The Chinese economy showed signs of'stabilization', nay, actual improvement in both the all-important the GDP release for QII (7.5% v 7.4%) and the industrial production data for June (9.2% v 8.8%) but how are we to reconcile such actions with Premier Li's brave words about how the market must lead the way?
The Chinese economy showed signs of'stabilization', nay, actual improvement in both the all-important the GDP release for QII (7.5% v 7.4%) and the industrial production data for June (9.2% v 8.8%) but how are we to reconcile such actions with Premier Li's brave words about how the market must lead the way?
The Chinese economy showed signs of'stabilization', nay, actual improvement in both the all-important the GDP release for QII (7.5% v 7.4%) and the industrial production data for June (9.2% v 8.8%) but how are we to reconcile such actions with Premier Li's brave words about how the market must lead the way?
The Chinese economy showed signs of'stabilization', nay, actual improvement in both the all-important the GDP release for QII (7.5% v 7.4%) and the industrial production data for June (9.2% v 8.8%) but how are we to reconcile such actions with Premier Li's brave words about how the market must lead the way?
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Money, Macro & Markets
O Mirabile dictu! Just as Premier Li and a whole host of other members of the Madarinate told us handily in advance, the Chinese economy showed signs of stabilization, nay, actual improvement in both the all- important the GDP release for QII (7.5% v 7.4%) and the industrial production data for June (9.2% v 8.8%).
And why not when, pressured from above to front- load their outlays, local government expenditures rose 16.4% year on year in the first half (and 6.1% in June alone) while basic tax revenues (i.e., receipts not including land sales) declined by around 4%?
Why not, again, when under the approach of Every stimulus of a macro import begins with a micro step, the credit spigots were once more liberally opened as the quarter wore on, to the point that June combined the second biggest jump in M1 on record with a 32% yoy leap in shadow finance (admittedly that latter calculated from a base which included last years quarter-end liquidity shock)?
The first begs the question of quite how we are to reconcile such actions with Lis brave words about how the market must lead the way - reiterated in a get-together with company bosses on Monday when he came over all Friedrich Hayek by telling them that:
The Chinese market is booming, the economy strong [sic]. Enterprises are the mainstay of the market. The gov- ernment must be firm in decentralizing and should aim to make bold moves but must still allow business to respond fully to the market. We should never assume that we few at the top have more insight or power but should try to mobilize the intelligence and creativity of the many thousands of our people so as to create unrivalled value.
As for the second development, it is all very well and good perpetually bewailing the grand mistake which the binge of 2009/10 entailed and publicly vowing henceforth to stay off the hard stuff, but if we are going to treat ourselves to a snort for medicinal purposes every time we start to sniffle, we can hardly be said to be properly on the wagon, now can we?
In trying to parse the numbers themselves, as ever with China, discrepancies abound. For in- stance, a US-style quarterly-annualized count of GDP supposedly shot from 6.1% to 8.2% between the first and second trimesters, yet the increase in overall electricity use (on a YOY basis) dropped from 5.4% to 5.2% making that either a glaring sign of fiddled numbers or glowing testimony to a remarkable improvement in energy efficiency. I wonder which it might be?
Similarly industrial production is said to have gone from 8.6% annualized to 9.2% annualized, yet power consumption in that area slowed from 5.3% to 4.9%, apparent oil demand edged up by less than 1%, the CISA said steel consumption showed no growth whatsoever to May, and. all the while, rail freight tonne-kilometres fell 4.5% over the first five months of the year.
