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[loganair] 09/12/2015 17:26

Why China's problems are worse than investors think China's problems are worse than many people think, argues Fidelity's Dominic Rossi.

China's slowing economic growth has proved the catalyst for the bulk of the stock market upheavals throughout 2015.

Whether it is the rout in mining stocks which has reignited over recent days, the heavy stock market falls over the summer or the jitters prompted by the failure of the US to raise interest rates in September, China has played a large role in the uncertainty facing investors as they look ahead to 2016.

Pause for thought:

Dominic Rossi, chief investment officer at fund group Fidelity, argued that China's economic problems were worse than many investors thought, and should prompt a shift in broader expectations around emerging markets.

China's economic growth has been faltering since its double-digit expansion before the financial crisis, with the recent third quarter figures putting its annual growth rate at 6.9%. And last month, China's premier Xi Jinping said the country needed to grow by more than 6.5% over the next five years to meet its targets.

Those still bullish on China have argued that despite the slowing growth, the country is still the world's faster growing major economy, with even a 6.5% growth rate far outstripping growth seen in the developed world.

Deflation threat:

That is too simplistic a view, argued Rossi in a conference call with investors today. China faces a deflationary threat, he said, pointing to the producer prices index – a measure of the price of factory goods – which had fallen for 32 consecutive months. Consumer prices are still rising modestly, but experts fear the slump in factory prices will ultimately hurt headline inflation.

Any deflation will weigh on economic growth, as does the fall in the yuan, down 3.5% against the dollar over the year after China's shock series of devaluations over the summer. Contrast that with the US, where the economy is expected to grow by 2.5% over the year, against a backdrop of core inflation – excluding food and energy prices – of 1.9%, and nominal economic growth, accounting for inflation, is twice as fast in the US in dollar terms as in China.

'The key event in 2015 is the emerging markets crisis we are now in,' said Rossi. 'The importance of this is it basically means the emerging world has joined the developed world in a very low nominal growth framework. Up until now we have been quite happy to think of emerging markets as having a much higher nominal growth rate.'

Rossi believes that markets in 2016 will continue to be led by the US. He argued markets were still in the middle of a post-financial crisis cycle contrasting markedly with the dynamics of the market that prevailed in the five years leading up to the 2008 crash.

The expansion of shares valuations by an increase in the multiples – or premium – investors are prepared to pay for growth stocks, rather than a rise in profits, have driven the post-financial crisis rally. This has been lead by developed markets, particularly the US, with investors prioritising intangible assets like intellectual property over hard assets like commodities, with income investments also in the ascendancy.

Strong US:

Rossi sees no signs of that changing next year. 'Throughout 2016, we remain very, very confident about the health of the US consumer and we think the health of the US consumer will work its way through the developed world,' he said.

But returns for much of the market will be subdued by the already-high premium placed on income-producing assets, he said.

'We are living in a world where we have too much capital chasing too little income. We are effectively bringing forward future returns to today. The gap between present value of securities today and their future value has been narrowed.

'We are in an era of defiantly high asset prices. The returns by definition must be lower by historical standards.'

He argued that technology and innovation, especially in the US, was where growth opportunities remained, despite its already strong run.

'The only way within equities to escape this environment is to focus on the theme of innovation. The innovation we are seeing in information technology, social media, gaming, healthcare, medtech and biotech. It's this leadership in innovation whic is mainly captured by the Nasdaq. That leadership is here to stay.'

[loganair] 05/12/2015 21:31

Like Soviet Russia in 1959, has China's economy already peaked?

Structural over-capacity and falling productivity in many once-booming sectors means the Chinese economic model is now in crisis, Barry Norris, founder and CEO of Argonaut Capital

When in 1959, Nikita Khrushchev visited the US; the spectacular economic growth recorded by the Soviet Union was commonly regarded as a challenge to the supremacy of the western model of democratic capitalism.

Impressive statistics, such as its manufacturing output of tractors, mesmerised Western opinion formers. Newsweek warned that the Soviet Union might well be "on the highroad to economic domination of the world".

American economist Paul Krugman's economic analysis suggested this "economic miracle" could be explained simply by the "rapid growth in inputs: expansion of employment, increases in education levels, and, above all, massive investment in physical capital", and that the subsequent collapse of the Soviet economic model stemmed from its failure to increase "units of output per units of input".

With falling productivity, Soviet growth would inevitably slow as returns on investment diminished.

According to Krugman in 1994: "Living in a world strewn with the wreckage of the Soviet empire it is hard for most people to realise that there was a time when the Soviet economy, far from being a byword for the failure of socialism, was one of the wonders of the world – that when Khrushchev pounded his shoe on the UN podium and declared 'We will bury you', it was an economic rather than a military boast".

