Thursday, March 05, 2009

China Dreams

Like Colt .45, it works every time! Macro Man points out that the market's gone down pretty consistently and that there seems to be remarkably little panic, and whammo! Here's a nice 2.4% rally to stick in your pocket.

But that was yesterday and this is today, which kicks off a pretty darned important 48 hours for financial markets. Chinese Premier Wen failed to deliver a hoped-for stimulus package in his keynote address to the NPC (more on this below), and tomorrow of course sees the release of US non-farm payrolls; Macro Man suspects that more than a few entries in office pools will be looking for seven-figure job losses.

But the real focus for the remainder of the day is the central bank announcements here in Europe. The ECB is widely expected to cut 0.50%, so focus will probably shift to the press conference, where JCT's comments will be parsed for hints of further easing. Certainly it's difficult to see the likely staff forecast downgrades standing in the way of taking rates down to 1%. That, at least, is what the bond market is saying; Schatz (German 2 year) yields appear to be in the grip of a Death Star-type tractor beam at 1%.

Even more interesting, perhaps, will be the Bank of England's announcement, which could prove historic. Why? Because for all the talk of quantitative easing, and all the ink that's been spilled over it, and indeed for all the central bank balance sheet expansion seen all over the world, no CB has actually formally adopted QE since the BOJ unwound it a few years ago. But perhaps the BOE will formally adopt it, in the sense of actually, you know, targeting some sort of quanitity. Whether they actually cut rates or not is largely academic; the market is expecting a 50 bps easing, but if policy is shifting to a quantitative asset-buying target, the level of base rates is largely irrelevant. Not that Macro Man wouldn't welcome another half a percent off of his mortgage rate, however!

And now, China. Ever since the stimulus package was announced last November, there have been elements in the market that seem to have pinned their hopes of global recovery on a quick bounce in Chinese growth. The January rally in A shares is greeted with a fanfare, while the February sell-off is met with radio silence. The BDIY edges off the bottom of the chart, and this is seen as proof that things are picking up. The PMI bounces, and suspicions are "confirmed"; China is on the way back up.

Macro Man finds himself in a difficult position here. One of his relative investment advantages is being on top of the data, seeing second-derivative changes in important trends, and anticipating market sentiment shifts. This would appear to be a perfect set-up for him to go long oil and copper on the back of a Chinese recovery.

Yet he is best by nagging doubts...which are largely a function of the poor quality of Chinese data. How much can it really be believed? It is certainly true that the government has announced a program to increase domestic infrastructure spend, but it is not the case that this Y4 trillion will be completely accretive to growth; some, if not most, of it will be deployed away from other areas. Nevertheless, it is not a surprise to see some measures bounce.

But still, Macro Man has reservations. Bank lending surged last month...but we know that bank credit in China is administered via diktat, larging without consideration of the merits of the borrower. Anecdotal evidence from China (Michael Pettis is an excellent man-on-the-street source) suggests that a significant portion of this new lending was ploughed into....the stock market. While that may be swell if you're invested in A shares, Macro Man isn't quite clever enough to figure out how it benefits world growth in any meaningful way. Anecdotal evidence also suggests that Chinese firms badly overestimated deamnd for basic goods, and that domestic steel prices are falling as a result. What does that suggest about future commodity demand?

More generally, there seems to be a virtually unquestioning faith in certain quarters about the government's ability to spend its way to its 8% growth target. Yet a simple analysis of what fiscal data is available suggests that this is nonsense. As mentioned above, the stimulus announced last November totalled Y4 trillion over the next couple of years. There was some suggestion that a new package of similar magnitude would be annoucned this morning. (It wasn't.)

But on Macro Man's readings of the data, there is just no way in hell that this is possible. Total central government revenues in 2007 were, accroding to Bloomberg Y5.1 trillion. The 2009 budget is forecast to run a deficit of roughly Y750 - 900 billion. That's 3% of GDP. And while it is certainly possible to run a much bigger deficit than that (hey, just ask the West!), the Chinese government might be able to do just that without allocating a single new yuan towards stimulus. That's because central government revenues are falling sharply, according to the monthly data available on Bloomberg.
So if revenues are falling and a big net spend is about to ensue....why, then the government must be about to adopt the Western model and increase borrowing very sharply. Given that the major buyers of government debt, the banks, have been increasing loan issuance instead...well, then surely Chinese yields must be ripping higher? While yields did rise in January, that appears to have been largely in synpathy with a global phenomenon (the "Barron's bounce" for yields.) Since then, yields have been trickling lower, as the chart of the 5 year rate below demonstrates.
So if revenues are falling and local bond markets aren't pricing in a big rise in borrowing, where's the massive net stimulus going to come from?

