Tuesday, May 13, 2014

China’s “New Normal” (excerpt)

Today, let’s review the latest news out of China:

(1) China’s top boss says get used to slower growth. Chinese President Xi Jinping said the nation needs to adapt to a “new normal” in the pace of economic growth and remain “cool-minded.” China’s growth fundamentals haven’t changed, and the country is still in a “significant period of strategic opportunity,” Xi said. At the same time, the government must prevent risks and take “timely countermeasures to reduce potential negative effects,” he said.

(2) Reading the tea leaves: No new big spending programs. In other words, the government isn’t likely to roll out a large stimulus program. That’s because such spending previously created too much excess capacity. That’s why the PPI has been deflating for the past 26 consecutive months through April. Interestingly, the employment component of China’s official M-PMI has been under 50 for the past 23 consecutive months.

(3) Too much debt, too little effect. On the other hand, Chinese bank loans continue to rise at a rapid pace. However, such lending activity doesn’t seem to be delivering as much bang per yuan as in the past. Again, that’s probably because there is already too much excess capacity in China.

A week ago, China’s central bank said it would monitor more closely default risk from loans to the property sector, local-government financing companies, and industries with overcapacity.

(4) Trade data are weak. Both exports and imports dropped sharply during February, with imports' decline extending into March. They were attributed to the Lunar New Year holiday, which often distorts the data at the start of the year. However, the March/April rebound in exports and the April bounce in imports still left both below their January record highs. It’s too soon to be sure, but both exports and imports show signs of flattening out over the past year.

(5) No bull in China. The China MSCI stock price index has been moving sideways in a volatile range since 2011. So far this year, it is down 7.8%. It tends to be a leading indicator for the CRB raw industrials spot price index. So it is currently indicating that the rebound in the commodity since last fall may not be sustainable.

Today's Morning Briefing: No Rest for the Bull. (1) From high-flyers to laggards and back? (2) SMidCap correction pushes LargeCap to record high. (3) Meltdown in melt-up stocks is healthy. (4) A broader melt-up wouldn’t be healthy, but it’s still a high-probability scenario. (5) Buybacks, M&A, and the Great Rotation could drive valuations back up. (6) Industry analysts more upbeat on earnings after better-than-expected Q1. (7) How do you say “New Normal” in Chinese? (8) Deflation and job losses at China’s factories. (9) Less bang per borrowed yuan. (10) No bull in China. (More for subscribers.)

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