabilise-130043162.html. That warning proved correct. Strong headwinds from Euro zone debt crisis and sluggish US recovery at a low edge is taking its toll on Chinese exports. Chinese factory growth in July hit a 3-year low pushing new export orders to its steepest monthly decline in 8 months! http://finance.yahoo.com/news/chinas-economic-slowdown-bottoming-data-000648129.html. Growth in annual fixed investment stagnates. And May retail sales growth of 13.8% was the smallest increase since 2006 declined further in July and continuing. August retail sales steadied at 13.2% only marginally better than the 13.1% recorded in July. http://sg.finance.yahoo.com/news/china-industrial-output-rose-8-061249026.html
- China’s July trade figures show many worrying signs. Year-earlier month comparison reveals stagnant export growth and import grew at a smaller rate. The result was a surprised narrowing of its July trade surplus to US$25.1 billion compared to US$ 31.7 billion in June. http://www.marketwatch.com/story/china-july-trade-surplus-unexpectedly-shrinks-2012-08-10?siteid=yhoof2 . The stronger May and June export figures were not sustained. The worry now must be the export figure in August. July’s lower import figure had the benefit of lower commodity prices, particularly, crude oil, thermal coal and iron-ore and that may signal volume decline, confirming weakening lethargic industrial demand inside China. A Platts analysis speculated that Chinese oil demand actually declined in June - the first time in 3 years. http://www.marketwatch.com/story/china-oil-demand-decline-first-in-3-years-platts-2012-07-23?amp%3Bsiteid=rss&SiteId=djm_HAMWRSSGMktgsH. Latest statistics Chinese demand for oil drop sharply. Oil import declined 12.5% on-year in August to 4.65 million bpd, nearly 16.5% decrease from month preceding. http://www.marketwatch.com/story/oil-futures-edge-lower-as-dollar-inches-up-2012-09-09?link=MW_home_latest_news. Looking at the latest August trade figures just released, the signs are even scarier. China’s imports data was worst than its depressing exports data. Exports – the key engine of growth – expanded by a mere 2.7% year-on-year, a slight edge better than July and in part due to a sharp 12.7% steep fall in European demand for Chinese-made goods. But look at August imports – that slipped by 2.6% surprisingly. http://www.smh.com.au/business/chinas-brakes-are-on-but-slowdown-uneven-20120910-25oen.html This was despite the fact that the Bank of Canada reported prices for oil and other commodities produced by Canada have, on average, increased since July. http://www.businessinsider.com/bank-of-canada-warns-on-chinas-slowdown-2012-9#ixzz26Afw5KY9. Oil and some base metals such as copper, nickel, zinc was higher in August than July but iron ore and thermal coal prices were lower. The decline in value of imports reflects MORE of the VOLUME decline in imports than the price relevance of Chinese commodities import. It is the fourth consecutive months of decline in import. http://sg.finance.yahoo.com/news/horrible-chinese-import-number-isnt-131401214.html And that reflect slowing real domestic demand inside China as the key driver of shrinking imports and consistent with the lower level of economic activity in August.
- JP Morgan sees global growth as bottoming out. http://sg.finance.yahoo.com/news/jp-morgan-global-growth-bottoming-123504423.html. But I see the odds of that happening razor thin, resting mainly of sustenance of US recovery – weaker manufacturing employment August figures, uncertainties surrounding the Presidential election outcome and fiscal cliff tweaking are ever-present threats.The Bank of Canada warned of these ominous pointers forward
Widespread slowing of activities is noted across advance and emerging economies. Economic expansion in the US remains gradual Europe is in recession and its crisis, whilst contained, remain acute China is decelerating much faster than expected reflecting past policy tightening, weaker external demand and difficulty with rebalancing its domestic demand as a contributing source of growth.
EVEN THE CHINESE LEADERSHIP IS NOT OPTIMISTIC
The Chinese themselves are NOT so optimistic either. Both China and Russia sounds alarm on the global economy at last week APEC meeting at Vladivostok. http://www.cnbc.com/id/48950720President. Hu Jin Tao pessimistic global view and “notable downward pressure” on the Chinese economy at Vladivostok, however, does not seems to be equally matched by the views of his Premier Wen Jiabao on China’s own economic prospect for the balance of this year. I believe politics is the key factor. The difficult and much-troubled once-in-a-decade autumn transfer of power to a new political leadership cannot afford the horrendous struggle (in the event) of a serious turmoil of economic tailspin similar or worse than the GFC experienced in 2008/2009. China last week announced a 1 trillion Yuan (US$ 158 billion) stimulus spending on infrastructural projects and further easing of bank credit. http://www.forbes.com/sites/afontevecchia/2012/09/10/chinas-doing-it-beijing-to-unleash-one-trillion-rmb-fiscal-stimulus/?feed=rss_home . Premier Wen was reported to have another 100 billion Yuan of stability fund on standby to boost growth if necessary. http://finance.yahoo.com/news/china-track-meet-2012-growth-100122079.html. There is some doubts as to the effectiveness of this “smaller” size stimulus policy tool as the amount of debt overhanging the ‘shadow banking system”, born largely out of the ill-managed 2008 excesses of 4 trillion Yuan, is unknown and could brunt the effectiveness of the new stimulus injection.
