lunes, 16 de noviembre de 2015

lunes, noviembre 16, 2015

Can China Reflate Its Economy?
             
Summary
 
- China now has 43 consecutive months of negative PPI.
       
- Chinese companies have borrowed more than $1 TRILLION denominated in dollars.
       
- China had a 20.4% plunge in imports last month, confirming a true and accelerating economic contraction.


China now has 43 consecutive months of negative PPI (wholesale prices). That's important deflation, and will spread to the rest of the world.

Now the global institutions think it is better to issue warnings rather than continue hiding the big problems. Only Wall Street analysts still play the "let's pretend all is well" game.

We hear all the time that China cannot have a crisis because it has $3.7 TRILLION in reserves.

We disagree with that for several reasons. First, who has counted that? Is this Chinese accounting? It may have accumulated over the years, but hasn't it been spent on extravagant and unproductive governmental projects, such as building cities where no one except the street sweepers live?

There have been huge "mal-investments" by the government over the past 5 years. There is no "return on investment" on that. Here is a great video on China's empty cities and empty shopping centers:



Furthermore, although the China government may not have lots of foreign debt, Chinese companies have borrowed more than $1 TRILLION denominated in dollars. Now that debt is rising in terms of the yuan, just as imports and exports are plunging, it becomes difficult to service that debt. That's what causes deep recessions or depressions.

China's largest coal mining company, which has a labor force of 240,000, announced that it would cut 100,000 jobs or 40% of its entire 240,000-strong labor force.

While the perma-bulls on China try to get investors to buy the China stocks, I think it is important to take a look at the true China economy, not what the China government and their mouthpieces tell you.

On October 13, the news out of China was a 20.4% plunge in imports. This is serious. It confirms a true and accelerating economic contraction.

If you consider that about 50% of world economic growth, and 80% of world commodity demand growth, came from China in the last 15 years, then you know how critical the current China crisis is to the world.

As we wrote three years ago in our book, "The Coming China Crisis", when China finally goes into recession, it will cause a Tsunami throughout the financial world.

China's Q3 GDP growth dropped a miniscule amount from 7% to 6.9% in the last quarter. How is that possible with such miserable economic statistics? No surprise for us. China has to show the world that the stock market crash didn't affect the economy, even if they have to fudge the numbers more than normal.

Amazingly, many comments from analysts were exactly what the China government wanted, namely that this is "proof" that all is well in China.

But Marketwatch.com wrote: "Analysts for years have expressed doubts about China's official data, but there was particularly intense distrust on Monday."

As you know, we look at much more important numbers in China, such as electrical consumption, rail car loadings, credit market conditions, etc. These are extremely negative.

They confirm our statements for months that the private sector in China is in a RECESSION!

Below is a chart of some these numbers, courtesy of AJ Bell.

Rail shipments in China (red line) are now down a hefty 15% on a year-over-year basis. Look especially at the drop in rail freight traffic. It is now declining at a big 15% rate. That is a better indicator of economic conditions than GDP.



China's stock markets are now seeing continued liquidation. There is basically one big buyer now, the government, through the financial entities it supports. Because sellers, such as financial firms, have seen their top executives arrested for the "crime" of selling stocks, and short sellers are arrested for "financial crimes," there is no incentive to buy.

Foreign financial firms won't buy under these conditions either, and are more interested in getting out than in getting in. The only buyers are the small speculators who think that the speculative market of earlier this year will revive. The vast majority of these speculators have little or no education, they don't look at fundamentals, and just buy a stock because it went up yesterday. They focus on the China Next Market (NYSEARCA:CNXT). The P/E ratio of this index is at a lofty 90, about five times richer than the 25 biggest China stocks.

The chart of the SHANGHAI INDEX shows the big rise in the June top propelled by government policy. The goal was to provide conditions to let the big government-owned firms refinance their excessive debt by selling shares. These firms are totally mismanaged because they are controlled by the family members of the highest officials. The boom eventually caused the bust. Almost $5 TRILLION in wealth was wiped out in the crash, equivalent to over 40% of annual China GDP.



China's private companies, not the large government-owned firms (SOEs), are in the middle of a huge credit crunch. The popular financing methods, often called the "shadow banking system", are basically closed. Therefore, companies defer payments to suppliers, which causes a negative ripple effect of defaulting loans.

US analysts tell us that China's private sector economy is recovering strongly. And then they quote some double-digit annualized gains over the past month, which to us looks like the typical "dead cat bounce" after a shock. It's meaningless.

China has been trying desperately to make the transition from an economy highly dependent on governmental "investments" to a consumer-driven economy.

About 10 years ago, 46% of the economy was the consumer. Now, after 10 years of boosting that percentage, it has actually plunged to 35%. Yes, even a communist dictatorship can't control the economy.

Bottom Line: China's "hard-landing" has arrived. The private sector economy is already in recession. The credit crunch is enormous. When a small firm can't get credit, the next step is closing down.

Governmental efforts to push "liquidity" into the system will be just as ineffective as it has been in Europe and the US. Small interest rate cuts and lower reserve requirements only work when lenders are willing to lend. But when loan defaults soar, bankers don't lend.

The stock market will be shunned by international investment firms for a long time. When a government prohibits selling of stocks during a plunge, how can any money manager defend buying the stocks for his investors?

0 comments:

Publicar un comentario