Wednesday, September 19, 2012


The Chinese government is picking fights with some of its neighbors over several islands in the South China Sea. These issues have been simmering for a very long time. Why are they coming to a boil now? One possibility is that the Chinese government is stirring up nationalist sentiments to distract the locals from some serious homegrown problems, and doesn't believe that the US will side with Japan and other Asian nations disputing China's territorial claims.

China’s Communist leadership change isn’t going smoothly at the same time that the economy is slowing significantly. For example, electricity output during the three months through August rose only 1.4% y/y. Crude oil demand has flattened out around 9.5mbd over the past six months through August. Fred Smith, the head of FedEx, warned on Tuesday that China watchers may be “completely underestimating” that the export slowdown is more than offsetting attempts by the government to boost growth.

The recent widespread protests in China against Japan’s claims to some of the disputed islands in the South China Sea are already harming the economy. Japanese companies are temporarily closing their manufacturing facilities and retail outlets in China. Trade between China and Japan totaled $323 billion (saar) during August, with China’s exports to Japan at $147 billion and imports from Japan at $176 billion.

China’s Shanghai-Shenzhen 300 stock price index rallied late last week, but now seems to be resuming the downward trend of the past year. The price of copper rebounded smartly last week on news that China will spend to build subways and roads, but could weaken if tensions between China and Japan don’t abate soon. Japan’s Nikkei is also vulnerable to the dispute between the two countries.

This morning, Reuters reports that the mass protests could backfire on China’s Communist leaders. Ultra-nationalists are going bonkers that Beijing isn’t being tough enough on Japan. Many demonstrators held up portraits of Mao Zedong. Last week, Gen. Xu Caihou, vice chairman of the Central Military Commission, considered the most senior military political commissar, said that military forces should be “prepared for any possible military combat,” according to the state-run Xinhua news agency.

Today's Morning Briefing: King of Hearts. (1) The lunatics have escaped. (2) Lots of angry people. (3) Uncle Sam has left the building. (4) China’s economy threatened by anti-Japanese protests. (5) Iran’s loony leader is ranting again. (6) Exercises in the Persian Gulf. (7) The world needs a warden. (8) They are mad in Europe and the US too. (9) Oil price rollercoaster. (10) Saudis want to pump it up. (11) Energy stocks and Dramamine. (More for subscribers.)

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