Here’s StockJockey’s discussion of China’s slowdown.
Excess Capacity to Confound Chinese Policy Makers
Courtesy of StockJockey at 1440 Wall Street
While stimulus from Chinese policy makers should avert the potential for "depression economics" taking hold, a contraction in Chinese GDP is sure to take place. Maybe not officially, however, as they continue to fudge the numbers. Still, a slowdown is apparent:
China’s economy expanded at the slowest pace in seven years as the global recession dragged down exports, increasing pressure for more government spending and lower interest rates to buoy growth.
Gross domestic product grew 6.8 percent in the fourth quarter from a year earlier, after a 9 percent gain in the previous three months, the statistics bureau said in Beijing today. The figure matched the median estimate of 12 economists surveyed by Bloomberg News. Bloomberg
Wall Street has until recently been in denial over the extent of the slowdown, but as the latest headlines hit the tape even the last guy on the deal team is waking up to reality.
How bad will it get? And when will it be over?
Anyone paying attention to the dramatic recent declines in China’s electric output would not be surprised at the latest data point. And while the focus remains on plummeting exports (which account for roughly 40% of Chinese GDP), at least a few strategists are focusing on the overinvestment from a unprecedented capital spending boom that started shortly after China was awarded the Olympics earlier this decade.
As usual, Frank Veneroso is on it like white on rice:
In a recent note I cited a report by a major Japanese bank that argued that capacity utilization in the Chinese automobile industry was already less than 50% several months ago. Because of so much excess capacity having been built over the last several years there is tremendous scope for a cutback in capital spending. ….Given a possible monstrous excess in capacity, if market forces were to prevail one would expect capital spending to be a significant drag on Chinese GDP for well in excess of a year. December 16, 2008
With the U.S. and other export markets a basket case, China will do what it can to buy its way into new markets. The coming prop-job might very well drive legitimate international competitors out of business thanks to a defacto subsidy from the Chinese government.
Yes, trouble is brewing, according to Veneroso:
Very rapid export growth has validated the massive overinvestment in China over the last several years. Declining foreign demand for Chinese exports and a collapse in China’s corporate profitability will remove the self finance available for such a high level of fixed investment. China’s captive banks will not be able to fully substitute for falling profits with yet more debt. Market forces will overwhelm the government’s efforts to throw credit at loss making enterprises in order to prop up an unsustainable investment boom.
It seems inevitable to me that China’s fixed investment accelerator will now come into play. China’s fixed investment will finally have to fall and this will be a very serious drag on China’s economy for many quarters to come. Government spending will try to offset this investment contraction, but the investment excesses will be too large for even the Chinese government to cope with.
Looking for a quick fix? That is unlikely, although seers like Dennis Gartman have apparently been long China/Short U.S equities for nearly the past month. Gartman is not one to fight the tape however, and he was quick to pull the plug from his “long commodities” theme by the spring and summer of 2008.
And lest you dismiss Veneroso, note that he was one, if not the only, strategist warning about the hoarding of copper and other commodities last spring. In retrospect it was probably the biggest contrarian, and most profitable, call of 2008:
According to one report, one single company built a speculative inventory of more than 500,000 tonnes of “contained copper” several years ago. There have been reputable press reports of very large builds in copper, aluminum and other base metal inventories in Shanghai warehouses in 2006 and 2007. These reports may suggest a propensity for some parties in China to hold large physical inventories for speculative purposes. It may be that the explosive rise in commodity prices in the first half of this past year led to an even higher rate of hoarding of various kinds of inventories. Something like this happened in the U.S., Europe and Japan in the first half of 1974 when the world had the last great parabolic rise in commodity prices.
In 1974, once aggregate demand began to decline, the huge speculative build of inventory, largely by firms, reversed. The inventory liquidation that ensued was in large part responsible for the unusual severity of the economic contraction that occurred in the last quarter of 1974 and the first quarter of 1975.
Of course, Frank’s warnings on the commodity markets were early, and remain controversial judging by the response to the recent 60 Minutes piece that attempted to deconstruct the moves in crude oil.
Keep in mind that his comments above were published over a month ago, but he seems to have hit paydirt again. Given the rapid declines in industrial production, worldwide employment and income losses are just picking up steam, and have not really been reflected in the official data.
Take the numbers with a grain of salt – but you ain’t seen nothing yet. Sure, we are due for a countertrend rally, but don’t get carried away. This is a war of attrition.
And we sure don’t want to see you end up like Dwight Anderson, either.
Try as they might, Chinese policy makers might find soon out that they can only contain, but hardly control, the damage.
Have the market declines discounted the coming deluge? That is the $64k question, but I think you know where I stand. Morgan Stanley is looking for growth to slow to 5.5%, but I think ultimately that estimate is a bit overoptimistic.
Patience, (long-biased) grasshoppers. If Nouriel Roubini eventually cuts his numbers for Asian GDP growth you will have a chance to buy.
And then some.
_______________________________________________________________
China’s Economy Grows 6.8%, Slowest Pace in 7 Years
Bloomberg
