I haven't been posting any trades for a while, and I don't think I will try to post every single one, too much to keep up with. But this is still a good place to put my thoughts to pap...er...anyways. This is the first of 4 questions I want to answer for possible trades in 2016. Positioning is extreme in many areas, all betting on further dollar strength, China weakness and oil oversupply. While some amount is not incorrect, parts of that reasoning are past their time and momentum has (and will likely continue to for the time being) carried these trades too far. My 4 questions concern: 1) China's economic growth and rebalancing; 2) EM's caught up in the wave of selling that don't necessarily belong in a group with, say, Brazil; 3) USD strength: against which currencies can this reverse and when?; 4) Oil - oversupplied but relatively balanced market - when will the price bottom and will we see a quick rebound or a gradual one?
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So I'm going to leave the "analysis" (more like scattered thoughts) below as-is for the time being. Long story short, stabilization in China will require more fiscal policy measures, and some monetary ones won't hurt either. The question is: to what extent is Xi willing to anger many in his country who depend on industry and construction for their wealth - and their jobs - to continue the rebalancing? At the moment it looks like targeted programs (e.g., urbanization, Yuan weakening, export and auto tax cuts) are it for fiscal policy; that won't be enough. Are there plans in the works to hit the 6.5% growth target for 2016 (or are we about to find out its going to be lower?) (will they fund African/EM infrastructure projects to use, rather than close, their excess capacity?). If not, how bad do things need to get before they step up the support? I don't know the answers to these questions, but I need to find out. Without that, all of the below is just yada-yada-yada.
I.e., to understand the economics, look at the politics
China's economy - will there be a rebound in 2016, and if so, will it be sustained through the year?
Has been slowing substantially over the last few years as the debt-fueled investment/real estate boom begins to wind down. The big problem is the bad debt, and there are 4 reasons it has and will continue to hit the Chinese economy: 1) reduced appetite and ability for more debt, causing slowdown in credit growth; 2) the excess capacity in industry/construction can't be exported away, it must close; 3) the corruption crackdown, targeting of political foes combined with repressed interest rates has and will continue to push money out of the country.
A word about the debt:
Total debt has risen to over 280%. According to McKinsey, "China’s debt has quadrupled since 2007. Fueled by real estate and shadow banking, China’s total debt has nearly quadrupled, rising to $28 trillion by mid-2014, from $7 trillion in 2007. At 282 percent of GDP, China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany. Three developments are potentially worrisome: half of all loans are linked, directly or indirectly, to China’s overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable," but goes on to conclude that the central government can bail them out, which is highly likely to do, but only if things get ugly (there is worry in China about moral hazard, believe it or not).
Over 2015, the borrowing slowdown will/has hit prices, creating a negative feedback loop through the real estate, construction industries, PPI and local government revenues. However, many see fiscal policy picking up where monetary policy left off in the fight to level the ship during the rebalance. Also, while the trend has been down all year, it has picked up over the last few months (now slowing again).
To what extent will fiscal policy go? Enough to bump up official GDP. Will it be enough to offset deflation caused by reduction in credit and overcapacity? In the short run yes, some believe only through Q32016, but alot of actions are being taken to alleviate the oversupply of homes (speeding up urbanization, etc) as well as destroy the oversupply that exists in industry (how will this one work without raising unemployment? Or does part of this plan involve Silk Road / African infrastructure investment?). Will monetary policy be put on hold due to capital flight concerns? For the most part, yes. CNY is not a free-floating currency and the PBOC doesn't necessarily need interest rate reductions, etc to weaken it.
From China's National Bureau of Statistics: "In the first eleven months, the sources of funds for real estate development enterprises reached 11,256.3 billion yuan, up by 2.2 percent year-on-year, and an increase of 0.9 percentage points over the first ten months. Specifically, the domestic loans stood at 1,862.8 billion yuan, decreased 3.2 percent, foreign investment stood at 25.8 billion yuan, down by 51.4 percent, self-raising funds stood at 4,464.8 billion yuan, down by 3.4 percent, and other sources stood at 4,902.9 billion yuan, up by 11.2 percent. Among the other sources of funds, deposits and advance payments totaled 2,853.8 billion yuan, increased 6.4 percent, personal mortgage loans totaled 1,471.4 billion yuan, up by 21.3 percent." The use of personal mortgages to finance construction increased 21% YoY. Also, while floor space under construction is slightly up overall, floor space of new construction is down double digits, YoY.
But...
How far along is the rebalancing?