Perhaps there are parallels with perceptions of the Chinese economy today?

Tipping point:

The Chinese economic model has been to establish itself as the world's lowest cost manufacturer by utilising cheap (rural) migrant labour on an unprecedented scale, and then to recycle the current account surplus from these exports on an equally unprecedented capital spending boom.

Accordingly, as the supply of cheap (rural) migrant labour slows and capital build in manufacturing, housing and infrastructure outstrips sustainable utilisation then – without commensurate gains in productivity – growth will slow-down.

Given the economic model requires surplus savings to be ploughed back into new production, consumption remains relatively depressed. As with the post-1950s Soviet Union, there is a tipping point when the economic model stops working.

China's response to the global financial crisis in 2009 – a stimulus programme, equivalent to 16% of GDP – is now widely regarded as a policy error. Local governments were provided with bank loans to finance capital spending on infrastructure, housing and manufacturing in order to achieve mandated GDP targets.

Money supply doubled between 2007 and 2011, with over half of all bank lending directed toward infrastructure projects. Much of the capital formation was non-productive and wasteful.

The stimulus also resulted in local party officials enriching themselves through appropriation of revenues from land sales, kick-backs and often ownership of the construction companies involved.

This resulted in a conspicuous consumption boom amongst Chinese elites and more recently a subsequent backlash in the form of an 'anti-corruption' purge.

The Chinese banking industry has also weakened. No major economy can sustain annualised loan growth of 30% without a subsequent rapid deterioration in asset quality.

There is a general reluctance across the industry to recognise bad loans: liquidity to unprofitable or insolvent borrowers is simply rolled and, as such, the 'true' non-performing loan (NPL) ratio is likely double digit, compared to an incredulous official rate of just 2%.

At best, the Chinese banking system will find itself short of equity and unable to allocate capital to profitable ventures that support sustainable economic growth. At worst, lack of confidence in a rotten and corrupt banking system will result in a wholesale loss of confidence in Chinese assets.

Over-capacity:

The trade-off between the short-term pain of reducing excess capacity in a wide-range of economic activities and the long-term gain of more efficient mobilisation of resources is now widely recognised.

Nevertheless, it is difficult to see how capacity is shut down, as financing to 'zombie' corporates is often supplied by regional banks under the influence of local government, reluctant to create localised unemployment and unrest.

A symptom of this structural over-capacity is that factory gate prices (PPI) are currently falling at an annualised double digit rate. Only by adjusting nominal output by this massive GDP deflator can it be argued that Chinese manufacturing is still contributing to overall economic growth.

There is the potential for this excess manufacturing capacity to be at least partially absorbed by exports. But China is no longer the world's lowest cost manufacturer, not only because the supply of additional cheap labour has diminished, but because its currency (by virtue of being pegged to the US dollar) has risen significantly against its Asian peers (on a trade weighted basis 30% over five years).

The Beijing government sees a strong and stable exchange rate as politically desirable: in part given their desire for its prestige as an international hard currency; but also because of a lack of confidence in its economic prospects that a devaluation would betray.

[loganair] 16/11/2015 19:54

China could surprise:

Another important factor is China. Andrew Cole, senior investment manager of the recently launched FP Pictet Multi-Asset fund, said he was becoming more optimistic about the world’s second largest economy.

Although China’s devaluation of its currency in the summer revealed the economic concerns held by its leadership, Cole said Beijing had pulled all the levers at its disposal, with repeated cuts in interest rates and other stimulus measures to shore up the declining growth in gross domestic product (GDP).

Cole told Citywire this convinced him that ‘whatever the number [GDP] is it doesn’t get much worse from here. We’re starting to see tentative signs that China produces a positive surprise in 2016'.

His comments come amid mixed but positive data coming from China. According to today’s Financial Times, the outflow of capital from China reversed last month as the central bank and the country’s financial institutions bought a net $2 billion (12.9bn Rmb) in foreign exchange.

Although figures last week showed China’s GDP fell to 6.9% in the third quarter, its lowest annual pace since 2009 with industrial production at a new low, retail sales had grown 11%, a sign that the transition from a state-led to a consumer led economy was intact.

Car sales rose 13.3% to 1.9 million units in October, the fastest pace in 17 months, the FT reported.