Furthermore, the 3mma YOY output numbers for a range of major industrial products came in as follows: glass, +5.1%; cement, +3.8%; motor vehi- cles, +5.0%; chemical fibres, 4.9%; non-ferrous metals, 5.7%; steel, 6.6%, and coking coal, -2.7%. No sign of any 7-, 8-, or 9-handles in there, you will note. Coming at it from another angle, H1 Nominal GDP was supposedly up 8.5% on the comparable period in 2013, with QI up 7.9% and QII a faster 9.0%. Though this is perhaps a bit racy, it is a pace which is not entirely out of keeping with the path of the SOE revenue data (5.9% in HI, split 5.6% QI and 6.2% Q2). The quickening sits a little less comfortably, however, with the first five month tally of sales of the universe of above scale industrial companies which is running at 8.1% YTD after putting in an 8% clip during first three months and 8.2% for the next two. If problems lie as they usually do in Austrian- style busts - up in the higher orders of production where the SOEs tend to be bunched, an under- shoot of business revenue to end-consumption focused GDP is in no way anomalous (just look at the GFC in the States where NGDP only dipped 3.2% peak-to-trough even as private non-financial revenues plummeted by nearly a fifth) and the specific application of a minus-1% PPI deflator could even get us back to the (real) 9% given for IP (ignoring the slower pace of sectoral increases mentioned a couple of paragraphs ago). What this does not do, however, is leave much room for any more general price rises in the com- pilation of the final numbers, even though their presence is a constant source of complaint when- MATERIAL EVIDENCE BY SEAN CORRIGAN J U L Y 1 8
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Micro, macro, mega... MATERIAL EVIDENCE BY SEAN CORRIGAN J U L Y 1 8
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ever the locals are surveyed. Such use of artificially favourable deflators to boost the real GDP number is a charge that is commonly levelled against the NBS by any number of respectable commentators, but that is to take us into very murky waters, indeed. In any case, what is clear is that, taking the numbers at face value, debt levels are still rising with destruc- tive rapidity in order to achieve even such spotty results as these. Coming from the broadest perspec- tive, Nominal GDP in the June quarter was an annu- alized CNY4.7 trillion greater than that of a year a year ago, but in that like period the stock of total social financing outstanding mounted almost four times as much, or by CNY17.7 trillion. More narrowly, SOEs revenues in QII14 were CNY2.6 trillion ahead of those in the equivalent quarter in 2013 and overall profits were up CNY200 billion (though note that operating profits were effec- tively unchanged), but liabilities showed a worrying rise of no less than CNY7 trillion with finance costs up 20.6% compared to the first half of last year.
And then there is the housing market, from whence so much GDP boosting fixed investment arises and wherein so much of Chinas distorted financial net- work is entangled.
Again reading through the GDP release, one can see that residential real estate equivalent to 7 months worth of current sales lies available for purchase while another 8 months is currently under construc- tion. In terms of area, 544 million square meters stands ready to welcome its proud new owners, with another 566 million on the way. At a generous 100 sq m per apartment, that would be enough to ac- commodate 11 million families say 33 million people or not far short of the entire population of Canada straight away . Not bad when prices for new homes are now falling in 55, and those for existing-homes in 52, out of the 70 cities surveyed by the NBS ,or when we hear that banks in what is traditionally the hotspot of Shanghai extended 40% less mortgage finance in QII than in QI.
Nor is the squeeze confined to the housing mar- ket, it seems. The latest report shows that the amount of office space sold in the first half was off by 2.8%, but that the receipts for such sales were a whopping 12.1% lower, implying the price of the average square metre fell by 9.6%, surely a drop of sufficient magnitude to merit the epithet, crash.
No wonder the response on Chinas bustling commodity exchanges to all this good news was for iron ore to drop as much as 4.6% and rebar by 3%, for coking coal to hug the lows, for PVC and PE to sag, and for copper to suffer a fourth con- secutive day of decline.
Scanning the Chinese press, the sense one has is primarily that problems related to the nations dysfunctional financial system and to the gross lack of personal accountability in its exploitation are being detailed everywhere.
The press is replete with accounts of the troubles involving mutual guarantee companies in When- zhou and Sichuan and commodity shippers in Qingdao; with revelations of hefty losses and even outright fraud at several insurers; with lurid headlines about BOC/CITIC 'money launderers' in Guangzhou. There are ongoing tales of woe for steel execs, coal barons, and trust sellers; stories of stockbrokers front running orders via their per- sonal accounts and of real estate developers col- luding with their local government buddies not least by diverting billions from the affordable homes programme. Even the official organs have been openly wondering whether the motivation of many of those who have flocked to take advan- tage of the newly liberalized company formation rules (capital requirement: 1 yuan!) is simply to abscond or to otherwise leave behind unpaid bill and wages. Warnings are coming out of HK (and, in a lesser fashion, Taiwan) of multiple trillions of Yuan in semi-licit, cross-border lending dressed up as lease financing and there is the abiding sus- picion that warehouse fraud has become en- demic.
