Update 9 – Global Economies Heading For Turbulence, Watch Out China
August 12th, 2011 | 
Author: Global economy turned amber this week, I warned of this on 21 May 2011 at
Seemingly 8 weeks “behind the curve”, our most learned Finance Minister, Mr. Tharman Shanmugaratnam, shared the same sluggish global economic thoughts on 17 July 2011 Sunday Times headline read. He, however, eviscerated the possibility of another 2008 global financial meltdown as remote. I certainly disagree with that.
METAPHORICALLY SPEAKING, I BELIEVE THE PREVAILING ECONOMIC CONDITIONS WILL “PAINT THE WHOLE TOWN RED” soon.
We came close to US sovereign debt default disaster, had it not for the down-to-the-wire compromise in the “love-making” between OBAMA (the flea?) and the “elephants” on the upward revised US debt ceiling over the previous weekend.The global economy, to me, is turning red from amber.
The share market carnage has already begun globally; the next chapter could be the banking meltdown of risks aversion, taking global economies down the rapid slippery slide.
Until this 17 July 2011 shift, the Monetary Authority of Singapore had been bullish on global economy despite the repercussions of the Fukushima nuclear/earthquake disaster and oil supply disruption emanating from the Libyan civil war.
MAS’s half-yearly macro-economic review released on 27 April 2008 had been very bullish – GLOBAL ECONOMY ON SUSTAINABLE PATH: MAS, written by Joanne Lee, page C28, Straits Times, 28 April 2011.
What is the reality in the interlude?
Firstly, there was a HUGE DISCONNECT between the bubbly financial markets and the underlying global economies. Nestle, which spent 60 billion Swiss francs on food raw materials in 2010 reported strong buying by investment funds into commodities because these offer better return than equities.http://www.theaustralian.com.au/business/news/nestle-faces-big-commodity-price-rises/story-e6frg90o-1226071786151. Not surprisingly, US corporate insiders have been selling their shareholdings in entities they manage since June, even as stock market was declining – an ominous sign of shift in insider behavior and loss of confidence in the real economy. http://blogs.marketwatch.com/thetell/2011/06/07/corporate-insiders-are-selling/And they recently accelerated the selling of their companies’ shares.http://www.marketwatch.com/video/asset/corporate-insiders-are-selling-faster-than-usual-2011-07-28/51167DFD-4376-4EC6-AD0D 41BBCB755638?siteid=bigcharts&dist=bigcharts. Insiders obviously don’t believe in the sustainability of the debt-funded rally in the equities markets or the sustainable benefits of the much-hyped hoped-for recovery arising from the QE2 spending boost.
- THE FAILURES OF QE2 MONETARY STIMULUS
Contrary to what Professor Linda Lim, Professor of Strategy, Ross School of Business, University of Michigan, said in Straits Times read – What’s up with the world economy, Monday, July 11, 2011, A17, the US Federal Reserve’s second round of “quantitative easing” (QE2 monetary stimulus) did NOT averted the feared “double-dip” recession, and deflation. In my view, it merely delayed it. The US first qtr GDP plunged steeply to a shocking final 0.4% growth compared to the US Bureau of Economic Analysis (BEA) final estimate of 3.1% preceding qtr. http://useconomy.about.com/od/economicindicators/a/GDP-statistics.htm . The final qtr of 2010 GDP boost had the benefit of seasonal upturn of increased consumer spending over Christmas but the long term deceleration remains. The revised 0.4% first qtr 2011 GDP statistics is also a big fall from the third estimate of 1.9% GDP growth of the BEA.http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm. And this weak performance of the US economy had not yet been even negatively impacted upon by the supply chain disruptions to US manufacturing resulting from the Fukushima earthquake/tsunami disaster of 7 April 2011.
About the only “successful damage” of this US QE2 injection did was it successfully triggered a speculative liquidity-driven global commodities and share market boom in the first quarter of 2011
The negative impact of that on the real economy was partnered only by inflationary spiral globally and a falling US dollar. In just 6 months, the US currency depreciated about 8% against Euro, Australian dollar, Singapore dollar, Korean Won, 4% against Canadian Loonie, Malaysian Ringgit, UK Sterling Pound, Japanese Yen and an awesome 16% against the Swiss Franc. Against the Chinese RMB, it depreciated only 2.5% and remains unchanged against the HK dollar.
This author had forewarned of big fall of the US dollar since 16 September 2010. http://global-economies-outlook.blogspot.com/2010_09_01_archive.html. The US Dollar index future had fallen from 82.74 since end-August 2010 to currently around 74.26 – more than 10% decline in less than a year! Any further steep decline in the greenback from this point risks a steep rise in the US interest rate to support the dollar and forestall imported inflation. That could potentially wreck the US economy.
- BASE METALS SHOWED NO EFFERVESENCE AS CHINA TOOK TO MONETARY POLICY TIGHTENING
Base metal prices had been falling for much of the last 6 months even as the US dollar is falling instead of moving in the opposite direction. The reasons included among many – the Chinese have been destocking their stockpile of base metals. Rising industrial & infrastructural construction demand from recovering economies globally, excluding China, have not kept pace evidencing global recovery momentum had been dogged by Fukushima tragedy and the aftermath of political crisis in Middle East and North Africa (MENA). Global economies were struggling, feeling the impact of Fukushima’s natural disaster and MENA’s political turmoil, and in China, the slowdown of economic activity consequent upon increasing tightening of banking credit. This author has no recollection of major natural disaster having no durable impact on global economies – Cyclone Yasi (Feb. 2011), Chilean earthquake (Feb 2010) Chinese snowstorm (December 2008) all left negative impact. So why is Fukushima “Black Swan” event any different – particularly no reconstruction of earthquake damaged zone is possible given durable radiation damage to environment? Even with the recent steep rebound, 6 month base metal prices were down for nickel but are now at the same level for copper, nickel, zinc and aluminum despite big fall in the US dollar. Latest trade figures show Chinese demand elasticity to and negative imports of copper and tin in the face of rising prices. Metals with falling prices attracted Chinese buying, notably aluminum, nickel, lead and zinc. The “effervescence” in Chinese demand for base metal seems to have taken a momentary freeze. There are two tell-tale signs. Societe Generale warned recently that the Chinese construction boom could be stalling. http://www.marketwatch.com/story/china-construction-boom-may-be-stalling-socgen-2011-06-24. That is bore out in Chinese June PMI statistical read. Consumer spending on autos were sharply down and forecast to continue the only on a moderate growth rebound trend forward.http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/1139733/1/.html. China’s import growth decelerated sharply in June to a 19.3 percent annual pace from May’s 28.4 percent – the slowest pace in 20 months. June exports rose 17.9 percent from a year ago, slowing from a 19.4 percent rise in May. The former evidenced how fast the Chinese economy is slowing as a result of broadening impact of monetary tightening and the latter points to slower global demand as rising material and labor costs squeezed margin. http://sg.news.yahoo.com/china-june-import-growth-weakest-20-months-063939188.html. Chinese may be getting tired of building more ghost towns beyond the notorious Kang Ba Shi http://www.bloomberg.com/news/2011-07-13/china-cities-sell-land-at-winnetka-values-with-bonds-seen-toxic.html There are no positive economic news coming out of China. Only big negative news – namely hiking its banking reserve ratio for large institutions for the 6th to 21.5% effective June 20 2011.