[loganair] 09/11/2015 20:19

China Adds Another 14 Tonnes To Its Gold Reserve In October:

The title here is self-explanatory. China has continued to announce small monthly increases in its gold reserves as part of its new transparency of reporting, following on from its big upgrading of its reserve by some 600 tonnes back in June (supposedly six years of accumulated gold purchases). Thus China has been reporting supposed month-by-month purchases since, and these appear to have settled down to around 14 tonnes a month with an October increase at 14.01 tonnes.

But many Western analysts remain sceptical regarding the true levels of the Chinese monthly purchases - indeed of the real total level of the country's gold reserves, suggesting that they both may be far larger than is being reported. China doesn't want to rock the gold price boat is the theory, so it can continue accumulating a massive gold reserve which it sees as vital in cementing its place in the global economic hierarchy. First it wants the Yuan to become part of the IMF's Special Drawing Right (SDR), which would effectively give it reserve currency status, and a decision on this is anticipated shortly. One suspects that the U.S., which dominates the IMF, will eventually have to capitulate and let the Yuan in, despite the threat this poses for current U.S. Dollar global hegemony.

China's past record in hiding the real level of its gold reserves suggests it may still be doing so and, at a suitable time, will unveil them - or at least yet another substantial addition - but the first goal is the SDR. Once the Yuan becomes part of this the next phase of Chinese economic policy could come about. The Chinese always have played their economic cards very close to the chest and one suspects they may well be continuing to do so until their ultimate aim of having the dominant global currency, with all the trade advantages that brings, becomes reality. It is already the world's largest resource consuming nation and it may be only a matter of time before the petroyuan replaces the petrodollar and the Yuan the Dollar as the world's pre-eminent reserve currency. Time will tell.

[loganair] 05/11/2015 13:31

China’s back in a bull market.

Yep, you heard that right.

The country that inspired this summer’s market panic has now rallied by more than 20% since its August low point.

We’re long-term China bulls so I can’t say we’re disappointed. So what’s next?

China’s growth is nowhere near 7% – but that doesn’t matter

After a fraught summer, China’s Shanghai Composite index gained 10.8% during October, reports the FT. Add in more recent gains, and it’s up by more than 20% from its 26 August low point.

That bounce of 20% means it’s back in a technical ‘bull’ market (that 20% is a completely arbitrary line in the sand by the way, in case you’re wondering).

Following all the ‘China is doomed’ headlines of recent months, there’s been a scrabble of explanations for the sudden recovery.

The authorities have been trying to reassure everyone that they’re not completely useless by cutting interest rates and re-dedicating themselves to a 7% growth target for the year, notes the FT.

This sort of “things are getting better, it must be because the government has everything in hand” thinking is quite telling. It shows how well trained we’ve all become.

The reality is that China’s current GDP growth is nowhere near 7% and that particular number is very much a headline fiction – an aspiration and a figurehead, rather than anything approaching a reality. It’s not even something China’s authorities try to hide particularly.

What matters more is the direction of travel. As Capital Economics – whose own China indicator suggests GDP is a lot lower – points out, surveys of economic activity are “starting to turn the corner”. And “other hard numbers are moderately encouraging… growth has stabilised, albeit after a sharp slowdown earlier in the year.”

Meanwhile, the stock market has blown off a lot of steam. Outstanding margin debt (people borrowing money to punt on the market, basically) has fallen by more than half since its peak.

China is also loosening monetary policy a bit, but at the same time, it’s not embarked on a full-scale devaluation of the renminbi, which threatened to spill a wave of deflation across the developed world. In fact, the currency has strengthened in recent weeks.

In short, it’s not all about the authorities talking a good game and ‘steadying the ship’ – instead there are real, practical reasons why the market fell, and why it’s now recovering.

On the one hand, you had an overheated market that needed to correct, and on the other, you have a situation where deteriorating fundamentals have turned a corner and are starting to improve.

The best times for China lie ahead:

So what’s next? Asia expert Rupert Foster has been covering China for MoneyWeek magazine over the summer months.

In the early summer, Rupert spelled out the long-term bull case for China, but also noted that he expected a correction of around 20-30% before the summer was out, which would provide a nice buying opportunity.

So far it’s turned out pretty much to script. Rupert pinged me an email last night, updating us on his views. Here’s Rupert:

“I think what’s happened over the summer very much supports my case and undermines that of the perma bears. China is undoubtedly going through lots of change – some good and some bad – and the authorities are capable of mis-managing the situation, but the overall trends are incredibly positive and most Western observers and circumspect on the outlook at best.”

Importantly, the property market “continues to recover. Volumes are now up this year by 30% year-on-year with average prices up 3% in leading cities with national inventories having fallen from around 17 months to around ten months”. That’ll help with consumer sentiment and also help to allay fears about credit quality.

