4 Reasons to Like China

Thursday, July 12th, 2012

Last month, in my Investment Directions monthly commentary, I predicted that we’d see further stimulus from China this yearas officials try to keep Chinese growth at a respectable rate ahead of a fall 2012 leadership transition.

And as I suggested would happen, the Chinese central bank last week announced its second surprise rate cut within a month. The action from the central bank was an acknowledgement that the world’s second largest economy is slowing. In the first quarter, China’s growth decelerated to 8.1% year over year, the slowest pace since the summer of 2009 as a slowing United States and ongoing European sovereign debt crisis took a toll on Chinese exports.

Still, despite China’s economic slowdown, I continue to hold an overweight view of Chinese equities for the following four reasons:

1.)    Valuations: Chinese stocks are selling at a significant discount to both other Asian emerging market countries and to their own history, especially when you consider that Chinese inflation is decelerating. In addition, current discounted valuations appear to be already reflecting the risk of a hard landing, which I don’t believe is the most likely scenario for China.

2.)    Growth Expectations: While China is experiencing a slowdown, it’s important to put China’s growth in perspective. I expect second quarter Chinese growth to come in around 8%, a level consistent with a soft landing scenario, and not anywhere near the United States’ truly slow 2% growth. In addition, the preponderance of evidence – and the few bright spots among weak recent economic data — still suggest that China can engineer a soft landing and even if China ends up growing at 7% to 7.5% next quarter, Chinese equities still look cheap.

3.)    Economic Policy: That China lowered interest rates twice within a month suggests that Beijing is refocusing on, and is willing to go the distance to stabilize, growth. In fact, I continue to expect more stimulus from China as it tries to ensure a smooth upcoming leadership transfer and as cooling inflation in the country gives the government more room to focus on growth. In addition, the gradual liberalization of the financial industry is also a plus for long-term growth.

4.)    Relatively Low Risk: Based on my team’s analysis, China is not one of the 15 riskiest markets. In addition, China enjoys a relatively stable currency, which reduces the volatility of its USD returns.

To be sure, Chinese equities, along with other risky assets, are still vulnerable to the fortunes of the global economy, and an exogenous shock, such as a worsening eurozone crisis, could certainly knock China off of its trajectory. But in the absence of such an event, most evidence suggests that China can engineer a soft landing and its outlook seems more positive than investors may be discounting. I prefer to access Chinese equities through the iShares MSCI China Index Fund (NYSEARCA: MCHI) and the iShares MSCI China Small Cap Index Fund (NYSEARCA: ECNS).

Source: Bloomberg

Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog.  You can find more of his posts here.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country and investments in smaller companies may be subject to higher volatility.

Tags: Acknowledgement, Chinese Central Bank, Chinese Exports, Chinese Growth, Chinese Stocks, Debt Crisis, Economic Data, economic policy, Economic Slowdown, Emerging Market Countries, First Quarter, Growth Expectations, inflation, Investment Directions, Leadership Transition, Preponderance Of Evidence, Sovereign Debt, Stimulus, Surprise Rate, Valuations
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Will the ECB and Fed Follow Where China Leads?

Monday, June 4th, 2012

Will the ECB and Fed Follow Where China Leads?

By Frank Holmes, CEO and Chief Investment Officer
U.S. Global Investors

Every month, policymakers track purchasing managers’ indices (PMI) around the world as they consider fiscal and monetary actions. To us, a PMI is a measure of health of companies around the world, because it includes output, new orders, employment and prices across manufacturing, construction, retail and service sectors.

Today, the J.P. Morgan Global PMI for May came in lower at 50.6—just above the level indicating expansion—and China’s HSBC Manufacturing PMI fell to 48.4. Both numbers were below their respective three-month moving averages. Historically, we’ve seen China’s PMI number leading the year-over-year change in exports by three to four months, so when the PMI has increased, a few months later, Chinese exports have historically risen, and vice versa.

China’s HSBC PMI tends to be more reflective of export demand, as it is compiled by private parties, covers a smaller survey sample and is weighted toward smaller businesses. Therefore, a lower PMI number indicates lower export demand.

With Europe’s growth in a deep freeze, China is feeling Europe’s pain. While many think the U.S. is receiving most of the Chinese-made goods, Europe is actually China’s largest export partner. Nearly 22 percent of China’s exports head to Europe, contributing nearly 6 percent to China’s GDP; only 17 percent of exports from China are shipped to the U.S.

With fewer exports to Europe, China’s GDP growth could be affected, but probably much less than one might think. Listeners of our webcast a few months ago heard Andy Rothman from CLSA explain how China has become less dependent on the world for its growth. As you can see from the chart below, CLSA had already assumed net exports of goods and services out of China to be negative this year because of slower growth from Europe and the U.S.