Did some of this jump in auto sales have to do with the recent tax cut on the purchase of autos? Yes, and how long will this last? It has helped reduce dealer inventories, but they still remain high. From Reuters: "The fact that growth has remained weak this year in spite of a period of sharply falling retail prices suggests that poor consumer sentiment and economic uncertainty - rather than pricing and affordability - are to blame for weak demand."
Further, Sales of commercial vehicles remain down 10% YoY, and both imports and exports of autos and motorcycles were down double digits YoY. From the China Association of Automobile Manufacturers: "According to customs data sorted out by CAAM, in October, the total import of automobiles was 87,200 units, down 28.2% year on year, and the total export was 51,300 units, down 32.9% year on year. For the first ten months, the accumulated imports reached 907,400 units, down 23.6% year on year; and the accumulated exports reached 647,300 units, down 15.7% year on year." How much will a weaker Yuan help exports? Currency reduction of 5% this year certainly helps their competitiveness.
Also, China beige book "shows 'disturbing' economic deterioration" http://www.bloomberg.com/news/articles/2015-12-17/china-beige-book-shows-disturbing-deterioration-on-all-fronts-iiaunzjp
So where's the stimulus announcements? Will they be small and specific as recently, or broad and meant to calm fears like a few years ago?
Without the government stepping in, the Chinese economy will continue to decelerate. Do they use their massive surpluses, or save (some) for bailouts and currency support. Do they take on more debt? Or do they let it slowly sink, with a little help along the way, like the last few months' measures (see, e.g., Xi's 4 annihilations for 2016, including overcapacity)
Only thing to save construction and related mfg is for China to fund infrastructure projects globally...but, for the short term, could announce more stimulus measures: annual economic meeting concluded 12/18 (this is where they set the annual growth target, Xi wants to keep growth at 6.5 through 2020)...in order to hit the target in 2016, stimulus will need to be added...
DCB 8/14/15: "much of the surge in apparent capital outflows in recent months which was meant in the consensus narrative to scare Beijing off a weaker currency was ‘…the rational hoarding of USD export earnings by corporates with heavy offshore borrowing.’ In other words, it reflected rational balance sheet management and hedging for anticipated RMB weakness"
Slump in import prices flattering net export figures, but that should wash out of the GDP reports by 1H2016
a falling yuan is a calamity in the making as it will dramatically accelerate the commodity bust by restoring local Chinese commodity production macrobusiness.com.au
_________________________________________________________________________________
So I'm going to leave the "analysis" (more like scattered thoughts) below as-is for the time being. Long story short, stabilization in China will require more fiscal policy measures, and some monetary ones won't hurt either. The question is: to what extent is Xi willing to anger many in his country who depend on industry and construction for their wealth - and their jobs - to continue the rebalancing? At the moment it looks like targeted programs (e.g., urbanization, Yuan weakening, export and auto tax cuts) are it for fiscal policy; that won't be enough. Are there plans in the works to hit the 6.5% growth target for 2016 (or are we about to find out its going to be lower?) (will they fund African/EM infrastructure projects to use, rather than close, their excess capacity?). If not, how bad do things need to get before they step up the support? I don't know the answers to these questions, but I need to find out. Without that, all of the below is just yada-yada-yada.
I.e., to understand the economics, look at the politics
China's economy - will there be a rebound in 2016, and if so, will it be sustained through the year?
Has been slowing substantially over the last few years as the debt-fueled investment/real estate boom begins to wind down. The big problem is the bad debt, and there are 4 reasons it has and will continue to hit the Chinese economy: 1) reduced appetite and ability for more debt, causing slowdown in credit growth; 2) the excess capacity in industry/construction can't be exported away, it must close; 3) the corruption crackdown, targeting of political foes combined with repressed interest rates has and will continue to push money out of the country.
A word about the debt:
Total debt has risen to over 280%. According to McKinsey, "China’s debt has quadrupled since 2007. Fueled by real estate and shadow banking, China’s total debt has nearly quadrupled, rising to $28 trillion by mid-2014, from $7 trillion in 2007. At 282 percent of GDP, China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany. Three developments are potentially worrisome: half of all loans are linked, directly or indirectly, to China’s overheated real-estate market; unregulated shadow banking accounts for nearly half of new lending; and the debt of many local governments is probably unsustainable," but goes on to conclude that the central government can bail them out, which is highly likely to do, but only if things get ugly (there is worry in China about moral hazard, believe it or not).