Keeping it short and sweet, the long-term bull case for China is very much intact and this turnaround is based on solid foundations.

So stick with it – and if you haven’t bought in already, you should. We’ll have more from Rupert in MoneyWeek later this month, and we’ll be discussing ways to get exposure to China.

[loganair] 28/10/2015 22:25

Buy China Now… And Retire Richer! By Peter Stephens:

The visit of the Chinese Premier to the UK has thrust the world's second-largest economy into the headlines. Clearly, the trade deals signed between the UK and China which are estimated to amount to over £30bn have split opinion, but for investors it seems to make sense to buy companies which are operating in the Far East.

That's because China offers unrivalled growth potential. Certainly, the days of double-digit GDP growth may not return for some time (or at all), but even with growth of around 7% per annum, its economy is increasing in size at more than twice the rate of the US economy. Therefore, investing in stocks which operate within the booming Asian economy could lead to much higher rates of growth than would be achieved if investors concentrated on domestically-focused stocks.

Of particular appeal are consumer goods stocks. That's because the Chinese economy is undergoing a transition away from being led by capital expenditure on infrastructure projects and towards being much more reliant upon consumer expenditure. And, with the Chinese population increasing and becoming wealthier, demand for products such as premium beverages, electronic goods and other consumer items is set to soar. In fact, with 44% of China's 1bn+ population due to be defined as 'middle class' by 2020 (up from around 28% this year), it is clear that the outlook for consumer goods sales is hugely encouraging.

Furthermore, as the last couple of decades have shown, branded goods are particularly popular in China. In other words, while demand for consumer goods in general is likely to soar due to the aforementioned increase in wealth and the rise of the middle classes, Chinese demand for specific, branded goods is likely to represent a significant proportion of this growth. And, with there being a relatively small number of companies which own the major brands in areas such as beverages, electronics, health care and other spaces, those companies could be set to benefit hugely from increasing growth.

So, for example, Diageo owns multiple premium spirits brands, while Unilever has a wide range of food and consumer products. These two companies are well-positioned to benefit from increasing Chinese demand alongside a number of others, although their number is perhaps smaller than many investors currently realise. Therefore, they have scarcity value.

Of course, Chinese growth is not going to be a smooth ride. Just like any other economy which has posted rapid growth in history, there will inevitably be bumps in the road. That is especially the case during this transitional period and, while the recent concerns surrounding China's long term future are understandable as the country's GDP growth rate comes under pressure, they present an opportunity for long term investors to buy in at even more appealing valuations.

The move from capital expenditure-led to a more consumer-focused economy does, meanwhile, call into question the future of resources companies. They have been hard hit by reduced demand for a range of commodities, but appear to have sound futures as a result of increasing demand for energy across the globe. In fact, energy demand is due to rise by 30% in the next two decades, with fossil fuels likely to retain a dominant position over renewables. So, while miners and oil companies are in the doldrums, they still offer strong growth potential in the long run.

Clearly, the future is a known unknown and there are no guarantees that China will deliver on its considerable potential. However, the risk/reward ratio appears to be very favourable and, by buying Asia-focused shares now, it seems probable that retirement will be a more prosperous period than would otherwise be the case.

[loganair] 29/9/2015 20:40

China is less ugly than you think

The thing is, China’s problems just may not be as bad as they look. Yes, we know that the official data is fiddled. But that’s not a new thing – we’ve known that for a very long time indeed.

And the fact that China’s economy is slowing isn’t new either. It started slowing in 2012. It’s just that not many people were talking about it then, or fretting about it as much as they are now.

It’s got to the point where we’re at the stage where investors are now so gloomy, that there is probably greater potential for positive surprises than for negative ones.

Here’s a very specific example: on Friday, sportswear giant Nike saw its shares rocket by 9%. Why? Partly because sales in China are going great guns. Sales of footwear in China and Taiwan “surged 36%” in the quarter to the end of August, and clothes sales rose 22%, reports Richard Blackden in the FT.

So, while the likes of Caterpillar and anyone who relies on the commodity extraction and production business are suffering amid the mining slowdown – as you’d expect – not every China-exposed company is feeling the strain.

And this isn’t restricted to individual companies. Despite the generally lacklustre economic data, and the understandable scepticism with which people treat Chinese data, various indicators suggest that things are turning around.

For example, as Bloomberg reports, its China Monetary Conditions Index improved for the second month in a row in August. That’s the “first back-to-back gain since 2013”. These sorts of improvements “in the past have tended to presage either an acceleration or a stabilisation in economic growth”.