- GLOBAL BANKING STILL GOING THROUGH HARD TIMES
Thirdly, there was hardly any compelling reason to celebrate stock market ebullience anywhere even before this week’s financial market turmoil. Banking stocks have been underperforming wider markets in North America, Australia and in Europe since year beginning. Eight European banks recently failed the stress test.http://finance.yahoo.com/news/8-banks-flunk-controversial-apf-202243619.html?x=0&sec=topStories&pos=7&asset=&ccode=. And another 16 barely scrapped through. Except for JP Morgan Chase, all major US banks continued to report revenue slides. If major US banks are not expanding its business and revenue base, how could the US economy is growing beyond a tepid pace? Two years after the GFC, Bank of America’s second qtr results is still “absorbing our legacy of mortgage issues” while Citibank “improved” results has been “ driven by a continued release of loan loss reserves” – legacy of hollow log accounting, leaving Vikram S. Pandit still to hunker down the rest of Citigroup’s troubled business . http://www.thestreet.com/story/11186409/1/citi-blows-out-the quarter.html?puc=tscmarketwatch&cm_ven=tscmarketwatch. Banking is dog’s business in current economic climate, particularly in EU. Resurgent spreading sovereign debt crisis cut Barclays first half earnings by 1/3 and it is retrenching another 3,000 employees before this year is out. http://finance.yahoo.com/news/Barclays-to-cut-3000-jobs-as-rb-3164624384.html?x=0&.v=2. Despite unveiling stronger pre-tax results of $370 million compared with the first six months of 2010, while total revenues edged ahead to $35.7 billion, HSBC, Europe’s biggest lender, announced staff cutbacks of 30,000 globally over the next 2 years but also selectively recruiting. Banking business have changed from retail focus to big computerisation and focussing on relationship management, and more than ever so, the criticality of prudent risks containment. One cannot help it but noticed that HSBC’s razor-thin pre-tax margins translated to 1.03c in a dollar of risks exposureforcing the massive restructuring of its banking operation to save $2.5-3.5 billion in costs by 2013. This is indicative of how tough the global economic landscape is.http://sg.news.yahoo.com/hsbc-axe-30-000-jobs-bumper-profits-131344054.html
- FUKUSHIMA NUCLEAR DISASTER TOSSED JAPAN INTO A RECESSION
Over in Japan, the economic story is even more somber. In the first quarter, the economy shrank an annualized real 3.5 percent. Private sector economists forecast another 2.6% real annualized rate of economic decline for the April-June qtr, noting the drag in industrial production and export shrinkages arising from the Fukushima earthquake and tsunami impact. Technically, Japan is in recession.http://mdn.mainichi.jp/mdnnews/business/news/20110801p2g00m0bu087000c.htmJapanese auto industry is recovering from Fukushima but there is greater worry that its steel industry could be constrained by further nuclear power shutdowns leading to power shortages ahead. http://www.steelguru.com/international_news/Japanese_earthquake_-_Fukushima_nuclear_power_shutdown_may_impact_steel_industry_-_JISF/216428.html
- RISING OIL AND STEELMAKING FEEDSTOCK PRICES EXACERBATED WORSENING INFLATION
Growing economic strength in developing countries face strong headwinds of rising inflation as oil price spiked to triple-digits again not seen since 2008. In contrast to base metals, crude oil and coking coal, priced in US dollar terms, rose sharply. Brent crude oil is up 24% over 6 months to currently around US$118 per barrel. http://www.indexmundi.com/commodities/?commodity=crude-oil-brent Wesfarmers recently reported 58% increase in Australian hard coking coal prices for the April to June qtr. to roughly US$320 per tonne FOB. http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9ODgxNTR8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1. All thanks to the damaged coal fields and infrastructure in Queensland after the February 2011 Cyclone Yasi. The International Energy Agency (IEA) June 2011 release of 60 million barrels of oil spread of over 30 days from strategic reserves of 27 member countries was an exercise of futility. http://www.epmag.com/2011/June/item84535.php. It can only be a case of false positive negative impact. False positive is because the quantum would not even satisfy a single day consumption of roughly 85 million barrels and not one of the oil consuming countries would be prepared to release more since.http://www.cnbc.com/id/43849352/Oil_Consumers_Decide_Against_New_Stocks_Release. And it is a negative because the depletion of stockpiles needs to be replenished against a background of supply/demand imbalance still incapable of solution in the immediate future. Libya’s shutdown of oil production has short term supply shortfall impact and long-term enduring damage to its oil production capacity. Libyan oil production is mainly light sweet crude while the Saudis pumping more, are mainly sour heavy sulphur crude more demanding of costly refining process . Libyan oilfields are likely to have been significantly damaged without properly-managed shut-down procedures undertaken as foreign workers fled the civil war in a hurry.
Of course, these rises in oil and steel-making feedstock input costs hurt China more than anyone else and, pertinently, most unhelpful to Chinese costs of steel production. Average steel production costs for Chinese steel mills rose 27.5 percent in the first quarter from a year ago. Coking coal costs climbed 15.17 percent and iron ore import costs surged 54.4 percent. It is still on the rising uptrend. Average profit margin is razor thin, at around 6% pre-tax currently. http://www.mineweb.com/mineweb/view/mineweb/en/page39?oid=126020&sn=Detail. China is the world’s largest steel producer and exporter – so manufactured costs of consumer and industrial durable goods must escalate going forward.Now who says inflationary pressures are temporary?
The above observations tell me the recent Chinese raging and escalating inflation has its origin other than volatile base metal prices. It is crude oil and critical feedstock in steelmaking that translate into higher production costs. As the Chinese Yuan fluctuates around 2.5% of the falling greenback, Chinese currency is also falling relative to all other major currencies like the Euro, Australian, Canadian, Sterling Pound and particularly Swiss Franc, imported consumer goods and raw material imports into China have become a lot more expensive than the 6.4% June CPI suggests. As we all know, the cost of living devil rises much higher on the supermarket shelves than the statistical CPI ghost. Adding to that is the Chinese seemingly insatiable cravings on all consumer goods foreign-made, consumer inflation spiked up will continue to uptrend though much will not captured in CPI calculation. That pressure is amply reflected in unprecedented wage cost spiral across China.ttp://www.financialpost.com/opinion/businessinsider/wage+inflation+mess+breaking+over+China/5058536/story.html. With labor shortages in coastal industrial zones, wage Inflation is unlikely to let up any time sooner as food prices also continue to escalate. Both wheat and corn – the staples of global food system – have rebounded as so is oil price. http://www.cnbc.com/id/43762905. Livestock sector demand adds to total consumption despite rising prices for wheat. And likewise, competitive bio-fuel demand for corn is underlying long-term pressures – these are unavoidable and escalating. The much hoped for inflation breather for the 2nd half of 2011 seems to have evaporated. . Inflation has taken a strong hold in China and China is exporting inflation to the rest of the world instead of deflation previously.