Yet, China clearly has the upper hand in controlling growth. Take a look at what happened in 2009 when exports declined dramatically: The government stepped in with a massive stimulus package devoted to bank lending and infrastructure construction. This effort significantly boosted overall GDP growth and “pushed the Chinese economy out of a deep slump,” says research firm BCA Research.

Despite net exports falling about 4 percent in 2009, GDP actually grew more than 12 percent.

China won’t put the pedal to the metal like it did in 2009, though. Premier Wen Jiabao recently said that the government “should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth,” according to Bloomberg News. China is more like Goldilocks: The government wants the economy to be not-too-hot or not-too-cold.

The important thing to remember is that the government will want to avoid the expansion that was “associated with the earlier plan that led to higher CPI, asset price inflation and a surge in lending to non-priority projects,” says J.P. Morgan. Rather, the focus is on making sure the country shifts to a “more sustainable trajectory of growth,” says the research firm.

With the renewed eurocrisis, “Chinese authorities are currently facing an extremely complex and unpredictable situation,” says BCA. They’ll continue to monitor the situation and not make any drastic moves; rather, “Chinese authorities will stay on high alert and act promptly to rescue growth in case of external shocks,” says BCA.

Tags: Chief Investment Officer, China Gdp, Chinese Exports, Construction Retail, Deep Freeze, ECB, Export Demand, Exports From China, Four Months, Frank Holmes, GDP Growth, Hsbc, J P Morgan, Moving Averages, Pmi, Private Parties, Purchasing Managers, Rothman, Service Sectors, U S Global Investors
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The Economy and Bond Market Radar (March 19, 2012)

Saturday, March 17th, 2012

The Economy and Bond Market Radar (March 19, 2012)

The yield on the 10-Year U.S. Treasury note registered the biggest weekly advance since July 1, in response to buoyant February employment data coupled with an absence of a strong signal of further quantitative easing from the Fed meeting on Tuesday. The chart below shows the 10-Year yield broke out of its trading range, oscillating around 2 percent since November. The “risk on” trade was reinforced this week.

The Fed raised its economic growth outlook to “moderate” from “modest,” in view of the continuation of positive economic data, especially on the employment front. The Fed described recent increases in oil and gasoline prices as “temporary,” and kept its verbiage unchanged for an “exceptionally low” fed funds rate “at least through late 2014.”

Strengths

• Three years of rising employment finally led to the first increase, albeit small, in consumer debt in the U.S. since the second quarter of 2008. U.S. household debt rose 0.3 percent in the fourth quarter of 2011, following 13 consecutive quarters of decline.
• Despite a 6 percent increase in gasoline prices in February, headline Consumer Price Index (CPI) in the U.S. rose only 0.4 percent month-over-month and 2.9 percent year-over-year, in line with expectations, thanks to tame pricing changes in non-energy items.
• India’s industrial production expanded by a higher than expected 6.8 percent in January from a year earlier, led by a surge in the food products and beverages category.

Weaknesses

• U.S. industrial production was little changed month-over-month in February, lower than expected and decelerating from December and January, due to a decline in mining activity and flat output from utilities related to warm weather.
• In January, U.S. new orders of non-defense capital goods excluding aircraft posted the first annualized decline since the second quarter of 2009.
• Chinese exports in January and February combined grew 7 percent year-over-year, decelerating from 13.4 percent in December and 20.3 percent in the entire 2011, driven primarily by slowing shipments to Europe.

Opportunities

• Should a growth scare resurface due to a lack of announcement of further quantitative easing from the Fed, bonds may rally again as investors flee to safety. This scenario happened in mid-2010 and mid-2011 when QE1 and QE2 programs ended.

Threats

• Rising oil and gasoline prices combined with liquidity implications of global easing led by Europe, may raise the prospect of the reappearance of higher inflation going forward. An increasing number of Asian central banks decided to leave rates on hold after recent cuts.

Tags: Bond Market, Capital Goods, Chinese Exports, Consecutive Quarters, Consumer Debt, Consumer Price Index, Employment Data, Fed Funds Rate, Fed Meeting, Gasoline Prices, Growth Outlook, Household Debt, Index Cpi, Market Radar, Strong Signal, Treasury Note, U S Treasury, Verbiage, Warm Weather, Weather In January
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Dow Jones – Hi or Lo?

Wednesday, February 29th, 2012

This Week: SPDR DJIA TRUST Ticker: DIA / NYSE

The Dow Jones Industrial Average just touched the 13,000 level this week after nearly four years. Where to from here? Well, the mountain is high. The valley is low. We think it will climb, but not without woe.

The biggest woe is Greece. The indebted nation agreed a $170 billion rescue plan, but will only get the money if its government fires workers, slashes pensions and wages, and raises taxes, all by month’s end. Greeks are rioting and opposition leaders are threatening reversal.