With both front-loading of fiscal stimulus adding to GDP statistic in 2012-2013 assumed of success, China is confident of meeting its growth target of 7.5% GDP growth for 2012. But analysts are not so sure. http://finance.yahoo.com/news/china-defends-growth-targets-analysts-072243053.html . Some market analysts warned that the Chinese economy has slowed down so fast that further stimulus won’t help it avoid a hard landing. In my opinion, a bigger load of stimulus is also out of the question. Past 2008 GFC stimulus has shown up other negative side effects of asset-pricing inflation, low quality construction, higher local government indebtedness and social issues of more corruption. It can’t afford to stretch too much negative side effect risks as China is still grabbling of such ill-effects of its 2008/2009 spending spree of 4 trillion Yuan.
WITHOUT THESE STIMULUS INJECTIONS, WOULDN’T CHINA’S ECONOMY TANK INTO A HARD LANDING, TAKING THE REST OF THE WORLD WITH HER?
Beneath the rhetoric and market interventions of these mammoth stimuli in merely short-term quick fixes, spending money in US, EU does NOT solve the structural problems – it is the SAME in China. Falling FDI, stagnating fixed asset spending, escalating public sector debt and financially tired consumers faced with soaring living costs, haunt the frail recovery path trapped in manufacturing over-capacity and a bubbly real estate sector. Demographic imbalance presents yet another challenge of labor supply shortage in coastal provinces adding to rising production costs. China is highly vulnerable to conditions in EU and US through trade linkages. Europe and US together accounts for nearly half of Chinese exports. http://www.emergingmarkets.org/Article/2974127/IMF-Crisis-could-slash-China-growth-to-4.html So the biggest danger is trade slowdown -> corporate slowdown -> rising NPLs -> bank deleveraging -> a decline in employment, growth and asset prices ->property crash. Any property market deflation is, understandably, of major concerns to the Chinese Government as it accounts for nearly 15% of GDP and has big linkages to steel, cement, household appliances, furnishing sectors of the economy. http://www.marketwatch.com/story/chinas-deflationary-growth-threatens-profit-2012-07-15?link=home_carousel. As an added measure to lift its economy, China unveiled a package of measures to boost exports, including hiking export rebates. http://sg.finance.yahoo.com/news/china-aims-boost-exports-economy-102700314.html.
INCREASING SIGNS OF CHINESE DESPERATION IN THE WAKE OF FASTER THAN EXPECTED SLOWDOWN
China’s economy is both export and investment lead and BOTH are weakening. EU is teetering on recession. US, facing the uncertainty of fiscal cliff of higher tax and government spending cut is likely to decelerate consumer spending forward. The economy is already on its downward growth trajectory in its second qtr .They obviously not helping China’s growth, either. China itself invested itself too much in heavy industry and real estate. It is now a disfigured economy plagued by over capacity particularly steel. And its government is determined to rein in speculative investment. Premier Wen said - “We must continue to firmly control speculative investment” and “we must make controlling property speculation a long-term policy…Prices cannot be allowed to rebound” Wen urges property speculation curb, July 9, 2012. Page A15, Straits Times. Boxed in the lull in most heavily invested sector of heavy industry and real estate curb, China has very little left of cushion in any eternal export shocks that is fast shaping into dangerous crystallization. With consumption comprising around 35% of its GDP, rebalancing economy to external shocks will be very difficult as employment retrenchment gains momentum. China is heading for a hard landing in 2013 – contrary to what Singapore’s Finance Minister’s confidence of its soft landing. July 10 ST page A 7 – China will avoid hard landing: Tharman by Robin Chan. Tharman was addressing some 450 corporate executives from around the world at the FutureChina Global Forum. TRANSITION INTO THE NEW PHASE OF GROWTH – “When a car turns a corner, it has to slow down” said Tharman.http://english.peopledaily.com.cn/90883/7869816.html
MONEY PRINTING SPREADING AS THE WORLD HEADS TOWARD A GLOBAL RECESSION
EU, USA, China and even South Korea are engaged printing money in the face of recessionary pressures. It is virtually unlimited in EU & USA of expanding ECB and the Fed’s balance sheets. And in China, it is constrained only by slower money supply given weaker external surplus in both capital and current account surplus and concerns over the risks and uncertainty of dilution impact of shadow banking bad debt overhang. The global banking deleverage originating from EU has halted growth in world trade which China is heavily dependent upon for its continued growth and stability. Geo-political instability is threatening to take oil price a lot higher destabilizing the already weaken global economies. Escalated territorial dispute with Japan adds uncertainty to economic relations with its fourth largest trading partner. Of course, China is a command economy. The STATE is its only institution but that is wobbly unstable. We saw the power struggle in what would have been preferred publicly to be seen as orderly and smooth transition of power instead met with an incoming President unseen for two weeks with no explanation of the political intrigues and drama unfolded. Gossips and speculation abounds and they illuminate China’s fragility and deep trouble ahead of restructuring its economy in a world that is edging into a global recession plunge and its power elite ideologically divided and locked in intense power struggle behind the curtain. Until stability is restored within its top power hierarchy soon and fast, the economic tailspin as seen from intense export pressure now, if escalate adversely further, could be really hard to handle and contain of spillover effects on social stability of its masses.
WHO IS STAKING A BET THAT CHINA IS NOT HEADING FOR A STEEP FALL IN GDP GROWTH AND HARD LANDING IN 2013?
Zhen He
18 September 2012.