- TEPID US ECONOMIC RECOVERY LARGELY BYPASSED AMERICAN CONSUMERS.
All the major economies – EU, Japan, China and USA saw slumping consumer confidence but much of the world didn’t notice at all. It is amazing to this author that record corporate profit in US corporate history in the so-called “economic recovery” were matched by the slowest pace of new home sales ever- according to data released by the BEA. Sales of existing home fell again in June to a 7-months low, in effect, signaling a housing second dip. This economic recovery bypassed US consumers, leaving fearful consequences ahead of the likely un-sustainability of forward recovery efforts and outlook.http://www.wsws.org/articles/2011/mar2011/econ-m26.shtml
- CHANGED CAUTIOUS AMERICAN CONSUMERS POST-GFC ADD TO A MISERABLE RECOVERY AFTER MISERABLE RECESSION.
Equally astounding is that US consumers’ new found thriftiness. American consumers, particularly the baby boomer generation, with little prospect of re-employment and income generation forward, has changed substantially, post the GFC – but not their dependency on credit card for groceries spending. Cheaper US dollar means higher food, energy and clothing prices are at record levels as imported inflation hits home. Consumers in US are relying on credit to pay for necessities such as food and gasoline as inflation and cheaper greenback erodes disposable income. http://www.bloomberg.com/news/2011-07-21/consumers-in-u-s-relying-on-credit-as-inflation-erodes-incomes.html. Poorer segments of US consumers are living hand-to-mouth and the wealthier ones trickled down to simplicity of shopping at Wal-Mart in place of more expensive specialty outlets. http://www.marketwatch.com/story/discount-stores-attract-plenty-of-wealthy-shoppers-2011-06-24. Discount stores now attract plenty of wealthy shoppers. Retail sales excluding autos, gasoline stations and building materials, had the smallest gain in June in 11 month are signs of deteriorating economic conditions, not an improvement. What is good for Wal-Mart is not necessary a good indicator of the true state of the US economy in terms of consumer spending.
The US is now seeing stronger corporate earnings with stronger balance sheets but dying consumers, oppressed also by inflated housing burden, energy and food prices and no increase in disposable income to spend. In the words of Martin Wolf, the US economy is a story of “miserable recession and a miserable recovery.”http://finance.yahoo.com/blogs/breakout/economic-downturn-years-unravel-wolf-180823003.html. External stimulus via QE1 and QE2 has been proven not to be working, so the recovery would need to be a long drawn out process. Large investors in the US are getting nervous just as US businesses were near the end of its 2nd qtr corporate results season. http://finance.yahoo.com/banking-budgeting/article/113238/large-investors-nervous-marketwatch?mod=bb-budgeting
- CONSUMERS GLOBALLY ARE ALSO RETRENCHING DEBT AND SPENDING
Elsewhere, falling US dollar means rising costs of imported consumer goods driving consumers out of shopping malls. It is the same retailing sentiment even in places like Canada. http://business.financialpost.com/2011/06/21/canadian-retail-sales-lacklustre/. Statistics Canada showed the inflation rate hit an eight-year high of 3.7% in May. As incomes are unlikely to exceed inflation, Canadian consumers are shopping frugally to reducing debt level.http://www.financialpost.com/personalfinance/Consumers+shop+around+prices+rise/5131151/story.ml. And Australia is no different. http://www.bbc.co.uk/news/business-14009797. Over in Australia, the mining boom created a two-track economy prospering on a resource sector boom but Interest rate hikes to curb inflationary pressure on housing had strong negative impact on retailing. There is now a global slump in consumer confidence – the lowest since late 2009, according to a Nielsen survey. http://www.newsdaily.com/stories/tre76g1lh-us-nielsen-confidence-survey/ Whilst it is true that a lot of corporate worldwide have eclipsed pre-recession profit levels, this was achieved only after having gone through aggressive cost-cutting restructuring exercises since 2009. Strongly negative interest rate environment also subsidized corporate earnings but people forget that this is a finite phenomenon that can’t last forever. For most of the rest, it has been largely a jobless recovery and one accompanied by falling living standards for bargain-driven consumers. This is even true of Chinese retailing sector. http://www.cnbc.com/id/43712712. Luxury retail malls are largely deserted.
- EURO ZONE SWIMMING IN SOVEREIGN DEBT CRISIS SINKING AGAIN
Euro zone is constantly challenged of its debt overhang. Weak growth in slowing economy amid bouts of eruption of sovereign debt crisis threatens the funding requirements of European banks. IMF warns of capitalization of banks in Europe as relative low, especially compared to US. http://online.wsj.com/article/BT-CO-20110714-712179.htm. This makes financial systems in Europe less resilient to systemic shocks. As of current indication, Italy, Euro zone’s third largest economy and too big to rescue by the ECB in any crisis, suffered a deep contraction and Spain moved into negative territory.http://business.financialpost.com/2011/08/03/for-world-investors-its-the-economy-stupid/The 17-nation Euro zone’s service PMI slid to 51.8, as Germany and France which had propped up the tepid EU’s growth also fell closer to the 50 contraction divide. Italy services sector suffered two consecutive qtrs of decline and Spain’s service index fell to 46.5 compared to June reading of 50.2. The Markit Euro zone manufacturing PMI fell to 52.0 from 54.6 in May which itself declined 3.4 from preceding April read of 58.http://www.ourbusinessnews.com/euro-zone-june-manufacturing-pmi-falls-to-52-0/. The two months consecutive output weakness is the greatest extent of decline since late 2008. Under threat of inflation and despite the weak growth, the ECB hiked interest rates by 25 basis points to 1.5% on 7 July. It aimed at tackling inflation now running at 2.7% (against an ECB target of 2%) despite Euro zone’s intensifying debt crisis. Higher currency and interest rates prevailing relative to the US must dampen its competitive prospect for recovery as US economy itself also showing increasing signs of stalling.
WHAT PROSPECTS GOING FORWARD?
- MANUFACTURING PMI ARE FALLING
Let us take a peek into the July-September qtr early economic indicator. US manufacturing activity barely grew in July. Its Institute of Supply Management gauge in July declined 4.4 points to 50.9, the worst reading since July 2009. http://www.marketwatch.com/story/ism-manufacturing-gauge-falls-to-two-year-low-2011-08-01?siteid=bigcharts&dist=bigcharts.China, Russia, UK, Spain, Greece all reported sub-50 PMI readings of manufacturing contraction. HSBC Brazil July PMI reading came in at 47.8, the second consecutive sub-50 reads below the no-change 50 line. India’s factory growth slide for the third consecutive months. The HSBC Markit Business Activity India Index fell to a 20-month low of 53.6 in July from 55.3 in June. India’s 10-year benchmark bond yield shot past 8.3% making Government borrowing prohibitively expensive to fund development projects.http://sg.news.yahoo.com/high-bond-yields-impact-govt-borrowing-source-062942568.html
These figures are universally bad, stretching from US, EU, to developing economies like Russia, Brazil, China and India.