Private holders of Greek bonds are being squeezed too: for every 2 bonds they hold, they’ll be offered a new one that is longer-dated and lower-yielding. If enough holders refuse the offer, Greece could default. There will be more on this by March. Until then, global equity markets will remain nervous.

A European recession would be woe #2. For all their sanctimonious lecturing, France and especially Germany profited from exports to their spendthrift, Euro-neighbors. But two years of fiscal clampdown have hurt economic growth. Now further austerity threatens to push it into recession.

The austerity hurt Chinese exports. And growth within China was dampened by central bank efforts to tame inflation and speculation, especially in housing (nothing we’d know about in Toronto). Slower growth in China will have a knock-on effect, especially on us hewers and diggers, but more broadly too.

Short-term technicals are also bearish. After climbing for five straight months, the Dow is showing signs of fatigue. Our proprietary indicator suggests a pull-back of about 5% in the next few weeks.  Also, since the start of February, the DJ Industrials has been climbing alone. The DJ Transportation Index, more closely tied to economic fundamentals, has lagged by 5.6%. Not a good sign.

This list of woes suggests a short-term correction for markets. Let’s get to the positives. What will take us higher on the Dow after the correction? Three things: stocks are cheap, bond yields are thin and the economy is improving.

Quality stocks are cheap by several measures. The Dow is trading at 13.3 times its earnings, near the bottom of its long-term range, as prices have lagged earnings growth. The Dow’s earnings-per-share is up 134% from the March 2009 lows, while the Dow’s price is up 70%. True, earnings growth has plateaued in the last two quarters, but that still leaves a large gap.

In the same period, corporations have drastically cut debt levels, bringing it to par with equity and the lowest level in over a decade. Little debt, lots of profit…it’s no wonder dividend yields have risen to 2.5% and are expected to rise further. Compare that to a yield of 3.2% on a similar quality 10-year bond.

From the technicals, looking past the next few weeks and out to the next few quarters, the view is positive too. Though not quite there yet, our proprietary indicator is near a Buy levels not seen since March 2009. A correction in the short term would put it firmly in the Buy camp. And while the recent new year rally has been on relatively light volumes, we expect low valuations and good dividend yields will lure investors back in.

Finally, the economy: It’s improving. Manufacturing and services have continued to gain. Unemployment is down, with initial jobless claims falling to the lowest level in four years. Consumption is rising again. Housing prices have bottomed.  The yield spread – the difference between long and short term interest rates – remains healthy at about +1.9 percentage points. Over many decades, this spread has proved an excellent recession forecaster, besting all economists. When it turns negative – that is, when the rate on a 3 month loan is higher than on a 10 year – watch out.

There are a couple of Exchange-Traded Funds to consider for the Dow Jones Industrial Average. The first is the SPDR DJIA ETF (DIA/NYSE), traded in U.S. dollars in New York. The second is the BMO DJIA Hedged to C$ ETF (ZDJ/TSX). Both are plain vanilla and hold all the 30 shares of the Index. For Canadian investors, with ZDJ you avoid a currency trade and you’re returns will mimic those received by a U.S. investor, regardless of how the U.S. dollar does against the Loonie.

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Tags: Austerity, Bond Yields, Canadian, Canadian Market, Chinese Exports, Clampdown, Dj Industrials, DJIA, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Fundamentals, Global Equity Markets, Greek Bonds, Nyse, Opposition Leaders, Private Holders, Signs Of Fatigue, Slashes, Spendthrift, Tame Inflation, Technicals, Transportation Index
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The Economy and Bond Market Radar (November 21, 2011)

Saturday, November 19th, 2011

The Economy and Bond Market Radar (November 21, 2011)

Treasury yields ended the week mixed, with short-term yields rising modestly while long-term rates moved lower. Europe dominated the news again this week as market worries move from one country to the next, with the focus this week on Italy, France and Spain. The European concerns led to an exodus to the safest assets, including the U.S. dollar and Japanese yen which appreciated versus most currencies.

Negative headlines abound, but an interesting positive dynamic continues under the surface as U.S. economic data continues to be positive. This can be summed up in the chart below which depicts the Conference Board’s Leading Index. The index has resumed its uptrend, rising 0.9 percent in October, and is at the highest level in over a year. As a leading indicator, this bodes well for economic prospects over the next several months and confirms many of the positives that have come out of the recent third quarter earnings reports.

Strengths

• Weekly initial jobless claims fell again to 388,000, hitting a seven-month low, suggesting that hiring may be on the upswing.
• Industrial production rose 0.7 percent in October, ahead of the 0.4 percent expected. This was driven by a ramp up in auto related production.
• October retail sales rose 0.5 percent, possibly confirming the recent improvement in the job market.