But China may not be a feasible excuse to delay for very much longer.

[loganair] 28/9/2015 09:37

China Financial Gauge Improves, Offering a Signal for Growth:


Monetary Conditions Index has presaged past growth upturns.

This time, downward pressures on growth appear more severe.

China’s 10-month campaign to relax monetary policy is showing signs of an impact as financial conditions ease, a shift that could help stabilize the nation’s growth rate.

Bloomberg’s China Monetary Conditions Index, a gauge that includes inflation-adjusted interest rates and the exchange rate, improved for a second month in August -- the first back-to-back gain since 2013. Episodes of improvement in the past have tended to presage either an acceleration or a stabilization in economic growth.

The economy is muddling through a slump in exports and a downturn in investment growth thanks to an overhang of debt. The best bet for a pick-up may be continued gains in consumer spending, along with a turnaround in public projects -- and that’s where financing conditions come in.

"As monetary policy has been loosened, there has already been a sizable turnaround in credit growth that should feed into stronger economic growth over the months ahead," said Mark Williams, chief Asia economist for Capital Economics in London. "We’ll certainly see that in the monthly data in the fourth quarter."

Premier Li Keqiang has responded to the economy’s slowdown with policy easing measures including five interest rate cuts since November, reductions in the amount of deposits banks must hold as reserves, a surprise currency devaluation last month and increased fiscal support.

The HSBC China Monetary Conditions Indicator also rose to a six-month high in August, after stalling in July. The Bloomberg and HSBC gauges are designed to give a sense of how monetary conditions evolve over time, with higher values indicating looser monetary conditions and lower values signaling tightening.

"We expect more policy easing to generate a modest growth rebound" in the second half, economists led by Hong Kong-based Qu Hongbin, chief economist for greater China at HSBC, wrote in a note this month.

While financial easing isn’t always followed by a pick up in growth -- signs of relaxation in the spring of 2014 ended up being followed by a further slowdown in the economy later in the year -- the index’s current gain coincides with other evidence that things at least are not getting any worse.

The economy isn’t as weak as it may look, according to a private survey from New York-based research group China Beige Book last week, while data culled from China’s most-used search engine, biggest online outlet and main bank-card network also signaled stabilization.

Though China’s central bank started cutting rates last year, the impact was until recently offset by low inflation that kept real borrowing costs high, slow loan growth, and a strong yuan choking off external demand, said Bloomberg economist Tom Orlik in Beijing.

"Now those factors have started to reverse, monetary conditions are more accommodative, and that should start to put a floor under falling growth in the months ahead," he said. "No one is expecting a sharp rebound."

China’s policy easing must counter severe downturns in the real estate market and industry and likely can only mitigate the impact, said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong. Growth is likely to slow in the second half, ending the year at 6.6 percent, and decelerate to 6 percent next year, it estimates.

Underscoring weakness in China’s old-line factories, a government report Monday showed that profits at Chinese industrial companies fell the most in at least four years in August.

The improvement in monetary conditions is "a stabilizing signal that growth will likely moderate only slightly," to 6.8 percent this quarter from 7 percent the previous three months, said Daili Wang, a Singapore-based economist at Roubini Global Economics.

[binladin] 16/9/2015 09:17

The problem here is that a 10 percent increase on the Chinese markets these will. Give you 1 percent..so it's not worth investing here,...

[rupe1958] 24/8/2015 16:17

Discount to NAV over 22% here. That's a lot.

[loganair] 13/8/2015 20:38

'It’s becoming clearer that the capital outflows from China are accelerating, and the authorities might find it too painful to protect the currency because shrinking their foreign exchange reserves is equivalent to monetary tightening, and that is the last thing they want given the slowdown in their economy,' he said.

'In addition, there seems to be a willingness from the authorities to allow market forces to play a more important role in setting the exchange rate, given the recent recommendations from the International Monetary Fund.

'Markets are also beginning to wake up to the possibility that China might be forced to join the currency wars (given the poor recent export data and the strength of the [yuan] vesus the Japanese yen for example).'

[loganair] 27/7/2015 15:56

China is rattling markets around the world.

The Shanghai Composite Index tanked this morning, falling by the most since February 2007 – down more than 8%.

It followed economic data showing that Chinese industrial profits had fallen in June compared with the previous year, while manufacturing activity is dropping too.

So is this the end of China’s growth story?

Or is it just the beginning?

Why is China’s market plunging?

The Chinese economy is slowing down. Commodity prices and the value of ‘commodity currencies’ (such as the Australian dollar) are collapsing, amid fears that demand is gone for good.