- STEELMAKERS ARE TELLING US MORE BAD NEWS OF GLOOMY OUTLOOK
If steel-making is any reliable early signpost of possible turnaround in manufacturing, it does not look good either. China is the world’s largest steel producing and consumer nation. Chinese steel production peaked in May, is expecting a seasonal slowdown as summer power outages in July/August due to nationwide “load shedding” reduction of pressure on its overwhelmed power grid as consumption peaks.
After posting a 17% fall in qtrly earnings, POSCO, the world’s third largest steelmaker warned of weakening demand growth and high input costs. Record Chinese production is flooding the market. POSCO warned of high prices of iron ore and coking coal, which rose between 25 and 47 percent quarter on quarter in April-June, show no signs of a sharp retreat due to tight supply. POSCO is only expecting a gradual recovery after it bottoms (if any) out in the third qtr. Autos, appliances and construction accounts for nearly 70% of aggregate customer base of steelmakers. Despite seasonal slide in Chinese production in July-September qtr, POSCO is not expecting an improved outlook of demand and pricing resistance in the market-place.
American producers U.S. Steel and AK Steel also warned of reduced earnings in the July-Sept period, echoing comments last week from Korea’s POSCO.http://www.reuters.com/article/2011/07/27/steel-idUSL3E7IR18K20110727. Contrary to earlier bullish outlook by all three Detroit automakers, US car manufacture is much less upbeat after a tepid sales growth in July as American consumers are pulling back on car purchase. http://biz.thestar.com.my/news/story.asp?file=/2011/8/3/business/20110803084851&sec=business
Acelor Mittal, the world’s largest steelmaker, supplying 6% to7% of the world’s steel production but not dependent on Chinese market, also forecast a seasonal dip in this coming qtr. http://www.bbc.co.uk/news/business-14304503. All steel producers are expecting Chinese public housing sector construction for long steel products to offset expected decrease in private sector housing. Short steel products used in autos and household appliances in China may still weaken if consumer confidence is further adversely affected by inflation. Just like Singapore, the authorities in China placed limits on new car in Beijing hampering demand growth. And right now, consumer confidence is also under severe attack in US and EU. There is real fear and doubt whether the euro zone can overcome its sovereign debt woes. Italian and Spanish bond yields have surged to 14-year highs. http://www.reuters.com/article/2011/08/03/us-eurozone-idUSTRE7712HB20110803. And Chinese auto production picked up only marginally in June after huge decline in April and May. Only Chinese steel consumption surged past the pre-crisis level since early 2009 but developing economies are approaching. See page 9 athttp://www.arcelormittal.com/rls/data/upl/627-55-0-0 110303FinlaPresentationAutoInvestorDay.pdf Developed economies still have a long way to climb to reach there. As steel consumption typically lags economic recovery, the steel consumption pattern post-GFC shows how little the developed economies have recovered of capital investment and consumer durable spending in the last 2 years. If Chinese steel consumption stumbles badly, it would indicate that the world economies are in big trouble.
Steelmakers and consumer confidence are telling us no good times ahead.
AT THE MACRO LEVEL, CHINA IS YET THE LAST DEFENCE BUT A WORRISOME ONE.
- MONEY PRINTING, GOLD, INFLATION, INTEREST RATE & DEBT UNSUSTAINABILITY.
Bernanke attributed the slow interim US GDP growth to temporary factors like gasoline prices pulling back consumers spending and supply disruption caused by Japan’s disaster slowing industrial production. But the real culprits were depressed housing market, credit tightening, and stubbornly unyielding unemployment. These are longer durable malaise undermining consumer confidence. Moreover, elevated gasoline is only part of a generalized imbalanced demand-driven (relative to supply) inflation and, more serious is the liquidity-driven price speculation sweeping the entire world ranging from real estate, base metals to food and traded equities. After QE2, the world is flooded with borderless liquidity stimulating assets bubbles across much of Asia and these are debt-funded. EU, USA, and China were big on printing money to spend on stimulus BUT NO ONE THOUGHT ABOUT THE CONSEQUENCES NOR THE EXIT STRATEGY THAT WON’T UNDERMINE THE REAL RECONOMY if it fails. It is too late now to stare at failures right before our eyes.
The evidences are plenty.
Bank of Korea bought bullion for the first time recently – its first purchase of gold since the Asian currency crisis of 1997-1998 as gold price keeps hitting new peaks. Central bankers are fearful of the brittle global economic recovery and the precarious debt situation in Europe and USA, the implied volatile currency yield risks of US 10-year bond yields, and waning faith in so-called safe-haven paper currencies such as the US dollar, euro. Inflation too, has been rampantly running ahead of target in India, China, Europe, Canada, and Australia and is at multi-year high. From net negative sellers of gold in the last decade, central bankers turned net positive net buyers globally. It is easy to understand the bearish sentiment prevailing among economists of prospects for near-term recovery of economies of USA, Europe and Japan.
In Europe and US, consumers refuse to spend, banks refuse to lend, businesses refuse to hire, corporate refuse to invest in fixed capital investment, the economies either stalled, stalling or crawling at a pace little faster than stagnation but Central bankers clueless on what to do next other than buying gold bullion in fear of doubtful value of paper money in a sea of raging seemingly unstoppable inflation surging beyond target rate, rising debt worries, volatile treasury yields, waning faith safe-haven currencies like greenback and euro etc.
Even central banks from poor developing countries like Mexico, Blanga Desh, Bolivia, Sri Lanka, India, Brazil, and most recently, Thailand and Russia are buying gold which promises only risks but no coupon or interest return by gold leasing to gold producers.http://www.reuters.com/article/2011/08/03/businesspro-us-gold-reserves-idUSTRE7722IK20110803.
Interest rate is set to rise globally, despite tough economic conditions. The reason, this author, argues is that, rising food, material, energy prices are feeding into wage inflation which seeps into inputs of manufacturing costs WITH VICIOUS CIRCLE OF FEEDBACK LOOPS INEVITABLY. The speed at which oil price rebound from two-digits back to triple-digits of Brent sweet crude despite the IEA stockpile release proves my point. Coking coal, iron-ore price seems immune to the glut of global steel supply and see how fast wheat and corn price bounced up steeply again. The Asian and Australian property bubble s are set to burst and needs to be so before Asian finds itself envelops by the same sub-prime intractable crisis engulfing them in a banking crisis and wrecking their economies exactly the same way much of Europe and USA followed Japan’s lost decade.
With rising interest rates, the debt profile of USA and most of EU (except Germany) raises question about their debt sustainability.
FISCAL DISCIPLINE IN US AND EUROPE MEANS SLOWER GROWTH.
Greece’s 10 year bond rate is now close to 14% and this will escalate its debt to GDP ratio further from 142.8 in 2010. Italian Govt 10 year bond gross yield of 6.13% is at decade high http://www.tradingeconomics.com/italy/government-bond-yield
So where the hope for sustained recovery pathway for USA and Europe is for the next few years as fiscal discipline must take hold to avoid insolvency default risks?
FISCAL DISCIPLINE IN US AND EUROPE MEANS SLOWER GROWTH.
In the environment of slow growth, where is the capacity of sovereign to service their debt liabilities?
Greece has seen two bailouts in deepening recession and that aggravates its sovereign borrowing costs adding further pressure of risks default going forward even more intensely.
