Wednesday, December 10, 2014

Chinese Imports Suggest Much Weaker Economy (excerpt)

Late on Monday, China’s securities clearinghouse banned investors from using low-grade corporate bonds as collateral for short-term financing. The move is part of Beijing’s structural reforms aimed at shoring up the financial system.

The Shanghai Composite dropped 5.4% to 2,856.27, suggesting that the recent stock bubble may be bursting already. The retail-dominated market is still up 35% this year. The Chinese have a huge savings rate. They’ve cooled off to putting their money into properties and wealth-management products. Instead, they’ve been pouring funds into the stock market. Yesterday’s FT reported: “The balance of outstanding margin loans has risen more than two-thirds since the beginning of September, to Rmb575bn, by the end of last week. Banks were themselves among the worst fallers on Tuesday with the financial sector off 7.6 per cent while energy shares dropped 7.4 per cent.”

The 7/11 WSJ reported that “China's banking regulator imposed fresh requirements on banks to keep their wealth-management product business in check, in another step to tighten its grip on a once-loosely regulated part of the shadow-banking business.” Banks must separate their wealth-management product business from retail lending business by setting up separate accounting, statistical analysis, risk management and performance appraisal systems...” Banks had until the end of September to complete the setup of the independent wealth-management departments.

Wealth-management products have been popular because they offer higher yields than deposits. But they are obviously risky. The WSJ reported that over 400 banks had a total of 13.97 trillion yuan ($2.25 trillion) in outstanding wealth-management products at the end of May.

The more fundamental problem in China is that the economy may be slowing faster than widely recognized. Last Wednesday, I reviewed the country’s imports data through October. November data were released on Monday showing that imports remain flat this year, using the 12-month moving average. That’s mirrored in China’s imports from Australia, Brazil, Japan, Taiwan, and the US. Only imports from the European Union and South Korea remain on uptrends, though they started to look toppy in November.

Today's Morning Briefing: Downsides In 2015. (1) From the upbeat scenario to the downbeat risks. (2) The bull is still prone to mood swings. (3) “Considerable time” is running out of time. (4) Yellen’s 6-month horizon. (5) More upbeat labor market indicators. (6) Next Fed QE in corporate bonds? (7) Is China’s mini-bubble bursting already? (8) China’s imports showing no growth all year. (9) Draghi renews his vows to do whatever it takes. (10) Greeks breaking plates again. (11) Will there be blood in the oil patch? (12) Oil majors vs. frackers. (13) The Russian bear is wounded. (14) The jury is still out on Abenomics. (More for subscribers.)

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