Weaknesses

• The eurozone grew a very modest 0.2 percent in the third quarter and a recession appears almost a forgone conclusion.
• The European sovereign bond markets remain in turmoil as yields rose, and specifically yields on 10-year Italian and Spanish bonds approach seven percent.
• Chinese exports to Europe have taken a hit in October as manufacturing-centric Guangdong Province reported a year-over-year decline of 8.7 percent.

Opportunities

• After another good week of economic data, fourth quarter GDP estimates may begin to creep higher with a possibility of three percent growth.
• With the holiday-shortened week, data will be front-end loaded with durable goods orders, Federal Open Market Committee minutes and initial jobless claims key data points for next week.

Threats

• The situation in Europe remains extremely fluid and negative news is almost expected at this point. Unfortunately it is politically driven and difficult to predict outcomes and ramifications.

Tags: Bond Markets, Chinese Exports, Earnings Reports, Economic Prospects, European Concerns, Eurozone, Forgone Conclusion, Gdp Estimates, Guangdong Province, Initial Jobless Claims, Italy France, Japanese Yen, Leading Indicator, Market Pulse, Market Radar, Market Worries, Negative Headlines, Quarter Earnings, Quarter Gdp, Term Yields, Treasury Yields, Uptrend
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Eurozone Breakup Logistics (Never Believe Anything Until It’s Officially Denied)

Friday, September 16th, 2011

In his latest Email update, Michael Pettis at China Financial Markets discusses the in more detail the likelihood of a Eurozone breakup.

Until the label “End Pettis”, what follows is from Pettis and anything in blockquotes (indented) is a reference that Pettis quotes.

Logistics of Denial by Michael Pettis

Slow growth is embedding itself solidly into the US economy and the bond mayhem in Europe continues. The external environment for China is getting worse. This will almost certainly make China’s adjustment – when Beijing finally gets serious about it – all the more difficult.

With still weak domestic consumption growth, and little chance of this changing any time soon, weaker foreign demand for Chinese exports will cause greater reliance than ever on investment growth to generate GDP growth.

Europe’s travails in particular can’t be good for exports. What’s worse, it’s now pretty much official that the euro will fail soon enough. We have this on no less an authority than Angela Merkel. Here is what Thursday’s Financial Times says: Merkel Promises Euro Will Not Fail

Angela Merkel, German chancellor, declared on Wednesday that “the euro will not fail” after the country’s powerful constitutional court rejected a series of challenges to the multibillion-euro rescue packages agreed last year for Greece and other debt-strapped members of the eurozone.

In a passionate restatement of Germany’s determination to defend the common currency, the chancellor welcomed the court’s judgment as “absolutely confirming” her government’s policy of “solidarity with individual responsibility”.

First Rule of Politics

No, I didn’t misread the article. I just have a very different understanding of the logistics of a denial. Last year, for example, I wrote on my blog about ferocious denials by both Spain and Portugal that they would need any official help in funding themselves. But according to one of my favorite British television comedies, Yes, Minister, an official denial means something very different from what is intended.

“The first rule of politics,” Sir Humphrey, the wily civil servant in the show, insists is: “never believe anything until it is officially denied.”

I don’t want to sound too glib or too jokey, but I wonder if there has ever been a forced devaluation that wasn’t preceded by ringing assertions from presidents and central bank governors that under no circumstance would the currency ever devalue.

What is all the more interesting is that I recently discovered that the quote “never believe anything until it is officially denied” doesn’t originate with the writers of the British TV comedy. Apparently it can be traced to at least as far back as Otto von Bismarck, who was born not too far from where Angela Merkel grew up. Never believe anything until it is officially denied, the Iron Chancellor warned us.

An Interesting Proposal

So if Germany’s Iron Lady is now denying that the euro will fail, can its failure be far off? It depends I guess on what we mean by failure. If any important reversal in the structure and membership of the euro is a failure, then it will almost certainly fail, but I suppose there are many ways the euro project can be transformed without quite calling it a failure.

At the end of last month Hans-Olaf Henkel, for example, the former head of the Federation of German Industries, had an interesting OpEd in the Financial Times. In Sceptic’s Solution he says:

Having been an early supporter of the euro, I now consider my engagement to be the biggest professional mistake I ever made. It would be misleading to proclaim there is an easy way out. But it is irresponsible to maintain there is no alternative. There is.

The end result of plan “A” – “defend the euro at all cost” – will be detrimental to all. Rescue deals have led the eurozone on the slippery path to the irresponsibility of a transfer union. If everybody is responsible for everybody’s debts, no one is. Competition between politicians in the eurozone will focus on who gets most at the expense of the others. The result is clear: more debts, higher inflation and a lower standard of living. The eurozone’s competitiveness is bound to fall behind other regions of the world.

