Sunday, May 15, 2016


In the eternal battle between the forces of light and the forces of darkness, I prefer the light side. I tend to be an optimist. However, in recent years, my optimism has been focused on the outlook for the US. I’m less enthusiastic about the Eurozone and Japan. In general, I’m not a big fan of emerging economies, particularly China. As a result, I have recommended a “Stay Home” investment strategy as opposed to the “Go Global” alternative.

On the dark side, I’ve written often about the credit excesses that have fueled excess capacity in China, which has to be the world’s biggest bubble ever. I was early in detecting the country’s capital outflows problem. I would like the Chinese authorities to know that no one else at Yardeni Research has contributed to my critical analyses of the country. But I will continue to write the truth, the whole truth, and nothing but the truth, though it is becoming increasingly dangerous to do so, especially for economists in China. The 5/3 WSJ included an article titled “China Presses Economists to Brighten Their Outlooks.” It ominously reported the following:
Chinese authorities are training their sights on a new set of targets: economists, analysts and business reporters with gloomy views on the country’s economy. Securities regulators, media censors and other government officials have issued verbal warnings to commentators whose public remarks on the economy are out of step with the government’s upbeat statements, according to government officials and commentators with knowledge of the matter.

The stepped-up censorship, many inside and outside the ruling Communist Party say, represents an effort by China’s leadership to quell growing concerns about the country’s economic prospects as it experiences a prolonged slowdown in growth. As more citizens try to take money out of the country, officials say, regulators and censors are trying to foster an environment of what party officials have dubbed "zhengnengliang," or "positive energy."
China’s President Xi Jinping seems to long for the glory days of Chairman Mao. He launched an anti-corruption campaign in 2012. It increasingly seems aimed at vanquishing his foes and at consolidating his power. His latest campaign aims to galvanize China around threats to national security. In recent weeks, the government has called for vigilance against spies. Even in the schools, children are playing games such as “Spot the Spy.” In mid-April, there was the first-ever National Security Education Day. Volunteers in Beijing handed out thousands of umbrellas imprinted with a hotline for reporting any perceived risks.

The accuracy and credibility of Chinese economic data have never been very good. Now they could get much worse. The official M-PMI may be sent to the countryside for a reeducation campaign. It edged down from 50.2 during March to 50.1 during April. It may have to be shot, or at least disappear, if it drops below 50.0 this month. Another candidate for summary execution is China’s monthly series on railways freight traffic. The series, which isn’t adjusted for seasonality, rebounded in March, offsetting most of February’s drop; but its 12-month average is down 17% from its record high on January 2014 and the lowest since November 2009.

By the way, FRB-Dallas Fed President Kaplan should probably watch his back too. In a recent speech, he warned:
[W]e are closely watching China, given its size and importance to world GDP growth … We estimate that [China’s GDP] growth rate will slow to 6.5 percent in 2016 and likely trend lower in subsequent years. China is dealing with high levels of overcapacity (particularly in state-owned enterprises), high levels of debt and an aging workforce. In addition, it has embarked on [what is] likely to be a very difficult [economic] transition.
I have instructed my colleagues that in the event of my disappearance, they should carry on without me and write only upbeat stories about China.

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