Meanwhile, the rampant stockmarket surge we saw over the last year or so has come to an end. A market that more than doubled is now seeing a painful correction. Chinese stocks had managed – with the help of the government – to bounce back by around 16% from their 8 July low. But today saw a huge plunge in both mainland Chinese shares and Hong Kong markets.

It’s probably not just weak growth that’s unnerving investors. They might also be concerned about the government’s commitment to keeping the stockmarket propped up.

The International Monetary Fund (IMF) has been telling China that, while it’s OK to intervene in markets sometimes (they can hardly complain about it after all), ideally “prices should be allowed to settle through market forces”, reports Bloomberg. China responded by saying that all the measures they’ve put in place to prop up the market should be considered temporary.

China is seen as wanting to keep the IMF happy at the moment. So investors may be a little worried about the longevity of the government’s commitment.

“Investors are afraid the Chinese government will withdraw supporting measures from the market”, as one analyst told Bloomberg. “Once those disappear, the market cannot support itself.”

Slower growth for China is inevitable:

But take a step back and this isn’t quite as astonishing as the market volatility might make it seem. For a start, when a market rises at the rate China’s has, you can’t expect the inevitable corrections to be pretty.

Meanwhile, as far as the growth slowdown goes, this is entirely to be expected as well. As Roger Bootle notes in The Daily Telegraph, slower growth is an inevitable aspect of economic development. “When a country is extremely poor and undeveloped, it is easy to register rapid growth rates. China’s slowdown… is fully in line with the experience of other east Asian countries.”

In other words, we’ve seen this particular development model before. And it turned out pretty well for South Korea and Japan, for example.

Concerns about the government’s desire or ability to manage the stockmarket are perhaps more valid, in that the response so far has been rather panicky.

But then again, markets across the globe have been managed and intervened in heavily for many years now. The eurozone has only stuck together over the last few years because European Central Bank governor Mario Draghi said he would “do what it takes” to keep it all going.

And elsewhere in the world, we’ve got investors biting their nails over the impact of the Federal Reserve and the Bank of England potentially raising interest rates by minuscule amounts.

So ironically enough, China – perhaps the most heavily-controlled major economy in the world – is about the only place in the world where investors aren’t showing complete faith in the ability of policymakers to control and support the markets.

It might take the Chinese a while to get to grips with the best way to wield their power, but at the end of the day, if they want to avoid a destabilising crash in the stockmarket, they can do it. It also helps that they have a lot more room to cut interest rates if they decide to, than most other countries right now.

These are growing pains, not the end of the growth era:

The thing is, as an investor, you can’t expect an evolving financial system, and one accustomed to highly centralised government control, to give you a smooth ride.

But at the same time, if you’re willing and able to cope with the ups and downs, then the long-term outlook for China remains attractive. As my colleague Merryn has pointed out in the past, there are similar examples across Asia which suggest that China could be at the start of a long bull market, rather than on the verge of collapse.

In short, what we’re seeing here is a nasty bout of growing pains. In the longer run, we’d expect a sustainable bull market to take hold.

[loganair] 22/7/2015 15:19

China can overcome triple-headed growth challenge.

Franklin Templeton global bond fund manager believes China has the right strategy and enough firepower to pull through its economic transition.

Franklin Templeton’s Michael Hasenstab has backed China to overcome the challenge posed by its three traditional drivers of growth all grinding to a halt simultaneously.

The bond fund manager said in a comment piece that China was at a critical juncture for long-term growth but had the necessary tools to recover.

His comments come in the wake of a turbulent period for the Chinese stock market, which has undergone several seismic drops over the past quarter.

Focusing on the challenges facing the economy as a whole, Hasenstab said outsiders would be alarmed by the hurdles the government must overcome to achieve meaningful growth.

‘Its three traditional engines of growth have all stalled at the same time: The real estate sector is contracting after a protracted boom; local governments needing to deleverage have scaled back their investment; and many components of the manufacturing sector have been shrinking.’

However, Hasenstab said, the move to consumption-led investment would address some of these issues, while the service sector can absorb the job losses caused by China losing its competitive edge in cheap labour and manufacturing.

‘The faster growth of the service sector, which has taken over from industry as the leading job creator, should be enough to provide them. Therefore, the contraction in manufacturing, real estate and local governments has not caused an increase in unemployment – which would pose a thorny social and political problem,’ he said.

Hasenstab said he was mindful of China falling into a ‘middle income trap’ in this scenario, with sustained wage growth having to be underpinned by faster productivity growth.