Macro Man can only conclude that the answer is from the daydreams of the China bulls.


Anonymous said...

I think it's admirable to ponder on which country will pull us all out of this global debacle. I guess it is human nature to search for the silver lining.

Ultimately I fear the debt fuelled consumption which started in the 1980s which has since spectacularly imploded will leave us all high and dry for quite a number of years to come.

All the government spending in the world won't initiate a V shaped recovery despite the glossy overtones on actions being taken past, present and future.

I cannot remember the last time I spoke to someone who was optimistic on the outlook of any market.

As always, interesting to read your views MM.

Macro Man said...

See, that's intertesting...I swear I must be the only guy (well, me and another chap I know complains about it too) who gets all these notes on the China bounce (I started getting them last December)and what it means for the rest of the world. Just yesterday, I got a note from a very well known and well regarded equity strat pimping the bull case for Chinese steelmakers based on the PMI....when as I suggest in the piece, the anecdotes on that industry are awful.

I dunno....maybe it's just a case of my having already found my way to play the rebound, whenever it may be, and just not understanding why anyone would screw around with China when there is a "superior" alternative floating about?

Or maybe I am just talking to people trying to sell a view, any view, and China rebound = commodities and commodity ccys higher is a familiar story and thus easier to sell?

I'm not sure, but what i do know is that contrarianism for contrarianism's sake is no virtue...

Anonymous said...


Any other China/asian-focused blogs apart from Mr. Pettis that you peruse?

Anonymous said...

I am a China-skeptic myself and would love to be the 8% offer to any bureaucrat or sell-side economist's forecast. To play devil's advocate to your post and my own view, however, don't they have $1.9 trillion in reserves? I'm sure USD reserve growth is now negative and reserves themselves are exiting as quickly as they are in Singapore, Middle East, etc. But officials have said they will use this hoard for domestic stimulus. Whether that's net positive or negative relative to the removal of the interest rate subsidy to US real rates and the FX subsidy to domestic exporters is another question...

Macro Man said...

Anon @ 11.12... Brad Setser is obviously the man for big picture financing issues, and Maoxian offers the occasional amusing anecdote..

Anon @ 11.13, at the moment, the only real ways that those reserves are being used is a) to maintain an artificially weak exchange rate, as per normal, and b) to invest in domestic banks, providing a capital infusion to offset the write down of once and future bad loans.

They are not being used to directly pay for stuff domestically, though conceivably China could ramp up its strategic resource acquisition with them. Though if the stories of iron ore-laden ships waiting to port in Shanghai are true, one wonders how likely it may be...

Anonymous said...

Sales side pundits never cease to amaze me and their divorce from economic reality has become all the more illusory.

At times I wonder if their powers of alchemy are not best served in the fiction section of WHSmith.

Anon 10:51

Pietro Paolo said...

I agree that the situation in China is much worse than they are admitting. Being short emerging markets, yesterday was very frustrating for me. The sell side pundits are sufficiently annoying. However, when you consider that there is a substantial amount of evidence at Chinese officials are being less than truthful about their current economic conditions, the situation becomes almost intolerable (for me at least). The two combine multiplicatively to create untruthfulness on an exponential scale.

I suppose that we should be a happy because this ultimately creates opportunities to position ourselves for when the true situation reveals itself.

Anonymous said...


Isn't possible that the Chinese stimulus is being financed by the Chinese banks? Instead of issuing CNY Govt. bonds and spending the way developed contries do, they authorize municipalities and provinces to borrow from banks and spend. So perhaps this huge surge in bank loans the past three months is the stimlus? Even adjusting the outsize numbers down for the off balance sheet adjustments and discount bills it is still a very large increase in loans.

Also, I find it funny that most of the posts here assume that being bullish on China is consensus. I am in the biz too and almost all the macro punters I talk to all say that China is cooking the books and it will end badly. China going down seems very consensus to me not contrarian.

Macro Man said...

Anon @ 12.28, yes, I think a lot of the stimulus is being routed through bank lending...which of course means it is less targeted- I can't believe it's terribly supportive for growth if money gets borrowed and then plowed into the stock market, for example.

Moreover, the likelihood of loans being allocated to inefficient borrowers is, I think, quite high; rationally, there should be close to zero lending for real estate/construction purposes, but I am highly dubious that that is the case...which opens up another can of worms at some point in the future when those loans go sour.

Perhaps you are right, though. Maybe virtually all punter are bearish, and it is the analysts and sales people who want to sell the story of the bounce. If so, it would nicely illustrate the distinction between the people who get paid to be right (the risk takers) and those who get paid to be interesting (the sell side.)

Macro Man said...

