Tuesday, August 11, 2015

China Is a Mess (excerpt)

The rebound in Chinese stocks on Monday is consistent with the bad-news-is-good-news performance of stock markets around the world since the financial crisis of 2008. That’s because bad news is viewed as likely to spur the central bankers to provide another round of easing. There were lots of downbeat indicators coming out of China in recent days.

As we noted yesterday, on a seasonally adjusted basis, imports fell 2.1% m/m and 8.1% y/y. Some of that weakness reflected the drop in oil prices. However, imports excluding petroleum still fell 3.4% y/y during June, suggesting weak domestic demand. Exports declined 4.9% m/m last month and 8.3% y/y, likewise suggesting weak global demand. Exports have been essentially flat now since early 2013.

July’s PPI was down 5.4% y/y. That’s the 41st consecutive monthly decline, and the worst since October 2009. There were lots of devils in the details for the various industrial categories: ferrous metals (-20.1% y/y), coal (-15.1), raw materials (-9.7), nonferrous metals (-7.7), heavy industry (-6.3), manufacturing (-4.5), chemicals (-3.1), and light industry (-1.1).

The underlying mess in China may be best reflected in the country’s rapidly rising capital outflows. Over the 12 months through July, the trade surplus totaled $541 billion, a tad below June’s record high. Over the same period, China’s nongold international reserves fell by a record $318 billion. This implies record capital outflows totaling $859 billion over the past 12 months through July.

The only positive spin is that China is lending lots of money to the ’Stans (Afghanistan, Kazakhstan, and Pakistan) to build the Silk Road project, which will boost China’s exports and absorb much of its domestic excess manufacturing capacity. The only problem with this theory is that most of the project is still on the drawing boards. More likely is that anyone with money in China is doing what they can to get it out of there, and fewer foreigners are interested in investing in China.

Today's Morning Briefing: Behind the Curtain. (1) What’s different this time that technicians aren’t seeing? (2) Warren Buffett’s latest deal offsets bearish technical signals. (3) Corporate funds driving bull market more than the investment public. (4) Individual investors mostly on the sidelines. (5) Institutional equity investors (excluding equity funds) are net sellers. (6) Foreigners selling US equities this year. (7) Corporations massively buying shares through buybacks and M&A deals. (8) The wizards behind the curtains in the US and China. (9) Chinese-style QE is sweet and sour. (10) Is greed back in China already? (11) Bad news is good news in China. (12) OPEC no longer the Fed of oil market. (More for subscribers.)

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