Chinese Takeaway

Yesterday's post excited quite a bit of comment from China buffs and commodity hounds alike. The ensuing 24 hours has provided several significant new datapoints with respect to the China story, so in the interest of completeness it's probably worth addressing them. What can we take away from the investment and trade data?

First, the good news. Fixed-asset investment rose a touch more than expected, climbing 32.9% year-to-date. The green shoots/China growth pimps proponents are pointing to this data as a sure-fire sign that de-coupling lives, China has engineered its own recovery, etc. OK, fine. To be sure, a goodly portion of of this investment has gone into infrastructure projects, particularly in western China. That is pretty valuable.

But capex growth keeps humming along....does the world really need more manufacturing capacity at this juncture? And readers are invited to judge for themselves how sustainable/healthy/desirable it is to see property investment starting to surge again.
The trade data, meanwhile, was less positive. Import and export growth undershot expectations (and by a larger margin, it should be added, than FAI exceeded them) even as Chinese firms continued to increase imports of commodities such as copper and crude.

One of the great things about trade figures in China is that they one of the few datapoints that you can be pretty sure aren't fudged or manaipulated too badly, since they can be corroborated with similar statistics from China's trading partners. In that vein, it's worth noting a remarkable disparity in China's PMI and its export data. While the PMI accurately herladed the collapse in export growth, to date its rebound has not been matched by a similar renaissance in export data.

While it's true that the PMI data may now be capturing more fo the iternally-driven ivnestment dynamic within China, it's worth pointing out that the latest survey had export orders rising.

This, of course, begs the question of who the Chinese plan on selling to. It's all well and good continuing to build factories and export capacity, but the real world isn't like Field of Dreams; just because you build it doesn't mean that customers will come. Yesterday's US trade figures were telling in that regard. Imports declined again in April; while an inveterate "second derivative" believer may find reasons for optimism in the slight lessening of the pace of import decline in yesterday's data, Macro Man is rather more sceptical. And the fact that US exports declined as well suggests that domestic demand in the rest of the world remains flaccid at best.

Perhaps May will bring better news for the US consumer (and thus, the Chinese export engine?) We'll know more in a few hours with the release of May retail sales figures. It will be an interesting test case to see if the reflation story is starting to bite itself in the ass; gas prices rose by 10% in May versus the April average, which should have taken a check out of households' disposable income.

'Twill be interesting to see if that fed through into lower demand for non-petroleum products. Macro Man suspects that it probably will have, which will then raise the uncomfortable question of whether we've already reached the point of renewed demand destruction in the oil market.
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Anonymous
admin
June 11, 2009 at 10:39 AM ×

who will buy? the mighty chinese "middle class"!! each chinese household will buy 5 toasters, 2 cars and 55 barbies each and all will be well.

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June 11, 2009 at 11:28 AM ×

Macro Man, as a guy who covers asian credit and equity for a living I can tell you one thing for certain: there is no such thing as good property price data in China. Sofun (搜房) produces some data but it looks like BS to me. Add that to really bad disposable income data and rent/income ratios are more or less impossible to get to. I'm waiting for the Chinese banks earnings announcements to read the tea leaves (or is that I Ching)?

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Anonymous
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June 11, 2009 at 12:49 PM ×

Here's a conundrum for you MM, what do you trust more, Chinese data or Gordon Brown's government ??

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Anonymous
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June 11, 2009 at 1:30 PM ×

http://zerohedge.blogspot.com/2009/06/thinking-unthinkable-treasury-black.html#disqus_thread

Good post but the comments are really interesting

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Anonymous
admin
June 11, 2009 at 1:53 PM ×

No, the comments aren't really interesting re:above comment. Especially when you get to the part where we read about the metal manipulation conspiracy.

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Anonymous
admin
June 11, 2009 at 2:34 PM ×

I thought PMI is a m-o-m index and export/import growth are a y-o-y data. Maybe this is not the case.

If I am right, so it is possible to have a positive PMI (>50) while have a negative export/import growth?

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Macro Man
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June 11, 2009 at 3:16 PM ×

Oh, absolutely. But exports are not only a function of your desire to sell stuff to others; they're also a function of their willingness to buy from you.

And frankly, I haven't seen much evidence that anyone is willing to buy more of anything from anyone else, with the notable exception of China's raw material import shenanigans.

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Anonymous
admin
June 11, 2009 at 3:24 PM ×

just watch turd laden BAC go nuts

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June 11, 2009 at 3:29 PM ×

DId anyone else notice they sent Nancy Pelosi to talk climate change and carbon trading with the Chinese? Its like sending a big dude with tattoos to talk debt forgiveness. I think this is likely to be a backdoor to protectionism once we see these trade imbalance issues worsen.

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spragus
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June 11, 2009 at 4:56 PM ×

Wonder where the Chinese January bank loan $$ went?!
Reversing the labels on the PMI/Export chart might make it easier to understand?

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Anonymous
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June 11, 2009 at 6:33 PM ×

I tend to be with MM in believing that demand for Chinese exports being robust any time soon is suspect. I can't speak to Chinese domestic demand. I will play devils advocate though and note that while the U.S. trade deficit expanded imports of consumer products grew for the second straight reporting period. Consumer products hmmm, that seems to be right up China's alley. I don't know, maybe U.S. purchasing managers are being a little too optimistic. We'll have to keep an eye on that.

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Anonymous
admin
June 11, 2009 at 8:58 PM ×

MM: ...but the real world isn't like Field of Dreams; just because you build it doesn't mean that customers will come.

And even if they do come, it doesn't mean they are able to pay in real terms

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Anonymous
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June 11, 2009 at 9:21 PM ×

Chinese's products are mostly low-end. So consumers would move from high-end (exports of Japan and Germany) to low-end (China). Substitution effects overcome income effects for a large number of consumers. Thus, Chinese export is a little more robust. Just saying.

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Anonymous
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June 12, 2009 at 1:58 PM ×

What I find interesting is that the large surpluses of major exporters such as china, which have typically been used to finance the US budget deficit, will stop growing and start reducing as the US et al saves more. However, as the US saves more, the treasury market should be the recipient of that capital. So the budget deficit is domestically funded in majority and the USD strengthens.

If the 30s are any guide to a deflationary episode, the sharp fall and rise in treasury yields mirrors 1929-1931 period. I think they peaked at some point in 1931 and rallied until the 1950s.

Also, I do believe that the non-senior sovereigns had problems getting funded as well. Latvia, Poland anyone?

Last two paragraphs probably slightly wrong, but it was a book I looked at years ago.

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