Over 2015, the borrowing slowdown will/has hit prices, creating a negative feedback loop through the real estate, construction industries, PPI and local government revenues. However, many see fiscal policy picking up where monetary policy left off in the fight to level the ship during the rebalance. Also, while the trend has been down all year, it has picked up over the last few months (now slowing again).
To what extent will fiscal policy go? Enough to bump up official GDP. Will it be enough to offset deflation caused by reduction in credit and overcapacity? In the short run yes, some believe only through Q32016, but alot of actions are being taken to alleviate the oversupply of homes (speeding up urbanization, etc) as well as destroy the oversupply that exists in industry (how will this one work without raising unemployment? Or does part of this plan involve Silk Road / African infrastructure investment?). Will monetary policy be put on hold due to capital flight concerns? For the most part, yes. CNY is not a free-floating currency and the PBOC doesn't necessarily need interest rate reductions, etc to weaken it.
From China's National Bureau of Statistics: "In the first eleven months, the sources of funds for real estate development enterprises reached 11,256.3 billion yuan, up by 2.2 percent year-on-year, and an increase of 0.9 percentage points over the first ten months. Specifically, the domestic loans stood at 1,862.8 billion yuan, decreased 3.2 percent, foreign investment stood at 25.8 billion yuan, down by 51.4 percent, self-raising funds stood at 4,464.8 billion yuan, down by 3.4 percent, and other sources stood at 4,902.9 billion yuan, up by 11.2 percent. Among the other sources of funds, deposits and advance payments totaled 2,853.8 billion yuan, increased 6.4 percent, personal mortgage loans totaled 1,471.4 billion yuan, up by 21.3 percent." The use of personal mortgages to finance construction increased 21% YoY. Also, while floor space under construction is slightly up overall, floor space of new construction is down double digits, YoY.
But...
How far along is the rebalancing?
Retail sales continues its strong growth, for example, driven by rapidly rising wages and household debt:
Did some of this jump in auto sales have to do with the recent tax cut on the purchase of autos? Yes, and how long will this last? It has helped reduce dealer inventories, but they still remain high. From Reuters: "The fact that growth has remained weak this year in spite of a period of sharply falling retail prices suggests that poor consumer sentiment and economic uncertainty - rather than pricing and affordability - are to blame for weak demand."
Further, Sales of commercial vehicles remain down 10% YoY, and both imports and exports of autos and motorcycles were down double digits YoY. From the China Association of Automobile Manufacturers: "According to customs data sorted out by CAAM, in October, the total import of automobiles was 87,200 units, down 28.2% year on year, and the total export was 51,300 units, down 32.9% year on year. For the first ten months, the accumulated imports reached 907,400 units, down 23.6% year on year; and the accumulated exports reached 647,300 units, down 15.7% year on year." How much will a weaker Yuan help exports? Currency reduction of 5% this year certainly helps their competitiveness.
Also, China beige book "shows 'disturbing' economic deterioration" http://www.bloomberg.com/news/articles/2015-12-17/china-beige-book-shows-disturbing-deterioration-on-all-fronts-iiaunzjp
So where's the stimulus announcements? Will they be small and specific as recently, or broad and meant to calm fears like a few years ago?
Without the government stepping in, the Chinese economy will continue to decelerate. Do they use their massive surpluses, or save (some) for bailouts and currency support. Do they take on more debt? Or do they let it slowly sink, with a little help along the way, like the last few months' measures (see, e.g., Xi's 4 annihilations for 2016, including overcapacity)
Only thing to save construction and related mfg is for China to fund infrastructure projects globally...but, for the short term, could announce more stimulus measures: annual economic meeting concluded 12/18 (this is where they set the annual growth target, Xi wants to keep growth at 6.5 through 2020)...in order to hit the target in 2016, stimulus will need to be added...
DCB 8/14/15: "much of the surge in apparent capital outflows in recent months which was meant in the consensus narrative to scare Beijing off a weaker currency was ‘…the rational hoarding of USD export earnings by corporates with heavy offshore borrowing.’ In other words, it reflected rational balance sheet management and hedging for anticipated RMB weakness"
Slump in import prices flattering net export figures, but that should wash out of the GDP reports by 1H2016
a falling yuan is a calamity in the making as it will dramatically accelerate the commodity bust by restoring local Chinese commodity production macrobusiness.com.au
As the China is one of the biggest manufacturer and supplier of the solar energy plant equipments, fall in China's Economy cause a delay for For Solar Energy Plant in Gujarat.
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