As a plan “B” George Soros suggests that a Greek default “need not be disorderly”, or result in its departure from the eurozone. But a Greek default or departure from the eurozone implies risks too high to take. First in Athens, then Lisbon, Madrid and perhaps Rome, people would storm the banks as soon as word got out. A “haircut” would not improve Greece’s competitiveness either. Soon, the Greeks will have to go to the barber again. Anyway, we now talk also about Portugal, Spain, Italy and, I am afraid, soon France.

That is why we need a plan “C”: Austria, Finland, Germany and the Netherlands to leave the eurozone and create a new currency leaving the euro where it is. If planned and executed carefully, it could do the trick: a lower valued euro would improve the competitiveness of the remaining countries and stimulate their growth. In contrast, exports out of the “northern” countries would be affected but they would have lower inflation. Some non-euro countries would probably join this monetary union. Depending on performance, a flexible membership between the two unions should be possible.

I think Henkel is right, although I think the likelihood of Europe’s adopting his Plan C is pretty small. Still, it is interesting to consider why he might be right.

Damned Either Way

The problem is that if Spain leaves the euro and returns to the peseta, it will be caught in a downward currency spiral like the ones suffered by Mexico in 1982 and 1994 and Korea in 1997. In both cases the currency plunged by far more than the amount of its theoretical overvaluation. This happened because a substantial portion of Mexican and Korean debt was denominated in foreign currency. Of course once Spain revives the peseta, it will be in a similar position – with a lot of its debt denominated in euros, which will become a foreign currency.

What does external debt have to do with the extent of the devaluation? Quite a lot, it turns out. Mexico and Korea (and a host of others examples) remind us that when a country is forced to devalue, the amount of the devaluation is not necessarily in line with estimates of the amount of overvaluation.

I would argue that Spain probably suffers from 15-20% overvaluation, but once Spain returns to the peseta the peseta will not devalue by that amount. It will devalue by at least 50%, and probably a lot more. Why? Because of the self-reinforcing relationship between the currency and external debt.

It always works the same way when a country with a lot of external debt devalues its currency. As the peseta devalues, Spain’s external debt will rise in tandem since it is denominated in the appreciating currency. Since Spain is already believed to be overly indebted, as the debt rises relative to domestic assets, Spanish credibility will decline quickly and financial distress costs will rise.

But of course as credibility declines and defaults rise, the peseta will drop even more as investors flee the currency and as domestic borrowers with euro-denominated debt try to hedge the currency risk. This will go on in a self-reinforcing way until the currency has been crushed. In the end, for Spain to leave the euro would probably cause its external debt to more than double – perhaps even triple – as the peseta falls. Of course it will be forced into default within days or weeks.

This, by the way, is not an argument for Spain to stay in the euro. If Spain stays in the euro we will still arrive at default, but much more slowly, and mainly at first through a grinding away of wages and economic growth over many, many years and a gradual building up of debt as Germany refinances Spanish debt at interest rates that exceed GDP growth rates. The default will occur anyway, but only after years of high unemployment.

This is why I think Henkel’s proposal makes sense. Rather than have Spain leave the euro, Germany can leave the euro. The new German currency would automatically appreciate and the euro would depreciate, but without the terrible debt dynamics, the adjustment in the currency value would be much closer to the theoretically correct adjustment. The relative adjustment would probably be in the 20% range rather than in the 50% range.

Of course German banks would still have a problem. Their deposits would be in the form of the new German currency, and a lot of their loans – all those to Spain, for example – would be in the depreciating euro, and so they would take large losses. But at least the losses will be less – and more importantly the process will be more orderly – than if Spain simply leaves the euro and defaults.

One way or the other Germany is going to take a pretty big hit. It is a complete waste of time trying to figure out how to avoid it. It would be far more constructive to resolve the problem as quickly as possible in as orderly a manner as possible, and as any good Minskyite would tell you, that means we have to pay special attention to the balance sheet dynamics. That’s why I think Henkel’s proposal is an interesting one.

Of course the really interesting thing about Henkel’s proposal (at least to me) is to figure out what decision France would make if something like this happened. If France remained within the euro (i.e. “peripheral” Europe in Henkel’s scenario), the possibility of a United States of Europe would be forever dashed, but it would almost certainly be replaced with a two-entity Europe – the United States of Germany and the United States of France, or perhaps, for those who like 19th Century monetary history, the new Zollverein and the new Latin Union.

End Pettis – Start Mish

There is much more in Pettis’ email including a discussion of trade, the irrelevance of China’s trade agreements conducted in the Yuan (a point I emphatically agree with) and competitive currency devaluations by Switzerland.

The post will be up on his blog shortly.

I raised the possibility that Germany would leave the Eurozone some time ago, and I am sure others have as well.

However, it was interesting to see detailed reasons from a former EuroBull (Hans-Olaf Henkel not Pettis), as to why option C makes sense.

Is it Plan B or Plan C?

Ironically, the longer everyone sticks with plan “A: defend the euro at all cost” remain, the more likely Plan C is, because plan A cannot possibly last.