Greece’s 10 year bond rate is now close to 14% and this will escalate its debt to GDP ratio further from 142.8 in 2010. Italian Govt 10 year bond gross yield of 6.13% is at decade high http://www.tradingeconomics.com/italy/government-bond-yield
Spain 10-year bond yield is now 6.28% – also ten year highhttp://www.tradingeconomics.com/spain/government-bond-yield.
And their most recent economic growth rates? Italy’s GDP rose 0.3 percent in the second quarter, up from a 0.1 percent pace in the first quarter, while Spain’s GDP expanded 0.2 percent in the second quarter, down from 0.3 percent the previous quarter. http://www.bloomberg.com/news/2011-08-05/german-10-year-bunds-advance-11th-day-on-debt-crisis-italian-bonds-slump.html
Estimated debt-to-gross-domestic-product ratio is 120 percent this year for Italy, the second-highest level in the euro region, compared with 68.1 percent for Spain.
Inflation in Italy and Spain is running at 2.7% and 3.1% respectively, above ECB target rate of 2%.Inflation restrains policy makers from loosening monetary policy. Italy, Spain, Greece has all found themselves stuck in an economic quagmire.
Growing debt to GDP ratio in circumstances of sustained weak economic performance triggers risks of continuing contagion spread. On market ‘s concern of a possible EU’s ‘Double Dip’ recession, credit-default swaps (CDS) on Spain surged 30 basis points to 420 and Italy jumped 34 to 367 in early August.
What is CDS? CDS function like a default insurance contract for debt. A widening of one basis point in a five-year CDS spread equates to a $1,000 increase in the annual cost of protecting $10 million of debt for five years. The cost of insuring against default on Spain and Italy surged to records, leading an increase in European sovereign bond risk, on concern indebted governments will struggle to fund themselves as the global economy slows. http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/08/02/bloomberg1376-LPAH800YHQ0X01-0UR9RE0LR6A178JI2UTIEGC9IA.DTL
Europe will remain buffeted in slow growth, mired in recurring sovereign debt crisis and constrained by continuing pressures of fiscal tightening. Presently, about 20% of the US S& P earnings originate from Europe. That spells disaster for US businesses which also face a much weakened economy of consumer demand pullback within US and the much awaited fiscal impact of budgetary cutbacks to local government and municipality funding. Meredith Whitney could be proven right to have warned of local government debt may be at the doorstep of a major crisis. States and local governments, which make up 12 percent of US GDP, are really pulling back,” http://www.cnbc.com/id/43973763
The austerity drive forward could be a thunderbolt strike at the heart US economy after it could only be sustained to such disastrous outcome following the failed QE2 stimulus.
The austerity drive forward could be a thunderbolt strike at the heart US economy after it could only be sustained to such disastrous outcome following the failed QE2 stimulus.
Another orgy of US stimulus will almost certainly drive the US dollar down lower, adding to inflation, raising interest rate and sinking US into a delayed but much deeper recession.
CHINA – YOUR LAST FRONTIER OF LITTLE HOPES AND TERRIFYING RISKS
ECB President Jean-Claude Trichet, Ben Bernanke, US Federal Reserve Chairman and Christine Lagarde might have sleepless nights worrying about the state of sinking global economies, PBoC governor, Zhou Xiaochua has immediate worries of how to better deploy China’s 3 trillion plus FX reserves and rising, adding big pressures on PBoC’s sterilization.http://asianbankingandfinance.net/foreign-exchange/in-focus/pboc-governor-china-needs-reduce-fx-reserves Mr Zhou, unlike other central bankers around the world, does NOT seems to have such a big hurried appetite for gold bullion buying beyond China’s current holdings of under 1200 tonnes. http://www.commodityonline.com/news/China-to-raise-gold-silver-reserves-in-2011-36118-3-1.html. For fair comparison of relativity, the Mexican Central bank bought 100 tonnes of physical gold recently.http://www.ft.com/cms/s/0/cbc02e10-7637-11e0-b4f7 00144feabdc0,s01=1.html#axzz1U4Miu3Ew.
Perhaps, Chinese got bigger risk appetite – come what may of global economic turbulence – as they are of managing of risks.
Life is cheap in China. Chinese will build and happily operates nuclear power plants far more dangerous of accident risks than Fukushima. Chinese economic model is like its super high-speed rail network linking Shanghai to Beijing which recently had a big crash at Wenzhou.
True to Chinese grit and political humor, they quickly buried the derailed carriages with the corpses inside of incriminating evidences – relenting only on a barrage of cyberspace howling protests from its millions of disapproving netizens!
That is how Chinese psyche works – defying gravity, and so far on the economic front, all previous forecasts of hard landing by doomsayers have found their grief of disbelief. Less known to economists, however, is the suspect that China’s GDP figures are “man-made” and therefore unreliable, said Li Keqiang, according to leaked U.S. diplomatic cables released byWikiLeaks. http://www.reuters.com/article/2010/12/06/us-china-economy-wikileaks-idUSTRE6B527D20101206. .
Li is widely expected to succeed Wen Jiabao as China’s next premier in early 2013.
But all that gravity-defying economic miracle achievements were before the GFC and before the world gets to know of GDP-boosting infrastructural white elephants like Kang Ba Shi besides and beyond already well-known and publicized empty commercial and residential blocks in major developed cities. http://www.businessinsider.com/pictures-chinese-ghost-cities-2010-12#there-are-no-cars-in-the-city-except-for-a-few-dozen-parked-at-the-glamorous-government-center-2. Chinese ghost cities were built out of debt mountains. And this white elephant real estate is located in a smallish countryside township of Loudi, Hunan Province.http://www.bloomberg.com/news/2011-07-13/china-cities-sell-land-at-winnetka-values-with-bonds-seen-toxic.html . And in Yinchuan in northwest China’s Ningxia Hui sparsely-populated autonomous region, it built a 25-km long eight-lane highway running through the city, with wide forest belts on both sides years ago.http://www.chinadaily.com.cn/opinion/2009-09/01/content_8646607.htm.
All of these are sub-prime bursting in-the-making scatters across the entire spread of China from north to south and west. Now this is the real China that never got into print of official media release nor got the attention of foreign economists’ publishing.
So how much can one trust of Chinese GDP statistics and its measure of underlying sustainable real economy? I will give some credit of reliability to official sources – at least those on the downside, even if these are most likely to be understated. China does not have a sophisticated banking system in place, unlike the developed countries. The State Council is the policy decision-makers on major macro-economic decision as interest rate. From the somewhat detached position, governing China and managing its economy suffer from the tyranny of size, geography and cumbersome bureaucratic layering. It is as like frying a very small fish in a big wog of very hot frying oil – removing too soon leaves it uncooked and too late burnt it. In both instances, the fish is not deliciously edible. The contextual sometimes contradicts the holistic and that is how this author believes Chinese statistics should be interpreted of its usefulness and reliability. China is not one uniform monolith but a mosaic of evolving landscape. Compounding these complications is the lack of transparent statistics. A lot of guesswork, glimpses of China’s policy making decisions and anecdotal evidence necessarily framework of assessment of the true picture of the state of affairs inside China.