You name your favourite flavour of dirty laundry and you will see it being aired in the media. Com- mand economies, which do not permit private negotiation and unhampered pricing to allocate resources must always fall back on arbitrary se- lection, on rationing, corruption and cronyism to deal with scarcity and, under such circumstances, the whole of society effectively becomes demoral- ize if not actively criminalized. Nor is it for us to condescend to those involved in this maelstrom of twilight inventiveness. If the natural desire to cater for ones needs and for those of ones de- pendants can only be fulfilled according to a twisted framework of rules and practices, the MATERIAL EVIDENCE BY SEAN CORRIGAN J U L Y 1 8
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All Sourced: Bloomberg, NBS Not many 7.5s in here! MATERIAL EVIDENCE BY SEAN CORRIGAN J U L Y 1 8
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maintenance of Socratic standards of ethics and candour can quickly become an expensiveeven a self-destructiveluxury.
The problem here is therefore as much political and institutional as it is economic and the attempt to deal with the problems inherent in the situation cannot take place other than from within a diseased architecture which is, of course, intricately inter- locking and which has hence becoming systemically fragile. We can all carp from the outside, but it is a tough task to have to remodel the entirety of this house of cards without bringing the edifice crashing down about the inhabitants ears.
Thus, not a day goes by without China's very own "little Dutch boy" finding that he needs another fin- ger to plug the new leak he caused by trying to stem the previous puncture. The very real risk is that he may soon run out of digits.
Against this backdrop, the regime is trying to launch reforms while not allowing Lis so-called 'bicycle' economy to slow down so much it falls over. Hence all the confusion about whether or not the accursed 7.5% level for GDP is or is not a target.
Li himself must shoulder some of the blame for this in that, having tried to wean people off their well- conditioned obsession with the number (as a trigger for further waves of ill-advised stimulus, if noth- ing else) by talking of the need to consider the qual- ity of growth, not just the quantity, and by alluding to the fact that the datum is but a cipher for the much more fundamental issue of whether a greater number of people are or are not enjoying an im- proved material standard of living (hence the em- phasis on containing adverse changes in the cost of living and of promoting both jobs and earned income), he then started to panic when it was clear that the economy was running well below this thoroughly arbitrary threshold at the start of the year
As the slightly fuzzy target therefore began to recrystallise into a hard one, off we went once more with a whole barrage of fiscal and monetary pump-priming measures, as we said at the head of this piece. But, now that that critical 0.1% accelera- tion has been written - however dubiously into the record books, it seems Li is back peddling the old line that 7.5% plus or minus a bit is not the issue as long as everything else looks OK. Fool me once, Mr. Prime Minister.
A key point here is that Xi's increasingly rigorous 'corruption' purge - or, for the more jaundiced, his ongoing internal coup - has totally paralysed deci- sion-making to the point that it is hard to resist the conclusion that all effort at meaningful reform has been completely grounded. This has gone so far beyond the bounds of what is routine that there was even some speculation to be read that his next move could come uncomfortably close to swallowing up Li himself (via the dynamics of Xi's factional struggle rather than through any intimation of his deputys personal culpability).
No wonder Li is said to be screaming at officials to get of their backsides and DO something in his meetings with them
One element of Xi's extraordinary concentration of power in his own hands is that he may be putting the nation on a (precautionary) war footing out of what he genuinely perceives as a heightened ex- ternal threat. Here we must keep an eye on events in HK where the fear of a US-incited 'colour revo- lution' being instigated can only add to paranoia over the unrest in the Muslim West and to a some- what more justifiable sense of strategic encircle- ment off Chinas eastern and southern coasts.
Perhaps the greater point, however, is that the problems he has inherited are so entrenched that every attempted solution becomes a new problem in its turn, hence all the chopping and changing and all the conflicting signals being generated as to the true thrust of policy.
As for his crackdown, if the idea was to scare the previously unresponsive local cadres into compli- ance with Beijing's directives, he appears to have completely overshot that particular mark. There are no heads above the parapet now and hence precious little appetite, further down the food chain to take anything that might be construed as bold action. We can just hear the Chinese equiva- lent of Jay and Lynns timeless functionary, Sir Humphrey Appleby, smoothly deterring his po- litical chief from taking a given decision by slyly characterising it as courageous.
