Monday, November 10, 2008

What Does 4 Trillion Yuan Buy?

Friday was a milestone in the evolution of the ongoing financial crisis. No, not the employment data, which was execrable (and prompted Goldman to raise their unemployment rate forecast to an eye-watering 8.5%.) In fact, Friday was notable because it was the first time in quite a while that Macro Man can recall being bored at the office.

It seems as if markets have mentally shut down and are content to limp into the end of the year. Liquidity has certainly dried up amongst many of the products that Macro Man trades, and declining volumes in a number of exchange-traded assets also bear testament to a lack of engagement. Moreover, the ever-reliable blog traffic indicator has shown a reasonable decline in eyeballs from the panicky markets of a month ago. As always, that is perhaps explainable by the dearth of quality of the commentary in this space...but nevertheless it would appear to indicate a waning interest in the day-to-day saga of the financial meltdown.

So it was with much elation that Macro Man and other punters greeted Sunday's announcement of a 4 trillion yuan Chinese stimulus package. Hurrah! A return to working on the weekends and wondering where Wellington will open FX rates on Sunday evening (London time.)

The rationale for the package is fairly obvious. Both anecdotal evidence and official data appear to indicate that the Chinese economy has hit something of a brick wall. Smoothed industrial production growth, for example, has hit six-and-a-half year lows. The property sector has also come under the cosh, and the Shanghai composite index is down 65% on the year following a 7% overnight rally.
Strangely, there appears to be quite a difference in opinion of how significant the package actually is. A number of the measures had been previously announced; still others represent the allocation funds that would have been spent anyways. Moreover, only a minority of the funds are coming from the central government, so the source of the remainder of the money is a trifle opaque.

The ultimate impact is also somewhat nebulous. One shop that Macro Man likes on China has left its 2009 growth forecast unchanged at a below-consensus 7.5%. Another has suggested annual stimulus along the lines of 1.5% per annum.

Predictably, markets have seized on the headline figure (which equates to roughly $586 billion) and rallied risk assets without bothering to consider the substance of the program. Given that much of the stimulus appears to be focused on rural housing and infrastructure (which, again, was going to see plenty of investment anyways), it's not immediately clear to Macro Man why the announcement merits a 2% rally in S&P futures, for example, other than a knee-jerk "buy first, ask questions later" reaction.

Of course, the size of the announcement demands that we ask the question: what exactly does 4 trillion yuan buy?

Lets consider some of the options:

1) 9.25 billion barrels of oil, using the front contract WTI futures price. Of course, there might be a little bit of slippage if China tried to print that particular ticket.

2) Real Madrid, Barcelona, Man United, Chelsea, AC Milan, Bayern Munich, Inter Milan, Arsenal, Juventus, Liverpool, Lyon, Roma, Schalke, Ajax, Rangers, Valencia, Benfica, Celtic, Stuttgart, Werder Bremen, Porto, PSV Eindhoven, Sevilla, Villareal, and Lille......39 times over.

3) Per July's modest proposal, Alaska, Idaho, Kansas, Montana, North and South Dakota, and Nebraska. They'd raise $560 billion, based on the Macro Man's calculations. And hey, they're all "red states"....just don't tell China that "red" means "Republican", and perhaps the new administration could get them to pay a premium!

4) HSBC, JP Morgan, Wells Fargo, B of A, Citigroup, and Deutsche Bank. It's not immediately obvious why China would want to buy these institutions, however; perhaps they'd be buying expertise in how to account away losses?

5) US fourth quarter Treasury issuance. Old habits die hard....

6) Ford and GM....plus Boeing, 3M, Google, and Exxon. It would be ironic if the US government nationalized the US automakers and flogged them off to a foreign buyer just after some American cars received the first non-scathing reviews in the history of Top Gear.

7) The entire market cap of Russia, Mexico, Hungary, and Ireland. They might have trouble taking possession in one of those places, however.

8) Mars. If China waits long enough, the fiscal straits of industrialized country budgets are likely to become so dire that they will happily sell off all future mineral and mining rights to the Martian landscape. And given that China has now put a man in space, perhaps they'll take delivery sooner than you think!

9) 83.71% of 1 TARP program. Puts it in perspective, doesn't it?

15 comments:

Anonymous said...

Apparently this Chinese package was announced on thursday and most people expected it to be bigger anyhow. So the markets can't rally because of that can they? or maybe they can? More likely the markets just rallied, don't bother trying to find a reason for it...

Anonymous said...

yes but do you fade this rally? or will the much discussed relief rally in risky poo finally gain some proper traction? more importantly (for me anyway) will any semi-sustained rally in riskies lead to a reassesment of how low CB rates can actually go?

Macro Man said...

All I know is that I have received a number of commentaries highlighting inverted head and shoulders patterns in all matter of risk-on stuff. Not sure if I want to sell, but the universality of the belief in risk rally certainly doesn't make me want to buy.

Anonymous said...

Hi MM,

I'm looking for something good to read on currency crises of the 80s and the 90s. Any suggestions?

AT

vandalsstolemyhandle said...

anon@12:54. Funabashi: 'Managing the Dollar: From the Plaza to the Louvre' is one worthwhile reference

Anonymous said...

A years supply of MickeyDs triple cheeseburgers for every Chinese citizen.

Anonymous said...

cot report thru last tuesday had commercials longer to +147k contracts net long US, but they sold 40k contracts TY to reduce to a net long of +47k, and they sold 9k contracts of SP to become net shorter at -34K, small specs with big numbers on the other side of those trades...our bond market closing early today and staying closed thru veterans day manana...
we see sarkozy fired the first shot, saying america caused the whole world mess with lehman handling...
the us dollar has been so strong due to the bumbling trichet and the fact that european banks are in far worse condition than american...austrian loans in hungary,the huge emerging market loans on the their books, will country of italy default a few reasons...
one downswoop day in our stock market last week (coincidentally?) coincided with the data that your banks increased their deposits with the ecb
-the deacster

Anonymous said...

Thanks a lot, VANDALSTOLEMYHANDLE.

AT

Anonymous said...

The beloved VW doesn't make the list? Had the package passed two weeks ago Volkswagen could have been picked up roughly one and a half times over. Puts it in perspective, doesn't it?

Anonymous said...

Could the stimulus announcement be another "stock buy back" move that is promised but never fulfilled?

Anonymous said...

Number 5, number 5!
Or alternatively they may have to lighten their UST holdings to raise funds... Either way its "old" news so fade fade.
@AT Barry Eichengreen wrote some of the best stuff on the Asain fx crises.
Cheers, JL

Anonymous said...

after further analysis the stimulus package took out 8% of the crude futures. nothing more telling than that

Anonymous said...

Andrew Krieger's 'Money Bazaar' reads like a small-town newspaper's sports page, but the analysis of the end of BW I and the subsequent FX meltdown is worth the price of the now-out-of-print book.

Anonymous said...

"As always, that is perhaps explainable by the dearth of quality of the commentary in this space"

nothing could be further from the truth, always a pleasure to read your insight as events unfold...but I suspect you know as much.

you're as witty as always:-)

Jacob said...

nice article