SO IS THERE A REAL ESTATE BUBBLE & GROWTH BUBBLE INSIDE CHINA?
Beyond the obvious deserted empty luxury retail malls, ghost towns, vanity projects dispersed over China, affordability has become a real issue in big cities.
It is said that in today’s inflated price climate, only 20% of Beijing top earners can afford their own housing. While the mass migration towards urbanization continues, prohibitive costs of living in big cities like Beijing, Shanghai, Guangzhou have encouraged migration to Chinese second-tier and even some third-tier cities where technology will allow of similar conveniences that big cities has of comfort-providing infrastructure.
Beijing, Shanghai etc have seen restrictive measures on property investment such as property taxes, increases in down-payment requirements, and raised interest rates. As at the time of writing this article, China Banking Regulatory Commission (CBRC) is urging commercial banks to lend healthy local government financing vehicles (LGFC) to support state-sanctioned projects including the building of subsidized housing.
THIS CONTRADICTS CBRC’S RECENT DIRECTION TO BAN ALL LENDING TO LOCAL GOVERNMENT after they chalked up an estimated 10.7 trillion yuan ($1.66 trillion) in debt, stirring fears of widespread loan defaults that could shake the world’s No.2 economy. http://in.reuters.com/article/2011/08/05/china-economy-housing-idINL3E7J50K520110805.
Under this new directive, loans issued for the construction of affordable housing should not be priced below 0.9 percent of the central bank’s benchmark lending rate and should have maturities no longer than 15 years. CBRC dictates also that provincial government should step in to assist in repayment of local governments which encounter loan repayment difficulties. That leaves enough room for meaningful conjecture, not definitively, that there is price bubbles in residential accommodation to varying degree across China.
It is said that in today’s inflated price climate, only 20% of Beijing top earners can afford their own housing. While the mass migration towards urbanization continues, prohibitive costs of living in big cities like Beijing, Shanghai, Guangzhou have encouraged migration to Chinese second-tier and even some third-tier cities where technology will allow of similar conveniences that big cities has of comfort-providing infrastructure.
Beijing, Shanghai etc have seen restrictive measures on property investment such as property taxes, increases in down-payment requirements, and raised interest rates. As at the time of writing this article, China Banking Regulatory Commission (CBRC) is urging commercial banks to lend healthy local government financing vehicles (LGFC) to support state-sanctioned projects including the building of subsidized housing.
THIS CONTRADICTS CBRC’S RECENT DIRECTION TO BAN ALL LENDING TO LOCAL GOVERNMENT after they chalked up an estimated 10.7 trillion yuan ($1.66 trillion) in debt, stirring fears of widespread loan defaults that could shake the world’s No.2 economy. http://in.reuters.com/article/2011/08/05/china-economy-housing-idINL3E7J50K520110805.
Under this new directive, loans issued for the construction of affordable housing should not be priced below 0.9 percent of the central bank’s benchmark lending rate and should have maturities no longer than 15 years. CBRC dictates also that provincial government should step in to assist in repayment of local governments which encounter loan repayment difficulties. That leaves enough room for meaningful conjecture, not definitively, that there is price bubbles in residential accommodation to varying degree across China.
Peter A. Sands, CEO, Standard Chartered, insisted this week there is no growth bubbles inside China. http://www.cnbc.com/id/43972390. “There is asset inflation in China and property bubbles in some parts, but that doesn’t mean that Chinese growth is a bubble,” I, substantially dispute him! The CBRC’s quick about turn of bank lending assistance to affordable public housing amid credit clampdown on all bank lending to local government points to desperation need of housing affordability across China.
There is real estate PRICE BUBBLES in top 10 Chinese cities, and certainly, to varying degrees in second-tier Chinese cities as well.
Affordable public housing is in dire needs.
The massive scale of subsidized public housing project over the next 5 years illuminates my contention. Housing construction and supporting infrastructure is a big driver of capital formation spending supporting China’s economic growth. So, if LGFC are financially-strapped or worst still technically insolvency of loan repayment liabilities as they fall due, and provincial government also unable to assume that liability, prudential lending by banks must necessarily deflate the growth bubble!
There is real estate PRICE BUBBLES in top 10 Chinese cities, and certainly, to varying degrees in second-tier Chinese cities as well.
Affordable public housing is in dire needs.
The massive scale of subsidized public housing project over the next 5 years illuminates my contention. Housing construction and supporting infrastructure is a big driver of capital formation spending supporting China’s economic growth. So, if LGFC are financially-strapped or worst still technically insolvency of loan repayment liabilities as they fall due, and provincial government also unable to assume that liability, prudential lending by banks must necessarily deflate the growth bubble!
Another aspect and extent of real estate bubbles not seen in public eyes is the prevalence of vacant residential apartments. That became public sometime in March 2010. A report emerged of some power entities – that 64.5 million urban electricity meters registered zero consumption over a recent, six-month period. http://english.caing.com/2010-08-03/100166589_3.html.
The magnitude is scary; the vacancy rate of occupancy is enough to house close to 200 million Chinese.
Not all are permanently unoccupied available space but there is certainly a lot of speculative buying of price bubbles overlaying this QUANTITY bubble. Asset inflation is leading the bubbles and quantity bubble is leaning on the price bubbles for viability support.
The magnitude is scary; the vacancy rate of occupancy is enough to house close to 200 million Chinese.
What would happen to these unoccupied, residential accommodations when affordability public housing fills the void which this 64.5 million vacant apartments waiting to be filled? Wouldn’t there is a gigantic banking crisis of massive mortgage defaults in a real estate crash, beyond the banking sector’s lending to nearly insolvent LGFVs?
- TIDES, TORRENTS, TSUNAMI – SHIFTING FROM PLACID CLUSTERED TO TURBULENT ENVIRONMENT WILL HAVE EARTHQUAKE EFFECTS.
Hong Kong sits just next door to China. If booming Chinese economy is so resilient, why are so many real estate developers lately have been talking about the risk prospects of a property crash?
Every market tanks; what doesn’t change is cycles….. “Each time the reason may be different, but (prices) will come down.”
Plenty of Chinese buyers could literally walk across the Shenzhen border and snapped all the “bargains” which locals either can’t afford or unwilling to pay? Robin Chan, Chairman of Hong Kong’s third largest property developer, has this warning.http://www.cnbc.com/id/43966773
Every market tanks; what doesn’t change is cycles….. “Each time the reason may be different, but (prices) will come down.”
That is exactly right with all financial market cycles. Will China’s push for massive affordable public housing squeeze private developer’s margin? Will the correction in asset inflation drives overleveraged developers and speculators there over the edge of the cliff hurting banks and destabilizing its economy?
There is also a chorus of views inside China that the real estate in China is due for a correction.
IT COULD COME SOONER than many expect.
Three official interest rate rises this year have pushed mortgage rate over 7%, leaving an expanding inventory of unsold properties. There are now signs of a price stalemate as Chinese home price teetering on a precipice. http://www.smh.com.au/business/china-home-prices-teeter-on-a-precipice-20110722-1hs94.html.
