Economists Anxious for China’s Economic Bounce

Saturday, February 7, 2009 2:05
Posted in category Uncategorized
Comments Off on Economists Anxious for China’s Economic Bounce

While nearly every news source, except perhaps the Onion, is filled with new of economic doom and gloom, this week seemed to be the week were China’s major economists all predicted “the bounce”.. or at least made an attempt to should that the November – January data provided some reason for hope.

In the words of UBS’s Wang Tao email today:

In recent weeks, we have seen some positive signs from the Chinese economy: loan growth surging at incredible speed, PMI improving, steel traders restocking, materials prices and shipping rates rebounding strongly. The domestic equity market also started the year of Ox with remarkable gains. Has growth bottomed in China? Is this the start of a sustained recovery? Is the year of the Ox turning to the year of the Bull after all?

From Andy Rothman’s Sinology report last week:

Recent data offers evidence of tentative stabilization of the Chinese economy, including the release today of January’s CLSA PMI, which rose for the second consecutive month. While it is still too early to argue that this is conclusive proof that the economy is on a sustainable rebound – – we may see setbacks when additional January and February data are released – – the latest results strengthen the case that GDP growth will accelerate in 2H09 to reach about 8% for the year.

The reasoning behind these calls for stability lie in some recent reports (see charts below) that show for the first time in nearly a year a month on month improvement of some “key indicators”.

A slight improvement.

A few observations of mine in reading through these reports (see Michael Pettis’s thoughts in similar reports):

The “growth” is still negative – it just is not as negative as before.

Looking at the three charts below (click to enlarge), you can see that November/ December offered numbers that (1) were off the low of October and (2) are the first positive move in nearly a year.

But the problem is that thenull numbers are still in negative territory.. and that is before we take into account that some officials may have fudged their numbers by under reporting how bad things were in their areas… and as today’s Shanghai’s Daily Coal output slows after power demand weakens article suggests, the power sector chart above is about to get a lot weaker.

This “improvement” was made possible by banks (particularly ICBC), not from a broad based improvement in manufacturing/ service

Looking at the chart to the right, it is clear that a very large amount of money entered the system, and would have had an impact.  This only further solidifies my skepticism that the recent economic blips should lead us to believe that things are stabilizing.

The banks are clearly not going to be able to continue pumping this liquidity into the market at the same pace… and even if they could.. look at the return they got!  With over a 1000% return, they only got an improvement of 2-3% on the indicators.

Surely there are going to be medium/ long term returns not captured in these charts after only 2 months, but I really would have expected a lot more for the 1000%.

The numbers reported, and the analysis presented, fail to take into account that large firms are now failing in larger numbers and at a faster pace

One of my key concerns when the banking crisis began was that many firms who previously enjoyed the fruits of a credit market would suffer once force to operate in a cash market.  That many businesses/ models simply did not make as much sense once a firm’s own cash was used to pay for everything.

It is a fear that is escalating, and proving itself, with the announcements made by Home Depot, Hardware Restoration, Linens & Things, and so on.  Firms whose operations were overbuilt, or built on the wrong model for the current market, through their closures (whole or part) will impact the markets at the root level over the coming months as suppliers see their orders fall off and impact the economy at the root level as the various vendors/ wider economy reacts to these closures.

Thus, my conclusion:

In the end, while appreciate the opinions of these economists (they are intelligent people after all), I am still largely unconvinced that we have seen the bottom.

The banks through their funding provided a boost, but the boost was at best marginal, and that in itself is scary and proves that China will not be able to buck the trend.

That Chinese economy (and recovery) is/ will be strongly tied to the global recovery, and that with the news of closures and layoffs growing in size and freqency, the real economy is showing that any improvements made in December have been quickly lost in January.

Both comments and pings are currently closed.