Eventually someone will leave.

Pettis Speculates on what France would do in a breakup. I think the answer is easy enough, or rather we will know the answer soon enough.

French President Nicholas Sarkozy May Be Ousted in Preliminary Voting

In French elections, the top two candidates face a runoff in the national elections. France 24 reports New poll shows far right could squeeze out Sarkozy

Marine Le Pen, leader of the anti-immigration National Front (FN), is projected to win enough votes to knock out President Nicolas Sarkozy from the second round of next year’s all important 2012 presidential election, the French daily Le Parisien’s revealed on Thursday.

Marine Le Pen Says “Let the Euro Die”

The results for Le Pen are very interesting because of her stance on the Euro. Via Google Translate, please consider M. Le Pen says “let the euro die”.

We must “let the euro die a natural death,” means of reassuring the markets and revive the economy, said the president of the Front National Le Pen Marine, interviewed this morning on France Info.

Asked about the remedies it proposes to end the economic crisis, she said that we must “first stop bailouts repeat: there was Greece, now there will be Cyprus, Italy, the Spain … ” “There are masses of savings to do,” she said, particularly expenses related to immigration. “The cost of the AME (State medical assistance for undocumented) explodes, there are 20 billion euros of social fraud against which nothing is done,” she added, saying that “of 60 Vitale million cards, 10 million are false, that qualify for benefits unjustified “.

The market clearly says “Time’s Up”, yet politicians cannot agree on one major thing, and to top it off, voters are fed-up with austerity measures, bailouts, and politicians.

Clearly Le Pen is an anti-Euro, anti-immigration candidate and that is just the kind of message that can easily catch fire in this environment.

Elections in Germany or France may seal the direction, unless we see exodus by countries before the election.

Plan B and Plan C?

Do not rule out Plan B and Plan C. By that, I mean Greece leaves, and everyone else initially stays on until an election in Germany or France seals the deal for plan C.

Thus, I am more optimistic for Plan C than is Pettis. However, there will be more pain involved than necessary because Merkel and Sarkozy will stay with plan A until they are booted out of office.

Both will likely be gone soon enough (along with Italy Prime minister Silvio Berlusconi and Greece Prime Minister George Papandreou). Spain’s Prime minister Jose Luis Rodriguez Zapatero has already indicated he will not seek reelection.

Look for a new set of leaders in Italy, Greece, and Spain, and probably France and Germany. Also look for those leaders to win on platforms far different than the “bail out the bondholders at all costs” platform of Merkel and Sarkozy.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

Tags: Angela Merkel, China Beijing, Chinese Exports, Constitutional Court, Consumption Growth, Denials, Domestic Consumption, External Environment, Financial Markets, Financial Times, GDP Growth, Investment Growth, Likelihood, Little Chance, Mayhem, Merkel German Chancellor, Michael Pettis, Restatement, Solidarity, Travails
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Chinese Yuan: Bent But Not Bowed

Monday, June 21st, 2010

The currency issue has been a constant tension in relations between the United States and China. Many analysts had expected the Chinese central bank to announce a one-off revaluation in the yuan to appease critics of the exchange rate policy.

However, on Sunday, the People’s Bank of China (PBOC) has ruled out the one-off revaluation that US politicians had sought. This was seen as a largely political move to deflect criticism of its fixed exchange rate ahead of the G20 meeting next week.

For now, Analysts still expect the yuan to slowly rise. Meanwhile, the decision should not have come as a surprise as there are several major risks (discussed below) should China implement a faster yuan move as favored by many.

Yuan-Dollar Peg Since 2008

China allowed the yuan to rise by about 20% beginning in 2005, but halted two years ago to help Chinese manufacturers weather the global financial crisis. Since then, the yuan’s value has been pegged to the dollar at an exchange rate of roughly 6.83 to $1. (Chart 1)

Many Western economists estimate the yuan is still undervalued by 25% to 40%. International pressure has been growing this year for China to end the linkage, because it tends to make Chinese exports cheaper, and is seen as giving them an unfair advantage in global markets.

Major Risk # 1 – Exports & Employment

China has long resisted pressures on yuan revaluation as China is still largely dependent on its export to deliver growth. Some government officials have warned that any further appreciation of the Chinese currency risked driving exporters out of business. .

Tags: Bank Of China, Brazil, BRIC, BRICs, China, Chinese Central Bank, Chinese Currency, Chinese Export, Chinese Exports, Chinese Manufacturers, Chinese Yuan, Currency Issue, Exchange Rate Policy, Export Goods, Global Financial Crisis, Global Markets, India, Pboc, Political Move, Profit Margin, Russia, Trade Surplus, Trade Weighted Exchange, Unfair Advantage, Western Economists, Yuan Revaluation
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Jing Ulrich: Chinese Equities Completely Disconnected from Economy

Tuesday, June 15th, 2010

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)

JING ULRICH, CHAIRMAN OF CHINA EQUITIES AND COMMODITIES AT JP MORGAN, TALKS TO BLOOMBERG’S ERIK SCHATZKER ABOUT THE STOCK MARKET.