Home price could fall this qtr and it may be a question of what extent and timing .Whilst it is true that escalating cooling measures had been in place since last October such as increased credit lending rates and jacking up banking reserve requirements, these policy initiative have not worked well correcting prices downwards as yet. Its subdued impact is because of the more “benign” global economic environment even if there is some degree of at least some degree of disturbed reactive environment. There is a measure of financial stability prevailing in global financial markets at least until recent weeks to give speculators and aspiring owners some confidence of continued buying support. That confidence stability impact could well turn devastatingly toxic now.
IT IS LIKE THE SHIFT FROM TIDES, TO TORRENTS AND NOW THE TSUNAMI – MOVING UP THE CHAIN OF ESCALATION FROM THE PAST OF PLACID CLUSTERED ENVIRONMENT. POST –GFC, TO DISTURBED REACTIVE ENVIRONMENT AT YEAR BEGINNING TO NOW UNPREDICTABLE TURBULENT FIELDS!
The financial rout in global financial markets late this week will leave tsunami impact as severe as the last GFC, this author must sadly reminds. As I wrote this line above, breaking news on my desktop reads – S & P downgrades US to AA+ rating with negative outlook on a Saturday morning. Last night, Australia’s central bank slashed the country’s GDP growth for 2011 down to 2% – a far cry from its most recent estimate of 3.25%. That itself is a significantly lower than earlier estimates of revised 4% down from 4.25%. Australia is a leading commodity export nation depending on China. The expectation within the Reserve Bank of Australia must be China will slow down significantly for the rest of 2011.
A BANKING BUBBLE ON ALONGSIDE A REAL ESTATE BUBBLE?
The IMF released its annual review of China a fortnight ago, warning that inflation, real-estate bubbles and weak monetary controls pose “significant risks to financial and macroeconomic stability” in the world’s second-biggest economy.http://www.theaustralian.com.au/business/economics/chinas-manufacturing-activity-contracts-hsbc-survey-shows/story-e6frg926-1226099012286. Food inflation is currently running round 17% and real estate inflation compounding. Inflation surged higher to 6.4% in June even as the 5th interest rate hike in eight months lifted the Yuan lending rate to 6.56% and deposit rate to 3.5% last month. The PBoC is obviously “behind the curve” trying to slow the inflationary spiral. http://www.theaustralian.com.au/business/interest-rates/chinese-scholars-state-case-for-higher-rates-agenda-in-beijing/story-fn91wad8-1226089890.
Yet it can’t raise interest rate too fast without the rest of the world lifting their own interest rate first, given comparative interest rates are much lower in EU and particularly in US.
Raising interest rate too frequently also risks the inflow of hot money into China via Hong Kong looking for higher yields in a strong Yuan which therefore offer the advantage of lower risk.
As Hong Kong dollar is pegged to the greenback, it is easy for banking channels in Hong Kong to access very cheap money near zero interest rate costs in the US. That influx could easily defeat China’s inflation fight. Indeed, it has already been happening.
This week, PBoC stops offshore Yuan borrowing of hot money by Chinese companies through Hong Kong. Until this week, there was a growing trend among mainland companies of borrowing relatively cheap offshore Yuan in Hong Kong and remitting it home for business purposes to circumvent tight domestic cash conditions in the mainland.http://www.cnbc.com/id/43982853.
The 6th reserve requirement hike this year took China’s reserve requirement ratio to 21.5% for large institutions effective 20 June 2011.To fund their tightened loan-to-deposit below the 75% regulatory threshold, banks now offer a whole range of “wealth management products” akin to short term investment certificates of deposits with maturity duration of 2 days and up 31 days. The rates of interest offered as high as 8% are much higher than the one-year benchmark bank deposit rate of 3.25%. Big banks and smaller financial institutions are circumventing the reserve requirement ratio to build their deposit base and expand their lending portfolio. Instead of managing their asset side (lending), banks are now managing their liability side of their balance sheet deposits taking making regulatory control harder for China Banking Regulatory Commission. Banks must roll over these “wealth management products” to keep their cash rolling i.e. in effect they are increasingly supporting illiquid long-term lending with short-term cash flow. The moment this customers stop buying, it is tantamount to withdrawal of funding supply. There is a real risk of a sudden run on all bank deposits in any sudden banking crisis.http://www.cnbc.com/id/43585557. A fuller descript of Chinese banking woes can be found at http://www.temasekreview.com/2011/07/13/temasek-holdings-change-of-direction-needed/
The China Banking Regulatory Commission (CBRC) boasts China’s banking system has a bad loan coverage ratio of about 220 percent, or 1.2 trillion yuan. It certainly looks impressive on paper. The big Chinese banks boast some of the lowest loan-to-deposit ratios and some of the highest coverage ratios on bad loans in the world.
The BIG QUSTION is what constitute “bad” loan when banks in China are known to have been pushing a variety of off-balance sheet lending?http://finance.yahoo.com/news/Analysis-Chinas-big-banks-rb-261135357.html?x=0&.v=1. Lending to LGFVs of local government for infrastructural construction with long and uncertain payback is prime suspect. “What bank would want to take re-possession of a toll road” is the repose. There are signs many entities created by local governments to finance infrastructure projects could face trouble repaying their loans.http://finance.yahoo.com/news/Analysis-Chinas-big-banks-rb-261135357.html?x=0&.v=1 It will all become non-performing only when massive defaults occur en masse. By then it will be too late of rescue efforts.
China’s state auditor said in June that local governments held a massive 10.7 trillion yuan ($1.53 trillion) in debt at the end of 2010, warning there was a risk some might default.http://www.theaustralian.com.au/business/economics/chinas-growth-unsustainable-say-analysts/story-e6frg926-1226100929751. By that sum, local governments owed debts equal to a quarter of its gross domestic product. http://www.theaustralian.com.au/business/markets/china-bears-sharpen-tools-amid-debate-over-worlds-second-biggest-economy/story-e6frg94o-1226086903484. And this is not the end of its banking woes. Lending to LGFVs of local government is not valid compartmentalized analysis. There are lending to local government and related entities NOT included in this 10.7 trillion yuan exposure. All that lending to SMEs could also turn toxic to add to the banking wreckage if the economy turns badly sour. That moment could be now as EU scrambles for some semblance of financial stability and the faltering US economy stalling to negative outlook. The signs are ominous.
CHINA’S NEAR TERM RISKY OUTLOOK – MANY NEGATIVES
Europe remains China’s first export destination and the US second, but growth in the West remains stubbornly anaemic. Not surprisingly, China lambasted US handling of the recent raised debt ceiling debate. China’s Foreign Minister Yang Jiechi said his nation will support Europe and the euro. It is in China’s own self-interest to do so.http://www.bloomberg.com/news/2011-08-05/china-s-scope-for-supporting-global-growth-limited-as-inflation-reaches-6-.html. At the same time, the Chinese are restricting their exposure to US treasury when it comes to investing its huge US$3.2 trillion of foreign reserve. http://www.smh.com.au/business/world-business/china-to-limit-us-exposure-blasts-debt-bomb-20110803-1iarg.html. Whatever, its domestic banking crisis, China would not find it easy to liquidate its foreign reserve holdings to prop up its own economy in a precipitated crisis. This is hard reality. And even if the Chinese Government is unable to shores up its banking sector’s non-performing loans of yet indeterminate size, what would happen to the decimated savings of ordinary Chinese citizenry deposited in its banking system? A banking crisis some reasonable magnitude hitting, even rescued with state capital injection, will be weakened and may not be strong enough to revitalized its stalled economy and underwrite Chinese future growth prospect. Without massive bailout in any banking distress, China will not recover to positive growth. It needs domestic consumption to sustain its economy instead of reliance on exports to EU and US. Domestic consumption now accounts for 30% of China’s GDP base and manufacturing around 40% according to market estimates.