Nevertheless, the degree to which stock markets seem to react to the marginal newsflow from China suggests to me that there is a hefty cohort of investors, possibly concentrated in Asia, to be fair, that are drinking the China Kool-aid as well.

Anonymous said...

"Macro Man suspects that more than a few entries in office pools will be looking for seven-figure job losses."

Do you really believe that more than a million is possible?

Macro Man said...

I think it is highly unlikely.....but I also think that a disproportionate amount of office pool entries will go for it nonethless. The cost of being wrong is minimal, but man, what a hero if you're right!

Anonymous said...

Long crude short copper, as the latter is more China reliant than the former?
Foreign country + lack of any clarity + massive blind speculation = dangerous direct play from either side I think.
Frustrated by the thinking that it will be any country that will pull us out rather than the economy re-clearing at new lower equilibrium, politically aided or (more likely) not. So personally not yet focused on the rebound although agri stocks are showing some resilience, but that may be too crowded.
Is your tantalising rebound talk referring to bottom draw stuff?
Cheers, JL

Anonymous said...

us dollar to da moon:

crude oil and gold have been moving oppositely for quite awhile now, first was long gold as crude dipped into the 33 number, and now some say it's long crude due to the 'gold-crude ratio' being out of whack

non farm friday on deck!
cheers, deac

Anonymous said...

Q- with ukx making new lows what is proping mcx up given it's around 10% higher than it's lows. Do we really think these smaller entities are better placed than global players to weather downturn?

Anonymous said...

I think it is just "Colt 45" that works every time. Here's Billy Dee selling that smooth taste.

Macro Man said...

Au contraire, Anon, au contraire. I'm frankly a little insulted that you think me ignorant of Billy Dee Williams, the smoothest man alive!

E said...

in reference to a post you made a while back - any idea how many of the S&P 500 companies wouldn't qualify for entry to the index now ?...from memory, was it 186 at last count some time ago ?...


Anonymous said...

Sorry MM, I thought the .45 indicated calibre... Did you also know that Colt 45 has the dynamite taste?

Love the site, btw.

Anonymous said...

IMHO, we'll see $20 WTIC oil before $60. I doubt that there is a treasury "bubble" when everyone is calling for a treasury bubble. I'm very worried about a continuing deflationary spiral. yikes.

Sincerely, another anonymous opinion.

Tyler said...

At the risk of proving my thick headedness…

“maybe it's just a case of my having already found my way to play the rebound, whenever it may be, and just not understanding why anyone would screw around with China when there is a "superior" alternative floating about?”

Are you saying that to “go long oil and copper on the back of a Chinese recovery” is the superior alternative?


Pietro Paolo said...

No one mentioned the possibility that the Chinese government is supporting the A-share market. Can't find the link right now, but I recall reading a story a while back to the effect that some Chinese government official thought it no big deal, even if they had to buy up the entire equity market to keep the CSI300 above 2000. For some reason a $600 billion market cap sticks in my head. It would certainly explain how this market has help up recently, while every other in the world has been declining of late.

I make the point not because I care about the Chinese market directly, but many participants in other markets are pointing to this strength as early evidence of a Chinese recovery.

Anish said...

You guys are too pessimistic. The Baltic Freight Index is still rising. This shows that the Chinese stimulus measures are having some positive impact.

Anonymous said...

Evidence of China's recovery:

Beijing Hyundai Posts Sales Increase Despite Downturn

Hyundai Motor recorded a sales increase for two straight months last month in the Chinese car market. Beijing Hyundai, China's joint venture of the Korean automaker, said Tuesday that it sold 32,008 vehicles last month, up 72.3 percent from 18,582 vehicles in February last year, increasing its overall market-share to 7.1 percent. Beijing Hyundai recorded a 17-percent surge in sales in January this year, ranking fourth in China's car industry.
Beijing Hyundai's success despite reducing worldwide car sales stems from the Chinese government's efforts to stimulate the auto industry, including reducing purchase tax from 10 percent to five percent for cars with engines below 1.6L and discounting the price of gas by 30 percent.

Hyundai's main vehicles Elantra (called Avante in Korea) and Accent (called Verna in China) with engines below 1.6L are reaping the benefits of the Chinese government's stimulus measures. Hyundai Motor expects to sell 360,000 vehicles in the Chinese market this year. The forecast is up 25 percent from last year's 290,000 vehicles.

Another Chinese car maker, Chery Auto reports that its car sales double in February.

Macro Man said...

Anon, I think that that is much stronger evidence that Lunar New Year was in January this year and February last year (thus flattering last month's figures on both m/m and y/y basis) than any underlying economic trend.

ravi said...

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Paul Deng said...

government can issue bonds, but they can also print money, right? so no movement in FI market did not mean anything.