All in all, Xi seems to have created his own 'tall poppy' moment in true Chairman Mao fashion, an outcome which is hardly helpful when even the partial change in approach currently being imple- mented is exposing and undermining so many of MATERIAL EVIDENCE BY SEAN CORRIGAN J U L Y 1 8
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The German loco is stuttering even as the DAX goes stratospheric Source: Bloomberg MATERIAL EVIDENCE BY SEAN CORRIGAN J U L Y 1 8
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Source: Bloomberg Source: Bloomberg No help here Prices eating stimulus What price capex? Hiring? Source: Bloomberg MATERIAL EVIDENCE BY SEAN CORRIGAN J U L Y 1 8
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Source: dolarblue.net 2% a watershed? Easy money = hot stocks Source: Bloomberg Source: Bloomberg Still 50% to match the Tech Bubble Argentinagetting Mess(y) again Source: Bloomberg MATERIAL EVIDENCE BY SEAN CORRIGAN J U L Y 1 8
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the shady practices which were previously propping up the system.
As for the rest of the world, Europes recent disap- pointmentstogether with Chinas turbulence seems to be having an impact on the heretofore in- vincible German industrial complex. Orders have been spotty, output slipping, revenues down, and sentiment beginning to turn negative to reflect this. Not a combination guaranteed to provide any funda- mental underpinning for the DAXs valuations, one might suppose. In Japan, too, the nonsense that is Abenomics is still taking its toll. The data are still reflecting the noise from the consumption tax hike, but it is clear that industrial sales are in trouble, while inventories are on the uphardly a combination to inspire the CEO to go out and fund an expansion of either capital or labour. What is also clear is that much of the stimulus is now being eaten up by the imported price rises, in terms of a slowing real supply of money. Falling LNG quo- tations and perhaps a fulfilment of the intent to switch the nuclear reactors back on might just lend some assistance here, but otherwise the omens are unremittingly bleak. Finally, in the US, some good news/bad news in the form of industrial data which finished June up 4.2% on a 3mma yoy basis, the fastest lick in a year, with the manufacturing component up 3.5%, the best pace since autumn 2012. IPalmost uniquely among the advanced nationsis now demonstrably above the pre-Crash peak even though, as we have shown with several other indicators, this recovery is tardy by the standards of all bar the previous one.
For us in the commodity world, the bad news here comes in the form that this improvement was already threatening to break the euro down and the dollar up, even before the dreadful events in the skies over Kiev added a further impetus to the trade. Moreover, in terms of capital flows, the US stock markethowever overpriced it may beis again showing signs of leaving Europes index behind, while the 10-year Bund-UST spread is the highest in 15 years and in the top two per- centiles of the range seen in the whole of the past, post-Soviet quarter of a century.
From here, the merest 0.8% move would serve to break the dollar TWI out of the shallow down - channel in which it has traded since February, allowing the major rising trend line from mid 2011 to re-establish command over the currency's direction and so possibly foreshadow the start of what could amount to a 12% rally to the top of the past decade's range. That would NOT help our cause.
Commodity Corner
The odd base metal aside, markets have been struggling ever since the June highs but the oil complex has been spared further immediate em- barrassment by a combination of being heavily short-term oversold and the knee-jerk reaction to news of the Malaysian airliner disaster . We are thus back to watching for renewed direction and also to seeing whether the Brent contango can re- establish itself and so reinforce thoughts of ample supply.
Nothing quite so positive for Natgas, where $4 bcf has given way, eroded by the rapidindeed, recordadditions to storage being reported week by week and hardly helped by the current spell of unseasonably cold weather which holds sway across the centre and east of the US in what is supposed to be peak air-con season. More pain could easily eventuate.
In ags, some of the verve has gone out of the sell- off partly because, again, things were their most oversold in the entire record and partly because there is already a useful short base to want to re- alise some gains. Whether this is anything more than a temporary respite remains to be seen, but if the recent lows do not hold, a further quick, loss of 10% could readily transpire.
Sean Corrigan
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Source: Bloomberg Source: Bloomberg Source: Bloomberg No shorts, no cash premium Ranging (and compressing) between the larger trends Topped at trend/HVP Source: Bloomberg $3.80 then $3.50 bcf the risk
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