Meanwhile, the rout and bloodbath in global financial markets could not have come at a worse time for China. US and EU consumers’ confidence so brittle in the fragile recovery has now taken a big hit.
Meanwhile, massive retrenchments will cause big pullbacks in consumer spending worldwide dampening consumption with severe negative impact expect to hit China in the third qtr.
This author is forecasting no good Christmas in 2011.
Now that darks clouds are sweeping the global economic landscape, the loss of momentum in the qtr is also unlikely to inspire a seasonal upturn in the final qtr. There is also a seasonal slowdown in China itself in the hot summer. The cost push in material, energy and labor input and falling global currencies (relative to Yuan and US dollar) have squeeze manufacturing margins to razor thin. China’s power companies are hemorrhaging cash, losing $2.3 billion in the first half of the year compared to $1.4 billion in the same period last year. They can’t raise energy prices without permission from Beijing. So without a bailout, power cut is inevitable to contain losses and energy shortage could undermining China’s economy. http://www.financialpost.com/opinion/business insider/China+facing+energy+crisis/5192570/story.html
Since 2007, coal prices have climbed 80% but they are allowed to raise prices by a mere 15%. And coal price is still increasing along with recent spike in oil price. Any energy price rise will hit its margin-stricken over-supplied steel sector with flow-on negative effects into autos, industrial and consumer durable manufacture. The vulnerable steel sector poses threat to China’s sustained recovery.
China is not immune to the developed-world debt overhang on global growth. Foreign direct investment slowed to just 2.8% annual growth rate but which was running at 13.4% in May and 15.2% in April. http://www.marketwatch.com/story/china-faces-slowing-foreign-investment-2011-07-17. Going forward, that could evaporate as corporate worldwide cut fixed capital investments in the wake of expected shrinkage in earnings and uncertain economic outlook ahead.
HSBC’s preliminary Purchasing Managers’ Index survey read of 48.9 signals China’s manufacturing contraction – the first first contraction in manufacturing activity since July 2010, and the lowest reading in 28 months – and a DOUBLE DIP. HSBC economist Qu Hongbin said: “The July preliminary PMI implies that June’s rebound in industrial production was just temporary. We expect industrial growth to decelerate in the coming months as tightening measures continue to filter through.”http://www.theaustralian.com.au/business/economics/chinas-manufacturing-activity-contracts-hsbc-survey-shows/story-e6frg926-1226099012286
The US first half GDP growth is sub-par – the worst since March 2009.http://www.tradingeconomics.com/united-states/gdp-growth.And the financial market rout this week is set to keep it on a downward trajectory. US July ISM manufacturing survey came in at a shocking 50.9, down from 55.3 the month earlier – very close to contraction. Manufacturing is the strongest consistent pillar of the US recovery story till now and that is faltering. http://www.cnbc.com/id/43980631 Anaemic US economy would be detrimental to China exports as the US is its second largest market after EU.
China’s growth has been over-stimulated since its 2008 RMB4 trillion ($581 billion) stimulus package, which focused on physical capital investment. Infrastructure spending has long-term payback period and adds little to continual multiplier effect.
Investments make up a record 48 per cent of GDP.
LIKE THE US, EU, THERE WAS NO PRE-PLANNED EXIT STRATEGY. http://www.theaustralian.com.au/news/world/we-must-be-ready-for-china-slowdown/story-e6frg6ux-1226097819349
A real estate crash in highly bubbly Hong Kong not only damage its own banking sector’s liquidity but also could have important ripple effects for China as many big Chinese conglomerates raise money there.http://www.theaustralian.com.au/news/world/we-must-be-ready-for-china-slowdown/story-e6frg6ux-1226097819349
China is past its sizzling 11% to 14% annual GDP growth rates seen just before the GFC.http://en.wikipedia.org/wiki/Historical_GDP_of_the_People’s_Republic_of_China Without stimulus support of autos and white goods spending of its consumer, it is unlikely that China could have returned to the plus 10% annual growth rate in the last two years. With this end of economic stimulus, it is now settling on a slower growth trend. Auto sales growth slumped steeply in the first half and the forecast forward till end of this year is only moderate gain expected. Economists have also noted “sharp declines” in growth in investment in infrastructure, property and manufacturing in June. China is heading for a slowdown, though not yet a contraction except manufacturing. After its economy grew 9.5 percent in the second quarter, the balance of meaningful probability must he further slowdown from credit tightening. http://www.bloomberg.com/news/2011-08-05/china-s-scope-for-supporting-global-growth-limited-as-inflation-reaches-6-.html
Meanwhile, China’s central bank chief Zhou Xiaochuan vowed to maintain a “prudent policy” to fight stubbornly high inflation. It is consistent with Chinese Premier Wen Jiabao’s exhortation that China must “treat stabilizing overall price levels as the top priority of our macro-economic controls and keep the direction of macro-economic adjustments unchanged,” Mr. Zhou comment that the central bank would work to “avoid big fluctuations” in the economic growth,indicating some concerns over downside risks to the economy is a CLEAR REFERENCE TO THE DOWNSIDE PROSPECTS OF SLOWER GROWTH FOR THE BALANCE OF THIS YEAR EVEN BEFORE THE CURRENT UPHEAVEL SWEEPING GLOBAL FINANCIAL MARKETS. http://www.cnbc.com/id/43708346
CONCLUSION
China led the rebound from the global recession in 2009 This time, it faced very strong headwinds of financial turbulence originating in its key export markets as it CONCURRENTLY struggles to contain domestic inflation amid escalating worries of its own banking vulnerability to local government debt and a residential real estate perching on the knife edge. China now may have limited room to counter weakening growth in the U.S. and Europe as inflation restrains policy makers from loosening monetary policy.
China’s only option available could be just watching the rapidly evolving financial turbulence and keeping its own financial house from catching neighborly economic fires originating from Europe, USA and the rest of Asia. I can’t imagine the dire consequences to global economies, if China hit the hard landing
WATCH OUT CHINA, the last sustaining bastion in this global turbulence could be a time-delayed cluster bomb waiting to explode of double-blow impact damage after EU and US have both meltdown into deep recession.
Anyone disagreeing?
.
ZHEN HE
Posted in 
I HAVE A LOT OF HELL NOTES, THEY CAN REQUEST FROM ME.
Jobs will be lost, PRs will go back, Rentals will drop, people will panic and start selling properties, some bankruptcy and bank auctions will start.
Property price will drop due to oversupply and no demand.
Be prepared for another few bad years and worse now we have too many people in Singapore, thanks to daft 60.1% Singaporeans agreeing to PAP policies.