JUNE 10, 2010

SPEAKERS: ERIK SCHATZKER, BLOOMBERG NEWS

JING ULRICH, CHAIRMAN OF CHINA EQUITIES AND COMMODITIES, JP MORGAN

06:15

ERIK SCHATZKER, BLOOMBERG NEWS: Overnight in China, economic data showed exports surged almost 50 percent last month and property prices rose at a near record pace. The economy appears to be on fire, yet Chinese stocks ended down on the day, and the Shanghai composite is off more than 22 percent this year.

With us to discuss the outlook for China is Jing Ulrich, JP Morgan’s Chairman of China Equities and Commodities, named one of the 100 most powerful women in the world by “Forbes” magazine. Jing is at JP Morgan’s China conference in Beijing today.

Jing, let me start by asking you this question. Are Chinese stocks behaving as if the global economy is headed for another recession?

JING ULRICH, CHAIRMAN OF CHINA EQUITIES AND COMMODITIES, JP MORGAN: Well the Chinese stocks are completely disconnected with the underlying economy. So what we are seeing today is that the economy has been growing on a very robust pace. However, Chinese stocks have been among the worst performing stocks in the world in the year to date.

Now today’s data just proves the Chinese economy is actually growing at a healthy pace. Exports actually surprised on the upside, up some 48 percent. The trade surplus also expanded to some $19 billion.

Of course on a monthly basis, the trade data are always quite volatile. But going forward, I think we have several challenges. One is the troubles in Europe. That may affect Chinese exports going forward. And secondly is the slowdown in the Chinese housing sector.

As you know, since April this year, the Chinese government introduced a host of measures to tighten control on the real estate sector, which is now actually affecting transaction volumes and affecting prices as well in the real estate market. So therefore, the stock market is a bit jittery these days.

SCHATZKER: Okay, so, Jing, I take it by what you just said there that you’re giving more credence to the potential slowdown from European exports and the housing situation than you are to concerns that still exist among some Chinese investors, that the central bank and other policymakers are going to tighten access to credit further.

ULRICH: Well credit has already been tightened since the very beginning of this year. Year to date, we’re seeing loan growth slowing from last year’s 33 percent to about 24 percent.

Now the new worries for the market are basically how rapidly will the real estate market slow down? We’re seeing transaction volumes in the key ten cities in China falling by 50 percent in May compared to the month of April.

In terms of Europe, as you know, the European continent accounts for 22 percent of Chinese exports. So that’s the single largest destination for Chinese exports.

So therefore, the combination of external pressures, the slowdown in Europe, and the internal slowdown in the property market may actually put continued damper on the Chinese stocks for the time being anyway.

SCHATZKER: Okay, Jing, we’ve only got about 30 seconds. You’re effectively saying that these concerns aren’t fully reflected in the price? That the Chinese stock market could continue to decline?

ULRICH: Well I think the downside at this point is relatively limited. Earnings are growing. P/E  ratio is low – about 15 times. And by and large, investors, both globally and in China, are already quite cautious.

So very few people at this point are overweight China. So the bad news that we mentioned earlier on is largely baked in. Some time in the fourth quarter this year, we’ll shift again to see the stock market performing better.

SCHATZKER: Jing, thanks so much. Jing Ulrich, Chairman of Equities and Commodities at JP Morgan in China.

06:18

***END OF TRANSCRIPT***

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China to the Rescue

Thursday, June 10th, 2010

This article is a guest contribution from Econompic Data.

The bull’s case has been that the emerging market growth will more than make up for stagnant growth in the developed world. Data coming out of China doesn’t do anything to counter that argument. Reuters details:

Chinese exports in May grew about 50 percent from a year earlier, sources said on Wednesday, a figure that blew past expectations and fuelled a rise in stock markets globally.

The key Chinese stock index .SSEC, which had been in negative territory, jumped 2.8 percent as the strong export growth reassured investors who have been worried that the European debt crisis would weigh on the global economy.

Exports, which are scheduled to be reported as part of broader trade data on Thursday, had been expected to rise 32.0 percent year-on-year in May after recording a 30.5 percent pace in April.

And that is not where China’s impact on a global recovery ends. The Washington Post reports:

Nearly bankrupt and sullied in the eyes of foreign investors, Greece is moving to rebuild its economy by tapping the deep pockets of another ancient civilization: China.

Spurred on by government incentives and bargain-basement prices, the Chinese are planning to pump hundreds of millions — perhaps billions — of euros into Greece even as other investors run the other way. The cornerstone of those plans is the transformation of the Mediterranean port of Piraeus into the Rotterdam of the south, creating a modern gateway linking Chinese factories with consumers across Europe and North Africa.

