Friday, June 10, 2011

WSJ - No Chinese Relief for Global Slowdown

And the Chinese to help us out on our USDCNY 3y Calls.

WSJ - No Chinese Relief for Global Slowdown

When global growth fell off a cliff in 2008, China's huge monetary stimulus was part of the rescue package. But with the recovery now losing some steam around the world, investors shouldn't expect a repeat performance. The inflationary costs of that stimulus still mean China's ability to act is constrained.

Inflation is expected to continue rising in the months ahead. Policy, though not tight, is tighter than it was nine months ago. Growth in money supply has fallen from close to 30% at the end of 2009 to 15.3% in April. With constraints on credit, interest rates up four times since October 2010 and 55% of borrowers paying rates above the benchmark, a more restrictive policy stance is damping growth.

Meanwhile, the main drivers of demand are misfiring. In real estate, residential floor space under construction still was up 32.3% year-on-year in the first four months of 2011. But sales growth is sharply down. As developers complete projects and face tight credit and weak demand, a drop in private investment appears inevitable. More social housing will take up some of the slack, but not all of it.

Domestic consumption has always played second fiddle to investment, but the signs here also aren't positive. Real growth in retail sales slowed to 11.8% year-on-year in April from 14.5% at the end of last year. Disintegrating sales of automobiles after government tax incentives came to an end have triggered a collapse in production, with output of vehicles down 1.6% year-on-year in the April data.

Export growth this year has been strong, but from a low base in early 2010. With the U.S. recovery wobbling and more challenging year-on-year comparisons from May onward, the growth outlook for exports is deteriorating. That already is visible in softening growth for imports of parts by manufacturers who incorporate them into products for export.

Under normal circumstances, the government response to such evidence of stuttering growth would be to take its foot off the brakes. In June 2010, the mere suggestion of a dip in industrial growth triggered an undeclared policy reversal, with bank lending restrictions left to quietly slide. New loans put in an unusual second-half surge.

This time, an inflation roadblock reduces the scope for a policy reversal. If the moderate slowdown turns into a collapse, a relaxation of lending controls or an end to the clampdown on housing-market speculation can't be ruled out. But with inflation set to be around 5% for the year and real interest rates still in negative territory, it raises the bar for such a response. Markets still are pricing in one more increase in interest rates, possibly two.

The consequence will be a long, hot summer of slower growth and higher inflation. Neither should be a disaster. A GDP growth forecast at around 9.3% for the year after 10.3% in 2010 is hardly shoddy. But with a wavering U.S. recovery, the European debt crisis and Japan struggling after a devastating earthquake, China won't provide the positive counterpoint investors want to hear.

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

No comments:

Post a Comment