‘Nonetheless, China appears to have adopted the correct strategy, and has supported its policies with other long-term reforms, such as capital account and financial market liberalisation aimed to improve capital intermediation and thus channel capital to the more productive parts of the economy,’ he said.

While overall positive, Hasenstab said significant risks were still evident in China.

He questioned whether the move to convert local government into municipal and provincial debt could potentially undermine the deleveraging needed at a local level. This, he said, would increase the likelihood of a hard landing.

Ultimately, Hasenstab expects the Chinese market to achieve a GDP growth closer to 6% over the next few years, which would support a fragile European recovery and also aid tightening of monetary policy in the US.

[binladin] 21/7/2015 14:14

This will fall now...

[loganair] 20/7/2015 15:28

One big mystery in the gold market has kept anyone interested in the precious metal guessing for the past six years.

How much gold does China hold?

Well, now we know. At the end of last week, China revealed the scale of its current gold holdings.

And judging by the market reaction, it was a massive anti-climax...

China’s hanging on to a lot less gold than anyone thought

In 2009, China held 1,054 tonnes of gold.

Now China is holding 1,658 tonnes of gold. That’s a jump of nearly 60% on 2009. By sheer size of stash, this makes China the fifth-biggest holder of gold in the world, overtaking Russia. (France, Italy, Germany and the US hold more, with the US holding the most).

Gold now represents 1.65% of China’s foreign exchange holdings. That’s up from 1.1% in 2009, but still way below the equivalent value for many other countries.

So in all, this is a big jump.

But it was also a great deal lower than anyone had expected. As Bloomberg reports, its own analysis service had thought that China’s gold stash could have tripled to 3,500 tonnes. That’s taken from looking at increasing mining output and ongoing imports of the metal.

Partly as a result of the disappointment, the gold price has slid.

You see, one of the narratives doing the rounds about gold has been that China was effectively aiming to back its own currency – the yuan – with gold. In some more aggressive variations of the story, China and Russia would team up to launch some sort of gold-backed currency to replace the US dollar.

The fact that China hasn’t been expanding its reserves as dramatically as expected suggests that this theory is either wrong or very premature.

Why hasn’t China bought more gold?

However, you shouldn’t just dismiss this in its entirety as a conspiracy theory.

There’s no doubt that China does want to increase the profile of its currency, and that’s exactly what you’d expect. China is clearly competing with the US to be global superpower and if it’s serious about that, then the yuan needs to become much more important to financial markets.

So while the idea that it wants to launch a gold-backed currency might be extreme, it would certainly like the yuan to be a ‘reserve currency’. And gold is one aspect of that. It’s no coincidence that the US holds the most gold of all the nations listed above.

China regards its gold reserves as a state secret. The main reason for updating on its gold reserves just now is that it would like the yuan to be included as part of the International Monetary Fund’s special drawing rights (SDR) basket.

The idea of the SDR is tricky to explain, but it’s almost a form of ‘Frankenstein currency’. Its value is based on a basket made up of the US dollar, the euro, the pound and the Japanese yen – the world’s four most important currencies.

The IMF will be updating on the composition of this basket later this year. China hopes to be included, and most economists surveyed by Bloomberg last month reckoned the currency – as much for political reasons as economic ones – will be included in SDRs from the start of next year.

That’ll be a sign that the yuan is coming of age, and a step towards it becoming a full-blown reserve currency.

So why hasn’t China stockpiled more gold? One reason is that it might find it tricky to do so without driving up the price. As the central bank put it: “The capacity of the gold market is small compared with China’s foreign reserves; if foreign exchange reserves were used to buy large amounts of gold in a short time, it will easily affect the market.”

Of course, China could be fudging the figures in some way.

China is also the world’s biggest gold producer. So as Bernard Dahdah at French bank Natixis put it: “It begs the question of what’s been happening to the gold produced that hasn’t been taken by the central bank”.

Questioning Chinese government statistics is hardly evidence of a conspiratorial mindset. The data can be made to put over the message that the Chinese government would prefer markets to hear. If you assume that China wants to reveal enough gold to persuade the IMF, but not so much that everyone starts asking what they’re up to, then you could argue that there’s every reason for it to understate its reserves.

We’ll never know for sure. But at the end of the day, as Joni Teves of UBS put it: “What matters now is whether the market believes they intend to continue buying”. If these figures are accurate, then China still has a way to go before its own gold pile comes close to matching those of its closest rivals. “They do appear to leave the door open to further purchases, which should limit the downside for gold.”

Our view on gold is that it’s worth having about 5%-10% of your portfolio in the physical metal as insurance against another financial crash. That still holds. And this might even prove a decent rebalancing opportunity.