The port project is emerging as a bellwether for Greek plans to pay down debt and reinvent its broken economy by privatizing inefficient government-owned utilities, trains and even casinos. This week, the Chinese shipping giant Cosco assumed full control of the major container dock in Piraeus, just southwest of Athens. In return, the Chinese have pledged to spend $700 million to construct a new pier and upgrade existing docks.

Source: Haver

Copyright (c) EconomPic Data

Tags: Ancient Civilization, Bargain Basement Prices, Bellwether, BRIC, China, Chinese Exports, Chinese Factories, Chinese Stock, Debt Crisis, Deep Pockets, Economy Exports, Emerging Markets, exports, Foreign Investors, Global Economy, Global Recovery, Government Incentives, Inefficient Government, Mediterranean Port, Negative Territory, Port Of Piraeus, Ssec, Stock Index, Washington Post
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Keeping an Eye on Currencies (Mark Mobius)

Monday, May 10th, 2010

This article is a guest contribution by Mark Mobius, Vice Chairman, Franklin Templeton Investments.

The value of the Chinese currency, the renminbi, has been a hot topic in recent weeks. China ties the value of the renminbi to the value of the U.S. dollar. Recently, however, the U.S. and some global institutions have increased pressure on China to change this valuation, which, they argue, has kept Chinese exports relative to the U.S. comparatively cheap. But the U.S. Treasury Department, which was due to issue a report on China’s currency on April 15, 2010, delayed this report by several months in order to allow a series of high-level meetings to take place.

As bottom-up equity investors, we focus on individual companies when evaluating investment opportunities. However, it is also important for us to understand how a company looks within its sector and country or region, and as such, our outlook on currencies forms part of our broader assessment on a company’s operating environment.

We look at all currencies on the basis of purchasing power parity (i.e. comparisons of different inflation rates) and, of course, any controls and influences imposed by the central bank of each country. We then try to asses whether a currency is over or undervalued, how devaluation or revaluation may impact a specific currency, and then gauge the potential impact of such currency characteristics on the business of each company. For example, for an export-oriented company, a devaluation of its operating currency could be positive because it may be able to export more aggressively and more profitably, while the opposite could be true for an import-oriented company.

Our purchasing power parity studies indicate that China’s currency, the renminbi, is actually close to fair value against the U.S. dollar at this stage. Judging from past experience, we believe that China is unlikely to act quickly on currency adjustments because they are afraid of the consequences of such volatility.

The Chinese Central Bank Governor, Zhou Xiaochuan, hinted in March that the renminbi might be allowed to rise once the global economy recovered. However, the Commerce Ministry and others protective of Chinese exporters expressed opposition to a rise in the renminbi, as exporters saw shipments fall early in 2009 for the first time since China began opening trade in the late 1970s.

As we see it, Chinese exporters have plenty of orders and Chinese companies are even stockpiling commodities such as crude oil, various metals, and grains, as a hedge against what appears to be rising inflation. Wages are moving up – in the export provinces of coastal China, for example, wages were raised by about 20% recently in an attempt to attract more workers from the interior.

If the renminbi appreciates, that could mean losses in China’s vast foreign reserves, which would fall in renminbi terms. Meanwhile, the Chinese are addressing the depreciation of the U.S. dollar with a diversification of their foreign reserves into other currencies and a move to higher interest rate securities compared to low-interest U.S. Treasuries.

The purchasing and storing of commodities is another way for China to conserve its value of foreign exchange reserves in an environment of a depreciating U.S. dollar. While statistics on commodity inventory levels in China may not be reliable or fully disclosed, our current information indicates that China’s commodity inventory levels are high. The Chinese favor commodities knowing that they will eventually be used, and also because they are concerned, given high and increasing demand, that commodity prices could rise further. A possible course of action could be to revalue the renminbi upwards so commodities would be cheaper in renminbi terms and wage demands could more easily be met. But with nationalist emotions rising, that course is probably closed.

Even though it is not clear if, when, and how China will make an upward revision in the value of its currency, one trend is clear: moves involving the renminbi by Chinese authorities will be closely watched around the world as China steps up to play a bigger role in world trade.

Source: Keeping an Eye on Currencies, Mark Mobius, Franklin Templeton Investments, May 10, 2010.

Tags: China, China Currency, Chinese Currency, Chinese Exports, Commodities, Devaluation, Equity Investors, Franklin Templeton Investments, Global Institutions, Hot Topic, Individual Companies, Inflation Rates, Level Meetings, Mark Mobius, Operating Environment, Oriented Company, Purchasing Power Parity, Renminbi, Revaluation, Treasury Department, U S Treasury, U S Treasury Department
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