[loganair] 17/7/2015 17:18

China learning the free market ropes By Graham Smith:

China’s brand of free market miracle for investors came to an abrupt halt earlier this month. Shares in Shanghai and Shenzhen have tumbled since June, giving up more than 20% of their value1. So what’s happened?

These falls follow a year of ballooning share prices, encouraged by a confluence of factors. Easy access to credit to buy shares and falling property prices were two of the main ones.

To top that, Connect, a programme joining the Hong Kong and mainland markets, got underway last November. The significance of the link was that it gave foreign investors the opportunity to invest in domestic shares via Hong Kong. Domestic retail investors envisaged a wall of overseas money heading eastwards.

Once the bull had started charging, domestic individuals accentuated the trend, much of it with borrowed money.

Since the market went into reverse, investors have rushed for the exit, raising cash to settle their debts. Beijing has announced a number of measures, including a cut in interest rates and a partial ban on short selling (that’s where investors use financial instruments to borrow then sell shares in the hope of returning them to the owner at a lower price, later).

One of the problems is that China is freeing up its markets for the first time in a modern, highly interconnected world. That puts Chinese markets and the inexperienced domestic investors who have been trading them at the mercy of market forces. China’s free-market predecessors opened their markets in an age when dealing in shares was considerably more unwieldy.

There are, perhaps, possible parallels to be drawn with the 1987 global markets crash, at least as it played out in Britain. The UK government’s privatisation programme of the day had introduced many to share ownership in the years leading up to the collapse. Some new investors had recycled their profits from companies like British Gas and Rolls Royce into other shares, some of them decidedly lacking in “blue chip” credentials.

The intriguing thing was that, though the crash came as something of a shock and short-term investors lost money, sentiment recovered quickly. One of the surprising facts about 1987 is that the FTSE 100 Index ended the year higher than it had been at the end of 1986, despite encompassing a “crash” in October.

It seemed as though, perhaps because the crash was over quickly, that millions of new investors had embarked on a path that was irreversible.

That was then though. During the financial crisis of 2008, a ban on short selling was introduced in the US and elsewhere, supposedly to stop the rot in global markets. The reality was these bans did nothing of the sort for three reasons.

First, would-be short sellers became pent-up sellers, who would go on to pressurise markets as soon as the bans were lifted. Secondly, they sapped the confidence of other investors, who knew they may be buying shares in a “false market” only to have any gains they might make in the short term wiped out later when the sellers returned.

Finally, and most importantly, the ban did nothing to improve the inconvenient truth - that credit had dried up and the world economy was headed for a deep recession. In other words, the economic fundamentals were poor.

So for China, two questions remain. Can the economy continue to grow at a fast enough pace to justify current share prices? And will China’s path to free markets continue despite current difficulties?

This week we learnt that the economy grew at a 7% annual rate in the second quarter of this year, with retail sales increasing by 10.6% year on year in June. That’s a bit better than expected and suggests the economy is stabilising after a prolonged slowdown.

The government will know that the liberalisation of China’s stock markets must continue. Healthy stock markets bolster the coffers of consumers – attractive for a government trying to reduce economic reliance on public spending and exports. Companies benefit too, from having an alternative source of financing other than bank loans, an important factor in China where there’s too much debt in the financial system.

For long-term investors, the opportunities might seem to beckon. Just as in the dot.com bubble of the 1990s, smaller, less liquid shares have travelled the steepest paths up then down, while many larger, higher quality names have been less affected. Meanwhile, the government has all the firepower it might need to combat any additional stresses built up in the financial system.

Notwithstanding caveats about market interventions, volatility is most likely to have created opportunities for those with patient strategies.

[binladin] 17/7/2015 11:28

The net assets should decrease on Monday..

[loganair] 17/7/2015 11:20

George Magnus who is senior economic adviser to UBS, and also an associate of the Oxford University China Centre - The Chinese stock market is going back down to where it came from. In the next 3 to 5 years expect a 4% growth rate which is pretty good during the Consolidation phase.

[loganair] 10/7/2015 18:31

I think one important point to note is that JMC also includes Hong Kong and Taiwan therefore JMC hasn't risen quite as far as the Chinese stock market did and visa-versa doesn't fall by as much.

[hydrus] 10/7/2015 17:30

Yes will be interesting to see. It's quite hard for westerners with little knowledge of Chinese society (ie people like me) to get a sense of how the market intervention will play out.It could mean that investors think that losses are subsidised by government meaning they pile in or it could be as poster above sets out.